Updated from 9:39 a.m. ESTThe flat-screen TV was the hot-ticket item this holiday shopping season and a driving factor in the sales numbers reported Friday by Best Buy ( BBY) and Circuit City ( CC). Both retailers said December same-store sales topped their expectations. Moreover, they signaled that their profits will be relatively in line with forecasts, despite a heated price war that has mangled margins. Best Buy, the larger of the two consumer-electronics chains, said December same-store sales rose 7% from a year ago, driven by strong results in Canada and online. Best Buy said the conversion rate, reflecting the proportion of store customers who make a purchase, also rose. Total sales rose 15% to $6.6 billion and comparable-store sales were particularly strong in flat-screen TVs, video gaming, MP3 players and notebook computers. The company guided to full-year earnings of $2.70 to $2.80 a share, in line with the $2.75 Wall Street estimate. Circuit City posted a 4.2% same-store sales increase and raised its sales guidance for the fiscal year. The company, noting strength in the second half of the month, said total December sales rose 5.9% to $2.10 billion from $1.98 billion. The company had a double-digit same-store sales increase in flat-panel TVs, with single-digit comps growth in sales of digital cameras, audio products and PC hardware. Circuit City now sees domestic fiscal 2007 same-store sales growth of 7% to 8%, up from an earlier view of 6% to 7%. The company projected net sales growth of 9% to 10%, up from its earlier projection of 8% to 9%.
Perhaps more importantly, Circuit City said it expects full-year earnings from continuing operations as a percentage of sales, before income taxes, will be at the top end of its previously projected range. Last month, both Best Buy and Circuit City disappointed Wall Street with a soft third-quarter profit performance, hit by keen competition for flat-screen TVs that forced the retailers to cut prices. Aside from the traditional competition with each other, Best Buy and Circuit City had to deal with the likes of Wal-Mart ( WMT), Costco ( COST) and even Home Depot ( HD), who all have tried to take advantage of the flat-screen TV demand. Circuit City said Friday that the promotional environment remained "intense," especially in the flat-panel TV category. Best Buy said December "continued to be a competitive environment." Investors were more impressed with Best Buy's numbers than Circuit City's. Shares of Best Buy recently were up 81 cents, or 1.6%, to $50.65, while Circuit City shares were down 50 cents, or 2.5%, to $19.50. Michael Appel, a restructuring specialist with Quest Turnaround Advisors, says he believes Best Buy is in a good position, while Circuit City appears to be having more trouble with its margins. "I really think the key is the ability of the retailer to jump on the new trend," he says, "and to work deals with the manufacturers. That's always been the case with the consumer electronics sector."
Richard Hastings, senior retail sector analyst with Smyth-Bernard Sands, says volume was a factor in the December sales numbers. "The volume of electronics, and especially flat-screen TV sales, were enough, especially in the case of Best Buy, to push earnings guidance back to the top of the range," Hastings says, "and very happily for Circuit City, to pull them back to better earnings after their extremely brutal third quarter." Hastings says that while he is cautious about the margins associated with flat-screen TVs, he believes "the volume will hold up very well going forward." "I think that from a volume perspective, things are looking good," he says, "but prices and margins have yet to stabilize, but I believe they will."