Best Buy Co Inc, the largest U.S. consumer electronics retailer, said same-store sales were expected to fall and higher discounting would erode margins in the second half of the year.
Best Buy's shares fell as much as 7 percent on Tuesday after the company also reported lower-than-expected revenue for the third straight quarter, hurt by weak sales of consumer electronics and competition from online retailers.
The company said it expected same-store sales to decline in low single-digit percentage terms and operating margins to remain under pressure due to higher sales of lower-margin items online and discounting in Canada and China.
Same-store sales fell 2.7 percent in the second quarter ended Aug. 2, steeper than the 2.2 percent decline estimated by analysts polled by research firm Consensus Metrix.
U.S. same-store sales slipped 2 percent.
Operating margin fell to 2.7 percent from 4.5 percent.
Best Buy's gross margins have not grown in the past 14 quarters, partly due to competition from online retailers such as Amazon.com.
Amazon's quarterly sales of electronics and general merchandise jumped nearly 30 percent in North America.
Best Buy's margins were hit further last year after it launched a plan to match the lowest prices offered by local and online retailers.
Competition from online retailers is likely to intensify.
In a recent Nielsen survey of people likely to buy items such as TVs and cameras in the next six months, 42 percent said they would buy it online, up from 15 percent a year earlier.
Analysts said Best Buy's forecast was conservative and the company could benefit from the expected iPhone launch next month and sales of ultra high-definition 4K televisions.
The customer response to 4K televisions was encouraging, but their impact on sales would be "relatively limited" this year, Chief Executive Hubert Joly said on a conference call.
Best Buy said it planned to invest $40 million-$50 million in the second half to improve shipping and order fulfillment.
Industrywide sales of consumer electronics such as TVs and desktop and notebook computers fell 2.5 percent in the quarter, the company said, citing NPD Group's Weekly Tracking Service. Such items make up about 65 percent of Best Buy's U.S. revenue.
Best Buy's revenue fell 4 percent to $8.89 billion in the second quarter. Analysts on average had expected $8.99 billion, according to Thomson Reuters I/B/E/S.
However, cost cuts helped the company report a better-than-expected profit.
Joly has removed layers of management, cut jobs, shut stores and boosted Best Buy's cash reserves since 2012 in an effort to make up for declining sales.
Net income attributable to shareholders fell 45 percent to $146 million, or 42 cents per share.
The year-earlier profit included a gain of $229 million from legal settlements.
Excluding items, the company earned 44 cents per share from continuing operations, above the average analyst estimate of 31 cents.
Best Buy's shares were down 6.8 percent at $29.81 in afternoon trading.
(Editing by Joyjeet Das, Sriraj Kalluvila and Kirti Pandey)