Consumer Electronics & Appliances
Date February 2019
- Consumers are frequenting discount and online electronics retailers offering lower prices, threatening well-established retail models
- Although Best Buy has struggled in the past, the company’s fiscal 2019 performance has surpassed market expectations
- As Sears moves forward as a smaller chain, competitor JCPenney announced that it will exit the appliance business at the end of February 2019
- Thirty-seven percent of U.S. consumers will make an online purchase of a large item, including appliances, in the next year according to a recent survey by Goodmind
- The global smart home market is forecasted to reach over $53 billion (U.S. dollars) by 2022, with North American consumers outspending other demographics in the category
Approximate net recovery on cost
E-commerce dominates for holiday 2018: The most popular products sold on Thanksgiving Day, Black Friday, and Cyber Monday 2018 were televisions, computers, and other electronics, and all three days exhibited healthy year-over-year sales growth. However, according to reporting from the Wall Street Journal, traffic in physical stores fell in 2018. It is impossible to ignore the growing trend toward online shopping—brick-and-mortar retailers that do not develop their e-commerce footprint suffer as consumers shift their spending online. According to Practical Ecommerce, most consumers now prefer a multichannel approach combining shopping in physical stores and online. E-commerce sales during the “Cyber 5” (Thanksgiving Day through Cyber Monday) increased 19 percent in 2018 over 2017. Much of the growth was due to expanded online deals on Thanksgiving Day and Black Friday.
Showing no signs of slowing down, total e-commerce sales increased 19.1 percent for holiday 2018, on top of a 13 percent increase in 2017. Overall holiday sales increased 5.1 percent; however, total sales of electronics and appliances decreased 0.7 percent according to data from Mastercard SpendingPulse indicating that the segment still faces challenges as consumer preferences change.
Sears undergoes restructuring: Sears’ long-anticipated Chapter 11 bankruptcy filing occurred in October 2018. After 10 straight years of losses, vendors and merchants were not surprised by the filing. Appliance manufacturers including Whirlpool had reduced their original equipment manufacturer and retail exposure to Sears in advance of the filing. At the time, Electrolux released a statement downplaying the effect Sears’ bankruptcy would have on its own business, saying that it “has been actively planning for various Sears’ contingencies while also growing the business with other customers.” In February 2019, ESL Investments, Inc. announced that its affiliate, Transform Holdco LLC, had completed its acquisition of Sears’ retail footprint, comprised of 223 ongoing Sears stores and 202 Kmart stores, for approximately $5.2 billion.
Competitor JCPenney announced in mid-February 2019 that it would exit the appliance business at the end of the month. Big-box retailers Best Buy, Lowe’s, and The Home Depot are potentially the biggest beneficiaries of Sears’ lost appliance revenue should consumers lose confidence in the ongoing chain. According to Michael Lasser, analyst for global financial advisory firm UBS, this is due to the stores’ overlapping product mix as well as physical proximity since approximately 80 percent of Sears original locations were within a 15-minute drive of one of its appliance competitors. Given its struggle to remain relevant in recent years, it remains to be seen how Sears will compete against Best Buy and others in the appliance space, and whether customer confidence will remain with the iconic retailer as it moves forward as a significantly smaller entity.
Best Buy’s turnaround: Best Buy, the top electronics retailer in the United States, has weathered difficult times over the last several years; however, the company’s performance has improved recently as evidenced by seven straight quarters of positive comps. Quarterly sales for the period ended November 3, 2018 increased 2.9 percent, including a 4.3 percent increase in comparable stores sales (on top of a 4.4 percent increase in the same period last year). The increase was partially offset by the closing of 297 stores; however, the majority of the closures were due to the planned exit of the company’s remaining 287 small-footprint Best Buy Mobile units.
Nevertheless, the industry remains cautious as total sales of electronics and appliances declined 0.7 percent during the holiday period, despite a 5.1 percent increase in overall retail sales, according to data from Mastercard SpendingPulse. In terms of category strength in driving future sales, the global smart home market is forecasted to reach over $53 billion (U.S. dollars) by 2022, with North American consumers outspending other demographics.
Best Buy management remains optimistic as the company anticipates its fourth quarter comps will range from flat to positive 3 percent for the reporting period ending January 2019.
Recovery rates are subject to industry change: Disposition recovery rates on a departmental basis in consumer electronics and appliances reflect individual company performance and, thus, may fluctuate up or down based on a company’s normal gross margins and the sell-through rates achieved. Sales fluctuations related to consumer demand, product availability, or seasonality may have a significant impact on recovery rates over a relatively short period of time. For electronics in general, due to high rates of innovation, product obsolescence is an ongoing concern that companies and lenders should monitor on a regular basis either through regular inventory appraisals and/or through company-generated reporting. Similar to the appliance segment, significant levels of open-box or sample inventory can negatively impact gross recovery rates and should be tracked as part of the normal course of business. Working with an experienced appraiser in this segment can offset client risk through regular collateral monitoring.
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.