Electronics Retailers: 3 Stocks to Watch

By Markets Fool.com

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Source: Best Buy.

The number of consumer-electronics retailers is dwindling: Circuit City went under in 2009, and RadioShack has been decimated after declaring bankruptcy this year. Competition from online retailers has certainly been a factor, with Amazon.com offering low prices and free delivery.

Many bricks-and-mortar retailers have struggled to adapt to this new reality. But along with Amazon, two companies, Best Buy and Conn's , are still worth watching.

Best Buy
Despite what NPD cited as a 5.3% year-over-year drop in consumer-electronics sales during the 13 weeks ending on May 2, Best Buy managed a comparable-store sales decline of just 0.7% during that period. Strong sales of TVs and smartphones helped Best Buy avoid a larger decline in sales. Furthermore, the company expects comparable-store sales to grow, albeit slowly, in its domestic business during the second quarter.

Best Buy has managed to hold on to its market share over the past few years by becoming more price competitive and slashing costs. Best Buy spent just 18.8% of revenue on sales, general, and administrative costs last year, down from 20.5% in FY11.

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Best Buy has reinvested some of its recent cost savings in growth initiatives, such as e-commerce. So while Best Buy has removed about $1 billion of costs from the business, not all of it has flowed through to the bottom line.

Best Buy has become the go-to destination for consumer electronics, and its strategy of offering "Advice, Service, and Convenience at Competitive Prices" differentiates it from online sellers competing mostly on price. For customers who aren't particularly tech-savvy, Best Buy offers what online retailers can't: face-to-face interactions. For those who follow technology and devices and know what they're going to buy without needing to go into a store, that doesn't mean much. But it's the source of Best Buy's key advantage over online retailers, and it makes Best Buy a stock to watch.

Conn's
Conn's, a small retailer that sells consumer electronics along with furniture and appliances, is worth watching for a different reason. Conn's business model involves financing most of its sales through an in-house financing program, serving customers with subprime credit scores. This approach allows Conn's to profit from both the sale of products and interest payments from customers.

At least it works that way in theory. From 2011 through 2013, Conn's stock surged as the company reported incredible comparable-store sales growth. Profit soared as well, and in 2013, the company managed an operating margin of 13.6%, far higher than typical values for the retailer.

However, Conn's was driving this growth by loosening its lending standards, and that practice caught up with the company in 2014, forcing Conn's to take a massive charge. The stock fell apart as delinquency rates soared.

Since the beginning of this year, Conn's stock has bounced back strongly from its lows. The stock has nearly doubled year to date as delinquency rates have started to decline sequentially: the result of Conn's tightening its lending standards. But same-store sales are falling as well, down 4.3% during the first quarter, and the credit business is losing money.

After bidding up the stock between 2011 and 2013 based on rapid growth and high earnings -- ignoring the loosening of credit standards and the deterioration of the credit portfolio -- this time around investors are cheering falling delinquency rates while ignoring the money-losing credit business and declining same-store sales.

Conn's is a stock to watch because it offers a case study in what happens when investors don't look at the whole picture.

Amazon.com
Amazon sells a lot more than electronics, but there's no doubt that the company had a hand in the bankruptcies of Circuit City and RadioShack.

One major benefit of buying consumer electronics from Amazon is free shipping. Prime members can have all sorts of items, from PCs to TVs, delivered in two days for free, after the $99 annual fee. Even non-Prime customers can get items delivered for free, albeit at a slower pace. Many other retailers have been slow to match the level of Amazon's free shipping offers.

Amazon is a good option for those who know what they're buying. For those who know they want a tablet but have no idea what kind, a physical store offers something Amazon can't match. But for items such as TVs, most people probably don't need to see them in-store to make a decision, giving online retailers such as Amazon an advantage. As e-commerce sales continue to grow faster than retail sales as a whole, Amazon has ample opportunity to grow its revenue from consumer electronics.

The article Electronics Retailers: 3 Stocks to Watch originally appeared on Fool.com.

Timothy Green owns shares of Best Buy. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.