Best Buy drops as sales, profit fall short

Shares dive 15% after the company reports weaker-than-expected quarterly results and cuts its full-year forecast.

By TheStreet Staff Dec 14, 2010 11:25AM

By Jeanine Poggi, TheStreet


Best Buy (BBY) shares were plunging after the electronics retailer reported weaker-than-expected quarterly sales and slashed its full-year forecast.


The company's earnings fell 4.4% to $217 million, or 54 cents a share, during the fiscal third quarter, which included Black Friday weekend. That compares with $227 million, or 53 cents, during the same period a year ago.


Wall Street was looking for a profit of 61 cents from Best Buy, according to Thomson Reuters.


Best Buy's revenue declined to $11.9 billion from $12 billion in the year prior, while same-store sales fell 3.3%. That compares with estimates of $12.5 billion.


The company said it lost 100 basis points of share in the market for televisions, video games and mobile devices to competitors. Management estimates that TV sales declined in the low double digits.

"As we talked about in our Thanksgiving weekend review, Best Buy was walking a fine line by balancing fewer promotions (at the risk of sales) against better margins, and it appears that their conservative promotional stance magnified weakness in the category," JPMorgan (JPM) analyst Christopher Horvers wrote in a note. "Best Buy has historically treated market share as the Holy Grail, and it lost share in both TVs and notebooks, two of their largest categories."


While the company expanded its gross margin -- a measure of profitability -- to rise 25.1% from 24.5%, that strategy might have hurt its efforts to boost sales on Black Friday weekend, Janney Capital Markets analyst David Strasser wrote in a note. The company also focused on wireless products that weekend, which might have contributed to the weak sales.


"Wireless is a tough product to sell on busy days, and that was a big focus for the company," Strasser wrote. "We believe Best Buy did not go deep enough discounting TVs on Black Friday, likely the result of their desire to protect gross margins."


Strasser says mass merchants, in particular Target (TGT), have been expanding their market share this year. Other potential gainers are HHGregg (HGG) and GameStop (GME).


Best Buy expects full-year earnings in the range of $3.20 to $3.40 a share, compared with prior guidance of $3.55 to $3.70 a share.


Best Buy said it doesn't "have complete visibility to how customers will behave over the next several weeks."


Shares of Best Buy were tanking 15% to $35.59 in early morning trading. Rival RadioShack (RSH) was also falling 2.6% to $18.71, HHGregg was dropping 8.6% to $22.50, and GameStop was down 1.1% to $21.68.

Despite Best Buy's disappointing earnings report, Strasser says he would consider buying the stock on today's weakness. "This is a company that has volatile earnings due to the nature of their volatile business model," he wrote. "Buying on the weakness tends to work."


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