Best Buy Could Be a Big Winner in the Great Retail Shake-Up

The list of consumer electronics retailers is getting shorter. Regional chain hhgregg is liquidating its assets after filing for bankruptcy in March, and RadioShack, which went bankrupt more than two years ago and restructured its business, has filed for bankruptcy for a second time.

Best Buy (NYSE: BBY), the largest seller of consumer electronics in the U.S., stands to benefit from the shuttering of these smaller chains. An analyst at Deutsche Bank estimates that Best Buy could add $335 million of revenue if it can capture 20% of hhgregg's sales, a windfall that would boost its comparable sales by nearly a percentage point.

This trend of weaker retailers biting the dust is unlikely to end anytime soon, and Best Buy is well positioned to pick up sales from its fallen peers. The company has been gaining consumer electronics market share during its turnaround over the past few years despite weak industry sales, thanks in part to its big e-commerce push. As more retailers fall, Best Buy could be one of the biggest winners.

Image source: Best Buy.

The next domino to fall

While hhgregg is small relative to Best Buy, the seemingly inevitable failure of Sears Holdings (NASDAQ: SHLD) could provide a significant sales boost. Sears sold $9.6 billion worth of hardlines in 2016, which includes appliances, consumer electronics, and various other categories. Appliances alone accounted for 15% of Sears' total revenue, which comes out to about $3.3 billion.

Appliances accounted for about 7% of Best Buy's sales during the fourth quarter, far less than both consumer electronics and computing and mobile devices. But it's one of Best Buy's strongest categories, with comparable sales jumping by 6.4%. Best Buy is the No. 4 seller of appliances in the country, behind Lowe's, Home Depot, and Sears. Even picking up a small portion of Sears' appliance sales will provide a meaningful boost to Best Buy and propel it into a strong third-place position.

It may still be a few years before Sears ultimately fails, with the company adept at financial maneuvers that extend its life. But at this point, with the company hemorrhaging cash and suffering from crippling sales declines, it's hard to see a scenario that doesn't end with bankruptcy. Best Buy, along with the other major appliance retailers, will be ready to pounce.

Other opportunities

Beyond picking up sales from Sears, Best Buy could benefit from other retailers closing stores and shifting away from consumer electronics. Office supply chains Staples and Office Depot have been closing stores at a breakneck pace, turning their focus toward serving business customers and away from retail. Both sell PCs and other consumer electronics, and their continuing de-emphasis of retail could be a boon for Best Buy.

There are other regional chains in danger of failing at some point down the line as well. Conn's (NASDAQ: CONN), a chain of about 100 stores that finances the bulk of its sales in-house, is facing a combination of credit losses and steep declines in comparable sales. During the fourth quarter, Conn's comparable sales dropped 8.9%, with consumer electronics suffering a 4.2% drop and home appliances suffering a 5.8% slump.

In Conn's credit business, delinquencies are rising, average credit scores are falling, and losses are getting bigger. The credit business lost $194 million in fiscal 2017, more than wiping out profits from the retail business. Conn's expects to return to profitability in fiscal 2018, but the situation will need to improve dramatically for that to happen.

There are also plenty of local and regional privately held consumer electronics and appliance retailers that will face increasing pressure going forward, both from bigger chains like Best Buy and from online retailers. As those businesses close their doors, Best Buy may be able to pick up some additional sales.

The major shake-up in retail, driven by both e-commerce as well as an overabundance of retail space, will have winners and losers. Small, weak retailers unable to adapt to changing consumer preferences, and incapable of matching the efficiency of larger retailers, will have trouble staying in business. Best Buy, which has made efficiency and e-commerce two pillars of its turnaround strategy, is in prime position to benefit.

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Timothy Green owns shares of Best Buy and Staples. The Motley Fool recommends Home Depot. The Motley Fool has a disclosure policy.