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Best Buy’s Q3 profit falls, shares skid

Wed, 12/14/2011 - 2:46pm
The Associated Press

Electronics retailer Best Buy said Tuesday that its third-quarter net income fell 29 percent as it cut prices in popular categories such as tablets and TVs to drive sales and traffic during the busy holiday season.

Its adjusted earnings missed analysts' expectations, and its shares sank more than 15 percent.

Best Buy Co.'s results highlight the challenges the largest U.S. specialty electronics retailer is facing as it seeks to boost traffic during the crucial November and December holiday season. The Minneapolis company, which is up against tough competition from discounters and online retailers, took profit-busting measures that included increasing markdowns and spending more on advertising.

CEO Brian Dunn said customers are firmly focused on "value" this holiday, so Best Buy had to cut its prices to attract them.

"We took decisive actions to drive our business," he said. "These actions, while negatively impacting gross margin, significantly resonated with customers and resulted in improved traffic."

Net income for the three months ended Nov. 26 fell to $154 million, or 42 cents per share. That compares with $217 million, or 54 cents per share, last year.

Excluding one-time items, Best Buy's adjusted earnings totaled 47 cents per share. Analysts expected 52 cents per share, according to FactSet.

Revenue rose 2 percent to $12.1 billion from $11.9 billion a year ago. Analysts expected $12.13 billion. Revenue in U.S. stores open at least one year, a key gauge of a retailer's financial health, rose 1 percent, boosted by a 20 percent increase in online revenue.

The company has been focusing on expanding its online offerings and services, such as free shipping, connecting devices to the Internet and letting customers pick up items ordered online in stores. Meanwhile, it has been reducing its square footage in the U.S.

Strong sellers during the quarter included mobile computing, appliances, e-readers, mobile phones and movies. Tablets and e-book readers saw triple-digit growth, the company said. TV sales also improved from the second quarter, particularly sales of larger-screen TVs.

Product launches including the iPhone 4S, Amazon's Kindle Fire and Barnes & Noble's Nook Tablet helped results. Digital imaging and gaming were weaker sellers.

"Strength in the mobile segment, along with solid growth in mobile computing (including tablets) and e-readers (helped by the launch of Kindle and Nook) helped the third quarter," said Janney Capital Markets analyst David Strasser. "We believe this trend has continued in the fourth quarter."

Still, the higher revenue came at a "steep cost," said Jefferies analyst Daniel Binder.

"While we think management is more focused on addressing competitive issues through better pricing and labor models, it is not producing enough top-line growth to convince investors that the longer-term challenges have changed all that much," Binder wrote in a note to investors.

Best Buy reaffirmed its full-year guidance of adjusted net income of $3.35 to $3.65 per share. Analysts expect $3.44 per share.

It expects revenue of $51 billion to $52.5 billion. Analysts expect $51.83 billion.

Shares fell $4.34, or 15.5 percent, to close at $23.73. The stock has fallen 30 percent in 2011.

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