As posted by: Wall Street JournalBest Buy Co. reported a steep drop in profit Tuesday, but investors cheered amid signs it is weathering the recession better than many of its retail rivals.
The nation's largest consumer-electronics chain by sales reported improved margins at a time of heavy discounting. Best Buy also said it continued to gain market share for highly discretionary items such as home-theater equipment, mobile phones and global positioning systems.
The retailer based in Richfield, Minn., said it was taking measures to shore up finances -- a step that Wall Street had urged for months.
Best Buy will limit new store openings in the U.S., Canada and China, and is offering buyouts to nearly all its 4,000 headquarters employees.
The combination of cost-cutting and signs that Best Buy was persevering through the downturn pleased investors, who believe it will prosper when the economy picks up. "Much of our enthusiasm on Best Buy over time is its potential for market-share gains as competitors fall by the wayside," said Credit Suisse analyst Gary Balter.
Best Buy shares surged 18%, or $4.21, to $27.68 at 4 p.m. in composite trading on the New York Stock Exchange as critics of the company's expansion plans, which include moves into Mexico and the United Kingdom, saw the results as confirmation that executives wouldn't put growth over profit.
Still, earnings were worse than expected for the fiscal quarter ended Nov. 29. The company posted a 77% drop in net profit, to $52 million from $228 million in the same period a year earlier. The latest period included a $111 million pretax charge for writing down its 2.9% stake in Carphone Warehouse Group PLC., a U.K. mobile-phone retailer. Third-quarter sales were better than expected, rising 16% to $11.5 billion.
Gross margin, a measure of profit before overhead, rose 1.5 percentage points to 24.9% in part because of the addition of higher-margin phone sales through the European joint venture with Carphone.
Margins in the U.S. also rose, the company said, despite a continuing liquidation sale at 155 stores due to be closed by a direct rival, Circuit City Stores Inc.
Chief Executive Brad Anderson said in an interview that the Carphone write-down wasn't a reflection of the joint venture's standing. The company last year paid $183 million for its Carphone stake.
"We invested in Carphone Warehouse at a time when the stock was worth a lot more than it is today. It was a little heart-wrenching for us because this is one of the best partnerships we have made."
Mr. Anderson said that the company was now cutting costs, including a 50% reduction in capital spending next year, because it couldn't reasonably predict the near future -- and, if anything, expects a long-lasting economic slump.
"We want to make sure the company retains its financial strength," he said. Nonetheless, Mr. Anderson said Best Buy plans to continue to invest strategically because he is convinced that companies that have the strength to do so will reap huge rewards.
"We are going to plant quite a few seeds over the next few years, things that will give us quite a few options when the economy begins to prosper again. We could increase our short-term profits by stopping that, but we hold that sacrosanct."
Best Buy didn't specify how many corporate jobs it wants to reduce, but it didn't rule out firings. Even though it will slash capital expenses in half during the next fiscal year, it won't necessarily translate to a 50% reduction in new-store openings, executives said.
Best Buy said it already had invested in remodeling many of its stores to showcase global positioning systems, mobile phones and other hot-selling categories, and has begun promoting more heavily a customer-loyalty program it began years ago.
Best Buy opened its second-largest store world-wide in Mexico this month, and plans to continue expanding Best Buy Mobile, a smaller stand-alone store format catering to phones, handheld games and music players that the company believes has strong potential. It now has 40 Best Buy Mobile stores in the U.S.
"We know there are a good number of customers at play in this marketplace," Best Buy President Brian Dunn told analysts, adding, "I hope you don't hear, 'hunker down, duck and cover.'"
