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Best Buy's Fight for Survival

By Rich Duprey - Oct 13, 2012 at 11:30AM

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The electronics superstore's price-matching guarantee lets it live to fight another day.

Boxing great Muhammad Ali called it rope-a-dope, allowing a rival to expend all his energy pounding on you only to beat him down as he could no longer throw any more punches. Best Buy (BBY 2.36%) may be trying the same tactic with its online rivals, hoping it will be able to withstand the onslaught of punches being thrown its way, only to be left standing at the end and come out the winner.

And its rivals have been teeing off on the electronics superstore with some pretty big upper cuts. Last quarter, sales fell 3% year over year as same-store sales slumped by a similar percentage, causing profits to plunge 92%. While most of the losses were because its international business fell off a cliff, the domestic unit was pretty anemic, too: revenues were down 2%, comps were down 1.6%, and profits were off 6%.

The fight club
Analysts by and large have laid the blame for its decline on "showrooming," as customers use Best Buy's stores as a place to preview the latest electronic gadgets only to go home and order them online from Amazon.com (AMZN 3.66%). According to The Wall Street Journal, 43% of electronics shoppers bought online after having checked out the product in a store .

While the retailer admits showrooming is a problem, it contends the phenomenon is much less than what Wall Street says it is. But to minimize the impact anyway, Best Buy is offering to match its rivals' online prices, and this is where the rope-a-dope strategy comes into play.

I coulda been a contender
The cost advantage of Internet retailers is narrowing as Amazon, eBay (EBAY 5.06%), and other e-tailers find fewer states allowing them to operate as a sales-tax safe haven. The closing of the sales-tax avoidance loophole will level the playing field considerably, and when shoppers can't realize the same dramatic savings they were previously enjoying, Best Buy will emerge victorious. If it can just withstand the body blows now, the superiority of its sales team, service, and selection will have it singing the "Rocky" theme song after the 12th round.

Other retailers agree. Wal-Mart (WMT 1.97%) wants to be the world's biggest showroom, using its stores breadth of products to get someone to buy. While its diverse merchandise selection may allow it to close more sales -- you might buy something when you go into the store even if it's not what you originally went in for -- it can't escape the showrooming impact, either. Sales last quarter were up in every category except electronics, though it blamed deflationary pricing pressures for the decline .

Which means there could be something to Best Buy's ploy. While electronic gadgets remain Amazon's fastest-growing segment (sales were up 41% last quarter), that's largely a result of the Kindle Fire e-reader, which is its best-selling product, with smartphones and tablets as big components, too.

Yet they're also big movers for Best Buy, which saw comparable-store sales grow in its mobile phone computing category last quarter. In fact, it was really just televisions and digital imaging that were the biggest problem, as it also enjoyed higher comps in appliances and e-readers. Just look at Corning's (GLW 2.00%) LCD revenues, which caused a 39% drop in profits, and you'll see it's an industry problem, not one endemic to Best Buy.

Dope, no rope?
The price-matching program does entail risk. Since it's just through the Christmas shopping season, and then only if it's asked for and then only at the discretion of the salesman, the company will risk losing customers again come January if it doesn't follow through afterwards.

I don't expect there to be many request denials, but just stepping into the ring means investors should expect even lower profit margins. Even if it survives a 12-round bruising as I suspect it will, I still wouldn't recommend buying the stock yet, certainly not until the economy shows real signs of improving. But I do think the ploy gives Best Buy a chance to survive and fight another day.

 

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Stocks Mentioned

Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$2,302.93 (3.66%) $81.38
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$128.48 (1.97%) $2.48
Corning Incorporated Stock Quote
Corning Incorporated
GLW
$35.65 (2.00%) $0.70
Best Buy Co., Inc. Stock Quote
Best Buy Co., Inc.
BBY
$83.99 (2.36%) $1.94
eBay Inc. Stock Quote
eBay Inc.
EBAY
$48.82 (5.06%) $2.35

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