Surprise! Price-Matching Works for Best Buy Co., Inc. (BBY): Target Corporation (TGT), Amazon.com, Inc. (AMZN)

What happened?
While Best Buy’s adjusted EPS fell from to $1.64 from $2.18 in the prior-year quarter, that drop can be almost entirely attributed to the 6.6% comparable-store sales decline in the international segment. In other words, the implementation of a price-matching policy was able to stop the loss of U.S. customers to Amazon.com, Inc. (NASDAQ:AMZN) and other online competitors, with a minimal impact on profitability.

Bears’ predictions did not come true in large part because popular items generally do not require big discounts to sell. InvisibleHand’s methodology was flawed, because it apparently averaged the discounts available on Amazon for all “overlapping” products, rather than adjusting for how popular each item is at Best Buy. However, many device manufacturers (most notably, Apple Inc. (NASDAQ:AAPL)) have implemented so-called “unilateral pricing policies” that prevent retailers from discounting beyond a certain level. Companies producing popular devices seem particularly likely to implement these policies, meaning that severe price competition is most common on less-popular items. The result is that the margin hit from price-matching is much less than might otherwise be the case.

Looking forward
In spite of the success of holiday price-matching, Pachter (the analyst who vouched for the original InvisibleHand study) recently went on CNBC to criticize Best Buy once again. He compared the company to the Titanic, and reiterated that price-matching would destroy the company’s profit and cut its free cash flow by nearly 60% this year.

While Best Buy’s management has already cautioned that first-quarter results will be weak, I believe that Pachter is overstating Best Buy’s troubles. Price-matching may have a bigger impact on profitability outside of the fourth quarter, because Best Buy has always discounted heavily in the holiday quarter. Nevertheless, price-matching is a necessary step to bolster Best Buy’s market share, and combined with other cost-cutting plans, should improve profitability by 2015.

The article Surprise! Price-Matching Works for Best Buy originally appeared on Fool.com and is written by Adam Levine-Weinberg.

Fool contributor Adam Levine-Weinberg owns shares of Apple and is short shares of Amazon.com. The Motley Fool recommends Amazon.com and Apple. The Motley Fool owns shares of Amazon.com and Apple.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.