If profits are down but market share is expanding, Wall Street doesn't quite know what to think in today's bumpy economy. That's what happened to Best Buy on Tuesday, when the nation's largest consumer electronics retailer announced that its first-quarter profit fell 6.8 percent, a smaller drop than expected, even while it grabbed more of the market for TVs, video games, laptops and mobile phones.

Shares fell 5.2 percent on the news, ending trading at $43.46.

It's a sign of how hard the company will have to pedal -- or, perhaps, peddle -- to climb uphill as consumers pull back on big-ticket purchases in light of higher gas, food and housing costs.

"We encourage investors not to put much weight on the seasonally small first quarter," wrote William Blair & Co. analyst Jack Murphy, who said the Richfield-based retailer still faces "cyclical risks" this year from weak housing, tight credit and lower profits on once high-profit items such as televisions.

Net income fell to $179 million, or 43 cents a share, in the quarter ending May 31, down from $192 million, or 39 cents a share, a year earlier. A share buyback during the quarter helped elevate the per-share numbers.

Revenue rose 13 percent to $8.99 billion, and sales rose 3.7 percent among stores open at least 14 months, a key measurement of a retailer's health.

Much of Best Buy's gains in market share are coming from Circuit City, which is on the auction block after reporting losses in five of six previous quarters. Circuit City will release its first-quarter earnings on Thursday, and analysts expect losses to have more than tripled from the same period last year.

But with Wal-Mart exploring whether to add a Geek Squad-like service component to its expanding electronics offerings, the market will remain competitive.

Target and Costco, whose more-affluent customers are more similar to Best Buy's than Wal-Mart's, also are expanding their offerings of iPods, flat-panel televisions and gaming systems.

It's one reason Best Buy executives said Tuesday that the company will continue to push the service side of the business, such as extended warranties and installation support, as a way to set it apart from competitors and drive profits. Geek Squad services grew at twice the rate of the rest of the business and are the "single component" explaining why Best Buy's results are better than those of its competitors, said CEO Brad Anderson. But Best Buy doesn't have the "service puzzle -- or the Geek Squad -- close to solved," Anderson said in an interview.

"The complexity of this industry about what's presented to customers is getting worse instead of better," Anderson said. "We're chasing trying to get in front of it with our consumers. As people continue to design more and more products that interrelate with other products, more and more things can go wrong."

Sales were stronger in the second half of the first quarter, fueled by two sales promotions that were timed just as consumers were starting to get their tax rebate checks in early May.

The decision to automatically send $50 gift certificates to customers who invested in HD-DVD technology -- the loser to Blu-ray in the high-definition format war -- turned out to be a $10 million investment that paid dividends.

Customers spent 50 percent more than they normally do when redeeming gift cards, said Michael Vitelli, executive vice president of customer operating groups, in a conference call with analysts.

Similarly, when Best Buy launched a zero-percent financing offer for all purchases over $999, some shoppers were "literally adding items to their shopping baskets to get to the $999 minimum," Vitelli said

That's not all that surprising to Piper Jaffray analyst Mitch Kaiser.

"They've got everything that people want from a discretionary standpoint," Kaiser said. "They've got a lot of hot products still."

With less than 40 percent of households owning high-definition televisions and the impending conversion from analog to digital television, Kaiser said Best Buy's sales trends look strong. The rollout of mobile phone sales to all stores and the expansion of Apple and Dell products could also help drive sales, he wrote in a report last week.

International sales, boosted largely by Canada, continue to outpace U.S. sales. New-store growth will be trimmed considerably in China, where Best Buy has run into difficulties getting approval to expand, Anderson said.

The company now plans to open eight to 16 Five Stars this year and one to three stores under the Best Buy name. Previous plans had called for 20 to 25 Five Star stores and five to eight Best Buys.

Jackie Crosby • 612-673-7335

1st quarter FY2009, 5/31

2009 2008 % chg. Revenue $8,990.0 $7,927.0 +13.4 Income 179.0 192.0 -6.8 Earn/share 0.43 0.39 +10.3 Figures in millions except for earnings per share.