Best Buy rings 'em up

While there's no question consumers remain jittery about overspending, Best Buy Co. Inc. said Tuesday that rising sales of smart phones, iPads and notebook computers helped the company's profit soar 61 percent in the second quarter.

Much of the gains came from tighter expense control and strong sales overseas, but many consumers still want the latest gadgets to keep them connected to the Internet, their music, their games and each other.

"Our customers are telling us that they want to be connected wherever they are," CEO Brian Dunn said in a morning call with analysts. "But they're confused by all the options out there and how to make them work together."

Dunn said the confusion "plays well to our strengths." Best Buy offers nearly every cell phone service provider and soon will be the only retailer to carry the full suite of e-readers: the Barnes & Noble Nook, the Sony Reader and, now, Amazon's Kindle.

For the quarter ended Aug. 28, earnings at the Richfield-based company grew to $254 million, or 60 cents a share, compared with $158 million a year ago, or 37 cents per share. Revenue was up 2.8 percent, to $11.3 billion.

The strong performance doused Wall Street doubters, who had forecast dour numbers based on still-shaky consumer confidence and soft sales in flat-panel TVs a year after the digital television conversion. Bloomberg analysts had estimated earnings of 44 cents a share. Early in the day, shares hit their highest mark in nearly three months, and they finished at $36.73, up 6 percent.

The company raised its full-year forecasts, with earnings per share now estimated between $3.55 to $3.70, a dime higher than originally projected. That would be a 13 percent to 18 percent increase from the last fiscal year. The company primarily attributed the bump not to improved consumer outlook, but its $5.5 billion stock buyback program, announced in 2007. Best Buy repurchased $600 million in stock during the quarter.

Part of Best Buy's upbeat outlook for the back half of the year comes from the expected launch of new products that bring excitement along with higher margins. As sales of flat-screens turn flat, the company predicts a future boost from 3D televisions, Internet-accessible TVs and Google TV.

It also predicts new motion-based gaming platforms from Microsoft and Sony will be hot sellers for the holidays, along with e-readers.

Stores will slim down their music and movie offerings to make room for the new gaming systems and the growing market for used video games, Dunn said.

Additionally, the popular iPad tablet, one of the few knockout product launches in recent months, has had limited availability -- sold in just 673 stores. Best Buy said Tuesday that the tablet will be in all 1,093 U.S. stores by Sept. 26.

"We're getting close to a tipping point where this business is all about connected devices and what you enable people to do around the information they crave, around entertainment that thrills them and being connected to the people and things they care about," Dunn said in an interview.

Best Buy Mobile continues to be a key growth area. The company opened its 100th stand-alone store during the quarter, and expects to add close to 50 more before the holidays. Most are mall-based and draw a different consumer -- particularly women and teens -- than big-box stores. The company has seen "modest cannibalization" when stores are within 3 miles of each other, Dunn said.

"They're doing a better job of meeting customer needs," said Mitchell Kaiser, an analyst with Piper Jaffray & Co. in Minneapolis. "Their 'Walk Out Working' program makes sure all of your [mobile phone] contacts are there and customized, and you don't have to go home and monkey around with it for hours and hours. There's a service element to it, and customers are embracing that."

Still, the shaky economy continues to dog the nation's largest consumer electronics retailer. Traffic was down at U.S. stores, but the average sale at the cash register increased. Same-store sales, a key indicator of financial health because it doesn't include any bump in sales from new stores, declined 1.4 percent domestically, and fell 0.1 percent for the company as a whole. That compares to an overall decline last year of 3.9 percent.

Best Buy expects same-store sales to increase 1 to 3 percent in the next two quarters, and finish the year up 1 to 2 percent.

Raising the outlook and overdelivering on the quarter helped ease some pessimism from Wall Street, said Edward Jones' Arnold. But analysts remain concerned about competition from Wal-Mart, Target, Costco, Amazon.com and others, he said.

Jackie Crosby • 612-673-7335