Best Buy 1Q profit falls, shares slip 5 percent

June 17, 2008 5:10:59 PM PDT
Best Buy said its first-quarter profit dropped 7 percent, but what its executives didn't say seemed to bother Wall Street more.

Officials at the nation's largest consumer electronics retailer did not predict a larger-than-expected full-year profit, or a turnaround in the economy. They did not forecast a big boost from the economic stimulus checks that went out just before the end of the quarter. Best Buy shares dropped 5 percent.

Despite the net profit drop, there were other first-quarter results for Wall Street to cheer about. Operating profit rose 4 percent, and revenue climbed 13 percent as shoppers bought higher-priced items such as flat-panel TVs, video gaming consoles, notebook computers and GPS devices. Earnings per share were better than analysts had expected.

Also, sales rose 3.7 percent at stores open at least 14 months, a key measure of retail health. The company said the gain "accelerated in the second half of the quarter and remains solid thus far in early fiscal June."

That was around the time of two developments aimed at stimulating the economy - low interest rates and government stimulus checks, which people began receiving in May, just before Best Buy's first quarter ended on May 31. The checks put money in shopper's pockets and low interest rates made it easier for Best Buy to offer low-interest financing.

"We believe what resulted were higher sales, market share gains and some consumers literally adding items to their shopping cart so they would hit the $999 minimum purchase" to qualify for the financing, said Mike Vitelli, Best Buy's executive vice president for customer operating groups, on a conference call.

Quarterly net income dipped to $179 million, or 43 cents per share, from $192 million, or 39 cents, a year earlier. Analysts had expected profit of 37 cents, according to Thomson Financial.

Earnings per share rose because the smaller profit was spread over fewer shares following share buybacks.

Vice Chairman and CEO Brad Anderson said in an interview the total net profit dropped because of smaller investment returns as the retailer spent some of its cash on share buybacks instead of keeping it invested.

Best Buy has suspended the share repurchases because of its $2.1 billion investment in a joint venture with Carphone Warehouse, Europe's largest cell phone retailer. Best Buy said that deal is expected to close around the end of this month.

Anderson said that perhaps a third of Best Buy's sales gain late in the quarter came from the stimulus checks, adding, "but that's an informed guess."

Best Buy Co. Inc. said revenue jumped 13 percent to $8.99 billion from $7.93 billion. Analysts expected $8.57 billion.

Looking ahead, the company expects adjusted profit of $3.25 to $3.40 per share and revenue of $43 billion to $44 billion in fiscal 2009. Analysts had been predicting profits of $3.26 per share and revenue of $43.90 billion. The company expects comparable store sales for the year to grow 1 percent to 3 percent.

Anderson said Best Buy left its guidance for the year intact despite the better-than-expected first quarter because it there's no sign of improvement in things like food prices, fuel prices, and unemployment.

Pali Research analyst Stacey Widlitz said the first quarter is less than 15 percent of the business for the year. "The question is, what are we left with for earnings (for) the bulk of the year?"

The company said it would answer that question after the Carphone Warehouse deal closes.

Richfield-based Best Buy lowered its new store plans for China for the year. It now plans to open eight to 16 Five Star stores and one to three Best Buy stores. Previously it had planned 20 to 25 Five Star openings and five to eight Best Buy openings. Government approvals for the new stores have been taking longer than it expected.

"While we are working through the timing of our store openings, our commitment to China as a growth market is unwavering," said Bob Willett, CEO for Best Buy International and chief information officer.

Best Buy shares dropped $2.42, or 5.3 percent, to close at $43.46 on Tuesday.