Better Profits for Electronics Stores?

Profit forecasts for electronics retailers are rising in a significant manner. During just the past 2 weeks, more than 40% of all earnings estimates for Retail-Consumer Electronics have been revised upwards - a very bullish sign.

The biggest beneficiary of the optimism has been Best Buy Co., Inc. (BBY - Analyst Report).

A couple of weeks ago, BBY shocked analysts with better-than-expected fiscal fourth-quarter earnings of $1.61 per share. Though same-store sales were down, the dollar amount of the average purchase rose. More importantly, gross margins widened by 90 basis points.

BBY also provided upbeat guidance. The company expects fiscal 2010 profits to total between $2.50 and $2.90 per share; the consensus had called for earnings of $2.36 per share.

Nearly all of the covering analysts adjusted their projections to be inline with BBY's guidance. The consensus estimate is now at $2.77 per share.

It's not just Best Buy that is responsible for the overall improvement in the industry group's outlook, however.

Competitor Conn's, Inc. (CONN - Snapshot Report) also beat estimates and said that gross margins improved. Video game retailer GameStop Corp. (GME - Analyst Report) generated same-store sales growth of 9.6%. Both companies provided an upbeat outlook.

Without a doubt, the demise of Circuit City is helping all 3 companies.

Another trend helping BBY and CONN is that consumers are still buying LCD TVs. Some of this might be attributable to the digital conversion, though declining prices and aging analog sets are also playing a role.

Corning Incorporated (GLW - Snapshot Report) recently said that it has been "experiencing increasing glass orders." As a result, the company is now guiding for first-quarter glass volume of flat to down 5%, versus previous guidance for a 20% to 25% drop. (GLW is a major manufacturer of glass for flat panel displays.)

Finally, tough economic conditions are causing more consumers to stay at home then go out. A DVD or a video game can cost less than taking a family of four out for a night. This trend favors companies like BBY, CONN and GME.

Finally, as I discussed last month, retail earnings in general have not been as bad as feared. This has led to multiple positive revisions across the retail sector.

CONN is a Zacks #1 Rank ("strong buy") stock. BBY and GME are Zacks #2 Rank ("buy") stocks. All 3 are classified in Retail-Consumer Electronics. GLW is a Zacks #2 Rank stock classified in Fiber Optics.

Related ETFs

There are a few exchange-traded funds that focus on retailers. SPDR S&P Retail (XRT) provides good overall coverage of the sector. Furthermore, Best Buy is the fund's fourth-largest holding, though no single position accounts for more than 2.5% of XRT's portfolio.

The Zacks Rank is a quantitative short-term indicator designed to determine a stock's relative performance over a period of 1 to 3 months.

Zacks Premium and Zacks Elite subscribers can view the Zacks Industry Rank List at http://www.zacks.com/zrank/zrank_inds.php. This interactive list allows you to see all of the companies, and their Zacks Rank, within more than 200 industries. Shown below is the Zacks Sector Rank List, which shows the trend in estimate revisions on a broader scale.

Charles Rotblut, CFA, is the senior market analyst for Zacks.com. He can be reached at crotblut@zacks.com.