Best Buy 3Q profit falls below forecast

Discounting took a bite out of Best Buy's third quarter earnings. The nation's largest consumer electronics retailer said Tuesday that fierce competition forced it to sacrifice profit for market share, but all should be well in the fourth quarter. Wall Street wasn't so sure and sent its shares tumbling.

"Consumer electronics is the focus for the holidays and everyone wants a piece of the pie," said Darren Jackson, chief financial officer of Best Buy Co. Inc.

Wal-Mart Stores Inc. lowered prices on high-ticket items in advance of the Thanksgiving shopping weekend, forcing Best Buy and other retailers to do the same. Best Buy's gross profit margin fell nearly 1 percent to 23.5 percent for the quarter.

Brad Anderson, vice chairman and chief executive, said the margin hit was worth it because discounts drove foot traffic through the stores of the nation's largest consumer electronics retailer, and it helped Best Buy gain market share.

"We chose to match or beat on categories like name brand flat panel TVs, and honestly, if we could do it all over again, we'd make exactly the same decision," he said.

Best Buy shares fell $3.12, or 5.8 percent, to $50.80 in midday trading on the New York Stock Exchange.

Revenue grew 16 percent to $8.47 billion for the quarter ended Nov. 25, from $7.33 billion last year. Sales in stores open at least 14 months, a key measure of industry performance, rose 4.8 percent for the quarter.

Net income for the quarter totaled $150 million, or 31 cents per share, compared with net income of $138 million, or 28 cents per share, a year ago.

But analysts polled by Thomson Financial had expected earnings of 35 cents per share. Revenue was just above forecasts of $8.42 billion.

Best Buy said it was prepared for the crush of customers on Black Friday _ the day after Thanksgiving and the traditional start of holiday shopping. However, Anderson said the company expected higher margins.

The decline in margins was not only due to price cuts, but due to higher-than-expected sales of already low-margin products, including notebook computers and gaming systems.

Jackson said sales were soft in October and early November, but surged at the end of the quarter due to the Thanksgiving weekend.

"The strong finish to the quarter allowed us to deliver sales at the high end of our original guidance," he said. "On the other hand, it also contributed to a gross profit rate that was below our plans."

He said the company expects strong sales to continue during the fourth quarter, when the company also expects some of the price pressure to slacken. "We remain bullish on the year despite the speed bump in this past quarter," Jackson said.

The company affirmed annual earnings guidance between $2.65 to $2.80 per share. Analysts expect earnings of $2.81 per share. It sees revenue growth "approaching" 16 percent for the year, implying revenue approaching $35.79 billion compared with revenue of $30.85 last year. Analysts expect revenue of $35.34 billion.

The company expects same-store sales growth for the year to be between 4 percent to 5 percent.

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Best Buy: http://www.bestbuy.com