Best Buy's Profits Squeezed by Discounts

  @ibtimes on December 13 2011 11:07 AM

(REUTERS) - Best Buy Co.'s quarterly profit missed Wall Street estimates as bigger discounts during the holiday season ate into profits at the world's largest electronics chain.

The news pushed Best Buy's shares down 11 percent on Tuesday and raised the question of whether price was the primary weapon to drive sales, a worrisome longer-term scenario for Best Buy and other brick-and-mortar chains with massive investments in infrastructure and major efforts to increase the service side of the business.

The results also coincided with a report from the Commerce Department showing that U.S. retail sales rose less than expected in November, tempering some of the expectations of a strong holiday shopping season.

The seasonal shopping that traditionally kicks off on Black Friday -- the biggest sales day of the year for retailers -- is closely watched by investors as consumer spending accounts for about 70 percent of the U.S. economy.

In its third holiday buying period after the bankruptcy of archrival Circuit City, Best Buy faces cut-throat competition from online retailer Amazon.com Inc and discounters such as Wal-Mart Stores Inc and Target Corp .

To woo the budget-conscious from mass merchants and online rivals, Best Buy offered deep discounts on items such as flat-screen TVs, promised to match any lower prices its brick-and-mortar rivals advertised during the season's peak and even offered free shipping.

Increased promotions hurt gross margin, but we also believe the shift online with free shipping was a significant negative to the gross margin, analyst David Strasser at Janney Capital Markets said.

The consumer is conditioned to wait for holidays to shop, as the weaker November retail sales result shows that the strong Black Friday weekend was offset by weaker sales industrywide in the weeks leading up to the holiday weekend, he said.

The decisions helped the industry bellwether to report a 0.3 percent rise in sales at its stores open at least 14 months in the latest third quarter, reversing declines in the past five quarters, but hurt the company's profits.

Total company gross profit dollars fell two percent during the quarter from the year-ago period.

Net earnings fell to $154 million, or 42 cents a share, in its third quarter that ended November 26, from $217 million, or 54 cents a share, a year earlier.

Excluding items, it earned 47 cents a share, missing the analysts' average estimate of 51 cents a share, according to Thomson Reuters I/B/E/S.

Total sales rose to about $12.10 billion, missing the analysts' average estimate of $12.14 billion.

On Tuesday, the company also backed its outlook for the financial year. It continues to see revenue of $51.0 billion to $52.5 billion, reflecting comparable store sales in the range of flat to a 3 percent decline.

Best Buy anticipates earnings per share of $3.35 to $3.65, including share repurchases, but excluding items.

Its shares were down 11 percent, or $3.14, at $24.93 in morning New York Stock Exchange trading.

(Reporting by Dhanya Skariachan; Editing by Derek Caney and Maureen Bavdek)

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