Best Buy misses forecasts; stock tumbles

No. 1 electronics retailer blames 'competitive' holiday pricing; full-year forecast weaker than expected.

By Parija B. Kavilanz, staff writer

NEW YORK ( -- Best Buy Co. Tuesday reported higher third-quarter earnings that nevertheless fell short of Wall Street forecasts - and cited stiff competition for computers, TVs, CDs and other products.

The nation's No. 1 electronics retailer posted net income of $150 million, or 31 cents a share, for the quarter, up from $138 million, or 28 cents a share, a year earlier. Wall Street had expected the retailer to log a profit of 35 cents a share, according to analysts surveyed by First Call.

Shares of Best Buy (down $2.77 to $51.15, Charts) sank about 6 percent in morning New York Stock Exchange trading. Volume was heavy.

Sales rose 16 percent to nearly $8.5 billion, in line with estimates, driven by higher sales of flat-panel TVs, notebook computers and gaming products, the company said. Projection TVs, desktop computers and CDs were the weak-performing categories.

Sales at its stores open at least a year - a key retail measure known as same-store sales - rose 4.8 percent in the quarter.

In a conference call with analysts, Best Buy CEO Brad Anderson addressed the decline in the stock.

"Let me say that we are not disappointed in our performance. From our perspective we are having a powerful year," Anderson said. "With our promotional activity, we chose to match or beat [competitors'] prices on name brand flat panel TVs. If we had to do it again, we would do exactly the same," he said.

Investors' jitters about Best Buy spread to shares of rival Circuit City (Charts), which tumbled more than 5 percent Tuesday. Circuit City also instituted a match or beat competitors' price strategy this holiday season. The retailer is expected to report its quarterly results on Dec. 19.

Wal-Mart the culprit?

"While a very competitive climate put pressure on our margins, resulting in earnings below our original expectations, I continue to support the strategic choices we made," the CEO had said in a statement issued earlier along with the results.

Indeed, Wal-Mart (Charts), the world's largest retailer, trumped its competition in the popular electronics and toy categories by being the first out of the gate to chop prices on flat screen TVs, digital cameras, cell phones and other products ahead of Black Friday, the day after Thanksgiving, the traditional start to the holiday shopping season.

Although Wal-Mart's aggressive move didn't help pump up its sales last month, it did put pressure on Best Buy, which responded by going with deeper discounts on higher-priced items like flat-panel TVs.

One analyst questioned management about why they thought it's necessary for the company to be so promotional on Black Friday and in turn sacrifice profits.

The company's executives said they recognized that while that one day alone may be a "red" day for the company, or indicative or losses because of the price slashing, "a deeper understanding of customers tells us that it's not really a red day," they said. "Other retailers consistently lose the weekend because they don't understand the elongated effect of it. That's not smart."

Aggressive pricing from Wal-Mart as well as from Target (Charts), Costco (Charts) and Home Depot (Charts) hurt Best Buy, said Andy Hargreaves, analyst with Pacific Crest Securities.

But Anderson said he's still optimistic that new customers and market share gains will give the retailer the momentum it needs in the fourth quarter, which typically generates a big chunk of Best Buy's annual earnings.

Nevertheless, Best Buy's management didn't miss a chance to take a few potshot at Wal-Mart without directly naming the retailer.

Executives pointed out in the call that Best Buy's Web site "didn't buckle" even when traffic quadrupled over the Thanksgiving weekend. The reference was to which suffered a number of problems handling the rush of online activity on Black Friday.

For the full year, Best Buy reiterated its earnings forecast of $2.65 to $2.80 a share. That falls just below the current analysts' consensus estimate of $2.81 a share, according to First Call.

The retailer also expects to generate same-store sales increase of between 4 to 5 percent for the year.

Hargreaves said analysts may now be forced to temper their fourth quarter expectations.

Hargreaves was interested to hear from Best Buy's management how consumers are reacting to flat-panel TV prices now that they have gone up from the initial holiday-related discounts.

"If demand has gone down then Best Buy could be forced to enforce another round of price cuts in the fourth quarter which will pressure its profits margins again," he said.

Michael Vitelli, Best Buy's senior vice president of merchandising, said during the call that he anticipated the price declines for LCD and plasma TVs to slow next year.

"LCD prices are down 25 percent year-over-year and down 30 percent for plasma. But every time someone changes a tube TV for a flatscreen, it's still a positive for us," he said, alluding to the still sizable profit margins between the two categories.

Meanwhile, holiday gift card sales could provide an added revenue boost in the fourth quarter. Best Buy said gift card sales last year jumped 16 percent to total $1 billion at Best Buy.

Gift card sales this year are tracking a 15 to 16 percent increase year over year. This bodes well for the retailer's revenue postholiday since retailers can only record gift card transactions once the cards have been redeemed.

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-Analysts quoted in this story do not personally own shares of Best Buy and their firms do not have a banking relationship with the retailer.