Best Buy news lifts — and then disappoints — investors

Best Buy stock, which can be volatile in normal times, has been on a roller coaster ride over the past couple of days, driven by back-to-back announcements emanating from the Richfield-based consumer electronics retailing giant.

Setting the stage for nervous investors was Friday’s U.S. Census Bureau report, which showed retail sales growing 7.4 percent year over year for May but unexpectedly dropping 1.4 percent from April to May as consumers grew more cautious.

Best Buy (NYSE:BBY) weathered that storm fairly well, closing up for the day at $41.20.

On Monday, the company announced that it was taking orders for Apple’s new iPhone 4 smartphone, scheduled for release June 24. That drove its share price to $42.65 on an intra-day high.

On Tuesday, however, before the market opened, the company announced disappointing Q1 earnings. That news was followed a couple of hours later by an announcement that the company would begin taking trade-ins on computer games at its U.S. stores later this summer in exchange for Best Buy gift cards.

By day’s end, traders and investors had absorbed all the news and sent the stock down more than 6 percent, or $2.49 a share, to close at $38.56 on 29 million shares traded, nearly four times its daily average volume.

On a day when the overall market saw strong gains, that left Best Buy essentially flat with where it was a year ago — and 16 percent below a recent high three weeks ago.

The iPhone 4 announcement is the latest development in a closely watched budding relationship between the largest U.S. consumer electronics retailer and one of the most successful consumer electronics companies worldwide. While unveiling availability of a hot product with a major partner has its own independent momentum and logic separate from other developments, it’s at best unfortunate that it had to compete with a disappointing earnings announcement.

CEO Brian Dunn explained in a Tuesday morning teleconference with analysts that the used-computer-game trade-in business should help drive traffic to the big-box retailer’s stores as consumers move to a new generation of more interactive 3D games.

Saying he was disappointed in the quarterly results, Dunn described store traffic as “choppy,” adding that “consumer spending is episodic … It appears that customers are operating on cues from the broader environment.”

The company posted net income of $155 million, or 36 cents per diluted share, for its first quarter ended May 29, compared with $153 million, or 36 cents per diluted share, a year ago. Earnings came in below the company’s internal unpublished projections and below an average of analyst estimates of 50 cents, according to press reports.

Revenue increased 7 percent to $10.8 billion, compared with revenue of $10.1 billion for the first quarter a year ago. Same-store sales (those open at least 14 months) rose 2.8 percent company-wide, and online sales grew 26 percent.

The company continues to grow its international business faster than the more profitable U.S. stores, which account for nearly three-fourths of Best Buy’s revenue. Same-store sales in China popped 35 percent but only delivered low single-digit operating profits. International comparable-store sales grew 6.3 percent, while those in U.S. stores rose only 1.9 percent, also missing company projections and analyst estimates of 3.5 percent, according to Bloomberg News.

Company officials said that sales of notebook computers and mobile phones were up but offset by declines in televisions, music, films and gaming merchandise. Declines on flat-panel televisions were at their lowest level in two years.

Gross profits on sales grew $240 million to $2.8 billion, including a more than $40 million one-time benefit from settlement of a rebate program with a vendor. Costs for selling, general operations and administration climbed 12 percent to nearly $2.5 billion, driven in part by the company’s move to increase its mobile product sales in store and on the web.

Analysts pressed management about its ability to control spending and keep to its targets for revenue and earnings growth for 2011.

Chief Financial Officer Jim Muehlbauer described the spending as at a “high water mark” for the year as a percentage of revenue.  “Don’t get overly pessimistic … it’s still very early,” Muehlbauer told analysts, noting that the first quarter is the typically the softest of the year.

“We have a significant opportunity to make up the shortfall through the rest of the year. … We control many levers from a spending standpoint … We’ll adjust labor accordingly as we see sales move up or down versus our expectations,” he said.

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