Best Buy profit up as Circuit City struggles

Wed Apr 4, 2007 2:17PM EDT
By Karen Jacobs

ATLANTA (Reuters) - Best Buy Co. BBY.N said on Wednesday that strong flat-panel TV sales helped quarterly profit top expectations, while smaller rival Circuit City Stores Inc. CC.N posted a loss after taking charges to close stores.

Although both retailers said they had gained market share and forecast rising sales in the current fiscal year, the results contrasted sharply. Best Buy had better-than-expected sales, while Circuit City trailed estimates.

"Best Buy is doing much better still," with strong sales at stores open at least a year, said Jefferies & Co. analyst Tim Allen.

But he cautioned: "I think there's some optimism built into both companies' guidance for this year."

Shares of both retailers fell on the New York Stock Exchange.

For the coming year, Best Buy said its gross profit rate would decrease on faster growth of products that carry lower profit margins, while Circuit City projected a pretax loss for the first half. Both chains projected higher flat-panel TV sales on stronger consumer demand.

MORE CUTS AT CIRCUIT CITY 

Best Buy said its effort to focus more intensely on consumer needs was luring shoppers, while Circuit City said it would speed up cost cuts to drive sales.

The outlook "requires a bigger improvement in trend at Circuit City than at Best Buy," Merrill Lynch analyst Danielle Fox said in a research note.

Best Buy's net income rose 18.5 percent to $763 million, or $1.55 a share, for the fourth quarter that ended on March 3, from $644 million, or $1.29 a share, a year earlier.

Analysts, on average, had expected $1.52 per share, according to Reuters Estimates.

Circuit City posted a loss of $12.2 million, or 7 cents a diluted share, for the quarter ended February 28, compared with a year-ago profit of $141.4 million, or 81 cents a share.

The Circuit City results included $144.6 million in pretax charges tied to store closures and other restructuring moves.

Best Buy's revenue increased 21 percent to $12.9 billion, beating Wall Street estimates of $12.75 billion, and sales at stores open at least a year increased 5.9 percent.

"The company believes it gained significant market share in electronics, particularly flat-panel TVs," Best Buy said in a statement.

Circuit City quarterly sales rose 1.2 percent to $3.93 billion, missing analysts' expectations of $4.02 billion. Same-
store sales fell 0.5 percent.

Sales growth "was somewhat less than we expected," Circuit City Chief Executive Philip Schoonover said in a statement.

For the current year, Best Buy forecast profit of $3.10 to $3.25 a share, compared with analysts' estimates of $3.18, on a 9 percent rise in revenue. But it said the gross profit rate would decrease on faster growth of products with lower profit margins.

"Best Buy is assuming a less promotional environment, with the majority of the earnings improvement coming in the second half," said Allen of Jefferies. "It's unlikely that the promotional environment will be much better than last year, especially with Circuit becoming more aggressive."

Circuit City forecast a sales increase of 5 percent to 8 percent this year. Analysts expect sales of $13.3 billion, representing a 6 percent rise over the prior year.

The retailer said it expected earnings from continuing operations, before income taxes, to be 1.4 percent to 1.8 percent of net sales.

Circuit City, which is closing about 65 stores and replacing 3,400 store employees with lower-paid workers, said it would also trim management layers, clamp down on travel and discretionary spending and revamp its procedures to give store workers more time to spend with customers.

At mid-afternoon, Best Buy shares fell 95 cents, or 2 percent, to $48.18 on the New York Stock Exchange, while Circuit City fell 26 cents, or 1.5 percent, to $18.02.

Best Buy's stock is down 2 percent so far this year, while Circuit City is off about 4.7 percent.

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