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Best Buy Posts Rise in Net Income, but Misses Estimates

The consumer electronics retailer reports third-quarter net income rose 46% and says it's close to announcing a strategic alliance.

Updated from 10:00 a.m. EST

Best Buy

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reported Tuesday that its third-quarter net income rose 46% on the back of strong sales of digital technology products, but the results still fell short of Wall Street's expectations by a penny a share.

The Minneapolis-based consumer electronics retailer also said it was in the final stages of negotiating a "broad-based, long-range strategic alliance" with an unidentified company.

A company spokeswoman declined to offer further details.

The company's stock tumbled after the announcements. Best Buy's shares fell 4 5/16, or 8%, to close at 47 1/4.

Harry Katica, an analyst at

Prudential Securities

in Atlanta, said he was surprised news of the alliance did not help to spark a rally in the share price.

"I would have thought it would have caused a rise in the shares, but I guess people need more data," said Katica, who rates the company a strong buy. Prudential has not done any underwriting for Best Buy.

David Schick, an analyst with


, said the sharp drop in Best Buy's share price reflected investor weariness about the company's expense ratio.

While a 110-basis-point, year-on-year increase in gross margins underscored success in niche markets, such as DVD, Schick said Best Buy was faced with limited upside potential in its more traditional home-office products division.

"This is an issue that is going to make the share more volatile... 35% to 40% of sales are in home office," said Schick, who rates the company a buy. Robinson-Humphrey does not do any underwriting for the company.

Net income for the third quarter rose to $78.4 million, or 37 cents a diluted share, compared with $53.5 million, or 25 cents a share, a year earlier.

The earnings reflected a charge of $2 million, or 1 cent per share, stemming from a directive issued by the

Securities and Exchange Commission

that the company change its accounting procedure for extended service contracts.

The post-adjustment earnings came in below the consensus estimate of 38 cents a share, according to

First Call/Thomson Financial

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Revenue for the quarter increased 25%, to $3.1 billion from $2.5 billion a year earlier.

"Digital technology products continue as the driving force in consumer electronics and provide future growth opportunities," Schulze said.

But Katica said the company had anticipated higher revenue.

"Internally, they (Best Buy executives) were planning a little higher," he said.

Katica noted that expenses also came in on the high side, as the company spent more than it expected to on consulting fees and its services and sales infrastructure.

Selling, general and administrative expenses rose to 15.1% of sales from 14.2% a year earlier as the company increased its sales staff for advanced digital products.

Katica said he expected Best Buy to announce a tie-up with a major Internet service provider similar to the one between


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and the one reportedly in the pipeline for

America Online




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. Such a deal would be seen as helping to expand Best Buy's Internet exposure, Katica said.

Best Buy chief executive Richard Schulze said in a statement he expected to announce details of the alliance shortly.

Best Buy operates 354 stores in 37 states. For fiscal year 2001, the company said it plans to open 60 stores and to enter the metropolitan New York area.