December 13, 2006 in Business

Sale pricing hurts Best Buy profits, but outlook is strong

Associated Press The Spokesman-Review
Associated Press photo

Best Buy shoppers watch a a Christmas advertisement on various wide screen televisions at a Best Buy store in Mountain View, Calif., on Monday. Best Buy Co. Inc. said Tuesday its third-quarter profit rose 9 percent as customers bought more expensive products, but results were below expectations as the nation’s biggest consumer electronics retailer made greater use of promotions to move merchandise.
(Full-size photo)

MINNEAPOLIS — For Best Buy, Wal-Mart may be the Grinch who steals Christmas.

On Thursday, Best Buy said fierce competition forced it to cut prices in the third quarter more than it planned to, so its profit growth fell short of Wall Street’s expectations.

It may have been a case of the nation’s largest retailer versus the nation’s largest consumer electronics retailer. Weeks ago Wal-Mart began slashing prices on everything, including gadgets like flat-panel televisions and notebook computers, two hot items for holiday shoppers.

Inevitably, when Wal-Mart discounts, other retailers feel the pain. Best Buy was not immune.

“Consumer electronics is the focus for the holidays and everyone wants a piece of the pie,” said Darren Jackson, chief financial officer of Best Buy Co. Inc.

But the company said that the short-term hit to profit margins was worth it because discounts drove foot traffic through the stores and it helped Best Buy gain market share.

“We chose to match or beat on categories like name brand flat panel TVs, and honestly, if we could do it all over again, we’d make exactly the same decision,” said Brad Anderson, vice chairman and chief executive.

Wall Street wasn’t as sure about the strategy. Best Buy shares fell $2.62, or 4.86 percent, to close at $51.30 on the New York Stock Exchange.

Revenue grew 16 percent to $8.47 billion for the quarter ended Nov. 25, from $7.33 billion last year. Sales in stores open at least 14 months, a key measure of industry performance, rose 4.8 percent for the quarter.

Net income for the quarter totaled $150 million, or 31 cents per share, compared with net income of $138 million, or 28 cents per share, a year ago.

But analysts polled by Thomson Financial had expected earnings of 35 cents per share. Revenue was just above forecasts of $8.42 billion.

Best Buy said it was prepared for the crush of customers on the day after Thanksgiving and the traditional start of holiday shopping. However, Anderson said the company expected higher margins.

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