High-end consumer electronics retailer Tweeter (NASDAQ:TWTR) preannounced today its sales and earnings expectations for fiscal Q1 (ended Dec. 31). Shares were off sharply in morning trading as a result. The less-than-stellar news illustrates the challenges faced by Tweeter and other small competitors in the war against the likes of Best Buy (NYSE:BBY) and Wal-Mart (NYSE:WMT).

Revenues rose 2% year over year, but that's about where the good news ended -- though the company said it was encouraged by a same-store sales decline of 1%. (I suppose I can see why: Comps fell 6.8% in the company's fiscal Q4, which we covered back in November. At that time, the company said it expected comps somewhere between 3% lower and 1% higher for the first quarter, which got off to a bad start.)

Perhaps more important, however, is the news that gross margins came under pressure. Tweeter blamed this mostly on flat-panel TVs, which the company purchased aggressively in advance of the holidays (and of which it still has substantial stock). All in all, Tweeter sees gross margins coming in "100 basis points" -- or one percentage point -- below its plan. That's not massive, but it's meaningful. A 1% decrease in gross margin for the last fiscal year, for example, would have reduced gross profit by more than $8 million.

The company says it managed to keep costs under control, but it can't cost-cut its way to profits forever -- at least, not if it wants to maintain the levels of customer service it has staked its brand on. (For another look at this story through the lens of Ultimate Electronics (NASDAQ:ULTE), revisit our November article.) The more it's forced to cut prices, the more trouble Tweeter will have competing.

Did somebody buy you a flat-panel TV this year? Brag about it on our Tweeter discussion board.

Dave Marino-Nachison can be reached at dmarnach@fool.com.