December 16, 2008 / 1:13 PM / 11 years ago

Best Buy beats expectations and offers staff buyouts

ATLANTA (Reuters) - Best Buy Co (BBY.N) reported better-than-expected quarterly results on Tuesday and said it will offer employee buyouts and cut back store openings as consumers cut spending, sending its shares up 16 percent.

People wait in line before the 5 a.m. opening of "Black Friday" sales at the Best Buy store in Westbury, New York November 28, 2008. REUTERS/Shannon Stapleton

The top consumer electronics retailer has taken several steps to counter the U.S. recession and fend off increased competition from discounters such as Wal-Mart Stores Inc (WMT.N), which has expanded its product offering and cut prices in the key holiday shopping season.

Minneapolis-based Best Buy said it is offering buyouts to its 4,000 corporate employees. New-store openings will be cut next year as it pares capital spending by about 50 percent.

“Certainly this report is better than feared from a (same-store sales) and gross margin perspective. We also applaud the cutback in store growth,” J.P. Morgan analyst Christopher Horvers said in a research note.

But he said that Best Buy’s strategy was based on a very tough economy and doubted “the sustainability in any potential advance in the stock price today.”

The retailer warned that it expects the consumer spending environment to worsen and was bracing for marked declines in sales at stores open at least a year.

“We anticipate that companies will be laying off more employees, which will exacerbate the decline in consumer confidence, uncertainty and weakening demand,” Best Buy Chief Executive Brad Anderson said during a conference call.

“In fact, we can foresee a period in which consumers may significantly shift their spending behaviors, which could have a dramatic impact on retailing,” Anderson added.

Best Buy net earnings fell 77 percent to $52 million, or 13 cents a diluted share, for the third quarter that ended November 29, from $228 million, or 53 cents a share, a year earlier.

Excluding impairment charges tied to a decline in the market price of the company’s stake in joint venture partner Carphone Warehouse CPW.L, Best Buy’s profit came to 35 cents a share. Analysts had expected 24 cents a share, according to Reuters Estimates.

POST-HOLIDAY

Dan Binder, analyst at Jefferies & Co, said investors should focus on how the company fares after the holiday shopping season ends, when consumer spending is expected to drop even further.

“Post-holiday, you have to start wondering what reason do people have to shop,” Binder said. “Unless there is some recovery in their cash-flow prospects, it’s hard to see why people are going to shop this category in a big way.”

Fire sales at bankrupt rival Circuit City Stores CCTYQ.PK, which is closing 155 U.S. stores, are also expected to pressure Best Buy’s results in coming months. Circuit City filed for Chapter 11 protection last month.

Best Buy said quarterly revenue rose 16 percent to $11.5 billion, boosted by inclusion of Best Buy Europe.

Sales at stores open at least 14 months, or same-store sales, fell 5.3 percent overall. Same-store sales were off 6.3 percent in the United States but rose 0.3 percent internationally.

Best Buy said U.S. customer traffic declined, but its average sale rose as bigger-ticket items such as mobile phones and laptops accounted for more of revenue.

Gross margin improved to 24.9 percent of sales from 23.5 percent, aided by sales of higher-margin cell phones at Best Buy Europe.

Last month, Best Buy slashed its full-year earnings forecast, saying the meltdown in global financial markets had prompted “seismic” changes in consumer behavior.

Best Buy cut its annual profit forecast to $2.30 to $2.90 a share from a prior view of $3.25 to $3.40 a share. On Tuesday, it stood by that reduced forecast.

The retailer said its buyout plan includes expanded severance and a year of paid health insurance for departing staff. It gave no target number of buyouts but added it may need involuntary layoffs depending on the response.

Shares were up $3.78 to $27.25 in afternoon trading on the New York Stock Exchange.

Reporting by Karen Jacobs; Editing by Derek Caney and Gunna Dickson

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