Can only give it away for so long.
Best Buy, Circuit City Suffer Tough Times
Tuesday December 17, 2:53 pm ET
By Ellis Mnyandu
NEW YORK (Reuters) - Top U.S. consumer electronics chain Best Buy Co. Inc. (NYSE:BBY - News) on Tuesday cut its quarterly profit outlook due to losses at its home entertainment stores and fierce competition, while Circuit City Stores Inc. (NYSE:CC - News), its largest rival, posted a quarterly loss.
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Shares of both companies tumbled on the New York Stock Exchange as worries about a prolonged profit meltdown swirled around the market. Circuit City traded at 10-year lows, while Best Buy skirted a one-month low early Tuesday afternoon.
An uncertain U.S. economy and fears about a war with Iraq have forced consumers to cut spending on pricey upgrades to digital satellite systems, big-screen TVs and newer wireless phones. Both Best Buy and Circuit City have been trying to lure shoppers with cheap DVD players, CDs and TVs as well as interest-free financing.
But the companies also face growing competition from the world's largest retailer, Wal-Mart Stores Inc. (NYSE:WMT - News), and warehouse clubs such as Costco Wholesale Corp. (NasdaqNM:COST - News), who are all slashing prices on home entertainment gear to attract thrifty buyers this holiday season.
Analyst Scott Ciccarelli of Gerard Klauer Mattison & Co. said the market is likely to remain difficult for both Circuit City and Best Buy.
"Sales growth is sluggish and the competitive environment is putting pressure on gross margins," he said. "Consumer electronics now seems to be something that Wal-Mart has decided to go after."
Even so, Patrick Jeffrey an analyst at credit rating agency Standard & Poor's, said Best Buy had a "deeper product depth" than its rivals. "There's still life in the digital product cycle which helps support Best Buy's base business," he said.
MUSICLAND BLUES UNDER SCRUTINY
For the third quarter ended on Nov. 30, Best Buy said earnings rose to $85 million, or 26 cents a share, from $80 million or 25 cents a share, in the year-ago period, as it kept costs under control.
Analysts polled by research firm Thomson First Call had expected a 25 cents a share profit, in line with Best Buy's own forecast of 24 cents to 27 cents a share. Quarterly sales rose 16 percent to $5.5 billion, but same-store sales fell 0.3 percent.
Best Buy said sales at its stores open at least 14 months also dropped "modestly" at the start of December, and it sees flat same-store sales for the fourth quarter ending in February.
The Minneapolis-based chain said it expects to post a fourth-quarter profit of $1 to $1.12 a share, below its previous outlook of $1.05 to $1.15. Analysts' estimates average $1.05, according to First Call.
Best Buy, which has vowed to keep a tight rein on business costs, said it expects an operating loss of $80 million to $85 million at its Musicland mall-based entertainment stores to weigh on fourth-quarter results.
"Inevitably, a significant number of underperforming locations will need to be scrutinized," Chief Financial Officer Darren Jackson said in a statement. Chief Operating Officer Allen Lenzmeier said in an analyst conference call Best Buy had not "cut expenses fast enough" at Musicland, which sells mainly music and movies.
Best Buy, which operates nearly 2,000 stores, has over the past year been spending an undisclosed sum of money to overhaul its Sam Goody music retailing chain, part of the Musicland Group that Best Buy bought for $685 million in February 2001.
Best Buy's stock fell $1.28, or 5.04 percent, to $24.12, while Circuit City slipped 62 cents, or 7.6 percent, to $7.57 in afternoon trading.
Circuit City, whose third quarter also ended on Nov. 30, reported a loss of $21.3 million, or 10 cents a share, from continuing operations for the period, reversing a year-ago profit of $9.2 million or 4 cents a share. Analysts had expected a 13 cents loss.
Excluding costs to improve store product displays and relocate some shops, the Circuit City loss was 7 cents. The Richmond, Virginia-based retailer said its losses were also due to increased personal bankruptcies and a slow economy which drove profits from its customer financing operations to $8.3 million from $17.8 million a year earlier.
Circuit City, which is still transitioning its business after deciding to cease sales of appliances two years ago, said quarterly sales rose 7 percent to $2.42 billion from $2.26 billion, and same-store sales increased by a slower than expected 6 percent.
In a conference call with analysts, Circuit City vowed to continue cutting prices to fend off competition.
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