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Electronics retailing giant Best Buy (BBY) will announce its Q4 and annual results on Feb. 28. In the fourth quarter, the company was in the news for quite a few reasons. Its holiday sales figures were being closely watched and tracked as the industry-wide phenomenon of "showrooming" became a big concern in 2012. An additional reason for close scrutiny was the likely effect of holiday sales results on a potential bid by Richard Schulze to take the company private. A few days ago, Best Buy announced a permanent price-matching policy. Under this, it will match prices offered by select online and bricks-and-mortar competitors in a bid to put an end to showrooming and regain market share.

Best Buy's holiday season results showed a 1.4% decline in comparable-store sales from 2011, while revenues showed a minor decline of 0.4%. The company's price matching policy was supposed to be responsible for the better-than-expected performance. Since price matching can only be done at the cost of margins, we think that Best Buy will report lower year-over-year gross margins for the quarter.

What investors will be most focused on is the potential buyout offer by Richard Schulze. The deadline given to him by the Best Buy board expires on Feb. 28. Any further time extensions are believed to be unlikely given that an extension was already granted once in November last year. While some of the movement in Best Buy's stock price over the last two months can be ascribed to factors like an encouraging holiday sales report and the new permanent price matching policy, we believe that a lot of it has to do with speculations surrounding the buyout offer.

Holiday Sales Data -- Scratching the Surface

We think that investor optimism on account of an apparently resilient holiday season performance needs to be tempered. The numbers also reveal some discouraging underlying trends that have been persistent for a long time. While same-store sales rose for categories like mobile phones, tablets, and appliances, they fell in segments like entertainment, computers, and TVs. This is in line with the structural shift being witnessed in the electronics retail industry for quite some time now. The average selling price for TVs has been falling even though the number of units sold are rising. This is due to higher contribution of small and mid-sized TVs to the product mix.

Also, we think that the market may have ignored the revised free cash flow guidance issued along with the holiday sales figures. Best Buy now expects free cash flows of approximately $500 million compared to its earlier guidance of $850 million to $1.05 billion in November.

The Permanent Price Matching Policy

There are different categories of customers. While some prefer to buy a product at the cheapest possible price, others value the whole experience of shopping in order to be educated on their purchases. There are also those who give maximum importance to convenience. Amazon.com (AMZN) offers low prices as well as conveniences such as two-day shipping for its Prime members on many in-stock items. This might sound convenient enough to some customers who want to avoid the hassle of going to a store and the inevitable gas charges. But there are also customers who value instant gratification.

We think that Best Buy's price matching policy might provide a marginal incentive to lure more people in this category to its stores. Customers who value the whole experience of shopping and interacting with knowledgeable sales staff may now opt to buy from a Best Buy store if they are getting products at the same price. However, it is too early to pass judgement on the overall consumer behavior going forward, which in turn will determine whether price matching succeeds in ending showrooming.

This strategy is sure to hit Best Buy's profit margins, though. Perhaps the company is ready to risk these margins in exchange for regaining its eroding market share. It's also possible that it is attempting to shore up sales and absolute profit numbers with an eye on Richard Schulze's buyout offer.

We have a price estimate for Best Buy of $16, which will be revised after the fourth-quarter earnings results.

Disclosure: No positions.

Source: Best Buy's Earnings: Margin Erosion And Sales Outlook In Focus