Markets & Finance

A Big Black Friday for Electronics Stores


Best Buy and Circuit City were busy over the holiday weekend, but are shoppers being lured by must-have gadgets—or deep discounts?

While most retailers prepare for a mediocre holiday season, electronic stores like Best Buy (BBY) and Circuit City (CC) may see strong sales as Americans stock up on flat-panel TVs, laptops, and other electronic gadgets.

Several analysts make that prediction based on strong traffic at electronics retailers over the Thanksgiving -- or "Black Friday" -- weekend. Busy stores could point to higher-than-expected holiday profits, but many investors worry about the price retailers are paying — in the form of deep discounts -- to draw the crowds.

In consumer electronics, "Black Friday was a home run," writes Bank of America (BAC) analyst David Strasser.

A Deutsche Bank (DB) survey found that, overall, 37% of stores said they were busy over the weekend, barely up from last year. But 76% of Circuit City stores and 75% of Best Buy stores were busy, up from, respectively, 68% and 61% a year ago and 33% and 47% in 2005.

Analysts prowling the stores noted a few trends. Popular sellers included: flat-panel TVs; laptop computers; MP3 players; video gaming equipment, especially Activision's (ATVI) Guitar Hero game; and digital cameras.

A surprise seller, according to Strasser and other analysts, was navigation equipment using global positioning system (GPS) technology. "GPS sold out almost everywhere at all price points, from what we observed and heard," Strasser wrote. The stock of GPS maker Garmin (GRMN) was up 8% by midday on Nov. 26.

A great Black Friday doesn't necessarily predict a profitable holiday season. Stores can cut prices to bring shoppers in the door, but then get hurt by lower profit margins.

Circuit City's discounts seemed to be more aggressive than Best Buy's price cuts, and that was raising investors' concerns. After good news from Black Friday, Circuit City's stock initially opened higher but then dropped 8.5% by midday on Nov. 26. Best Buy was faring much better, up 1.75% by midday.

Last year, notes Piper Jaffray (PJC) analyst Mitchell Kaiser, Best Buy logged a "very strong Black Friday" but then was hurt by "aggressive promotions, particularly on flat panel TVs." He wrote that "the more rational promotions provide us with confidence" in profit margin predictions at Best Buy.

According to a Jefferies & Company (JEF) analysis, Circuit City provided an average discount on televisions of 32.5% over the weekend, down from 38% last year. Best Buy marked down TVs 27.6%, vs. 36% a year ago.

Though many analysts predict strong demand for consumer electronics this holiday season, not all are as optimistic. Consumers "cherry-picked" discounted items and seemed to be buying more lower-priced electronics like cameras than higher-end items, JPMorgan (JPM) analyst Stephen Chick wrote. Traffic in stores looked, at best, no better than last year, he said.

There are plenty of reasons for retailers to worry. A weak back-to-school shopping season raised fears that Americans will be less likely to spend big for Christmas. Spending on gifts may be hurt by rising expenses, particularly higher energy prices, and anxiety about the economy.

A survey of 2,000 consumers by Susquehanna Financial Group found 36% plan to spend less on holiday gifts this year. More than 70% of respondents were "very" or "somewhat" concerned about the economy, with only 7% optimistic. Those consumers will be looking for deep discounts. Sixty percent expect a discount of at least 20% on their consumer electronics, the survey said.

Black Friday weekend only represents about a tenth of the holiday retail spending. So a key question is whether consumers will keep buying in future weeks.

Perhaps, as the optimists would have it, Americans are especially excited about a range of new electronic gadgets, from navigation devices and new video games to wider TVs and lower-priced laptop computers. In that case, even a stressed consumer may shift more of their holiday budget toward electronics.

But the strong traffic at Best Buy and Circuit City also suggests another theory: Perhaps Americans, astounded by the deep discounts they found in recent years on big-ticket electronics, have been trained to shop for electronics on Black Friday to the exclusion of the rest of the season.

Steverman is a reporter for BusinessWeek's Investing channel.

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