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Uncertain Outlook Seen For CE Retailing In '08

2/25/2008 02:00:00 AM Eastern

The disappointing holiday and Super Bowl seasons may have set the tone for the balance of 2008, dealers and analysts are predicting, as the soft economy continues to stifle consumer electronics sales.

"It will be a challenging year," said Jim Ristow, executive VP of Home Entertainment Source (HES), the specialty A/V division of Brand Source. "People will have to fine-tune their businesses to come out strong."

Underscoring the challenging marketplace was an earnings warning from Best Buy, which this month lowered its fiscal year forecast due to slow January traffic and continuing softness in home theater, MP3 players and digital imaging.

"The macroeconomic environment grew more challenging after the holidays," said Jim Muehlbauer, Best Buy's interim CFO. "Our post-holiday results are not going to be what we originally expected." As a result the company now expects a "modest decline" in comp-store sales for the current quarter, and has lowered its full-year comp projections from 4 percent, to 2.5 percent to 3 percent.

Dennis May, president/COO of hhgregg, believes the weak housing market and attendant media coverage have helped sour consumer sentiment. "The consumer is certainly barraged with a lot of bad news in the marketplace," he told analysts during a conference call this month. (See the chain's financial report on p. 57.) But the pain is nevertheless real for low- and middle-income shoppers, suggested chairman Jerry Throgmartin, who observed that unit sales of major appliances are "slowing a lot more significantly at the mid- and entry levels due to the condition of those most likely to buy at those price points" The multiregional retailer projected flat same-store sales for the current quarter.

Another sign of the times came from the U.S. Commerce Department, which said January sales for CE and majap dealers fell 1.6 percent year-over-year to $9.3 billion, and restated their December sales from 2.1 percent growth to a decline of 0.1 percent, to $9.4 billion. On a consecutive basis, dealer sales fell 3.2 percent in December from November, and slipped another 1 percent in January from December.

According to National Retail Federation (NRF), the leading retail trade group, the sales figures show that consumers are focused on buying necessities more than discretionary items. "The January numbers are indicative of the issues consumers are facing, including the housing slump, a sluggish employment sector and high energy prices," said NRF chief economist Rosalind Wells.

The sentiment was echoed by Wal-Mart, which found that its customers were holding onto gift cards longer and were redeeming them for food and other consumables.

Like HES's Ristow, Goldman Sachs retail analyst Matthew Fassler foresees a tough slog for the balance of the year. "We expect continued challenges for retail sales through the rest of 2008," he wrote in a research note, "as a tough housing market and spillover to the broader economy, i.e. lower income growth, continue to crimp consumers' wallets."

NRF's Wells was equally pessimistic, expecting only "marginal improvements" in the back half of the year once consumers begin to receive their government rebate checks.

But all is not doom and gloom. Despite the rough ride, Ristow believes that business will "tick back up after the housing market flushes itself out," and that his member dealers will ultimately gain share. "The independent is very agile, and history has shown that the industry will recover," he said.

John LaRegina, senior TV and video buyer for P.C. Richard & Son, was also optimistic. "The last time there was real bad economic news, in the late 1980s, people watched their pennies but they still bought that $2,000 TV," he said. "Flat panel is a demand product right now. People will clamp down on other expenses like vacations, but they still must entertain themselves."

Bill Trawick, president/executive director of the NATM Buying Corp., believes the rapidly approaching analog turnoff will further buoy business. "People are saying, 'Maybe it's time to step up and replace the old tube TV," he noted.

Stephen Baker, industry analysis VP for The NPD Group, said CE sales declines were related less to macroeconomic issues than to market saturation in high volume categories such as cameras and MP3 players. "The consumer electronics industry isn't exempt from consumers worrying about the economy, but historically we have not seen an impact on electronics sales from the overall economy," he observed. While NPD foresees lower CE growth this year as a result of declining demand, it also anticipates more stable pricing, which can lead to higher profits for retailers. — Steve Smith contributed to this story.

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