Retail Consumer Electronics

Consumer Electronics & Appliances

Industry Insight

Date February 2020

Consumer Electronics Projected Values

Current Trends

  • For holiday 2019, the electronics category did especially well online, where sales were up 10.7% over 2018
  • Electronics manufacturers anticipate that product shipments may be delayed by as much as nine weeks or longer as a result of the coronavirus outbreak in China
  • Consumer electronics stores’ revenue is forecast to decrease an annualized 0.2% through 2024
  • With Sears’ downsizing and JCPenney exiting the appliance business in February 2019, retailers Best Buy, Lowe’s, and The Home Depot are the biggest beneficiaries of the lost appliance revenue

 

Approximate net recovery on cost

Synopsis

Electronics sales positive for holiday 2019, but down annually: Total holiday sales (spanning the months of November and December) increased 3.4 percent for 2019, coming in slightly above the holiday forecast of 3.1 percent growth. The positive trend followed the 5.1 percent increase generated for holiday 2018, according to Mastercard SpendingPulse. This year’s success was driven by a 13.1 increase in digital sales, according to Adobe Analytics. The electronics category did especially well online, where sales were up 10.7 percent over 2018 for the holiday season. However, December 2019 retail sales for electronics were up just 0.6 percent over the prior year, a trend that had reversed itself in January, which was down 0.5 percent based on Census Bureau data. Year-over-year electronics sales decreased 3.5 percent in 2019 over 2018, which saw a year-over-year sales increase of 2.0 percent.
 

Industry leader Best Buy had a positive holiday season and fourth quarter of 2019 posting a sales increase of 2.7 percent for the quarter driven by a 3.2 increase in comparable store sales, which was on top of a 3.0 percent increase in the same period of 2018. Management reported that sales were especially strong in the categories of headphones, mobile phones, and appliances. The company’s domestic same-store sales increased 3.4 percent, with digital sales increasing 18.7 percent. The company’s international sales improved by 1.6 percent after falling for the prior three quarters.
 

As a percentage of domestic revenue, digital sales penetration increased to 25.4 percent, up from 22.0 percent in the fourth quarter of 2018. With a steady year-over-year store count, positive sales trends, and a favorable credit rating, the company appears to be well positioned for a good year in 2020.
 

Coronavirus Disrupts Electronics Supply Chain: Sectors that are heavily dependent on Chinese imports are already being negatively affected by the coronavirus outbreak that is centered in China. As a significant share of the inputs and components required in electronics manufacturing are sourced from China, the industry has been one of the first to be hit hard by plant shutdowns and worker shortages brought on by the virus. Electronics may contain hundreds of different components sourced from numerous suppliers, and one missing part or factory delay may cause shortages of the finished product. Even if manufacturing occurs in regions not affected by the coronavirus, those products often use parts or sub-assemblies made in China.
 

Manufacturers anticipate that products shipments may be delayed by nine weeks or longer according to IPC, a trade group that represents contract manufacturers and other suppliers of electronic parts, as well as some original equipment manufacturers. On average, manufacturers surveyed by IPC were told to expect three-week delays from their suppliers; however, the average expectation is five weeks, and some companies are expecting delays of more than nine weeks. While some manufacturers are looking to source alternative suppliers outside of China, some suppliers in other countries are reluctant to fill a temporary gap.
 

In terms of what to expect, reporting from The Economic Times on February 27, 2020, indicated that all electronic equipment would be scarcer by 20 to 30 percent over the next 30 days, including mobile phones and other key products. Further, experts say this issue will hinder the sector for three to six months until supplies come back online. As replenishment slows, retail gross recovery rates may suffer as new products are not being introduced into inventory, causing growth in lower-turning and aged inventory categories over time.
 

Appliance retail shifts in the wake of Sears and JCPenney closures: After filing for bankruptcy in October of 2018, Sears, Inc., continued its reduction in store count that began in 2014. As of February 2020, new parent company Transform Holdco will operate just 182 Sears and Kmart stores in the United States. However, in mid-2019, as part of its transformation to a smaller but more profitable business, the new entity opened the first of three new smaller-format specialty stores called Sears Home & Life in Anchorage, Alaska. Company management describes the new concept stores as “a go-to destination for appliances, home services and connected home products.” Peter Boutros, chief brand officer for Sears and Kmart noted, “we’ve been listening to our customers and Anchorage residents have told us they want our best categories – appliances, smart products, and our Home Services offering.”
 

With Sears’ dramatic downsizing and competitor JCPenney exiting the appliance business in February 2019, retailers Best Buy, Lowe’s, and The Home Depot were the biggest beneficiaries of the lost appliance revenue. According to Michael Lasser, analyst for global financial advisory firm UBS, the stores’ overlapping product mix as well as physical proximity were beneficial, as approximately 80 percent of Sears original locations were within a 15-minute drive of one of its appliance competitors. Based on company feedback, appliances were one of Best Buy’s most successful comparable sales growth drivers for its U.S business for third quarter of fiscal 2020.
 

Sample inventory considerations: Similar to the challenge in consumer electronics retailing, one major factor impacting gross recovery values on major appliances is the issue of sample inventory. Typically sample inventory used for display or demonstration on selling floors will not recover as well as first-quality (non-sample) boxed goods.
 

In terms of inventory mix, it is important for borrowers to track levels of sample inventory separately from non-sample goods so that an experienced appraiser can factor in the reduction to sample categories in the aggregate. Significant levels of shopworn, damaged, or obsolete appliance inventory may negatively impact gross and net recovery values.
 



Note: This publication is provided for informational marketing purposes only. The material contained herein should not be regarded as advice, nor relied upon to make financial, operational or other decisions; nor should it be used as a substitute for an asset appraisal. Actual recovery values may vary from transaction to transaction and the recovery values referenced herein are for representative transactions without regard to specific key factors. This material may be redistributed only in its entirety, including notice of copyright. All rights reserved. ©2020 Gordon Brothers, LLC.
 

Reference sources: bestbuy, transformco, chain store age, business insider, ibisworld, The economic times, nbc news, mastercard spending pulse, adobe analytics, creditntell