U.S. News

Best Buy Gains, Circuit City Slips in Electronics Retail Wars


Best Buy pulled further ahead of consumer electronics retail rival Circuit City, reporting an 18.5% rise in its fourth-quarter profit while Circuit City swung to a loss.

Best Buy, the nation's biggest consumer electronics chain, said it earned $763 million, or $1.55 a share, during the quarter that ended March 3, up from $644 million, or $1.29 a share, in the three months ended Feb. 25, 2006.

Revenue rose 21% to $12.9 billion from $10.69 billion a year ago, driven by store openings and a quarter that was a week longer than last year's.

Analysts surveyed by Thomson Financial were expecting earnings of $1.52 a share on revenue of $12.67 billion.

Best Buy also announced that it would carry Apple computers in 200 stores by this fall.

Meanwhile, Circuit City Stores Inc. continued to struggle.

The nation's No. 2 consumer electronics chain said it lost $12.2 million in the fourth quarter, hurt by hefty restructuring charges related in part to store closings. It said revenue growth was slow because of declining flat-panel television prices and uneven demand for computer hardware in advance of Microsoft's launch of its new version of Windows.

For the quarter ended Feb. 28, Circuit City lost 7 cents a share compared with profit of $141.4 million, or 81 cents a share, a year ago.

The latest results included pretax charges of $144.6 million related to store closings and other restructuring activities and a lowered value for its international unit. Circuit City closed about 55 stores in Canada in February, and expects to close about 10 more this year.

Best Buy, Circuit City Results

Sales rose 1% to $3.93 billion from $3.89 billion, but fell short of analysts' estimate of $4.04 billion, according to a survey by Thomson Financial.

Sales at stores open at least a year slipped half a percent.

"Fourth-quarter sales growth was somewhat less than we expected," said Philip J. Schoonover, chairman, president and chief executive.

Circuit City said personal computer hardware posted strong sales growth in both December and February, but January sales were hurt as the company kept inventories lean in advance of the Vista introduction.

The company's shares fell on the New York Stock Exchange. Since hitting a high of $31.54 a year ago, the stock has steadily declined and recently hit a new year-low of $17.02.

While Circuit City blamed TV and computer volatility for its troubles, Bank of America analyst David Strasser wrote in a note that "we believe competitive pressure from BBY is a big part of the issue."

Circuit City is also facing an age discrimination/wrongful termination lawsuit after three former employees filed suit in Los Angeles. They were part of the 3,400 workers laid off by Circuit City who earned more than the local rate for a similar job.

Best Buy's revenue grew faster than its profit -- meaning Best Buy profited slightly less from each dollar in sales than it did last year. The company said that was because of growth in areas that carry lower profit margins, such as video game consoles, online sales, and its Five Star electronics retail stores in China. Best Buy also said margins were pressured by tough price competition in home theater, music and movies.

The company said margins would have been worse if not for gift card "breakage," or cards that don't get redeemed. That added up to $23 million for the first three quarters of the year.

Best Buy said it plans to spend $800 million to $850 million this year on new stores and other initiatives, in addition to spending for acquisitions such as the $97 million purchase of Internet provider Speakeasy announced last week.

Best Buy's comparable-store sales gain -- a key retail barometer -- was 5.9%, driven mostly by a strong increase at stores outside the U.S. Sales grew 4.8% at U.S. stores open at least 14 months, down from 7.4% growth during last year's fourth quarter. Best Buy said the comparable store sales gain was driven by an increase in the average sale made to each customer.

Best Buy has already made moves into China, and on Wednesday it said it might open test stores in Mexico and Turkey within the next year and a half, said Bob Willett, who runs Best Buy's international operations.

"We believe that international expansion is one of the key ways we will meet the growth goals of the company," he said.

Shoppers rush to get in line outside of the Best Buy early Friday, Nov. 24, 2006, in Jackson, Miss., to take advantage of the Black Friday bargains. (AP Photo/Rogelio V. Solis)
Rogelio V. Solis

He said China operations would contribute more than $1 billion in revenue this year "and be modestly profitable -- a bit of a feat during the rapid growth phase for any business, particularly in an environment of such rapid change," he said.

Best Buy said it expects to earn $3.10 to $3.25 a share during the current fiscal year on revenue of about $39 billion, which would be an increase of 9%. Analysts were expecting earnings of $3.18 a share on revenue of $39.8 billion.

Best Buy shares dropped on the New York Stock Exchange. They have traded in a 52-week range of $43.51 to $59.50.