Best Buy rings up a 52% rise in profit

Buoyed by swift sales of laptop computers, video gaming equipment, GPS systems and flat-panel televisions, Best Buy Co. Inc. saw a 52 percent surge in third-quarter profit.

The Richfield-based company also posted a 6.7 percent increase in same-store sales and boosted its year-end earnings estimates -- results that led one executive to boast that it was one of the best third-quarter operating gains in recent memory.

It took a while for Wall Street to figure out how it felt about the news, however.

At midday, the stock for the nation's largest consumer electronics retailer was down about 2.75 percent. But by day's end, Best Buy finished at $51.62, up about 48 cents, or just less than 1 percent.

The likely reason for the Street's less-than-enthusiastic response was that, unlike last year, this year's quarter included the entire month of November.

Combined with gift-card sales that won't be counted until January, that means fourth-quarter results could be "down modestly," Jim Muehlbauer, Best Buy's senior vice president and interim chief financial officer, said during a Tuesday morning conference with analysts.

Best Buy CEO Brad Anderson chuckled that the executives had prepared for a host of responses to Tuesday's better-than-anticipated earnings news, but that "nobody expected the stock to drop."

"We're basically very optimistic about the long-term future, because so many elements of what we're bringing to the market seem to be working at this stage," Anderson said in an interview. "We're very bullish on where the year will finish. Even more so ... we think the horizon for the company the following year is very good. So it wasn't like we thought we were pouring cold water on expectations."

Net income rose to $228 million, or 53 cents a share, in the quarter ended Dec. 1, topping analysts' predictions by about 12 cents a share.

Based on the solid third-quarter performance, Best Buy raised its earnings guidance for the year to a range of $3.10 to $3.20 a share. Previously, Best Buy expected earnings per share in the top half of a range of $3.00 to $3.15. Overall, same-store sales for the year are expected to be up about 4 percent, driving nearly $40 billion in sales -- an important milestone.

Best Buy, like other retailers, has had slower-than-expected sales so far in December. It's a trend the company has seen in recent years as shoppers wait closer and closer to Christmas to finish shopping, Anderson said.

Muehlbauer said inventories and staffing levels have been beefed up for "a strong end to the holiday season." Inventory is up 8 percent, higher than in previous quarters. He said it was a "purposeful investment" in such high-interest items as flat-panel TVs, gaming systems and notebook computers.

Morningstar analyst Brady Lemos said while higher inventory levels are typically a cause for concern, he's optimistic about Best Buy's prospects for growth.

"It's something to watch, but historically, they've managed their inventory very well," he said. "It's become a category killer -- taking market share from weaker competitors."

Best Buy is facing competition from discount retailers such as Wal-Mart, Sears and Target, which also carry many of the same consumer electronics. But it is pulling ahead of its closest rival, Circuit City, which is expected to report third-quarter losses later this week, according to Thomson First Call.

Best Buy has been striving to improve customer service. It has trained its attention on its Reward Zone members, a bonus program for its best customers that it said has grown to 28 million members.

It offered a private sales event before Thanksgiving. And 14 months after launching a Reward Zone Master Card, it has more than 1 million members, making it one of the country's fastest-growing retail credit cards, said Brian Dunn, Best Buy president and chief operating officer.

Jackie Crosby • 612-673-7335

Revenue $26,605.0 $23,035.0 +15.5 Income 670.0 614.0 +9.1 Earn/share 1.47 1.24 +18.5 Figures in millions except for earnings per share.