Flat-panel price drops leave Best Buy vulnerable

MINNEAPOLIS — Call it the law of narrowing screen sizes. The slimmer televisions get, the less money that big-box retailers make from them.

A sharp and persistent decline in flat-panel TV prices has triggered a financial meltdown among consumer electronics retailers. Chains that initially prospered from consumers' desire for these sleek sets now face a flooded market, intense competition from discounters and a buying public that expects deep price cuts year after year.

Furious price-cutting has over the past four months compelled Circuit City to replace 3,400 sales clerks with lower-paid hires; pushed Tweeter Home Entertainment into Chapter 11 bankruptcy; and forced CompUSA to shutter more than half its stores nationwide. Not since prices for personal computers plunged in the early 1990s have so many retailers been hurt by a single product cycle, say analysts.

So far, Best Buy Co. Inc. has weathered this storm better than most. Analysts expect the retailer on Tuesday to post flat or slightly improved earnings per share for its first quarter, which ended June 2. Still, last week, investment firm Stifel Nicolaus of St. Louis cut its earnings per share estimate for the quarter to 48 cents from 51 cents a share, citing increased markdowns from Best Buy's competitors.

Still, whether the Richfield, Minn.-based retailer suffers the fate of its competitors or benefits from an industry shakeout remains to be seen.

The worst may be yet to come. Wal-Mart Stores Inc. has been stocking its shelves with thousands of competitively priced flat-panel TVs. Visio, which makes TVs for Wal-Mart, saw its sales surge 25 percent in the first quarter, while most other TV manufacturers saw a seasonal decline.

Some analysts believe Wal-Mart is preparing a major push into the flat-panel TV market, one that could set in motion another series of price declines. "Everything suggests that this is the year that Wal-Mart gets serious about the TV business," said Edward Taylor, vice president for TV market research at DisplaySearch, a market research firm in Austin, Texas. "And when Wal-Mart gets serious, it changes the whole industry."

For many retailers, the experience with flat-panel TVs has been a replay of what's happened with other consumer electronics over the past three decades. Prices for notebook computers, DVD players and camcorders, among other devices, all plunged within several years after their introduction.