Best Buy ( BBY) and Circuit City ( CC) both beat third-quarter earnings expectations on Tuesday, but that doesn't mean their holidays will be happy. Best Buy lowered its guidance for its fiscal fourth quarter, which began Dec. 1, by 5 cents per share. Circuit City declined to provide any kind of projections at all for how it would fare in its fourth quarter. The soft economy, a dearth of must-have electronics products and increased competition from discounters such as Target ( TGT) and Wal-Mart ( WMT) threaten to spoil the holidays for both companies, warned Scot Ciccarelli, an analyst with Gerard Klauer Mattison. "I think it's going be tough for both of them," Ciccarelli said. "It's a little more onerous for Circuit City. Providing no guidance for the fourth quarter is usually not a good sign." Gerard Klauer Mattison does not have any investment banking business with either company. The disappointing outlooks for the electronics retailers come amid a generally downbeat holiday shopping season to date. A survey by ShopperTrak RCT on Monday, for instance,
projected that retail sales would fall 5.4% this month from last December. Meanwhile, Wal-Mart , Target and Federated Department Stores ( FD) have reported weekly sales in December that are at or below the low end of their projections. Best Buy, at least, posted fairly strong third-quarter numbers. The Minneapolis-based retailer earned $85 million, or 26 cents a share, on $5.5 billion in revenue. Last year, Best Buy earned $80 million, or 25 cents a share, on $4.8 billion in revenue. The company's gross profit margin held steady at 21.6% of sales, while its sales, general and administrative expenses increased slightly to 19% of sales, from 18.9% last year. But those numbers hid more developments for Best Buy. The company's Musicland division, which it acquired last year, continues to struggle. While comparable-store sales in the third quarter for the entire company declined by 0.4%, same-store sales at Musicland stores dropped a whopping 11.5%. Same-store sales compare results from outlets open more than one year.
Best Buy attributed its decreased fourth-quarter guidance to further problems at the music and media products retailer, which operates the Sam Goody and Suncoast chains. Best Buy forecasts that same-store sales at Musicland will decline by the high teens, and that the division will post an operating loss of $80 million to $85 million, up dramatically from the $10 million operating loss the company had previously forecast. Best Buy blamed the problems at Musicland on the industrywide decline in sales of prerecorded music and soft sales of its movies and video games. "We are reassessing all of our Sam Goody mall locations, and we have a more comprehensive review under way," said Allen Lenzmeier, Best Buy's president, on a conference call. But he added, "We can't cut expenses fast enough to adjust to our lowered expectations." The Musicland acquisition continues to bog down Best Buy, and the problems there continue "ad nauseum," said Richard Zimmerman, an analyst with Commerce Capital Markets. "They're back to square one on how to get that business turned around," Zimmerman said. "It's an issue that's not going to go away quickly." Commerce Capital Markets does not have any investment banking business with either company. Sales of appliances and computers have also been slow at Best Buy stores. Meanwhile, the company expects promotions and discounts to eat into its gross profit margins in the fourth quarter. "They still have some weakness in their overall product and sales mix," Zimmerman said. Circuit City faces much more acute problems, analysts say. Although the company beat Wall Street expectations for its third quarter, its bottom line was sharply below last year's results. For the quarter, Circuit City lost $21.3 million, or 10 cents a share, on $2.4 billion in sales. In the same period last year, the Richmond, Va.-based retailer earned $9.2 million, or 4 cents a share, on $2.3 billion in revenue. Although the company's overall sales increased 7% in the quarter, its gross profit margin declined from 24.4% of sales to 22.6% of sales. The company blamed that on an increase in promotions industrywide. In order to be cost-competitive, Circuit City was forced to discount, reducing margins, company chairman Alan McCollough said during a conference call with analysts. "Historically, there were times when we weren't stepping up and competing
on price ," McCollough said. "We decided we can't afford not to play." Sales were particularly off in wireless and digital satellite services, McCollough said. Not only did consumer demand slow, but the prices on those products dropped also, he said. The company's problems with pricing are something to keep an eye on during the fourth quarter, said David Campbell, an analyst with Davenport. "Circuit City seems to be unable to generate demand from higher-end consumer electronics buyers. They're driving traffic with heavy promotional activity," Campbell said. "They can't discount more than they've already done. They've got to find way to draw traffic into their stores other than by lowering prices." Davenport doesn't have any investment banking business with either Best Buy or Circuit City. The company was also affected by a drop-off in its financing business. Circuit City earned $8.3 million before taxes from its financing operations in the third quarter this year, compared with $17.8 million in the same period last year. The company blamed the decline on the weak economy and an increase in personal bankruptcies. Both Circuit City and Best Buy have faced a difficult holiday season thus far, Ciccarelli said. Unlike last year, when the newly introduced Microsoft Xbox and Nintendo GameCube drew customers and helped boost sales, there aren't as many must-have products this year, he said. Meanwhile, the slowing economy has forced customers to be more price-conscious, meaning that the electronics chains have to lower prices or face losing sales to discounters such as Wal-Mart. "It's harder to get people in the store," Ciccarelli said. Shares of both Best Buy and Circuit City traded down on Tuesday after their earnings announcements. In afternoon trading, Best Buy shares were down $1.35, or 5.3%, to $24.05. Circuit City shares were down 59 cents, or 7.2%, to $7.60.