The retail industry saw a superb 2012. This has led most people to set higher expectations for 2013. With the help of two stocks in this space, I have tried to gauge the authenticity of these expectations:
hhgregg, Inc. (NYSE:HGG): It is interesting to note that the stock has appreciated 37% on a YTD basis. This has sent bearish signals to the market since such a rally is surprise given that the company has achieved little success in overcoming the secular growth challenges it has been facing. The investment question for HGG in 2013 is how sustainable the competitive advantage is for a big box retailer with ~36% of its sales derived from consumer electronics. HGG’s video category has had nine consecutive quarters of negative comparable same-store sales and continues to see significant margin pressure from Internet competitors.
Recently, the management altered its strategy to focus on improving sales mix in the category in hopes of improving gross margins, but this has come at the expense of the company’s market share. Over the next few quarters, as HGG continues to struggle to find the optimal mix between gross margin rate and market share in the video category, the company’s results will become increasingly dependent on the appliance category. A bright spot in HGG’s product mix next year, the appliance category should see accelerated sales and improved profit margins as housing continues to recover.
However, increased promotional cadence from Sears Holdings Corporation (NASDAQ:SHLD), The Home Depot, Inc. (NYSE:HD), and Lowe’s Companies, Inc. (NYSE:LOW) could further pressure the company’s margins. Overall, a limited upside to HGG’s stock in 2013 is expected given its 37% rise YTD, as weak product trends and aggressive promotional activity may keep results under pressure. Credit Suisse has lowered the FY 13, 14, and 15 EPS estimates to $0.76, $0.87, and $1.05, respectively.
RadioShack Corporation (NYSE:RSH): The Street is mostly bearish on the stock given that 2013 is expected to be another transition year in which earnings should remain under pressure. While it is widely believed that exiting the Target Corporation (NYSE:TGT) Mobile business is a positive that should provide some margin relief in 2013, the main themes that have been driving margin pressure (product commoditization, growing mobility business) are expected to continue into next year.
RadioShack’s partnership with Target has been a disaster for RadioShack’s shareholders. According to the partnership, RadioShack was supposed to staff employees at postpaid mobile kiosks in more than 1,500 Target locations. The initial thinking behind the partnership by RadioShack was that it would benefit from the partnership with a stronger retailer, and this deal would also help it to control its overheads. However, in reality, the deal has benefited Target, but RadioShack’s shareholders have lost millions of dollars in this agreement.