Best Buy Q1 profit drops 15%, tops forecasts

Tue, 06/16/2009 - 8:05am
Anne D'innocenzio, AP Retail Writer

NEW YORK (AP) – Best Buy Co. Inc. reported Tuesday that its first-quarter profit fell 15 percent – even as Circuit City, a key competitor, closed the last of its stores – because recession-weary shoppers were still limiting big-ticket purchases.

The earnings beat Wall Street expectations, and the nation's largest consumer electronics seller maintained its annual profit outlook.

But Best Buy's shares fell $35.94, or almost 7 percent, to $36 in midday trading as investors reacted to deeper-than-expected sales declines at established stores.

The company earned $153 million, or 36 cents per share, in the quarter that ended May 30. That compares with profit of $179 million, or 43 cents per share, a year earlier when federal stimulus checks briefly spurred consumer spending.

Adjusted profit was 42 cents per share. Analysts surveyed by Thomson Reuters expected 34 cents per share.

Revenue rose 12 percent to $10.1 billion as it opened 185 new stores and gained some market share from the shuttered Circuit City Stores. The company said it had gained 2 percentage points of market share for the three months that ended April 30, fueled by sales of TVs, computers and mobile phones. It said the gain accelerated after Richmond, Va.-based Circuit City closed its last outlets across the U.S. March 8.

"Our share gains accelerated during the quarter since a major competitor closed its doors, something we've been very purposeful in planning for and – to be blunt – taking advantage of," Brian Dunn, Best Buy's president and chief operating officer, told investors during a conference call following the earnings release. Dunn becomes CEO on June 24.

Minneapolis-based Best Buy, which has about 22 percent of the market in consumer electronics according to a Deutsche Bank report, hopes its sales staff and its Geek Squad paid service will help differentiate it from discounters like Wal-Mart. The Bentonville, Ark.-based retailer has about 14 percent of the electronics market, according to Deutsche Bank.

Even after Circuit City shed stores and became a lesser competitor during 2008, its absence left about $6 billion for the taking, estimates Barry Judge, Best Buy's chief marketing officer. In 2007, Circuit City generated almost $11 billion in revenue.

But the weak economy – particularly rising unemployment – has made it harder for Best Buy to take advantage of the environment as shoppers continue to be frugal. Furthermore, Best Buy also faces increasing pressure from discounters, particularly Wal-Mart Stores Inc., the world's largest retailer, to grab those orphan customers.

Wal-Mart is aggressively expanding its consumer electronics areas in its 3,600 stores to include higher-end brands like Sony, Apple and Dell. And it's experimenting with interactive displays like those many other electronics retailers have long featured for hi-definition Blu-ray and video gaming.

Best Buy's same-store sales fell 6 percent, and the stronger dollar hurt its overseas results. Same-store sales, or sales at stores open at least a year, are a key measure of a retailer's health because they measure sales at existing stores and exclude sales at those that open or close during the year.

Best Buy said that the same-store sales decline was fueled by a reduction in customer traffic and a flat average total transaction; in particular, the company said, its sales of gaming devices, digital cameras, appliances and movies fell.

Gains in notebook computers, mobile phones and repair services partly offset those decreases. Best Buy added that same-store sales of flat-panel TVs were essentially unchanged from last year as an increase in volume offset price declines.

Company officials said that while it couldn't take full advantage of Circuit City's demise in March because of an inventory slip-up – stores ran out of TVs and digital cameras shoppers were seeking – its market-share gain accelerated in April as it improved its product assortment.

Officials predicted market share data for May also will show continued market share gains in areas like home theaters and car stereos where Circuit City had a heavy presence, Judge said.

Another signal that things are getting better is that customer traffic at its stores fell less in the first quarter than it had for a year.

Best Buy held to its forecast of annual earnings between $2.50 and $2.90 per share, including restructuring charges. Analysts project $2.79 per share.

– AP Retail Writer Vinnee Tong contributed to this report

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