Strong holiday sales help Best Buy beat profit estimates

  • Article by: SUSAN FEYDER , Star Tribune
  • Updated: April 4, 2007 - 11:14 PM

The Richfield-based retailer's fourth-quarter results were far better than those at rival Circuit City.

Aggressive price-cutting on a wide range of items during the holidays paid off with higher-than-expected profit for Best Buy Co. Inc., which on Wednesday reported an 18.5 percent earnings gain for the fourth quarter.

The Richfield-based electronics retailer also announced plans to carry Apple computers in 200 stores by this fall, nine years after pulling the products because of slow sales.

Best Buy said that sales of flat-panel televisions, video-game hardware, notebook computers and holiday gift cards were especially strong during the company's fourth quarter, which ended March 3. Net income was $763 million, or $1.55 a share. The results topped the $1.52-per-share estimate compiled by Bloomberg News using projections from 27 analysts. Sales for the quarter rose 21 percent, to $12.9 billion, while sales at stores open at least a year -- same-store sales -- increased 5.9 percent.

Best Buy's results contrasted sharply with those of competitor Circuit City Stores Inc., which also released results Wednesday. The Richmond, Va.-based retailer posted a $12.2 million loss for the quarter ended Feb. 28, including a $144.6 million pretax charge related to store closings.

Circuit City posted a slim 1.2 percent gain in sales, to $3.9 billion for the period.

Mitch Kaiser, an analyst at Piper Jaffray & Co., noted that Best Buy and Circuit City both said they had gained market share during the recent quarter. Kaiser said he believes that Best Buy has been especially successful at taking market share from smaller, regional consumer electronics retailers.

"Best Buy has done well at moving upstream and making inroads in the higher-end market and competing against smaller players like Ultimate Electronics," he said.

At the same time, Best Buy appears to have withstood increased competition from a wide range of national retailers -- including Wal-Mart Stores Inc., Home Depot Inc. and Costco Wholesale. Late last year, Best Buy was forced to slash prices on several products, most notably flat-panel televisions and laptop computers, saying that it would match or beat any price in the market.

That policy, as well as more sales coming from low-margin merchandise such as video gaming hardware, bit into Best Buy's profit margins. Gross profit as a percentage of revenue in the fourth quarter dipped to 24.1 percent, compared with 25 percent the previous year.

Sales, earnings, up for year

For the full year, Best Buy reported net earnings of $1.4 billion, or $2.79 a share, compared with $1.1 billion, or $2.27 a share a year ago. Revenue rose 16.5 percent, to $35.9 billion.

The company said it expects revenue for fiscal 2008 to rise 9 percent, to $39 billion, and earnings per share of $3.10 to $3.25. Analysts currently estimate profit of $3.18 a share on sales of $39.4 billion, according to Bloomberg.

Best Buy said the decision to carry Apple computers follows a successful test last year. The stores have carried Apple iPods, but they had stopped selling the company's computers in 1998 because sales were slow. Apple pulled its products out of most retailers and later started its own chain of retail stores, which have significantly boosted sales of Mac computers.

Best Buy stock closed Wednesday at $47.89, down about 2.5 percent. Volume was unusually heavy at about 13.1 million shares.

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