Best Buy Shares Fall Despite Higher Profit

Best Buy Co. on Tuesday reported an 11% increase in fiscal third-quarter earnings and said “unacceptably high” expenses would weigh on results in the fourth quarter. Shares of the largest electronics retailer had their biggest drop in three years.

Net income in the period ended Nov. 26 rose to $138 million, or 28 cents a share, from $125 million, or 25 cents, a year earlier. The results include the expensing of stock-based compensation, including options. Sales climbed 10% to $7.34 billion, Richfield, Minn.-based Best Buy said.

The average profit estimate by analysts surveyed by Thomson Financial was 30 cents a share.

Expenses jumped by $289 million as the company hired 2,500 people for its Geek Squad technical-support service. Best Buy said costs might rise faster than profit growth as Chief Executive Brad Anderson remodeled stores.

“We over-invested in certain transformation activities,” Anderson said. “Spending was unacceptably high. We are evaluating our spending to increase the yield and will edit activities that aren’t delivering results.”

Shares of Best Buy plunged $5.90, or 12%, to $43.94. They have gained 11% this year as Best Buy’s sales outpaced those of Circuit City Stores Inc., the second-largest U.S. electronics chain.

Best Buy’s sales have grown an average of 14% the prior 10 quarters, compared with an average increase of 3.1% for Circuit City. The smaller chain has been remodeling its stores, doubling the space for digital music players and adding displays for satellite radio. Wal-Mart Stores Inc., the world’s biggest retailer, surpassed Circuit City’s electronics sales in 2002.

Best Buy reaffirmed its full-year forecast for earnings from continuing operations of $2.05 to $2.15 a share. It projected it would earn $1.06 to $1.16 from continuing operations in the fourth quarter, as selling, general and administrative expenses increase faster than the growth of gross profit. Analysts expected $1.16, Thomson Financial said.

The Geek Squad is Best Buy’s 24-hour computer-support staff. Members help customers connect printers to computers by phone for $49, or drive to consumers’ houses in their black-and-white Volkswagen Beetles to set up dial-up Internet connections for $129. Best Buy increased its U.S. Geek Squad staff by 21% in the quarter to 11,900.

Anderson said that after fiscal first-quarter profit jumped 49%, the company decided to speed up its plan to differentiate itself from Wal-Mart, which is setting aside more floor space for consumer electronics by remodeling stores and expanding services.

“We saw a huge gain in sales from the Geek Squad, and comparable-store sales were better in the customer-centric stores, but it wasn’t at the rate we’d gambled on,” Anderson said.