Plunging Flat Panel TV Prices Painful For Best Buy, Circuit City

Prudential’s Mark Rowan today cut his ratings on both Best Buy (BBY) and Circuit City (CC) one day after a disappointing profit report from Best Buy, on concerns about the rapidly eroding prices for flat-panel televisions and lower warranty attach rates.

For Best Buy, Rowen went to Neutral Weight, from Overweight, and trimmed his price target to $50, from $55. “We have always assumed that, one day, discount retailers would commoditize the excess profits out of the flat-panel TV business, but we did not expect to see it occur this holiday season,” he wrote in a research note today. “While we may be jumping the gun based on one data point, we are concerned, because if BBY can’t make outsized profits on flat-panel TVs now, when will it be able to? We believe the competitive environment will only become more intense next year.”

He also says that one reason for the lower profit margins in the quarter may be a decline in the rate at which people buy extended warranty plans.

Meanwhile, Rowen says that aside from TVs, “the rest of BBY’s business appears to lack exitement,” with “lackluster” computers, and appliances and music down year-over-year in the latest quarter. He also says that, while video gaming hardware is expected to be strong, the segment features low margins which will pressure overall margins.

On Circuit City, he went to an Underweight rating, from Neutral Weight, for exactly the same reasons. “We believe CC earns a significant portion of its operating profit from warranties,” he writes. “We are concerned that warranty-attach rates may be falling at CE retailers, given BBY’s 3Q margin shortfall.”