Will Best Buy’s Huge Gamble Help Defeat Amazon?
Best Buy (NYSE:BBY) has made a $400 million dollar bet on this year’s holiday shopping season.
In an attempt to compete with Amazon (NASDAQ:AMZN), the company announced in mid-October that it would match appliance and electronic prices of the online retailer for the season. Electronic sold in the online stores of Apple (NASDAQ:AAPL), Dell (NASDAQ:DELL), Sears (NASDAQ:SHLD), Target (NYSE:TGT) and several other retailers are also eligible.
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This strategy is part of Best Buy Chief Executive Officer Hubert Joly’s plan to turnaround the company. Increasingly customers have used the electronic retailer’s brick-and-mortar stores for showrooming, meaning consumers browse the company’s inventory before making purchases online. Joly will speak to analysts and investors on Tuesday in New York regarding the company’s future.
But analysts are concerned about Best Buy’s pricing strategy. In a joint investigation, the price-comparison company InvisibleHand and Forward Venture Partners determined that the cost of price matching Amazon would be staggering. Based on the assumption that 30 percent of customers take advantage of the offer, it would cost Best Buy more than $400 million of gross profit this quarter, which translates into an earnings per share of -$1.12.
The resulting prices would be, on average, 17 percent cheaper than on Amazon.com.
In order for the bet to pay off, Best Buy would have to double its 2011 holiday sales and increase cross-sale value by 100 percent, PandoDaily reported.
Furthermore, showrooming is not Best Buy’s only problem. Investor confidence is low, indicated by the company’s downward trending stock price; year-over-year revenues are decreasing; and most importantly, the price to earnings ratio for the company is zero. In comparison, Amazon’s price-to-earnings ratio is 3,045.
Best Buy will report third-quarter earnings tomorrow, November 20th.
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