Updated from 9:10 a.m. ESTBest Buy ( BBY) met expectations with its holiday results and offered a higher-than-expected guidance for fiscal 2007, promising to cut costs as its customer-focused store transformation continues. The consumer electronics retailer said Thursday that it earned $644 million, or $1.29 a share, in its fourth quarter, up from the $572 million, or $1.13 a share, it recorded for the same quarter last year. On average, analysts expected earnings of $1.29 a share, according to Thomson First Call. Best Buy's own forecast, which it bolstered last month after a better-than-expected holiday, called for fourth-quarter earnings of $1.25 to $1.30 a share. For fiscal 2007, Best Buy projected earnings of $2.65 to $2.80 a share, trumping Wall Street's estimate of $2.64 a share. Much of the optimism stems from the company's plan to cut costs, possibly by laying off workers. "We'll redeploy resources as well as eliminate redundant and non-strategic work, which, unfortunately, means changing or eliminating certain positions,'' Best Buy's president Brian Dunn told analysts on a conference call. "But we'll add jobs in those areas that directly support our growth.'' In fiscal 2006, the company hired around 2,500 workers for its ''Geek Squad,'' a technical support service. Geek Squad represents an element of Best Buy's transformation to its so-called "customer centricity" model. The store transformation is part of Best Buy's bid to differentiate itself from mass merchandisers, like Wal-Mart ( WMT) and Target ( TGT), which have encroached onto the electronics space with their potent, low-price business model. Best Buy has transformed approximately half its store base in an attempt to demystify the ever-changing world of electronics for customers. "They have committed to completing this transformation, and they say they've crossed the threshold," says Harris Nesbitt analyst Richard Weinhart. "This year, they're going to start reining in the costs of it all. They're essentially targeting specific customer segments to try and present a package of products to them in order to enhance the shopping experience."
In the fourth quarter, Best Buy's incentive compensation costs raised its expense rate to 16% of revenue, up from last year's 15.3%. Its gross profit rate for the fourth quarter was 25% of revenue, up from last year's 23.5%, as sales grew. The company's top line rose 12.5% to $10.7 billion, beating Wall Street's estimate calling for sales of $10.53 billion. Strong sales of flat-screen televisions, MP3 players and holiday gift cards drove a same-store sales gain of 7.4% in the U.S. and 6.4% abroad. "The combination of robust sales, continued gross profit gains and focused operating expense reduction paid off in our most important quarter of the year," the company said. "This outcome encourages us, yet we have further work ahead of us. Operating an efficient and effective, customer-centric enterprise is a key focus for Best Buy in fiscal 2007." The company expects to open 90 new stores and post a same-store sales increase of 3% to 5% for the current year. Weinhart says investors expected better sales growth this year, and the company's focus on cutting costs may reflect expectations for a slowdown in consumer spending after the first quarter. "This will be a challenging year for the electronics industry," Weinhart says. "We're concerned about the lack of spending power from consumers with interest rates rising and the housing market slowing. The job market has been improving, but that's really the only positive factor." Shares of Best Buy were down 13 cents, or 0.2%, to $54.39.