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Tuesday, September 23, 2008

Best Buy Profit Falls Despite Sales Gains

Despite sale gains, Best Buy loses profitBest Buy Co.'s fiscal-second-quarter net income fell 19% as higher spending on stores and growth initiatives more than offset better-than-expected sales at the consumer-electronics retailer.

The Richfield, Minn., company said Tuesday that the investments were "prudent" for long-term growth despite the difficult times for consumer spending and maintained its full-year earnings guidance of between $3.25 and $3.40 a share.

The company curtailed estimates for sales growth at stores open at least 14 months.

"In a challenging environment that finds many of our competitors retrenching, we are growing and opening more new stores," Chief Operating Officer Brian Dunn said.

The retailer said it planned to cut some advertising, infrastructure and labor costs during the second half of the year. Federal stimulus checks helped buoy sales in recent months, and their absence, coupled with consumers' already strapped wallets, led the company to curtail estimates for sales growth at stores open at least 14 months to between 1% and 3%, less than half its present rate.

Best Buy shares declined $1.30, or 3%, to $42.40 in 4 p.m. composite trading on the New York Stock Exchange.

"The inability of [Best Buy] to control spending in a tough macro environment adds to our angst towards [its] shares over the balance of 2008," said UBS analyst Brian Nagel.

Best Buy has moved aggressively on several fronts to ensure future growth -- retrofitting all 973 of its U.S. stores with mobile-phone sales outlets, pushing store development in places like China and Turkey, and paying $2.1 billion for a joint venture with U.K.-based Carphone Warehouse Group PLC to jump-start a push in Europe. On Monday, it announced it was buying digital-music-downloading company Napster Inc. for $121 million.

For the quarter ended Aug. 30, the retailer recorded net income of $202 million, or 48 cents a share, down from $250 million, or 55 cents a share, a year earlier. Revenue rose to $9.8 billion from $8.75 billion.

Comparable-store sales climbed 4.2%, compared with a 1.9% forecast among analysts polled by Thomson Reuters. Best Buy said its domestic market share increased by 1.6 percentage points.

Analysts at both Jefferies & Co. and UBS had warned earlier this month that an industry-wide glut of flat-panel televisions will hamper Best Buy's future profit margins because the store may have to lower prices in order to sell its supply.

But Best Buy's gross margin was in line with analysts' expectations, and the company said its growing mobile-phone business, which carries higher profit margins, helped.

Last week, Best Buy became the first retailer to start selling Apple Inc.'s latest version of the iPhone.

By: Mary Ellen Lloyd
Wall Street Journal; September 17, 2008