Is Competition Weighing on Best Buy?

On Tuesday, the Commerce Department released data that showed US retail sales increased at their slowest pace in five months.  The 0.2% gain in sales last month followed a 0.6% advance in October that was more than initially reported.  “It’s fairly disappointing given that all the evidence was pointing to fairly strong gains during the month,” said Millan Mulraine a macro strategist at TD Securities.

Retailers like J.C. Penney (NYSE:JCP) and Gap Inc. (NYSE:GPS) are relying on discounts to drum up sales, as the labor market and incomes struggle to improve. Consumers have had to draw down savings to their lowest levels in four years in order to maintain spending.  However, discounts and increased competition are hitting bottom lines.

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On Tuesday, Best Buy Co. (NYSE:BBY) reported third quarter results.  Net income for the electronics store fell to $154 million (42 cents per share), compared to $217 million (54 cents per share) last year.  This represents a whopping 29% drop, as Best Buy missed estimates for the second consecutive quarter.  The company is facing heavy competition from Wal-Mart (NYSE:WMT), Target (NYSE:TGT) and Amazon (NASDAQ:AMZN).  In fact, Best Buy is often referred to as Amazon’s showroom, because consumers often research products at Best Buy and purchase it for less on Amazon.

Even though Radio Shack (NYSE:RSH) is offering less competition these days, Hhgregg Inc. (NYSE:HGG), is also turning up the heat on Best Buy.  Hhgregg is a specialty retailer of consumer electronics, home appliances and related services.  In the previous quarter, Hhgregg Inc. reported a 53.1% increase in net income, and a 28.6% increase in revenue.  Furthermore, the company continues to expand its presence.  CEO Dennis May explains, “During the quarter, our strategic initiatives began to gain traction and generate favorable results. We launched our new website, gained market share in appliances, and expanded our assortment in the home office category, all while successfully opening 24 new stores in the Chicago and Miami markets. Additionally, we drove customer traffic and market share gains through increased promotional activity, primarily in the video category. While this resulted in pressure on our gross margin performance in the video category, this approach enabled us to generate positive comparable store sales.”

Going forward, it will be increasingly difficult for Best Buy (NYSE:BBY) to attract customers without promotions and sales.  Retailers are desperate for customers, and are willing to sacrifice margins.  In this high unemployment environment, consumers are likely to continue shopping at the lowest priced retailers.

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