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Best Buy shares tumble on weak holiday sales, margin forecast

People walk past a Best Buy store in New York August 21, 2012. REUTERS/Brendan McDermid
People walk past a Best Buy store in New York August 21, 2012. REUTERS/Brendan McDermid

By Dhanya Skariachan

NEW YORK (Reuters) - Best Buy Co shares tumbled about 30 percent on Thursday after the world's largest consumer electronics chain reported disappointing holiday sales and warned of a bigger-than-expected decline in quarterly operating margins.

The company blamed intense discounting by rivals, tight supplies of phones and high-end tablets industrywide, and weak traffic in December.

The news, which knocked off almost $4 billion of Best Buy's market value, was the latest evidence that holiday sales at many chains came at the expense of profit.

"It just seems that the promotions did not drive incremental sales, that opening on Thanksgiving just added costs," Janney Capital Markets analyst David Strasser said.

Adding to the pressure on Best Buy, he said, was the "promotional cadence of troubled retailers" like Sears , Toys R Us Inc and smaller electronics chains.

Best Buy cut prices sharply in November and December to thwart competition from Wal-Mart Stores Inc , Amazon.com Inc and other chains. The electronics specialist said on Thursday that it continued to discount in January.

Best Buy's stock, one of 2013's hottest, was down 27.6 percent at $27.19 after touching a low of $25.99 earlier in the session. Heading into Thursday, only one out of two dozen analysts covering the stock had a "sell" rating on it.

Shares of consumer electronics peers such as RadioShack Corp and Hhgregg Inc also fell.

The overall weakness in the consumer electronics industry was a "shock for everyone," Best Buy Chief Executive Officer Hubert Joly said, but insisted that the company's own turnaround was not at risk.

"Since the beginning, we've seen this transformation as a multiyear journey, and we are in the early innings of this ball game," he said.

Joly, who joined the company in the fall of 2012, has removed layers of management, eliminated hundreds of jobs, closed unprofitable stores and boosted cash by selling Best Buy's stake in a European joint venture with Carphone Warehouse Group Plc .

So far, he has taken out $550 million in annualized costs, and he said he saw room to make the company more efficient by reducing and better managing the items that are returned by customers.

Best Buy also plans to do more to personalize its email marketing efforts, especially since it has a database of 40 million members.

In what many on Wall Street called the most promotional holiday season since the recession, shoppers were bombarded by too many emails from retailers, making it harder for Best Buy to stand out, Joly said.

Best Buy had warned in late November that its decision to discount more could hurt margins. But some analysts had then expected the chain to offset some of the margin pressure through cost cuts and market share gains.

MARGINS VS. MARKET SHARE

Heavy discounting ate into profits, and Best Buy expects operating margin, excluding special items, to be 175 to 185 basis points lower in the fourth quarter ending February 1 than a year earlier. Credit Suisse analyst Gary Balter said that outlook was well below Wall Street expectations.

The discounting, however, boosted Best Buy's market share at a time when overall industry sales fell, Joly said, citing data from NPD Group.

Best Buy's sales at stores open at least 14 months were down 0.9 percent in the United States and up 0.1 percent internationally in the nine weeks ended January 4. Total revenue fell about 2.6 percent to $11.45 billion.

Declines in sales of digital imaging, movies, MP3 players and other products more than offset strong demand for computers, appliances and gaming devices, the company said.

Best Buy's online segment was a bright spot in the otherwise weak report. Domestic online revenue was $1.32 billion, and comparable online sales rose 23.5 percent.

During the most recent holiday season, Best Buy offered free shipping for online orders of more than $25 and made its website easier to navigate.

The company also shipped directly from more than 400 stores this season to compete with retailers like Amazon.com and Wal-Mart. It is now expanding that service to its 1,000 big box stores, Best Buy said on Thursday.

(Reporting by Dhanya Skariachan; Editing by Jeffrey Benkoe and Lisa Von Ahn)

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