Top Two US Consumer Electronic Retailers May Exceed Estimates

Analysts expect the top two US consumer-electronic retailers to post healthy fiscal 2000 earnings, as consumer demand doesn't seem to be slowing despite interest rates inching higher. Americans seem to have forgotten that interest-rate increases and surging energy prices are supposed to slow consumer demand. Instead, they've continued spending, spurring retail sales to a stronger-than-expected 1.1 percent increase in February, the U.S. Commerce Department said, up 9.4 percent from the year-earlier period. The increase follows a 0.4 percent gain in January. Consumers were especially willing to open their pocketbooks for electronics, among other things, helping retailers like Best Buy Co. (BBY) and Circuit City Stores Inc. (CC) meet estimates that have already been adjusted higher, say analysts. ""Senior management of both companies are upbeat about fiscal year 2000,"" said Analyst John S. Glass at Deutsche Banc Alex. Brown. ""We continue to be very bullish on the consumer-electronics sector."" In fact, he expects both companies, each of which he rates a ""strong buy,"" to grow earnings at least 25 percent over the next three to five years. ""The plethora of new products, from digital audio/video products to Internet access devices to home network products, should continue to drive top- and bottom-line growth,"" he said. US retail same-store sales for the month of March are expected to rise one to two percent, according to the Bank of Tokyo-Mitsubishi/Schroders weekly sales report. Same-store sales, or sales at stores open at least a year, are a key indicator of a retailer's business because they exclude new and closed locations. Federal Reserve policy-makers raised the overnight bank lending rate to its highest level in almost five years, saying the US economy remains at risk of overheating and that further rate increases are likely in coming months. This is the fifth increase since last June 1999. The Fed is trying to slow spending and keep inflation contained by making it more expensive for consumers and businesses to borrow money. So far however, consumers are shrugging the Fed off, say analysts, as retailers such as Wal-Mart Stores Inc. (WMT) and Target Corp. (TGT) reported higher sales in February at stores open more than a year. Wal-Mart sales were 6.1 percent higher than a year earlier while Target's sales were 5.6 percent higher. Analysts suggest selective buying of retailers, focusing on faster-growing names such as Best Buy and Circuit City. Best Buy Earlier this month, Best Buy said fiscal fourth-quarter same-store sales rose 11 percent, which beat beating forecasts. Satellite systems, DVD-Video players, wireless telephones, digital cameras and camcorders led the sales gains. Sales beat Best Buy's estimate of a ""high-single digit"" percentage gain, as the US retail industry had its biggest holiday season in seven years. Analysts' forecasts for same-store sales growth ranged from eight percent to ten percent for the quarter. Shares of Best Buy closed up 2 5/8 to 73 1/2 in New York Stock Exchange trading. The Eden Prairie, Minnesota-based retailer's stock has gained 46 percent since January 1. US Bancorp Piper Jaffray Analyst Rebecca Yarchover reiterated her ""buy"" rating on the stock last week. Best Buy is adding digital products to its stores because they generate more profit on each sale than analog items. Digital goods account for more than ten percent of the company's annual sales, analysts said. Sales gains at the 357-store chain are exceeding the consumer-electronics industry average of about 7 percent a year as Best Buy lures customers away from smaller, independent stores. Circuit City Also earlier this month, the second-biggest US chain of consumer-electronics stores said sales at stores open at least a year rose ten percent in the fiscal fourth quarter, led by demand for personal computers. An extra day in February added about three percentage points to same-store sales, the company said. The Circuit City Group, which includes the CarMax auto stores, said total sales increased 15 percent to $3.48 billion from $3.03 billion in the year-ago period. The company also announced it will test two new store concepts, one focusing on consumer electronics and the other on appliances. It plans to open six to eight of the appliance stores this year. Shares of the Richmond, Virginia-based company closed down 1/4 to 48 5/8 on the New York Stock Exchange. Robinson-Humphrey Co. Inc. analyst David A Schick expects shares to rise another 32 percent within a 12-month period.Source: Zacks Investment Research, Inc