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Analyst: Best Buy Maintains Margin Sacrifice

29 Sep, 2009 By: Erik Gruenwedel

Best Buy Co. continues to shave margins while ensnared in a race with Wal-Mart and other consumer electronics retailers for the estimated $11 billion up for grabs following the shuttering of Circuit City, said an analyst.

Stacey Widlitz, retail and home entertainment analyst with Pali Capital, said the Minneapolis-based No. 1 CE retailer this week in its weekly newspaper circular discounted prices by an average of 18% on 34 high-definition televisions models — the most since Labor Day weekend.

Widlitz said Best Buy is offering free next-day delivery, three years of free interest and basic installation (Geek Squad) on all HDTV units priced from $999.

Separately, SNL Kagan reported that price cuts and related value-add propositions would help surge HDTV sales in the second half of the year and into 2010.

Best Buy also pays the shipping for all online orders $25 and up.

“Since the middle of August, we have been concerned about ongoing signals that Best Buy would ratchet up discounting in order to gain market share in an increasingly price-sensitive CE world,” Widlitz wrote in a note. “The discounting continued this week.”

Indeed, Best Buy, in its most recent financial report, attributed its “strong market share gain” of about 270 basis points in large part on competitive pricing.

The chain said its U.S. store profit rate declined 20 basis points due to the launch of several initiatives in the quarter intended to capitalize on competitive opportunities and drive incremental traffic to the stores.

Operating income as a percentage of revenue declined to 3.8%, compared to 3.9% during the prior-year period.

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