Perception & Reality
By Steve Smith -- TWICE, 4/16/2001
As we bid the first quarter a fond adieu and turn to the spring months for rejuvenation and renewal, logical questions for anyone involved in consumer electronics retailing should be: Are we now in a recession? Is the worst over and will the economy rebound? How will sales be in the second quarter and second half?
You don't need me to tell you that Wall Street is continuing to lick its first-quarter wounds, companies of all stripes are cutting their profit estimates, layoff announcements have become more and more prevalent and the California energy crisis may move to other states.
Conventional wisdom seems to indicate that this will be a difficult year for retailers of all stripes. But as we reported, during the first half many independent, privately-held electronics/appliance retailers say they think their sales will be fine this year and they will be able to generate profits even if sales are flat.
Reading tea leaves and gazing into a crystal ball is not part of TWICE's editorial charter. Neither is touting individual stocks. But the financial health of the consumer electronics industry will be categorized in the consumer media by the large, publicly held national retailers. Four of the majors, Best Buy, Circuit City, RadioShack and Amazon.com, all issued financial reports since our last issue. As a group the reports from these four retailers, which you can read in detail in our news section, are quite varied.
The sunniest news comes from Best Buy, which closed its fiscal fourth quarter on March 3 with double-digit gains in sales and earnings growth. The performance is impressive by any standard, especially when you consider the chain had to absorb the costs of acquiring Musicland, the launch of BestBuy.com and the opening of 15 new stores.
Things were not so rosy for Circuit City in its fiscal fourth quarter, which ended February 28, as sales slid 9 percent while earnings for the quarter dropped 70 percent, which the chain blamed on softer than normal demand for PCs and softer consumer electronics sales in January and February.
RadioShack, which has been on a hot streak for at least a year or two, issued a statement saying that March sales were up 8 percent, year-to-date sales were up 9 percent and that earnings-per-share growth will probably be 7 to 10 percent for fiscal 2001. That's about half of what it forecast for the year in February. Reasons cited included price cuts on PCs, decreasing mobile phone margins, increasing sales of lower-margin prepaid wireless services and lower commissions on DirecTV sales. Yet when the chain's final report for the quarter is filed, RadioShack should have first quarter earnings between 31 and 33 cents, versus 34 cents for the same time last year.
And finally Amazon.com, which endured takeover rumors, guilt-by-association from the demise of many other dot.coms and continuing losses, reported preliminary first-quarter sales and earnings. Led by strong growth in consumer electronics the online retailer had a sales increase of 21 percent to $695 million, while its pro forma operating loss for the quarter was $50 million, down from last year's $99 million.
What should independent electronics/appliance retailers make of all these contradictions? While you should continue to follow what the big guys are doing, see how the economy is doing in your area of the country, and watch how your local competitors and your buying group members are performing. But most importantly, closely watch the buying patterns of your customers. Talk to them. Those observations are probably more important than any other market research you can do, especially during changing times.
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