Consumer Electronics Retailers Will Always Break Your Heart

Holiday Shopping
Nam Y. Huh/PShoppers at a Best Buy last November.

Two of last week's bigger losers were Best Buy (BBY) and RadioShack. Best Buy stock declined 8 percent on the week, held back by an uninspiring financial update. RadioShack surrendered 32 percent of its value after The Wall Street Journal reported that the battered chain was preparing to file for bankruptcy next month.

It's not just them. Investors have seen hhgregg (HGG) drop by 59 percent since the end of 2013. It could be worse: Conn's (CONN) has plummeted 78 percent since the beginning of last year, and RadioShack stock has given up 90 percent of its value.

Best Buy could be considered the lucky one in comparison. It's only down slightly over the past year. However, it's pretty clear that this is not a good time for folks buying into these chains. It may have made sense in theory. The housing market's revival is -- or at least was -- creating a spike in appliance sales. The mobile revolution is sending consumers scrambling to buy the latest smartphones and tablets to make the computing experience portable.

Unfortunately for the chains, a perfect storm of cheaper online retailers, wireless service providers reaching out directly to customers, and a general lack of interest in TVs and high-margin services find traditional brick-and-mortar retailers in a funk. It was bad before, and it's not getting better.

Best Buy Is Better, but Not the Best

Retail industry tracker NPD Group reported that consumer electronics suffered a 3.7 percent hit in sales during the telltale holiday shopping period. It's not a surprise given sluggish tablet and TV sales. However, Best Buy is holding up better than its peers. It reported a welcome 2.6 percent uptick in sales during the nine-week holiday shopping period.

Best Buy's stock retreated despite the upbeat domestic news because the superstore chain warned that margins will be pressured in the near term as it invests in growth initiatives. Best Buy needs to navigate through an iffy operating climate, and that won't come cheap.

Best Buy blames external pressures that are disrupting the industry, including deflationary pricing, weak industry demand in many categories, and diminishing demand for the extended warranties that used to be big moneymakers for the store.

Attacking the industry's shortcomings is the right thing to do, but investors have to be worried that Best Buy may be fighting for something that is no longer there. Physical retailers selling big-ticket consumer electronics could be a model of the past.

RadioShack Is No Love Shack

As bad as things may be at Best Buy, they're far worse at RadioShack. Sales continue to fall. Losses continue to mount. With pesky debt levels and little reason for creditors to think that RadioShack can turn things around, it isn't a surprise to see it resorting to bankruptcy reorganization.

Closing underperforming stores hasn't been enough. Remodeling stores hasn't been enough. One big tweak to the model -- emphasizing wireless products and services over its flagship consumer electronics gadgetry -- has backfired.

This isn't necessarily the end of RadioShack. Chapter 11 bankruptcy will help improve its balance sheet from its current sorry mess that's light on cash and held back by $841.5 million in long-term debt. However, there's also a good chance that common-stock shareholders will get wiped out. It's also hard to fathom any incarnation of RadioShack that would break back into profitability since slipping into the red in 2011. Yes, it's hard to be a publicly traded retailer of consumer electronics these days.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. Want to make 2015your best investing year ever? Check out The Motley Fool's free report on one great stock to buy for 2015 and beyond.