Best Buy Says Holiday Promos Will Squeeze Margins

Best Buy Says Holiday Promos Will Squeeze Margins

The electronics retailer’s stock is up 235 percent this year but fell Tuesday after the company announced that it expects lower margins due to increased promotional costs.

Best Buy reported a jump in third-quarter earnings and a slight drop in revenue, but its stock fell more than 8 percent Tuesday following the announcement that “holiday pressures” may pose a challenge in the fourth quarter.
 
The Richfield-based electronics retailer beat analyst expectations with profits of $54 million, compared to a loss of $10 million during the same period in 2012. However, the company said a need to keep up with competition over the holidays may lead to smaller margins in its fourth quarter.

“If our competition is in fact more promotional in the fourth quarter, we will be too, and that will have a negative impact on our gross margins,” Best Buy Chief Financial Officer Sharon McCollam said in a statement. She said that in light of competitors’ decisions to open early for “Black Friday,” Best Buy would be opening stores early as well. And that “this requires increased promotional offers and an incremental investment in store payroll . . . it’s table stakes.”

Shares of Best Buy’s stock were trading down 8.5 percent at $39.86 during Tuesday afternoon trading; however, the stock is up 235 percent from the start of the year.
 
Best Buy reported third-quarter revenue of $9.36 billion, down 0.2 percent from $9.38 billion in the third quarter of 2012. Third-quarter revenue was about $6 million above analysts’ projections.
 
McCollam said in a conference call that the company’s revenue decline was primarily due to a store closing during the second quarter and “continued softness” in the company’s international market.
 
The company saw growth in mobile phones, appliances, and notebook sales, which was offset by a decline in gaming, movies, and digital imaging, said McCollam. The company’s online channel saw comparable sales—which are year-over-year sales that exclude sales from new stores—over 15 percent. And she said that number would have reached 20 percent had the quarter included pre-orders of new gaming consoles, which will be recognized in the fourth quarter.
 
The company’s international revenue fell more than 11 percent, driven by a same-store sales decline of 6.4 percent—primarily due to lower industry demand for consumer electronics in Canada and the May expiration of government subsidies in China. 
 
According to CEO Hubert Joly, Best Buy didn’t close any stores this quarter, and the company’s “retail performance is improving, and the financial economics of closing stores is becoming less compelling.” However, he did say the company plans to close one additional store at the end of the year.