Best Buy Beats Expectations, Shares Surge


Consumer electronics retailer Best Buy reported better-than-expected quarterly profit Wednesday as it held down costs to cope with slowing US demand.

Oliver Quillia for cnbc.com

The company forecast that earnings would rise over the coming year as second-half growth more than offsets first-half declines.

Its shares were up more than 2 percent in morning trading.

Results "looked really good in a very difficult retail environment and just shows that management can still succeed even though the economy is slowing down," said Alan Lancz, president of Alan B. Lancz & Associates, an investment advisory firm in Toledo, Ohio, that owns Best Buy stock.

"When the economy finally picks up, Best Buy is going to be a much stronger company with greater market share," Lancz added.

Best Buy took market share in the last year as main rival Circuit City Stores stumbled with disruptive store changes and competitors CompUSA and Tweeter Home Entertainment closed outlets as consumer spending slowed in the face of higher gasoline prices and tighter credit.

Circuit City, which faces pressure from industry investor Mark Wattles to remove its CEO, is expected to report a quarterly loss next week.

Spending in the Slowdown

Not immune to the slowdown, Best Buy said it was planning for a "soft consumer environment" in the near term, but would boost spending to open new stores and expand shops that sell cell phones.

Net earnings came to $737 million, or $1.71 a diluted share, for the fourth quarter ended March 1, compared with $763 million, or $1.55 a share, a year earlier. There were fewer shares outstanding in the latest period.

Analysts expected $1.65 a share for the quarter, according to Reuters Estimates.

Total sales rose 4 percent to $13.4 billion, better than the $13.17 billion analysts expected. Sales at stores open at least 14 months, or same-store sales, fell 0.2 percent overall as a decline of 0.9 percent in U.S. sales offset a 3.4 percent international sales gain.

The same-store sales decline reflected lower traffic, partly offset by higher selling prices as consumers bought bigger-ticket goods such as flat-panel TVs, laptop computers and navigation devices.

Lower incentive pay and changes in store labor helped hold down domestic costs, Best Buy said.

The retailer forecast earnings of $3.25 to $3.40 a share for the year ending February 2009 compared with profit of $3.12 a diluted share for the just-ended year. Analysts expect $3.33 a share, according to Reuters Estimates.

Same-store sales are expected to rise 1 to 3 percent over the next year, with the international segment performing better than the U.S. division, Best Buy said.

"The guidance is surprisingly optimistic," Sanford Bernstein analyst Colin McGranahan said in a research note, adding that improving trends in the second half was "a highly uncertain outcome" at this time.

The retailer said capital spending would rise to $1.1 billion over the next 12 months from $800 million a year earlier as it opens about 140 new stores globally and expands its Best Buy Mobile shops, which sell cell phones.

Best Buy also said it reclassified investments in auction-rate securities as noncurrent assets. It cited recently failed auctions and uncertainty over when these investments could be successfully sold at par. Auction-rate securities, a class of structured investments, have had liquidity problems in the global financial crisis.

Best Buy shares rose 71 cents, or 1.7 percent, to $44.18 while Circuit City gained 32 cents, or 7.3 percent, to $4.72, both on the New York Stock Exchange at mid-afternoon. Best Buy's stock is down 9 percent over the past year, while Circuit City shares have fallen 75 percent.