Best Buy 3Q profit jumps, but shares fall as company says 4Q gross margin will be lower

Best Buy 3Q profit up, but co sees slimmer margins

NEW YORK — Customers snapping up electronics and gift cards for the holidays boosted Best Buy’s third-quarter profit, but the nation’s largest electronics retailer said Tuesday that shoppers are focused on prices, particularly of TVs and computers.

Best Buy predicted consumers will stay that way in the fourth quarter, squeezing its profit margin. That forecast sent the retailer’s shares down nearly 8 percent from their highest level in a year.

Still, Best Buy Inc. raised its annual profit and revenue forecasts and said both traffic and shoppers’ average spending rose from a year ago.

Sales at Best Buy stores that have been open at least one year — a key retail measure — rose more than 10 percent Thanksgiving weekend, CEO Brian Dunn said in a conference call with analysts. Half the gain came from higher traffic and half from customers spending more.

Best Buy’s Web sales rose 20 percent in the third quarter, which ended on Nov. 28, the Saturday after Thanksgiving, from a year earlier. Jim Muehlbauer, Best Buy’s CFO and executive vice president of finance, looked to the rest of the holiday shopping season with cautious optimism.

“The trends we experienced in the third quarter continue to provide encouragement about what lies ahead in the balance of the fiscal year,” Muehlbauer said.

Sales of gift cards rose 40 percent in November, after a “dramatic” drop last year as consumers cut their spending as the financial crisis ballooned, Dunn said. Other strong sellers were notebook computers, flat-panel TVs, mobile phones and appliances, while sales of higher-margin games, movies and music were weaker.

A highly competitive atmosphere and holiday promotions have driven down the prices of TVs and computers. Best Buy said its average selling price for TVs fell about 17 percent this year.

Industrywide Thanksgiving week, the average flat-panel TV price fell 22 percent this year to $501, from $642 last year, according to Stephen Baker, vice president of industry analysis and market research firm NPD Group.

The average price of a notebook computer fell 26 percent to $475 from $638 last year.

Best Buy is betting that lower prices on TVs and computers will boost its market share in those categories, and lead customers to buy more services later, such as connecting their new flat-screen TVs to the Internet.

Net income for the third quarter rose to $227 million, or 53 cents per share, from $52 million, or 13 cents per share, last year when it wrote down the value of its U.K. retailer Carphone Warehouse.

Analysts polled by Thomson Reuters, on average, predicted a profit of 43 cents per share.

Revenue rose 5 percent to $12.02 billion, while analysts predicted $11.98 billion.

The Minneapolis company now expects yearly revenue of $49 billion to $49.5 billion, up from previous guidance of $48 billion to $49 billion. It expects profit of $2.94 to $3.09 per share, or $3.00 to $3.15 per share excluding one-time items.

Best Buy has gained market share since its biggest direct competitor, Circuit City, closed last year. IBIS World Inc. estimates the company has about 40.5 percent of industry revenue compared with just 5 percent at its closest competitor, RadioShack Corp. But it faces stiff competition from Walmart, Target and online retailers like Amazon.

Shares fell $3.57, or 7.9 percent, to $41.80 during midday trading. Just Monday shares were trading at a 52-week high of $45.55.