Best Buy’s Earnings Fall Short of Forecasts; Its Shares Fall 11%

Best Buy Co. said Tuesday that its fiscal second-quarter profit fell short of Wall Street forecasts as it stepped up spending to overhaul stores and had lower-than-expected sales, causing the company’s stock to post its biggest percentage drop in nearly three years.

The electronics retailer also forecast third-quarter earnings below analysts’ estimates.

“Expectations have been brought back to reality,” said Stacey Widlitz, an analyst with Fulcrum Global Partners. Some analysts had projected higher earnings after Best Buy’s strong first quarter, when profit rose 85%, she said.

During a conference call, executives of Richfield, Minn.-based Best Buy said price promotions on cars might be reducing consumer spending on other products. “We are also concerned about the influence of rising gas prices,” said Jim Muehlbauer, senior vice president of finance.

Profit for the second quarter ended Aug. 27 totaled $188 million, or 37 cents a share, a 48% increase from a year earlier but a penny short of the average estimate of 38 cents among analysts polled by Reuters Estimates. Revenue rose 10% to $6.7 billion.

Best Buy said it raised spending as it converted stores to a new format that tailors products for specific audiences such as suburban moms and technology enthusiasts. It also hired more “geek squad” staffers to provide computer services.

In the second quarter, overhauled Best Buy stores outperformed those that had not been changed, the company said. The new format is expected to be in place in more than half of its stores by year-end.

Piper Jaffray analyst Mitchell Kaiser said decreased traffic caused sales at stores open at least a year, a key retail measure known as same-store sales, to miss expectations.

Best Buy said same-store sales rose 3.5% in the second quarter, trailing company estimates and down from a 4.3% increase a year earlier. Demand for higher-priced items such as MP3 players, notebook computers and flat-panel televisions was strong, but sales of lower-priced goods such as CDs, DVDs and telephones declined.

The company said it expected profit of 28 cents to 32 cents a share for the third quarter and reiterated guidance of $2.07 to $2.17 a share for the full year. Best Buy now expects same-store sales to rise 3% to 5% in the second half, compared with prior guidance of a 4% to 5% increase.

The full-year guidance excludes damage caused by Hurricane Katrina, which affected 15 Best Buy stores.

Analysts expected earnings of 34 cents a share for the third quarter and $2.23 for the year.

Best Buy shares tumbled $5.57, or 11%, to $44.79, their biggest drop since an 11% decline in October 2002. Shares of rival Circuit City Stores fell 46 cents, or 2.7%, to $16.46.