Autumn Chill for Retail

Best Buy's guidance raises worries about the holiday season.
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Updated from 8:35 a.m. EDT

One of the retail sector's stars,

Best Buy

(BBY) - Get Report

, took a hit Tuesday after the company posted lackluster second-quarter earnings and guided the Street lower.

The consumer electronics chain earned $188 million, or 37 cents a share, in the quarter compared with $127 million, or 26 cents a share, a year ago. Revenue rose 10.2% to $6.70 billion in the quarter, reflecting a 3.5% gain in same-store sales over the period that was largely attributable to strength in digital televisions and music players.

Analysts surveyed by Thomson First Call were forecasting earnings of 38 cents a share in the quarter on sales of $6.75 billion. The shares were recently selling off $4.01, or 8%, to $46.35.

The extreme reaction reflected concern about the outlook for DVD and video-game sales around the Christmas shopping season. Rick Weinhart, an analyst with Harris Nesbitt, noted that those categories are unlikely to show major improvements, and while Best Buy's appliance category showed strength, it was mainly due to sales of air conditioners.

"Offsetting all that, you've got this incredible up-cycle in digital music players and televisions, but everything else seems to be working against the industry," Weinhart said (his firm has no banking relationship with Best Buy). "This seems like confirmation that consumer spending over this holiday season is probably not going to be as great as people had hoped for. If you thought you could do 4% to 5% sales growth on a comparable basis before these increases in gas prices, it's only reasonable to think you're going to do less than that."

Looking ahead, Best Buy expects third-quarter earnings of 28 cents to 32 cents a share on a same-store sales growth of 3% to 5%. The Wall Street consensus estimate for the third quarter is for earnings of 34 cents a share.

For the full year, the company reiterated earnings guidance of $2.07 to $2.17 a share on sales of $30 billion, which is short of the $2.23 a share on $30.59 billion expected by analysts. The prediction doesn't include the potential impact of Hurricane Katrina, which affected 15 Best Buys on the Gulf Coast.

"Nine of the stores re-opened quickly, and four are expected to re-open by the end of September. The re-opening dates for two stores remain undetermined," Best Buy said.

The results stoked nervousness elsewhere. Shares of

Wal-Mart

(WMT) - Get Report

shed 60 cents, or 1.3%, to $45.29.

Home Depot

(HD) - Get Report

was down 58 cents, or 1.4%, to $40.75. Best Buy's chief rival in consumer electronics,

Circuit City

(CC) - Get Report

dropped 62 cents, or 3.7%, to $16.30; and

RadioShack

(RSH)

sold off 45 cents, or 1.7%, to $25.76.

At Best Buy, same-store sales for consumer electronics products in the second quarter rose 11.4% from the same quarter last year. This reflected "triple-digit" comparable-store sales growth in flat-panel televisions, where lower prices drove strong unit growth. MP3 players had a similar performance.

Best Buy's weakest sector was entertainment software, where same-store sales fell 7.2% from a year ago. "Continued softness in the performance of new releases in music and movies drove the decline in this product group," the company said.

In the middle was home office products, which made up 36% of the quarter's revenue. In the segment, which includes computers and computer repair, same-store sales fell 0.7% from a year ago, as low-double-digit gains in notebooks were offset by declines in monitors and desktop PCs.