Best Buy Profit Falls, but Shares Jump

A renewed focus at Best Buy (BBY) on hot-selling gadgets and a larger presence in China pushed the retailer's first-quarter results beyond what Wall Street had expected, vaulting shares as much a 7 percent higher Tuesday.

Yet even as industry analysts lauded the nation's largest specialty electronics store for its ability to keep costs down and maintain its financial outlook, they also see a threat to margins going forward, with consumers increasingly heading online or to discount stores for the best deals.

Mainstays like flat screen televisions and DVDs are no longer selling like they once did, and Best Buy has shifted quickly to capitalize on consumer favorites like smart phones and the iPad2 to draw them back in, either in stores or to the company website.

Yet the company has had to spend more to promote its top products and while revenue climbed, profits are under pressure.

Net income fell 12 percent to $136 million, or 35 cents per share, compared with $155 million, or 36 cents per share, last year. That bested consensus estimates by 2 cents, according to analysts polled by FactSet.

Revenue rose to $10.9 billion, edging out most Wall Street revenue expectations as well. Revenue in stores open at least one year fell 1.7 percent. That figure is a key gauge of a retailer's financial health because it excludes the volatility of stores that open or close during the year.

In response to the shifting habits of consumers, the company is revamping its strategy and cutting down the size of its stores. CEO Brian Dunn said the company has begun talking to landlords at about 50 stores in the U.S. to negotiate reducing square footage.

And it is expanding its online pursuit of shoppers.

Online sales jumped 12 percent during the quarter and Best Buy has increased the number of products it sells on the Internet to 10,000 different items over the past year. It plans to double its U.S. online business in the next three to five years.

In addition to online sales, Best Buy is seeking new customers overseas, in China. The company plans to expand its Five Star brand from 170 existing stores by 400 to 500 stores in the next five years. Best Buy says it wants to double revenue in China to $4 billion in the same time period.

The company also bought back $505 million shares during the quarter which a Citi Investment Research analyst said was the big reason it beat Street estimates, in addition to cost cuts.

Longer term, however, analyst Kate McShane expects the company to lose more market share in the shifting retail landscape.

But Best Buy's Dunn remains confident the company's ability to find new ways to reach shoppers.

Backing that up, the company reaffirmed its full-year net income guidance of $3.30 to $3.55 per share, excluding one-time items. Analysts expect $3.46 per share. The company now expects revenue toward the higher end of its projected $51 billion to $52.5 billion range. Analysts expect $51.8 billion.

Shares of Best Buy Co. Inc. rose $1.50 or 5/2 percent, to $30.32 during midday trading. The stock has traded between $28.09 and $45.63 over the past 52 weeks.

The general market rose as well, shaking off a two-week slump, with The Dow Jones industrial average, the Standard & Poor's 500 index and the Nasdaq composite all on track to have their best day so far in June.

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