business

Just a month ago, many retail experts were predicting a dismal holiday shopping season for Best Buy Co. Inc. and Circuit City Stores Inc.

The nation's two largest consumer electronics chains had been forced to slash prices to compete with an array of new competitors, from discounters to warehouse clubs such as Costco, that had begun selling big-screen televisions, laptop computers and other electronic gadgets.

But fears of a holiday sales crunch proved to be exaggerated. On Friday, a day after many retailers reported disappointing holiday sales, Best Buy and Circuit City surprised Wall Street investors with strong December sales.

Richfield-based Best Buy, the world's largest consumer electronics retailer, said December sales at stores open at least 14 months rose 7 percent; Circuit City's climbed 4.2 percent. By comparison, retailers overall saw sales rise 3.1 percent last month, the International Council of Shopping Centers said.

Shares of Best Buy rose 16 cents Friday, to $50. Circuit City shares fell 71 cents, to $19.29.

"Consumer electronics appears to have been one bright spot in an otherwise lackluster holiday season," said Colin McGranahan, a retail analyst with AllianceBernstein, an asset management firm in New York.

As recently as mid-December, there was widespread concern among analysts that falling TV prices would eat into sales and profit margins. Prices for many flat-panel TVs this holiday shopping season were 30 percent less than a year ago, said Ross Rubin, director of industry analysis at NPD Group.

Best Buy, in particular, managed to offset falling TV prices by selling more electronic gear and services, and by improving their delivery of products bought online, Rubin said. Best Buy's consumer electronics segment, which excludes video games, digital video discs and appliances, rose 11.4 percent in December at stores open at least 14 months. Sales through Best Buy's websites rose 33 percent.

"As these TVs get larger, consumers have more interest in the accessories that go with them," Rubin said. "Best Buy understands that better than most" electronics retailers.

Profit margins remained stronger than many analysts had anticipated going into the holidays.

Based on sales through December, Best Buy projects a 5.6 percent operating profit margin for the current fiscal year, which ends March 3. That's up from 5.3 percent a year ago. A retailer's operating margin is the amount of money left over, as a percentage of revenue, after paying for products and overhead.

McGranahan said Best Buy took a risk when it slashed prices early in the season. In a previous interview, Best Buy Chief Executive Brad Anderson said the company probably lost money on Black Friday, the day after Thanksgiving, which is the traditional start of the holiday shopping season.

But the move established Best Buy as a "price leader" early in the season, and compelled shoppers to return to the company's stores in the final weeks before Christmas, McGranahan said. "Black Friday is the Super Bowl of retail, and these guys brought their best game," he said. "That created a halo effect around Best Buy, and it continued through December."

Best Buy raised its earnings per share forecast for the year to $2.70 to $2.80, from a range of $2.65 to $2.80.

However, as prices for flat-panel TVs fall, shoppers will place less importance on the sort of gear and services that Best Buy sells, warned Brady Lemos, a retail analyst at Morningstar.

Wal-Mart Stores Inc. and Target Corp., among others, should benefit. "It's only a matter of time before flat-panel TVs become commodities," he said. "It's part of the natural business cycle."

Chris Serres • 612-673-4308 • cserres@startribune.com