Best Buy Falls as Holiday Discounts Threaten Profit

Best Buy Co., the world’s largest consumer-electronics retailer, fell the most in 11 months after saying it will keep pace with competitors’ discounts in the holiday season, hurting fourth-quarter profitability.

The shares dropped 11 percent to $38.78 at the close in New York, the biggest decline since Dec. 14. Richfield, Minnesota-based Best Buy has more than tripled this year, the second-best performance in the Standard & Poor’s 500 Index.

Chief Executive Officer Hubert Joly, seeking to stem the loss of customers to Inc. and Wal-Mart Stores Inc., agreed to match rivals’ online prices during last year’s holiday season and made the policy permanent in February. Best Buy will face an “increasingly promotional environment” in the fourth quarter and is determined to remain competitive with rivals’ prices, Chief Financial Officer Sharon McCollam said today.

“It is table stakes in our transformation,” McCollam, who also serves as chief administrative officer, said in a statement. “So 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.”

Fourth-quarter gross margin, or the percentage of sales left after subtracting the cost of goods sold, may be 0.8 percentage points to 0.9 percentage points lower than last year, Best Buy said today. Gross margin in the fourth quarter last year was 22.6 percent.

To make up for the lower prices, Joly has eliminated jobs and worked to slash operating expenses since taking the reins in September last year. He’s also expanded store space for Samsung Electronics Co. gadgets and devices running Microsoft Corp.’s Windows 8 operating system, while revamping the retailer’s outdated website.

Third-Quarter Results

The cuts helped the company post net income of $54 million, or 16 cents a share, in the three months ended Nov. 2, compared with a loss of $10 million, or 3 cents, a year earlier. Excluding some items, profit was 18 cents a share. Analysts estimated profit of 12 cents, on average. Sales fell 0.2 percent to $9.36 billion, trailing the $9.37 billion average projection.

“The category remains competitive on its own, which should only be fueled by a soft retail environment over the past several months,” Hale Holden and Jamie Robbins, credit analysts at Barclays Plc, said in a note to clients yesterday before the company reported its results. The analysts have a market weight rating on the 2016, 2018 and 2021 bonds.

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