Thursday, May 03, 2012


What is the worst business you can imagine? It would be retail, flogging commodity-like products, with more or less perfect competition, large square-footage requirements, large inventories with associated carrying costs, big staff requirements, low margins, high macroeconomic dependency, transient or unreliable employees, high after-sales service requirements, high internal pilferage rates, and uber-rapid product obsolescence. Guessed it yet?

The history of American retail is littered with the carcasses of electronics retailers. Crazy Eddie, The Brick, Musicland, Sam Goody, Radio Shack, Circuit City, and most recently, the humbled Best Buy. And if the aforementioned challenges are in and of themselves not sufficient to deter retail entrepreneurs and their investors, then just add the challenge of web retail, where prices are lower, sales  taxes non-existent, fulfillment rapid, and the comparative technical information, more informed. Strangely, somehow, a few Europeans have managed to prosper in their restricted markets (e.g. FNAC, Darty, Interdiscount, Saturn). They are all reasonably pleasant to frequent, and have managed to preserve margins - perhaps because they have achieved scale, straddled both web and bricks&mortar, and perhaps due to logistical bottlenecks and pervasive and unavoidable VAT, weathered on-line competition. The UK experience (witness Dixons and Comet/Kesa!) has been equally as dismal, despite Kesa's ownership of the excellent Darty franchise. Only Apple has prospered, and they, as of this moment, haven't turned their attention to Vacuums or Toasters....yet.

But as quickly as the lights go out, the plug is pulled, the speakers are blown, and the latest Top Dog is at best humbled or worse, liquidated, investors - ever hopeful (or merely gluttons for punishment) - try their luck anew. This time, it's Texas-based Conn's, a former favourite of the IBD crowd when they pumped it up to absurd heights back in the mid-noughties, before souring and returning it's share price to panhandles altitude. 

Analysts (the few who cover it) are again optimistic, despite their poor 2011, and leverage which is double that of former heavyweight champion, Best Buy, along with an ev/sales 5x that of BBY,  and an ev/ebitda more than 3x BBY's - both on historic and forward-looking measures.  Historical margins are inferior in every way, though, they are forecast to sparkle in the coming year. What CONN's does have going for it is a short interest nearly double that of highly-shorted BBY. Perhaps it is the the fact that Texas is NOT the USA. Perhaps it is CONN's marginally-broader offering - a few lawnmowers and some furniture - that separate it. Maybe it's made the IBD TOP-50, again with its Donchian channel breakout and high momentum. Or perhaps it is the starry-eyed belief that like Tractor Supply, good 'ol boy Conn's may be on the cusp on succeeding nationally where the dull methodical no-nonsense midwestern Best Buy could not. I really do not know.

What I do know is that, outside the hasidic bucket shops in Manhattan where it seems to be as much a way of life as a business, electronics retailing well-and-truly sucks.  And investors should be ever-wary of paying up, or being optimistic, or thinking that THIS time it's different. It's not. And it won't be. At 6x next year's forecast, with a reasonable balance sheet, huge scale, BBY might be cheap enough provided the macro status quo doesn't further deteriorate. I am not long, and am unlikely to be so, but there are no shortage of bottom-fishers that may think otherwise. As for Conn's, god bless them and their investors. They will need all the help they can get in order to fulfill expectations.

1 comment:

Anonymous said...

Jeez... And Battling Barry, Stereo Wholesalers (with 3 name changes), Nobody Beats the Wiz, Lafayette Radio, plus countless stereo/hi-fi shops. And broader retail in my area: Caldor, Jamesway, Best, Channel, Grossman's. All gone. John Hempton had similar comments about Aussie electronics. Tough market. Why anyone would try to compete in this area is beyond me. Never heard of Conn's, but maybe I should try them out while I still can.