Best Buy Battered After Miss

The retailer says it is on the right track despite a first-quarter stumble.
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Updated from 11:53 a.m. EDT

Trust us on this.

That was the message from

Best Buy

(BBY) - Get Report

executives to analysts Tuesday following a rare earnings miss from the electronics retailer.

Best Buy shares were falling $2.45, or 5.1%, to $45.56 in recent trading after the first-quarter stumble. The company said a shift toward sales of lower-margin products weighed on the bottom line, and it lowered its profit outlook for the year amid uncertainty about consumer spending.

While expressing disappointment with the results, Best Buy executives maintained that it is on the right track, and pointed to gains in market share, customer loyalty and strong international sales as evidence of a successful long-term strategy.

For the quarter ended June 2, the Minneapolis-based consumer-electronics giant posted earnings of $192 million, or 39 cents a share, down from $234 million, or 47 cents a share, a year earlier. Analysts polled by Thomson Financial projected earnings of 49 cents a share for the latest quarter.

"We're proud of our track record of earnings growth over the last 10 years," Brad Anderson, vice chairman and CEO, told analysts during a conference call, "so missing as we've done in this quarter is not taken lightly by this organization."

Sales managed to top Wall Street's expectation, rising 14% to $7.93 billion. Analysts, on average, predicted sales of $7.85 billion.

But while sales were strong, the bottom line was hit by a decline in margins. Best Buy's gross profit rate for the first quarter was 23.9% of revenue, down from 25.4% the prior year.

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Best Buy said the inclusion of its China business, acquired last June, weighed on margins, since it carries a lower gross profit rate.

Back in the U.S., higher sales of lower-margin products, particularly notebook computers and gaming hardware, also added to the decline, the company said.

Last year, Best Buy was struck by margin troubles due to pricing competition for flat-panel TVs, which have been a major driver of growth. For the most recent quarter, the company said flat-panel TV margin issues came from product transitions, which led to markdowns of older models and weighed on profits.

U.S. Spending Questions

Best Buy's same-store sales, or sales at stores open at least a year, climbed 3% in the first quarter. That gain was driven by growth abroad, as U.S. same-store sales rose just 1.7%.

International segment revenue jumped 53% to $1.2 billion, helped by the contribution of the China business and a 17% rise in revenue in Canada.

In the U.S., first-quarter revenue increased nearly 9% to $6.7 billion.

Brian Dunn, president and chief operating officer, said that after dramatic growth in the electronics industry, consumers have hit the "pause button." He attributed the slowdown to natural ebbs and flows of the sector, combined with such economic issues as housing interest rates and high gas prices.

"It's a humbling reminder that no matter how tight a ship you run, no matter how confident you are of the course you're sailing, external conditions outside completely outside your control can still rock your boat," Dunn said.

For the year, Best Buy now sees earnings of $2.95 to $3.15 a share, down from its prior forecast of $3.10 to $3.25. Wall Street targeted full-year earnings of $3.15 a share.

"Early evidence suggests that consumer spending will be more difficult to predict this year -- but it appears to be accelerating in lower-margin categories," said Chief Financial Officer Darren Jackson, adding that the company expects earnings growth in the back half of the year.

The report sent shares of rival chains sliding as well.

Circuit City

(CC) - Get Report

was dropping 52 cents, or 323%, to $16.01;

RadioShack

(RSH)

was losing $1.08, or 3.1%, to $33.79.

Circuit City, the No. 2 U.S. electronics chain after Best Buy, is due to report its first-quarter results Wednesday. The company, in the midst of a restructuring, already warned that it expects to report a loss for the period because of a tough competitive environment in flat-panel TVs.