Best Buy, Circuit City Earnings Rise, but Price War Is Feared

Best Buy Co. and Circuit City Stores Inc. reported higher quarterly earnings Tuesday, but shares of the two top U.S. consumer electronics retailers fell on fears they have begun a price war that could hit profits.

Although Minneapolis-based Best Buy, the No. 1 player, affirmed its earnings and revenue outlook for the year, it said costs to launch its namesake brand in Canada and improve some other chains would hurt its fiscal second quarter.

Best Buy and Richmond, Va.-based Circuit City said growing demand for home entertainment products such as DVD players, video games and big-screen TVs helped drive up sales in the latest quarter.

Best Buy reported fiscal first-quarter earnings of $70 million, or 22 cents a share, up from $55 million, or 17 cents, a year earlier.

Circuit City, which has been struggling to overhaul its business after stopping sales of home appliances in November 2000, reported fiscal first-quarter net income of $27.9 million, or 8 cents a share, up from $16.9 million, or 5 cents.

The consumer electronics business has been on the boil since the Sept. 11 attacks led many people to cut down on activities such as travel and instead focus on making their homes more comfortable.

But much of Circuit City’s and Best Buy’s gains in the latest quarter were due to aggressive price cuts and promotions aimed at customers in danger of defecting to mass merchants such as Wal-Mart Stores Inc., which have beefed up their consumer electronics.

Shares of Best Buy, which operates more than 1,900 stores, ended down $3.25 at $39.01 on the New York Stock Exchange. Circuit City closed 30 cents lower at $21.10 on the NYSE.

“The second half of this year could be really competitive from a pricing standpoint and lead to a possible earnings shortfall,” said Midwest Research analyst Todd Kuhrt.

Circuit City said that excluding its 64% interest in used-auto retailer CarMax Inc., the company’s consumer electronics store business had a loss of $1.3 million, or 1 cent a share, compared with $9.6 million, or 5 cents, a year earlier. Still, the loss was narrower than expected, thanks to sales gains and cost control.

Circuit City, which is revamping about half of its 620 stores, said it viewed an aggressive promotional stance as a measure that would benefit its business in the long run.

Circuit City, whose shares year to date are off 18%, said it promoted video game titles, CDs and DVDs that attracted repeat customers in the first quarter. The stores also have used interest-free financing pitch to attract buyers.

For the second quarter, Best Buy said it expected earnings of 30 cents to 32 cents a share. Estimates by analysts polled by Thomson First Call averaged 33 cents.

Even though Best Buy has been registering strong growth in almost all of its merchandise segments, music sales are suffering from Internet piracy.