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Best Buy sees weaker holiday margins, shares fall

By Dhanya Skariachan
/ Source: Reuters

By Dhanya Skariachan

NEW YORK (Reuters) - Top U.S. electronics chain Best Buy Co said gross margins during the holiday season would fall short of expectations as it sells more discounted goods like flat-screen televisions, sending shares down 8 percent.

Best Buy has been aggressive with promotions to win market share from competitors like Amazon.com and Wal-Mart Stores Inc . Investors fear the competition will only get more fierce and weigh on margins over the longer term, said Oppenheimer analyst Brian Nagel.

A lack of hot new gadgets to entice shoppers to buy at higher prices also adds to investor concern.

"As the market looks into 2010, it gets more and more worried about a waning product cycle and a stock that is a peak valuation," Nagel said.

Best Buy reported a quarterly profit that beat Wall Street estimates on Tuesday and raised its full-year earnings forecast.

Net profit rose to $227 million, or 53 cents a share, in its third quarter that ended on November 28, from $52 million, or 13 cents a share, a year earlier.

Revenue rose 5 percent to $12.02 billion. Same-store sales rose 1.7 percent.

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Analysts on average were expecting a profit of 43 cents a share on revenue of $11.98 billion, according to Thomson Reuters I/B/E/S.

While Best Buy saw strong demand for notebooks, flat panel televisions, mobile phones and appliances, sales were weak in the gaming, movies and music categories.

Best Buy expects improved revenue for the fourth quarter, but said it would be driven by lower-margin products like notebook computers and lower-priced flat-screen televisions.

Best Buy reported a gross profit rate of 24.1 percent in the third quarter, down 30 basis points from a year ago.

Best Buy shares fell $3.58 to $41.79. Amazon rose 0.5 percent and Wal-Mart slipped 0.2 percent.

AN OVERSELL?

Despite the share sell-off, Best Buy may have little choice but to keep up promotions to keep shoppers' interest.

The chain offered "Black Friday" promotions on certain models of flat-panel TVs and other home theater products a week before the big shopping day this year to lure consumers.

"Best Buy is being wise in keeping the velocity of products through the stores high by offering attractive pricing," Lawrence Creatura, a portfolio manager at Federated Clover said. "These aren't normal times for consumers."

Anthony Chukumba at FTN Equity Capital Markets said investors were being "nit-picky," particularly given the weak economy.

Best Buy stock has risen 19 percent since it reported second-quarter earnings and it "almost seems like investors were looking for an excuse to sell the stock" on Tuesday, he said.

In a bid to differentiate itself, the retailer has upped the ante on customer service, promoting Twelpforce to answer consumer queries on Twitter and hiring more seasonal workers. It is also providing services such as its Geek Squad repair assistance to shoppers.

For fiscal 2010, Best Buy raised its profit outlook to about $3.00 to $3.15 a share, up from its prior forecast earnings of $2.70 to $3.00 a share, excluding items. Analysts were expecting it to earn $2.96 a share.

(Reporting by Dhanya Skariachan, editing by Michele Gershberg, Dave Zimmerman and Gunna Dickson)