This Just In: Upgrades and Downgrades – Best Buy Co., Inc. (BBY), Costco Wholesale Corporation (COST)

If you don’t care too much about selection and want a lifetime, free warranty, you go to Costco Wholesale Corporation (NASDAQ:COST), which has the reputation (at least) of being willing to take back pretty much anything you ever bought at their store the moment it breaks, and give you a full refund. (In actual fact, Costco’s written policy is that most electronics goods have to be returned within 90 days of purchase if you want a refund, but there are multiple reported instances of the company stretching the policy to consumers’ benefit).

So how does Best Buy tackle this competitive landscape? According to Goldman, the key moves Best Buy is making, and the moves that add up to the analyst’s buy rating and its $25 price target, include:

“a more realistic approach to pricing” (targeting Amazon and Walmart)
“substantial cost cuts” (likewise)
“a more concerted effort online”

Foolish takeaway
It seems to me, though, that even if they result in stronger sales, these moves are likely to cut into Best Buy’s profit margins as it fights a losing battle on cost. With most analysts already agreed that Best Buy’s earnings are headed downward for the foreseeable future, this doesn’t appear to be the kind of strategy that will stop the slide.

Meanwhile, Best Buy’s strategy appears to ignore the only real advantage the company has, and the primary reason consumers might choose it over the others: Post-sale assurance that the product will work right. Missing from Goldman’s exhortation to buy Best Buy is any mention that the company’s playing to its strength in Geek Squad or finding a way to counter Costco Wholesale Corporation (NASDAQ:COST)’s ability to attract shoppers on the basis of its perceived “forever warranty.”

My hunch: Fighting a losing battle on pricing is no way to make Best Buy a winner. Until Best Buy shifts tactics, Goldman’s Best Buy gamble is a likely loser.

Fool contributor Rich Smith has no positions in the stocks mentioned above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he’s currently ranked No. 329 out of more than 180,000 members. The Motley Fool recommends and owns shares of Amazon.com and Costco Wholesale (NASDAQ:COST).

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