Best Buy warns of 'increasingly promotional' holiday quarter; price wars on deck

Summary:The upcoming December holiday quarter will be tough, the U.S. retail giant warned. While it's optimistic about customer volume, gross margin will likely take a hit.

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Image: Hohbach-Lewin

U.S. retail giant Best Buy warns of a tough fourth quarter ahead of the December holiday season in its fiscal third quarter earnings report.

The company reported net income of $54 million, or 16 cents a share, for the three months ending November 2 (statement). But revenue was flat at $9.36 billion, up by a meager 0.3 percent.

Wall Street was expecting 11 cents per share on revenue of $9.37 billion, according to Thomson Reuters.

Shares in the company fell by more than 6 percent in pre-market trading in New York on Tuesday morning.

With the holiday season, set to kick off next week, almost a week shorter than on the year-ago quarter, brick-and-mortar stores are facing the prospect of narrower margins as they attempt to out-do each other in price undercutting.

Meanwhile, Best Buy continues to cut costs, increase training, and lower product prices in efforts to get customers through the doors. 

Chief executive Hubert Joly said, however, this strategy was "starting to pay off." But looking ahead to the company's fiscal fourth quarter, investors may be in for a bumpy ride.

The electronics retail chain said a number of factors are squeezing the company's profit driver ahead of Thanksgiving and Christmas, not least as a result of the rising competition. The company said it's opening its stores earlier — 6 p.m. on Thanksgiving Day, compared to 12 midnight last year — in order to increase promotional offers. 

"It's table stake," Best Buy chief financial officer Sharon McCollam said in prepared remarks. "We know that we will be facing an increasingly promotional environment."

Describing how these "pressures could financially impact" the retail giant's fourth quarter earnings, which are expected to be reported in March 2014, McCollam made an outright declaration on the price wars. "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."

What's clear is the increasingly competitive environment retailers are finding themselves in. Lowering prices in order to get customers through the door is a strategy on its own. But when every other retailer is doing it, the industry is cutting its nose to spite its face.

All eyes should be on the traditional retail giants come March when most companies report their holiday earnings. We'll see then what the impact to their collective declaration of price war had on the retail space.

Topics: Tech Industry

About

Zack Whittaker writes for ZDNet, CNET, and CBS News. He is based in New York City.

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