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OTTAWA (GlobeinvestorGOLD) - Investors have been making a bundle in the toy business, but don't bother trying to guess which little doo-dad has caught the eye of our nation's darling children.
Fact is, kids are only a small part of the customer base for the MP3 players, ipods, portable DVD players, digital cameras, cell phones, computers, game systems and other cool electronics that are today's toys of choice of the masses. Teens, adults - everyone is buying these products and the stores that sell them are cleaning up. So are the people who invest in these retail chains.
Take Best Buy Co., which operates in Canada and the United States under its own name and as Future Shop as well in Canada alone. The company's shares are up a flashy 23 per cent this year and a cumulative 300 per cent over the past five years. U.S.-based Circuit City Stores Inc. which took over Canada's RadioShack stores last year, is up 36 per cent this year and a total 161 per cent in total over the past five years. Retailing is a brutally tough game, especially in the U.S. market, so there's good reason to question how much more gains stocks like these can produce. For now, though, electronics retailers are making like the Energizer bunny.
The day after the Thanksgiving holiday in the United States is known in retailing circles as Black Friday because it marks the point in the year when stores move into profit-making mode. Retailers are closely watched by analysts over Black Friday and the following weekend to see how they're performing. The verdict this year: electronics retailers and Wal-Mart were the big winners. Driving electronics sales were products like the new Xbox 360 video game system, LCD televisions and digital cameras. Demand so strong that Bloomberg News found at least 150 people waiting in line at a Circuit City store in Trumbull, Con., at 4:50 a.m. on Black Friday.
Sales expectations for the holiday season are such that an analyst with the investment dealer Credit Suisse First Boston told clients recently to buy the shares of Best Buy and Circuit City on weakness. This may be a challenge, given the performance of both chains in November. Best Buy rose 9.5 per cent, Circuit City 21 per cent.
Best Buy and Circuit City are the clear leaders in North American electronics retailing, so much so that many of their publicly traded competitors just aren't in the game in terms of share price performance. For example, RadioShack Corp, a ubiquitous presence in the U.S. market, is down about 30 per cent this year.
If you're going to exploit the craze for electronic toys as an investor, be sure to keep an eye on economic conditions. U.S. consumers are heavily indebted and their debt carrying costs are rising as interest rates move higher. Any hint of a drop in consumer spending or a broad weakening in the U.S. economy would inevitably have an effect on the money people are spreading around in stores like Best Buy and Circuit City. Here in Canada, rates haven't gone up as much as they have south of the border, and consumer debt levels haven't prompted the same level of concern.
Should economic conditions hang in there, electronics retailers will have a huge advantage in keeping sales humming along. No matter what you buy in their stores, you know that a new and better version will come along in the not-too-distant future. Just as the Xbox begat the Xbox 360 and MP3 players have been trumped by the ipod, so too will future products supersede these hot button products of the moment. When will this endless cycle of consumption stop? Hard to say. Kids need their toys, and so does everyone else.
Rob Carrick has been writing about personal finance, business and economics for more than 12 years.