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Market share trumps margins at Best Buy

Best Buy’s defense of its market share proved costly during the holidays as greater-than-expected price cuts caused same-store sales to decline 0.9%, resulting in significant margin erosion and a vow to accelerate cost-cutting efforts in 2014.

Total sales for the nine-week period ended Jan. 4 declined slightly to $11.5 billion, with the domestic segment accounting for $9.75 billion of those sales. While domestic same store sales fell 0.9%, the company can take some comfort in the fact that its online comps increased 23.5%.

According to president and CEO Hubert Joly, the promotional intensity the company anticipated and participated in during Black Friday weekend accelerated throughout the entire holiday period. That was something the company didn’t anticipate, so in order to maintain market share Best Buy engaged in the highly promotional climate so much so that Joly said fourth quarter operating margins would be 175 to 185 basis points below the fourth quarter the prior year. Joly defended the price cuts as an essential component of the company’s “Renew Blue” transformation strategy and said the investment if price will be beneficial in the long run.

“Our price competitiveness combined with our improved customer experience both in-store and online, as demonstrated by a 400 basis point improvement in our Net Promoter Score, resulted in a market share gain in an industry that NPD says declined 240 basis points during the holiday period,” Joly said.

In addition to the deflationary effects of the promotional environment — which Joly said did not stimulate additional demand — other negatives during the holiday period included supply constraints for key products, traffic declines and a disappointing mobile phone market.

“Looking ahead, our holiday performance reinforces our resolve and our sense of urgency around our transformation,” Joly said.

That means the company plans to more quickly and more deeply lower its cost structure, grow online at an accelerated pace and improve the omnichannel experience. In addition, Joly said Best Buy will look to enhance its marketing approach and effectiveness, particularly relating to personalization and grow the Geek Squad business.