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Best Buy warns steep holiday discounts will hurt its margins

November 19, 2013|By Ricardo Lopez
  • People wait in line to buy the latest PlayStation console at a New York Best Buy store.
People wait in line to buy the latest PlayStation console at a New York Best… (Stan Honda / AFP/Getty Images )

It's a retailers' arms race for consumers' holiday dollars -- and Best Buy warned Tuesday that promotional discounts this season could hurt profitability.

As stores race this year to kick off Black Friday sales earlier and earlier, Best Buy plans to fight for its share of customers. For consumers, that means more bang for the buck. But for the beleaguered electronics retailer, it means narrower profit margins.

On Tuesday, the Richfield, Minn.-based company beat Wall Street expectations when it reported a profit during its most recent quarter. Net income rose to $54 million, compared with a loss of $10 million during the same period last year. 

Still, investors were more focused on comments by Best Buy chief financial officer Sharon McCollam in the company's earnings statement.

"We know that we will be facing an increasingly promotional environment," McCollam said. "As such, we want to give you color on our response to this competitive situation and our perspective on how these pressures could financially impact the fourth quarter."

McCollam said the company intends to remain competitive on prices, offering discounts to match other retailers. 

"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 margin," she warned.

She also said Best Buy will follow the lead of other retailers who are kicking off Black Friday sales earlier. Best Buy stores will be open for Black Friday shoppers at 6 p.m. Thanksgiving Day and will remain open until the late evening on the Friday after, she said.

Extending Black Friday hours "requires increased promotional offers and an incremental investment in store payroll. But again, it’s table stakes.”

The struggling retailer has implemented an aggressive cost-cutting strategy and renovated stores in an effort to compete for consumers' dollars. 

Best Buy shares were down $3.45, or 7.94%, to $40.11 on Tuesday. 

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