Best Buy Rides High

The retailer boosts its forecast as strong demand continues after the holidays.
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Updated from 8:21 a.m. EST

Best Buy

(BBY) - Get Report

was riding high Thursday as holiday sales momentum for flat-screen televisions spilled into January and allowed the company to raise its earnings expectations.

Shares of the leading consumer-electronics chain were recently up $4.06, or 8.3%, to $52.89 as lingering concerns about the retailer's aggressive growth plans gave way to enthusiasm. The company, which disappointed Wall Street in December with weaker-than-expected third-quarter results due to rising expenses, cited cost controls as a major boost to its bottom line this time around.

"Best Buy finds itself in the middle of a big upgrade cycle for digital, flat-panel televisions that continues to show strength, and they also really tightened down on expenses over the holiday quarter," says Harris Nesbitt analyst Rick Weinhart. "Our channel checks in recent weeks have shown that labor was cut down dramatically in their stores. I think they realized they were taking on too much labor expense as part of the customer-centricity strategy. So, to do well this quarter they were going to have to strangle the labor."

Best Buy now expects to earn $1.25 to $1.30 a share for the fourth quarter ending Feb. 25, up from its post-holiday projection for earnings at the high end of a $1.06 to $1.16 a share range. The Thomson First Call mean analyst estimate for the quarter calls for a profit of $1.16 a share.

Driving the higher estimate was January same-store sales growth in the low double digits. Best Buy expects same-store sales growth of 6% to 7% in the quarter, up from a prior guidance of 3% to 5%. The company had comps growth of 5.8% in December.

"The strong revenue momentum that we saw in December accelerated through January," Best Buy said. "The strong revenue results, a better-than-expected promotional environment and tighter expense controls are driving the earnings results above our prior guidance range. This range also includes the impact of higher incentive compensation expense."

The company said strength in flat-panel TVs, portable audio products like MP3 players, notebook computers and video games drove the better-than-expected January same-store sales. Best Buy said a 20% increase in the number of gift cards issued in the holiday season also helped to boost January results.

For fiscal 2006, Best Buy expects earnings from continuing operations to increase to a range of $2.24 to $2.29 a share. On average, analysts expect the company to earn $2.14 a share for the period.

Despite the positive news, Weinhart remains neutral on the stock (he does not own shares and his firm has no investment banking relationship with the company). While the company is benefiting from strong television sales, he sees weakness in other product categories that could pose risks down the road.

"These results come from the strongest months of the year for TV sales, so you're seeing the positive aspects of the digital television cycle now," Weinhart says. "When you get into the spring and summer months when they're selling more cameras and what-not for Mother's Day and Father's Day -- that's where we could see more weakness from the other categories taking a toll."

Best Buy noted that it may see a slowdown in earnings growth for the first quarter ending in May.

"Looking forward to the first quarter of fiscal 2007, earnings will likely show a fairly modest increase over last year's first quarter. We grew earnings per diluted share by 85% in the first quarter of fiscal 2006, so it represents the most difficult earnings comparison for the coming year."

The company earned 34 cents a share in the year-ago first quarter and is expected by analysts to earn 38 cents a share in this year's.