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Tough Competition Hurts Best Buy

Best Buy reported lower-than-expected quarterly profit as the consumer electronics retailer slashed prices on flat-panel TVs in order to boost sales at the start of the holiday shopping season.

"A very competitive climate put pressure on our margins, resulting in earnings below our original expectations," Chief Executive Brad Anderson said in a statement.

The company reported net income of $150 million, or 31 cents a share, for the fiscal third quarter ended Nov. 25, compared with $138 million, or 28 cents a share, a year earlier.

Analysts, on average, had been expecting 35 cents a share, according to Thomson Financial.

"The problem is expenses," said Credit Suisse analyst Gary Balter in research note. "We believe the stock performance...will depend on how (management explains) away the growth in expenses."

Balter said expenses grew 12.5%, higher than the 8.4% Best Buy reported in the second quarter, due to increased advertising spending, home theater investments, more new stores and litigation expenses. If these prove to be "more one-time in nature" the analyst believes the stock will recover during the day.

Flat-panel LCD and plasma TVs have emerged as one of the holiday season's hottest items, and retailers have rolled out aggressive promotions to lure customers into their stores.

Trying to get a jump on the competition, Wal-Mart Stores started marking down prices on flat-panel TVs in October, much earlier than usual.

Analysts have been waiting to see how well specialty retailers such as Best Buy and Circuit City Stores can stand up to pricing pressure from Wal-Mart and each other.

Investors have predicted that the price competition will reduce margins, leading to lower profits.

Best Buy said its gross profit rate for the third quarter was 23.5% of revenue, down from 24.4% a year earlier.

Best Buy attributed the decline to increased sales of lower-margin products, such as notebook computers and video game consoles, and hefty promotions during the Thanksgiving holiday
shopping weekend.

The company said third-quarter revenue rose 16% to $8.47 billion, above analysts' average forecast of $8.45 billion, helped by the addition of 227 new stores in the past 12 months.

Sales at stores open at least a year, a key gauge of retail strength, rose 4.8%.

The company said it's on track to report full-year earnings of $2.65 to $2.80 per share. Analysts' average forecast is $2.81, according to Thomson Financial.

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