Fool's Eye View

[ May 3, 2000 ]

Fad Boutique

By Alan Oscroft (TMFAlan)

Liverpool -- It was numbers time for Electronics Boutique (LSE: EBQ) today, as the company announced preliminary results for the year ending January 2000, Here's the bottom line compared with last year's results...

                       2000     1999
                        £m       £m

Turnover             251.25    159.43 
Operating profit       3.15     14.02
Pre-tax profit         2.78     15.25
Basic EPS              0.33p     4.36p

Now that looks like pretty bad news in anybody's language. Anybody's but that of the company chairman, Peter Lewis, that is. As Rob reported in this morning's Breakfast Fool, Mr Lewis excelled himself when he came out with the words "The group has successfully counteracted the effects of severe price discounting experienced in the market last year and we are optimistic as regards the current year". Yeah, right!

What that really means is that Electronics Boutique saw some severe price falls and increased competition during the year, as more and more suppliers entered the market and competition between competing games platforms got ever hotter. That competition means lower prices, and it means that companies in this market end up competing only on price.

There are other statements in today's news release that are open to alternative interpretation too. Here's a couple:

They said: "Market share consolidated at over 30%"
We say: "They haven't grown their market share"

They said: "Gross margins have been restored to over 30 per cent"
We say: "Gross margins have fallen from 33% to 31%, and what's more, operational costs have nearly doubled to £74 million, almost wiping out the entire gross profit for the year"

A couple of years ago, Electronics Boutique looked to have a bit of a first mover advantage, with a chain of shiny new shops opening up on our high streets, packed to overflowing with kids spending their pocket money. And the company became an instant hit with investment fadsters everywhere. "Electronic games, they're here to stay," people would say, and that much was true. But to get ahead and stay ahead, a company needs more than a first mover advantage. Nobody corners a market just by being the first to open new shops.

The Pitfalls for EBQ

There were two pitfalls for investors who saw Electronics Boutique as the road to long term riches, and two things that stood in the way of their chances of dominating their market.

Firstly, the company erected no real barriers to entry. Their business model was a simple retailing one, and there are plenty of bigger fish with larger high street presences who could (and do) take advantage of the increasing demand for electronic games.

Secondly, Internet retailing is slowly killing high street retailers. One day, it will probably put most conventional retailers out of business, but at the moment the ones that are being pressed the hardest are the "software" sellers. And by that I mean books, music, films, electronic games, computer software.

Further into the future, when we have enough cheap bandwidth (wonderful stuff, bandwidth), all of those will be sold and downloaded directly over the Internet. No boxes, no postal delivery, no shops. And what a liability a chain of established high street outlets might turn out to be then.

This isn't all just hindsight though; I clearly remember a similar discourse kicked off well over a year ago by Pyad, round about the time the EBQ fad bandwagon was just pulling out of the station.

All thoughts welcome on the Fool's Eye View discussion board.

Fool's Eye View Resources

•  All feedback encouraged to the Fool's Eye View discussion board •  Read the latest Market News •  All the latest Fool news •  All the latest quotes, data and AFX news