Best Buy Co (BBY.N) is cutting prices for the holiday season to thwart fierce competition from Wal-Mart and other discount and online rivals, a move that it warns will hurt margins for the current quarter.
Tuesday's news took some momentum from Best Buy's stock, one of this year's hottest, sending the shares down as much as 11 percent. But many Wall Street analysts said the strategy is needed as Best Buy, the No. 1 U.S. consumer electronics retailer, battles to stay relevant and tries to change the perception that its prices are higher than those of many rivals.
"They have spent much of the past year establishing themselves as a low-price retailer, turning the battle into one on service and selection, one where they have an advantage," said Credit Suisse's Gary Balter. "It is important that they don't slide back into the image of a higher priced retailer."
Earlier on Tuesday, Wal-Mart Stores Inc (WMT.N) promised to match select Black Friday offers on toys and electronics from rivals Target Corp (TGT.N), Toys R Us Inc and Best Buy, starting as early as later this week.
Black Friday falls on the day after the U.S. Thanksgiving holiday and traditionally has been the unofficial kickoff to the holiday season.
While the U.S. economy has been expanding, lower-income Americans have been holding back on spending because of higher payroll taxes and slow job growth.
"If our competition is in fact more promotional in the fourth quarter, we will be too," Best Buy Chief Financial Officer Sharon McCollam said, warning that the holiday discounting will hurt gross margins.
The change in holiday strategy overshadowed a better-than-expected third-quarter profit at Best Buy, and dragged down its shares. Before Tuesday, the stock had soared 269 percent, the second best performance in the S&P 500 so far this year, behind Netflix Inc (NFLX.O).
In an interview, Chief Executive Hubert Joly said Best Buy, the No. 1 U.S. consumer electronics retailer, is "playing to win" and does not want "price to be an obstacle" for holiday shoppers. He declined to estimate the potential effect on margins.
BB&T Capital Markets analyst Anthony Chukumba said the retailer should be able to offset some of the margin pressure through cost cuts and market share gains.
"While one can get concerned on what looks like a bloody fight in the gutters, the reality is that discounts are not that great this Christmas, with manufacturers tightly controlling discounting in the key and visible consumer electronic products," Balter said.
Balter said he expects the actual impact on margins to be small, likely 10 to 20 basis points of gross margin and some additional labor.
In a further bid for customers, Best Buy is offering free shipping for online orders over $25 and promising a "significantly improved" experience for online shoppers after investing to make its website easier to navigate.
Best Buy will also ship directly from more than 400 stores this season as it combats online giant Amazon.com Inc (AMZN.O), and brick-and-mortar chains such as Wal-Mart that use their stores as mini-warehouses.
The retailer is also increasing the number of Black Friday door buster deals, hosting exclusive events for "My Best Buy" members and opening its stores at 6 p.m. on Thanksgiving evening, earlier than last year.
COST CUTS BOOST PROFIT
Under Joly, who took the helm last fall, Best Buy has removed layers of management, eliminated hundreds of jobs and closed unprofitable stores. It also boosted cash by selling its stake in a European joint venture with Carphone Warehouse Group Plc CPW.L.
Best Buy slashed $115 million in costs in the third quarter, bringing total cost cuts to $505 million so far this fiscal year.
Its net earnings were $54 million, or 16 cents a share, in the third quarter, compared with a net loss of $10 million, or 3 cents a share, a year earlier.
Excluding restructuring charges and other items, it earned 18 cents a share, beating the average analyst estimate of 12 cents, according to Thomson Reuters I/B/E/S.
Sales fell 0.2 percent to $9.36 billion. Same-store sales rose 0.3 percent in the quarter, including a 1.7 percent rise in domestic same-store sales.
In early afternoon trade, Best Buy shares were down 9 percent at $39.62 on the New York Stock Exchange.
(Reporting by Dhanya Skariachan; Editing by Jeffrey Benkoe and Gerald E. McCormick)