Best Buy 3Q Net Down 4.4% As Domestic Sales Fall

Dec 14, 2010

NEW YORK -(Dow Jones)- Best Buy Co. (BBY: 35.12, -6.48, -15.58%) reported disappointing fiscal third-quarter results Tuesday, saying it is losing market share and its domestic same-store sales slid on weak television and video-game sales.

The results, which included a 4.4% drop in profit, sent the retailer's shares tumbling 14.1% to $35.81 in recent trading as investors grew concerned about the company's longer-term growth prospects. Shares of regional electronics retailer Hhgregg Inc. (HGG: 22.23, -2.38, -9.67%) also took a hit, falling 9.6% to $22.27 on commentary about industry sales trends.

Best Buy, the biggest U.S. consumer-electronics retailer by sales, had been reporting strengthening results of late. The most recent figures, however, reveal the fragility of that improvement, given continued high unemployment and consumer concerns about spending. Domestic same-store sales fell 5% in the fiscal third quarter, as the company saw sharp declines in sales of televisions, video game software and mobile computing products.

While sales of items such as DVDs and CDs are down broadly and 3D and internet-connected televisions haven't caught on as anticipated, Best Buy also is struggling in categories that are otherwise popular. The company surrendered 110 basis points of market share in the most recent quarter as Wal-Mart Stores Inc. (WMT: 54.43, +0.24, +0.44%), Target Corp. (TGT: 59.24, +0.44, +0.75%) and Amazon.com Inc. (AMZN: 174.55, +0.31, +0.18%) grew more aggressive on pricing and GameStop Corp. (GME: 21.65, -0.28, -1.28%) promoted its loyalty program.

"I don't know how Best Buy ever gets out of this," Wedbush Securities analyst Michael Pachter said. Best Buy now expects domestic market share to decline for the full fiscal year compared with the prior year.

A number of analysts question how Best Buy can bounce back. Any short-term gains from the demise of competitor Circuit City Stores Inc. have since passed, and consumers aren't jumping for new technology offerings in televisions the way they were when flat-screen devices first came to market.

"Best Buy is left in a difficult position near term," Jefferies analysts wrote in a client note Tuesday, saying shares likely will settle in the mid-$30s.

Best Buy Chief Executive Brian Dunn said on a conference call with analysts Tuesday that there was a "significant increase in channels of distribution" from which customers buy televisions, and a number of sellers in those channels were more aggressive on opening price points for low-end products.

Best Buy reduced its per-share profit forecast for the year to a range of $3.20 to $3.40, below analysts' expectations. The new forecast is below the estimate the company gave earlier this year, before raising the view to $3.55 to $3.70 a share in September.

For the quarter ended Nov. 27, Best Buy's profit fell to $217 million from $227 million a year earlier but was up a penny at 54 cents on a per-share basis as the number of shares outstanding dropped 4.9%.

Revenue fell to $11.89 billion from $12.02 billion, with about three-quarters coming from domestic operations. Same-store sales, which include revenue at stores, call centers and websites operating for at least 14 months, declined 3.3%, compared with a 1.7% increase a year earlier.

Analysts polled by Thomson Reuters forecast a profit of 61 cents a share on $12.45 billion in revenue.

Gross margin widened to 25.1% from 24.5% on growth in the mobile business and cost controls. The company forecast continued increases in gross margin rates for fiscal 2011, somewhat offsetting the weak domestic sales.

Analysts at Janney said in a client note that Best Buy's focus on protecting its margin may have hurt the retail over the Black Friday shopping weekend, with fewer discounts resulting in fewer customers. Dunn said on the conference call that stores posted higher average tickets on Black Friday.

Best Buy repurchased $420 million in shares in its fiscal third quarter, bringing the year-to-date total to about $1.1 billion. The company estimated that repurchase activity added about 3 cents to per-share earnings in the quarter.

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