Stock Option Advisory

Who’s Stepping into Circuit City’s Shoes?

What the market may be learning from the demise of Circuit City, once the nation’s number two electronics retailer, is that today’s consumers have little patience with young, lower-paid hourly workers who display scant knowledge of the latest products. When it comes to home electronics, some consumers are comfortable enough with the technology to buy online, while others look to brick-and-mortar stores with knowledgeable sales staff, adept at demystifying increasingly complex appliances. And this may be why small regional electronics retailers are thriving in this economic downturn: Their back-to-the-future business model includes commissioned sales staff, trained to explain new technology.

To have staying power in this market, electronics retailers will be expected to provide a high level of customer service. And here’s where the small retailers stand to benefit. They offer the levels of service shoppers seek. Capitalizing on both the liquidation of Circuit City and the slumping commercial real estate market, smaller retailers such as Indianapolis-based hhgregg Inc. (HGG) and Beaumont, Texas-based Conn’s Inc. (CONN) are pursuing ambitious expansion plans, according to the Wall Street Journal.

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Hhgregg added six stores in the third quarter alone, bringing its total to 111. Founded in 1955, the family-run appliance business continued its expansion southward, opening 20 stores in the last year and reporting increased sales of 6.6 percent compared with last year.

Conn’s operates 75 stores in Texas, Louisiana and Oklahoma. Founded in 1890 as a plumbing company, Conn’s opened seven new stores in the last year and posted a 2.6 percent increase in sales for the quarter ended April 30. By comparison, Best Buy (BBY) reported a 9.7 percent increase in sales for the quarter ended Feb. 28.

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The nation’s top electronics retailer, Best Buy is widely expected to be the biggest beneficiary of the collapse of Circuit City earlier this spring. Hoping to meet the needs of today’s electronics customer, the company is investing heavily in its customer centricity philosophy, which calls for tailoring individual stores to local markets and training sales staff to act as technology counselors. The company’s Geek Squad, which provides set-up, installation and troubleshooting for computers, home theater, navigation systems and more, is part of this multi-pronged customer service approach.

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Touting lower prices than the competition, Wal-Mart (WMT) and Target (TGT) have also positioned themselves to collect some of the estimated $11 billion in annual revenue Circuit City once claimed. But the lure of low prices might not be enough to satisfy consumers in the long run. Wal-Mart is banking on shoppers who feel comfortable with the technology and wish to avoid the high-pressure tactics sometimes employed by commissioned salespeople. Many of these consumers have migrated to the Internet, however.

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Interestingly, new owner Systemax Inc. (SYX), parent company of, online retailer of computers, electronics and industrial products has resurrected the Circuit City brand as an online business. The new advertises lower prices, wider selection, faster shipping and 24/7 customer service everything sought by online consumers, many of who are now shopping (AMZN).

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Investing in CONN might appear risky, as the company has a small market capitalization of $225M. However, an investment in CONN can be protected with stock options. A put option can provide stock insurance, similar to auto or homeowners insurance. Stock options can provide portfolio insurance for investments in the event a stock or stock in the portfolio takes dive in price. The combination of CONN with a put option is known as the married put strategy. A married put strategy enables investors to protect themselves no matter how the stock market behaves.

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[tags] Circuit City, Wall Street Journal, Texas, Louisiana, Oklahoma, Geek Squad, AMZN, Inc., BBY, Best Buy Co. Inc., CONN, Conns Inc., SYX, Systemax Inc., TGT, Target Corp., WMT, Wal-Mart Stores Inc. [/tags]

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