Best Buy Plunges on Shortfall

The electronics retailers took a beating Thursday as the sector's trendsetter warned once again that its performance won't be up to Wall Street's expectations.

Shares in industry leader Best Buy (BBY Quote - Cramer on BBY - Stock Picks) plunged 38% Thursday after the company lowered its second-quarter profit forecast. The shortfall sparked a rout in rivals such as Circuit City (CC Quote - Cramer on CC - Stock Picks), which dropped 12%, in sympathy.

Adding insult to injury, a smaller competitor to the big-box stereo sellers is preparing to close many of its stores. The Wiz, a New York regional chain run by cable television operator Cablevision (CVC Quote - Cramer on CVC - Stock Picks), will shut more than half of its 43 stores as its cash-strapped parent tightens its belt.

Best Buy said it now expects second-quarter earnings of 17 cents to 21 cents, down from previous expectations of 30 cents to 32 cents. The average analyst estimate was 32 cents a share, according to Thomson Financial/First Call. Thursday marked the second time in two months that the company, whose shares soared late last year after a bang-up holiday season, cut its quarterly profit outlook.

Best Buy dropped $11.81 to $18.99, Circuit City slid $1.75 to $13.25 and Cablevision fell 84 cents to $7.

In lowering its forecasts, Eden Prairie, Minn.-based Best Buy cited declines in consumer confidence that resulted in flat comparable-store sales over the past four weeks. The declines come at a testy time for retail investors, who have endured profit warnings from a number of apparel chains along with a 9-point drop in consumer confidence in July. Those have raised fears that the consumer is tightening up, putting the economic recovery in jeopardy.

In that regard Best Buy's warning is likely to compound those worries that consumer spending -- which accounts for two-thirds of economic activity and helped to keep the economy afloat as business investment waned -- is finally moderating.

"Our June results were in line with our expectations, but comparable store sales softened significantly in July, finishing the month essentially flat," said Brad Anderson, vice chairman and CEO of Best Buy, in a statement. "In light of the environment, we are closely monitoring sales and inventories, and identifying ways to pare expenses in the second half."

Nevertheless, some analysts were sticking by the company. Merrill Lynch's Peter Caruso published a note Thursday reiterating his strong buy rating on the stock. With the sharp decline Thursday, the stock now trades at less than 10 times earnings, he notes, which makes it even cheaper than Radio Shack, which he says has virtually no top-line growth. (Merrill has a banking relationship with Best Buy.)

Best Buy is scheduled to report second-quarter earnings on Sept. 17.