Best Buy stock tumbles; firm misses forecast

MINNEAPOLIS -- Best Buy Co. shares tumbled more than 11 percent Tuesday as the nation's biggest electronics retailer missed Wall Street's forecast despite a 25 percent rise in second-quarter earnings and said its profit for this quarter will be weaker than expected.

Its shares fell $5.57, or 11.1 percent, to close at $44.79 on the New York Stock Exchange, about midway between its 52-week range of $31.93 to $53.17.

Richfield, Minn.-based Best Buy earned $188 million, or 37 cents per share, for the three months ended Aug. 27 compared with $150 million, or 30 cents a share, reported a year ago. The company's latest results included expensing stock-based compensation and were 47 percent above the $127 million, or 26 cents per share, that it would have earned a year ago if those results also reflected such expensing.

Revenue rose 10 percent to $6.7 billion from $6 billion a year ago, bolstered by new store openings. Sales in stores open at least one year -- a key retail measure known as same-store sales -- rose 3.5 percent.

Wall Street expected 38 cents per share, the average view of 25 analysts surveyed by Thomson Financial, on estimated revenue of $6.75 billion for the quarter.

The company said triple-digit growth in sales of MP3 players and flat panel televisions offset a 7.2 percent decline in the entertainment software group, including DVDs and compact discs. The company attributed the software sales decline to weak-selling new releases.

For the current third quarter, Best Buy projected earnings between 28 to 32 cents per share, and same-store sales growth from 3 percent to 5 percent. Analysts' current consensus is for earnings of 34 cents per share.

Credit Suisse First Boston analyst Gary Balter said in a research note that investors should not be overly concerned about the reduced quarterly guidance, saying that it reflects investments in the future.

One of those is an expansion of the Geek Squad, Best Buy's computer support business. Best Buy said that during the second quarter, domestic stores added nearly 1,000 Geek Squad employees, and the division had more than 9,400 total "agents" at quarter's end.

Chief Executive Officer Brad Anderson said a company initiative under which stores are converted to focus on specific customer groups, such as small-business owners and suburban housewives, is helping sales.

Those stores reported sales gains during the second quarter of more than double the rest of the chain. "It's another positive indication that our customers are responding to our transformation," Anderson said in a conference call with analysts.

The company operates 187 stores under the model, with the changeover of another 58 stores expected in October. On Tuesday, Best Buy announced that another wave of 50 such stores will be built or converted by February. It has more than 700 Best Buy stores in the United States and Canada.

For the fiscal year ending Feb. 25, the company said it expects earnings from continuing operations of $2.07 to $2.17 per share on revenue of about $30 billion.

The company said those expectations exclude the effects of Hurricane Katrina, which closed 15 Best Buy stores in the Gulf Coast. Nine of them quickly reopened and four more are expected to reopen by the end of the month. The company had not set dates for the other two stores to reopen.

Jim Muehlbauer, senior vice president of finance, said the overall effects of the hurricane on the company were not yet known, but it appeared they would not be material.

He also told analysts in a conference call that while the company was concerned that economic forces including high gas prices could hurt consumer spending, "our outlook remains substantially unchanged."

The company plans to open about 72 new stores in the United States during the fiscal year, up from a previous announcement of plans to open 60 new stores. It also plans 14 new Best Buy stores in Canada.

"We want all consumers to have access to Best Buy," said Brian Dunn, president of the company's North American retail operations.

The company operates 694 Best Buy stores, 20 Magnolia Audio Video stores and 10 stand-alone Geek Squad stores in the United States. In Canada, the company has 34 Best Buy stores and 116 Future Shop stores.

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