Retailers War Over Flat-Panel TVs

Wal-Mart and other retailers are using aggressive pricing and other tactics to lure buyers. S&P says the battle plan won't work for all

Retailers are hoping vivid colors and sharper pictures will help lure customers into their stores this holiday season. Demand for flat-panel TVs is on the rise, particularly at bargain prices, and the stakes are potentially high. Flat-panel sales are expected to exceed $20 billion this year, according to the research firm DisplaySearch.

The holiday shopping season officially got underway on what is known as Black Friday, the day after Thanksgiving, and more chain stores than last year are selling flat-panel displays at promotional prices. This strategy might not turn out to be positive for everyone, S&P thinks.

Analysts say that investors should consider how flat-panel merchandising fits into retailers' overall merchandising and operational strategy, especially since so many different retailers see flat panels as appealing to new and existing customers.

Committed to Leading

Price wars among retailers—even among ones not known for their electronics inventory—have been heating up. Wal-Mart (WMT; ranked 4 STARS, buy) has launched an aggressive pricing campaign for flat-panel displays this holiday season to attract customers into its stores, and is even running commercials showcasing its products, says S&P equity analyst Joseph Agnese.

In fact, the retailer said it's "committed to being a leading retailer of high definition TVs (HDTV)," which is a new, digital high-resolution technology, the largest and sharpest of which is 1080 resolution. Wal-Mart sells a range of both liquid crystal display (LCD) and plasma display panel (PDP) screens from Samsung, Panasonic—a Matsushita Electric (MC; 5 STARS, strong buy) brand, Philips (PHG; 4 STARS, buy), RCA—a Thomson (TMS; 3 STARS, hold) brand, Sony (SNE; 3 STARS, hold), Hitachi (HIT; 1 STAR, strong sell), and Sanyo (SANYY; 3 STARS, hold).

Depending on the make and model, flat-panel display prices have dropped as much as 70% this year vs. last. That has paved the way for warehouse clubs, such as Wal-Mart's Sam's Club and Costco (COST; 4 STARS, buy) to jump into the category. Costco said its flat-panel TV sales reached $1 billion for the first 44 weeks of its fiscal year ended Sept. 3, up 60% from a year earlier.

Appealing to the Affluent

Agnese notes that big screens have moved closer to the entrances of the warehouses to make a grand statement. He believes that flat-panel sales reflect a strategic shift in merchandising for both Wal-Mart and Costco: bigger-ticket items aimed at customers from higher-income demographics in an effort to raise average transaction size. "We believe a relatively upscale product mix appeals to a more affluent customer base," Agnese says.

The strategy appears to be working for Wal-Mart, too. A new survey suggests that more than a quarter of U.S. households with income of more than $100,000 will purchase electronics at Wal-Mart. In the national study, conducted by Thomas, Townsend & Kent with market intelligence firm BIGresearch, of those affluent customers planning to purchase flat-panel TVs, 41.3% said they would likely buy their new screen at Wal-Mart.

Another 28.8% of affluent customers surveyed intend to buy a flat-panel TV at Target (TGT; 4 STARS, buy). S&P equity analyst Jason Asaeda says the "upscale discounter" plans to offer an expanded assortment of LCD TVs and portable electronics this holiday season, adding fuel to the already fiercely competitive segment, in his view. "In line with its pricing policy, the company is likely to match competitor Wal-Mart's prices on identical or similar items, which could limit profit margin," on flat panels, Asaeda says.

Squeezed Margins

But discounters and warehouse clubs aren't the only ones moving into the category and helping to pressure prices on flat screens. Even Home Depot (HD; 5 STARS, strong buy) is testing the product, which S&P equity analyst Michael Souers believes is a category that the home-improvement chain anticipates should help boost overall sales.

"Getting into a hot product category, as other core home-improvement products are showing softness, should help in the short term," he says. But he projects the margins on these big-ticket electronics will be squeezed due to heightened competition. "Flat-panel display margins may be weak, but the TVs may be a way for the chain to get quick sales in a sluggish sales environment."

Souers also covers the office products chains, Office Depot (ODP; 2 STARS, sell), Staples (SPLS; 3 STARS, hold), and OfficeMax (OMX; 3 STARS, hold), for which the flat-panel monitor segment for PCs are a natural segue.

Get Them in the Door

The chains have benefited recently from robust business spending. However, Souers says high stock valuations are discouraging a higher ranking for the chains, which are mainly selling LCD monitors that replace the desktop's heavy and bulky cathode-ray tubes (CRT) for business, small business, and home-office use.

According to Asaeda, the rivalry will not likely result in big sales. He thinks that flat panels will not drive profits for these businesses, nor for department stores such as Federated (FD; 4 STARS, buy), JC Penney (JCP; 3 STARS, hold), Sears (SHLD; 3 STARS, hold), and Kohl's (KSS; 3 STARS, hold).

However, flat panels are part of a bigger strategy this holiday season to help get shoppers in the stores, because chains are featuring flat panels as "treasure hunt" items or high-end gifts, in Asaeda's opinion. For example, Kohl's CEO cited increased foot traffic and higher-ticket items as sales drivers. In a conference call with analysts on Nov. 9, Larry Montgomery said "sales rang up in single- and double-digits across all lines of business and all regions of the country."