Best Buy's profits squeezed by discounts

By @ibtimes on

Best Buy Co's quarterly profit missed Wall Street estimates as bigger discounts during the key holiday selling 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.

Lowering pricing is but one step to evolving to a winning formula, Credit Suisse analyst Gary Balter said. Given that more aggressive pricing is leading to lower profit dollars, Best Buy also has to be attacking expenses, primarily through right sizing stores and closing some in certain cases.

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 key selling season - which traditionally begins with 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 season 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 .

Retail has been very promotional and consumers have been very value-conscious, Best Buy CEO Brian Dunn said on a conference call as it summed up the season so far.

Unlike last year, when it held the line on discounts and promoted only pricey items, Best Buy is now offering deep discounts on items such as flat-screen TVs and free shipping. It also promises to match any lower prices advertised by its brick-and-mortar rivals at the peak of the season.

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 strategic shift 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.

It is a very delicate balancing act. It is tough to get it right, said BB&T Capital Markets analyst Anthony Chukumba.

Total company gross profit dollars fell 2 percent during the quarter from the year-ago period.

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For a graphic comparing Best Buy with its peers, click http://r.reuters.com/ten55s

For a graphic on Best Buy's third-quarter results, click http://link.reuters.com/qur55s

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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 11.4 percent at $24.87 Tuesday morning on the New York Stock Exchange.

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

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