updated 6/17/2008 2:50:00 PM ET 2008-06-17T18:50:00

Best Buy said first-quarter profits dropped 7 percent in a choppy economy, but the results released Tuesday still beat Wall Street expectations. Revenues climbed as customers began spending their rebate checks and took advantage of low-interest financing.

Executives with the electronics retailer foresee a “volatile” year ahead, however. Best Buy shares dropped $1.87, or 4 percent, to $44.01 in afternoon trading.

Net income dipped to $179 million, or 43 cents per share, from $192 million, or 39 cents per share. Earnings per share rose because the smaller profit was spread over fewer shares because of share buybacks.

Thomson Financial said analysts expected profit of 37 cents per share.

Best Buy Co. Inc. said revenue jumped 13 percent to $8.99 billion from $7.93 billion. Analysts expected $8.57 billion.

Operating profit rose 4 percent. Vice Chairman and CEO Brad Anderson said in an interview that the net profit dropped because of smaller investment returns as it spent some of its cash on share buybacks instead of keeping it invested. Best Buy has suspended the share buybacks because of its $2.1 billion investment in a joint venture with Carphone Warehouse, Europe’s largest cell phone retailer. Best Buy said that deal is expected to close around the end of this month.

Sales rose 3.7 percent at stores open at least 14 months. Comparable store sales are a key measure of a retailer’s health. The company said the gain “accelerated in the second half of the quarter and remains solid thus far in early fiscal June.” Best Buy said the gain was driven by customers who bought higher-priced items such as flat-panel TVs, video gaming consoles, notebook computers and GPS devices.

“We believe company-specific drivers, including rolling out Best Buy Mobile’s store-within-a-store and Apple store-within-a-store are enabling (Best Buy) to take share from competitors,” Deutsche Bank-North America analyst Mike Baker wrote in a note to investors.

Best Buy seemed to benefit from two developments aimed at stimulating the economy — low interest rates, and government stimulus checks, which people began receiving in May, just before Best Buy’s first quarter ended on May 31.

How the company will do when those checks are spent is unclear.

“It is very early in what we still expect to be a volatile year for the consumer,” said Jim Muehlbauer, chief financial officer. “While the challenges in the external environment will continue to make consumer spending difficult to predict, we are very encouraged by the local growth plans we’ve developed.”

The company expects adjusted profit of $3.25 to $3.40 per share and revenue of $43 billion to $44 billion in fiscal 2009. Analysts had been predicting profits of $3.26 per share and revenue of $43.90 billion. The company expects comparable store sales for the year to grow 1 percent to 3 percent.

Richfield-based Best Buy lowered its new store plans for China for the year. It now plans to open eight to 16 Five Star stores and one to three Best Buy stores. Previously it had planned 20 to 25 Five Star openings and five to eight Best Buy openings.

“While we are working through the timing of our store openings, our commitment to China as a growth market is unwavering,” said Bob Willett, CEO for Best Buy International and chief information officer.

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