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Best Buy warns promotions could hurt holiday-quarter margins

A Best Buy store is seen in Niles, Illinois near Chicago, September 23, 2013. REUTERS/Jim Young
A Best Buy store is seen in Niles, Illinois near Chicago, September 23, 2013. REUTERS/Jim Young

By Dhanya Skariachan

(Reuters) - Best Buy Co Inc said on Tuesday it would be competitive on prices during the holiday season as promotional activity by rivals grows fierce, but warned it could hurt margins in the fourth quarter.

Earlier Tuesday, discounter Wal-Mart Stores Inc said it would match select Black Friday offers on toys and electronic items from rivals Target Corp , Toys R Us Inc and Best Buy starting as early as a week before the big shopping day, a day after the U.S. Thanksgiving Holiday.

"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," Best Buy Chief Financial Officer Sharon McCollam said.

The comments overshadowed a report of better-than-expected third-quarter profit from Best Buy, the world's largest consumer electronics chain, and dragged down its shares by more than 4 percent in early trading.

Coming into Tuesday, the stock had soared 269 percent, the second best performance in the S&P 500 so far this year, behind Netflix Inc .

(For a graphic on Best Buy's third-quarter performance, click http://link.reuters.com/jet74v

"We believe that price competitiveness is table stakes," Chief Executive Hubert Joly said on Tuesday, underscoring that pricing was a minimum requirement to fend off discount and online rivals.

In a further bid to stay aggressive, Best Buy is offering free shipping for online orders over $25 and promising a "significantly improved" experience to online shoppers after investing to make its website easier to navigate.

Best Buy will also ship directly from more than 400 stores this season as it combats online giant Amazon.com Inc and brick-and-mortar chains like Wal-Mart that use their stores as mini-warehouses.


Under Joly, who took the helm last fall, Best Buy has removed layers of management, eliminated hundreds of jobs and closed unprofitable stores. It also boosted cash by selling its stake in a European joint venture with Carphone Warehouse Group Plc .

Best Buy slashed $115 million in costs in the third quarter, bringing total cost cuts to $505 million so far this fiscal year.

Its net earnings were $54 million, or 16 cents a share, compared with a net loss of $10 million, or 3 cents a share, a year earlier.

Excluding restructuring charges and other items, it earned 18 cents a share, beating the average analyst estimate of 12 cents, according to Thomson Reuters I/B/E/S.

Sales fell 0.2 percent to $9.36 billion. Same-store sales rose 0.3 percent in the quarter, including a 1.7 percent rise in domestic same-store sales.

The stock dropped 5.6 percent to $41.11 in premarket trading.

(Reporting by Dhanya Skariachan; Editing by Jeffrey Benkoe and Gerald E. McCormick)