Wal-Mart Ads Put Pressure on Best Buy, Circuit City

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Wal-Mart Stores Inc. (WMT) will roll out its holiday advertising campaign next week, and jitters that the seasonal pricing competition is getting an early start put pressure on shares of electronics retailers Circuit City Stores (CC) and Best Buy Co. (BBY).

On Tuesday, Wal-Mart said it would launch an "aggressive" advertising campaign for the holidays starting on Nov. 1, which would make it the earliest launch in the retailer's history.

In light of the announcement, Banc of America Securities downgraded shares of Circuit City, citing "an intensifying promotional environment highlighted by Wal-Mart's aggressive tone at its analyst meeting."

The bank downgraded shares to "sell" from "neutral."

Wal-Mart is increasing its focus on consumer electronics by offering a wider range of products and stocking more high-end items, like high-definition, flat panel televisions, to try to lure higher-spending shoppers in its stores.

Its Web site currently features electronics on its home page including high-definition television, an MP3 player, a portable DVD player and a digital camera. Those are many of the same products that Best Buy listed at its recent analyst meeting as ones that are expected to be hot for the holiday.

Wal-Mart's expanded focus on consumer electronics has sparked worries that the world's biggest retailer will cut its prices on high-end, hot items like flat panel televisions, and customers will walk through its doors instead of into a Circuit City or a Best Buy store.

The announcement that its advertising efforts would start earlier than usual added to those worries.

"When someone hears that, and everyone is nervous ... it pressures whoever is in the way," said David Ricci, a portfolio manager for William Blair & Co. and a former stock analyst who covered electronics retailers. "Right now, it's like 'Oh my God, this has to be bad news for Best Buy and Circuit City' and so their stocks are down."

For the week, Circuit City shares are down roughly 4 percent, while Best Buy is down roughly 3 percent. The S&P Retail Index (search) is roughly flat for the week.

Ricci said there are ways to get around the promotional environment. For instance, he said Best Buy focuses on "solution selling." They are competitive with pricing on hot items, but when consumers come in to their stores they then try to sell them higher-margin accessories to go with their electronics purchase.

He also said the market for flat panel or high definition televisions is expected to grow so much this year that while Wal-Mart will increase its sales, so too will Best Buy and Circuit City.

"I don't see them really cutting into Best Buy's or even Circuit City's sales for that matter because the market is just growing so fast," he said.

In a research note on Best Buy last week, Goldman Sachs said the "bark" from promotions could be worse than the "bite," and that while Best Buy and Circuit City stock would be more volatile than the broader retail group, "sanity will ultimately prevail" by December, the heart of the shopping season.