Best Buy Results to Give Clues on Holiday Sales

Wednesday, 6 Dec 2006 | 1:55 PM ET

Investors will get a first look at whether early strong holiday sales for electronics are translating into higher profits when Best Buy reports its quarterly results next week.

On Tuesday, the No. 1 U.S. specialty consumer electronics retailer will release earnings for its fiscal third quarter, which ended in November and included the Thanksgiving weekend that marks the kick-off to the holiday shopping season.

Initial reports said consumer electronics, such as flat- panel TVs and MP3 players, were hot weekend sellers as retailers opened doors early and cut prices on hot items.

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While Wal-Mart Stores last week posted a decline in November sales at stores open at least a year. It said electronics were among its strongest categories as it cut prices on plasma televisions.

Analysts are now waiting to see how well specialty retailers such as Best Buy and Circuit City Stores -- which will report results Dec. 19 -- were able to stand up to pricing pressure from Wal-Mart and each other.

"The central controversy ahead of third-quarter results centers on whether acceleration in TV unit growth will fully offset faster-than-expected (average selling price) declines," wrote Sanford C. Bernstein analyst Colin McGranahan in a note.

"We believe TV sales remained very strong -- albeit slowing somewhat -- despite the sharp TV price deflation."

High-definition LCD and plasma TVs are expected to be one of the holiday season's hottest selling items.

Retailers are fighting to win sales by cutting prices and promoting "price guarantees" -- offering to match competitors' prices or refund customers from 110 percent to 125 percent of the difference if they buy a TV but then find the same one advertised for less elsewhere.

Electronics retailer Tweeter Home Entertainment Group, which reported a quarterly loss on Wednesday, said it was seeing a "stunningly promotional, highly competitive environment" in flat-panel TVs, with falling gross margins.

Bernstein's McGranahan said aggressive prices on TVs, and strong gaming and personal computer demand should drive strong sales for Best Buy. But he said increased promotions, margin erosion in TVs and a shift toward lower-margin gaming and PC categories pose a risk to gross margins.

Best Buy faces an easy comparison with its year-ago third- quarter when profit fell short of Wall Street targets on higher costs as it converted stores to a "segmented" format that tailors products for specific shoppers.

Analysts, on average, are expecting it to earn 35 cents per share in the third quarter, according to Reuters Estimates, up from 28 cents a year ago.

"We expect Best Buy to report a solid third quarter, likely meeting the consensus estimate," wrote William Blair & Co. analyst Jack Murphy in a research note.

Murphy expects Best Buy to maintain its full year earnings forecast of roughly $35.5 billion in sales and earnings per share of $2.65 to $2.80.

"We do not expect management to change its full-year outlook heading into the important fourth quarter, which accounts for approximately 35 percent of full-year sales and 54 percent of full-year earnings, by our estimate," he said.

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