Rent-To-Own Electronics Retailers Are Outperforming Their Counterparts

by: Benjamin Goldman

On July 25th, Radio Shack (NYSE:RSH) shares dropped 28.77% after a bad earnings report. Shares are down over 80% in the last year and the electronics retailer has crossed into the red. With a valuation just over $250 million, $4.4 billion in expected 2012 revenue, and a P/E ratio under 10, the company may look like a value buy right now, but bearish activity will most likely continue for RadioShack and other electronics retailers for the foreseeable future. Radio Shack's high drop in shock price is not unique. Best Buy shares are down over 40% in the last year and will probably drop further after its August 21st earnings report. GameStop shares (NYSE:GME) and hhgregg (NYSE:HGG) are down 33% and 48%, respectively, in the last year.

It is a well known fact that electronics retailing is switching to an online sales model. Online retailers like Amazon (NASDAQ:AMZN) and eBay (NASDAQ:EBAY) have been performing very well as of late. Many of the top consumer electronics manufacturers have made large investments in their own online sites. Smartphone sales for the most part take place at wireless providers' stores instead of big box retailers. Brick and mortar retail stores have become places where consumers can go and try out a product before buying it online.

Despite all of the bearish activity, brick and mortar retailers with a Rent-To-Own model have been performing very well. CONN's Inc. (NASDAQ:CONN) shares are up over 63% in the last year and Rent-A-Center's (NASDAQ:RCII) shares are up 18%. However, the performance can be attributed to beating expectations more than any kind of long-term sustained growth. Conn's revenue has gone down the last three years, but analysts expect strong growth in revenue and earnings over the next to years despite the company's struggles to stay in the black. Rent-A-Center earnings have been stagnant, though consistently in the black over the last three years and analysts expect this to continue.

There is strong possibility that other retailers may adopt Rent-To-Own options in order to access a new market that still has growth potential. Wal-Mart (NYSE:WMT) re-instituted its layaway policy last holiday season and I wouldn't be surprised if Best Buy and Radio Shack do the same. It could take some time for them to implement a Rent-To-Own policy from a systems and marketing standpoint, but it is almost definitely something that they are considering.

Right now, I would stay away from the traditional brick and mortar consumer electronics retailers. I expect these companies' shares to perform similarly to the way Research In Motion (RIMM) and Dell (NASDAQ:DELL) have performed as of late. P/E ratios will get incredibly low, but store closings, missed expectations, and occasional setbacks will continue to send shares lower. Because of their low valuations, any of them have a chance to jump 10% in one day with some good news (or an unexpected liquidation), but highly volatile stocks with bearish tendencies are a terrible choice for investors. I strongly suggest picking companies in strong industries with high expected growth over companies in decline with low valued shares that look like "bargains". It's a much safer investment strategy.

As far as the Rent-To-Own retailers like CONN's and Rent-A-Center go, I believe there is still potential for them. I currently put a Hold recommendation on the stocks, and they are definitely a great alternative for those who want to invest in brick and mortar retail, but are afraid of what could potentially happen to Best Buy and Radio Shack. It will be interesting to see if CONN's and Rent-A-Center can continue to outperform their competitors with a business model that was believed to be obsolete years ago.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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