Holidays Foreshadowed Weak First Quarter

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TWICE: Can we agree that the holiday season was disappointing?

Ross Rubin, The NPD Group: Yes, it was a season of relatively weak revenue according to our panel down, about 2 percent for the six-week period, not including video games or cellphones.

TWICE: Where were the strengths?

Rubin: We really saw an increasing dependence on the top five categories, in particular televisions and notebook PCs, as the revenue leaders. We tracked LCD TV as the leading revenue generator followed by notebooks, digital still cameras, MP3 players and portable navigation, and together they accounted for 48 percent of the revenue we saw during the holiday season. That's up from 43 percent the previous year and 34 percent for the top five categories in 2005.

Even though we continued to see strong growth from a lot of last year's fast-growing categories, such as portable navigation and digital picture frames, we really haven't seen a new champion product category emerge other than LCD TV. And its growth is coming at the expense of other technologies — tube of course, but also microdisplay, which was down last year.

And even though there was in general less aggressive price promotion than the previous year, declining ASPs, particularly on LCD televisions, really put a damper on revenue.

TWICE: Why the downturn? Was it macroeconomic, the lack of a breakthrough product, or because pricing was more rational?

Steve Caldero, Ken Crane's: The consumer is being much more conservative. California has been hit very hard. And they're tightening credit. People can't go to the house piggy bank and take out money to go buy toys anymore. You can't refinance in a week like you could before. From Black Friday on, our finance turndown rate was much higher than a year ago.

And it's domino-ing. One by one it's affecting all the elements. You can offer three-, 12-month or 18-month financing, but if they don't qualify, what have you accomplished?

Also, I don't know where this rational world pricing was because in our market some of our competitors decided that $899 for a 50-inch plasma made sense. I'm not sure how that makes sense, but they thought it did. We pulled out last year's ads for Black Friday, and everyone was marveling that we broke $2,000 for a 50-inch plasma. It was a very challenging season.

TWICE: Was there a pattern to the sales activity?

Caldero: The two weekends before Christmas were very strong, and the period after Christmas was very strong. You had that slow period after Black Friday and the first part of December where it was pretty grim. We were looking at all of this inventory thinking, "What are we going to do with it?" But we did move a lot of it.

TWICE: What happened to the theory that when times get tough people will hunker down and forgo the vacation for a home entertainment system?

Dave Workman, PRO Group: I believe it went wrong, given the macro environment and the general retail economy. We are still capturing the consumer's imagination, but as Steve just said, the third-party credit houses are doing re-scorings with the underwriters. They're taking anywhere from 400 to 600 basis points of approval out of the process. The credit crunch is starting to move from the home over to the other areas of credit.

It's also the amount of units that you have to add to what you did last year based on ASP declines, and in certain segments like television you definitely have an element of channel shift going on. That's just a natural evolution. For the specialists, you have to rethink your position about some of these categories and where you want to be relevant with the consumer.

That's not to say game over, but rather where am I going to concentrate my effort? As high-definition TV becomes just TV for the consumer, different channels will have to focus on different areas of the business to build their sales. In the old days when it was all analog TV, specialists always had their greatest amount of business and share in bigger televisions. We're going to see the same striation in HDTV as time goes by, with certain retailers dominating certain segments of the business.

TWICE: Was there a lot of inventory hang?

Dan Schwab, D&H Distributing: In a lot of respects everyone was chasing inventory during the previous two years from a TV standpoint, and this is the one year that if you go to the manufacturers, I don't think they're in the same position. I think there's plenty of inventory. That's one of the biggest changes from last year to this year.

Workman: But everybody is pretty tightly supplied. Supply chain is such a huge element, and with the tool of the mark-down credit they have the ability to adjust a model and announce on Sunday a change that went into effect the previous Friday. They're making a lot of adjustments anyplace where they have inventory, and can do so much more quickly than in the past with price markdowns and price guarantees as inventory is revalued based upon sales rate.

So I'm not hearing that there's a huge abundance of inventory, and where there is a build it seems that they're making adjustments in price.

Fred Towns, New Age Electronics: On the IT side of our house notebooks were screaming hot, and throughout the whole season everything that came in went out the door, so we ended very, very cleanly at the end of the cycle.

On the TV side, we had a good year and our business was up very nicely, but there was a lot of deal cutting going on out in the marketplace. Everybody was waiting until the end of the month — the old style of seeing who was really hanging with a lot of product, and unfortunately some of the pricing was just stupid.

The challenge for the retailer is how to deliver value for the technology that's out in the marketplace. I saw a great commercial by a local retailer this morning talking about how they'll teach you how to use your HDTV. That's very smart because the bleeding-edge or more sophisticated customers did all of their homework and has already made their decision, but there is a whole other group out there, like my parents, which is going to have a lot of questions. "If I get one of these 1080p sets, what do I have to do on my box setup? What are the other things I need to do to get maximum performance out of it?"

It's up to us to help educate consumers who are in a quandary, and to also help retailers manage their inventory flow so they're in stock with what they need when they need.

It was super competitive, and I feel this year it will be a very competitive first quarter.

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