MINNEAPOLIS – Best Buy Co., the nation’s largest consumer electronics retailer, lowered its 2008 profit estimate on Tuesday, blaming a softening economy that’s steering shoppers away from high-margin items such as flat-screen TVs.
The company also reported that first-quarter earnings fell 18 percent, partly in response to the inclusion of the company’s new lower-margin business in China. Shares slid $2.83, or 5.9 percent, to $45.18 Tuesday.
Chief Executive Officer Brad Anderson said weakness in the overall economy was a major factor in the company’s sales skewing away from big-ticket products. A growing amount of its sales is coming from items such as notebook computers and gaming hardware, which don’t bring as much profit.
“I think the reason those categories were soft had to do with the macro economy,” he said. “Some of our consumers felt the squeeze on their discretionary income. We felt that pretty directly and pretty immediately.”
He said he expected improvement in the economy – and Best Buy’s profits – by the end of the calendar year, however. In particular, he said the company expects television sales would pick up in the fall. “It is very heavily driven by the football season,” he said.
Despite the difficult quarter, Anderson said he was upbeat about the company’s long-term prospects. “We’re never satisfied with missing earnings,” Anderson told analysts during a conference call. “However, we know it does not reflect the core health of our business.”
He said the company gained market share in the quarter, posted strong international sales and outperformed other electronics retailers.
Still, the company cut its fiscal 2008 profit outlook to a range of $2.95 to $3.15 per share, down from its earlier projection of $3.10 to $3.25 a share. The company retained its annual revenue guidance of about $39 billion.
“We continue to believe that our earnings growth for the year will come in the back half of the year,” Chief Financial Officer Darren Jackson told analysts. “The first half will be tougher based on the industry trends and our first quarter results.”
Jackson said gross profits were down 1.5 percent for the quarter, some of it attributable to the inclusion of the China business but about half from the sale of lower-margin items. “To be honest, we expect this trend of mix to continue into the back-to-school shopping season,” he said.
Bank of America analyst David Strasser was more skeptical of Best Buy’s prospects for the second half, saying he was surprised the company’s computer services business, Geek Squad, did not offset the sales of low-margin products.
“There is very little to be encouraged about in the quarter,” he wrote in a research note. “Profitless sales are nothing to be excited about.”
Profit for the quarter ended June 2 dropped to $192 million, or 39 cents per share, from $234 million, or 47 cents per share, in the same period a year ago.
Revenue rose 14 percent to $7.93 billion, from $6.96 billion last year. The revenue increase included the addition of 230 new stores, including 131 through acquisitions.
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