Best Buy Says: Bring It!

Some Best Buy (NYSE: BBY  ) shareholders were a little blue after the electronics retailer reported its third-quarter earnings. But is this really a surprise? There's a price war going on, people!

Wal-Mart (NYSE: WMT  ) fired the first volley in late October, when it slashed prices on popular electronics such as high-definition TVs, cell phones, and digital cameras. That made it clear that this was going to be a competitive holiday season for the likes of Best Buy, Circuit City (NYSE: CC  ) , Costco (Nasdaq: COST  ) , and Target (NYSE: TGT  ) . Taken in that light, Best Buy's results aren't too surprising.

The third-quarter earnings report brought some mixed messages. Sales rose 15.5%, and comps climbed 4.8% -- both perfectly impressive numbers. But it was Best Buy's profit that caused alarm. Even though it was up 8.7%, that was less than analysts anticipated, as margins fell across the board. (See our related Fool by Numbers for the whole picture.) Best Buy was able to generate sales volume, but obviously, it was doling out some good deals to consumers to do so.

I'd say it's not easy for retailers to gauge just how far they should go to woo shoppers in an ultra-competitive season like this one. Wal-Mart's early call to arms was a big deal, and I've heard recent news reports saying the holiday shopping season so far is rather "sluggish" -- consumers are playing coy, waiting for better deals to come, and that extra weekend before Christmas gives shoppers even more time to play hard to get. As Fools, we don't get too caught up in the short-term news, of course. However, it is logical that Best Buy had to play this carefully, given those factors and Wal-Mart's presence on the offensive (or defensive, depending on how you look at it), using aggressive cost-cutting tactics to drum up more sales growth.

Best Buy shares fell today, but investors shouldn't forget that the retailer has had a good year otherwise. For the long term, the Motley Fool Stock Advisor recommendation is well-known not only as a staple in the consumer landscape, but also as a source of innovative, customer-centric strategies. In the company's conference call, CEO Brad Anderson said that customer response to its price cuts was healthy, and that the company believes it has made "significant gains in market share." Again, that comes from the "this means war" school of thought.

Best Buy's shares did fall about 5% on the earnings news, and while I don't think anybody could argue it's dirt cheap at these levels (it's still got a P/E of 20), it's a bit more reasonable since last quarter, when it seemed to be heading up into premium range. Meanwhile, I don't see any indication that Best Buy's positive long-term story has changed. Investors do well to disregard disappointments like this, which don't represent long-term threats or a change to business fundamentals. In fact, this could all have lasting positive effects, as in a possible gain in market share. I don't think there's any reason to think that the third quarter took the "best" out of Best Buy.

Check out a good year at Best Buy:

Best Buy and Costco areMotley Fool Stock Advisorrecommendations. Wal-Mart is aMotley Fool Inside Valuepick. Check out either service free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned.


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