Despite falling profit Best Buy holds on to electronics market

Best BuyBBY said Tuesday its first-quarter profit fell 15% even as its biggest competitor exited the market.

One year ago, the federal government's stimulus checks put extra cash in the hands of consumers, leading to higher spending. Yet the nation's biggest consumer electronics retailer still beat earnings estimates.

Profit was $153 million, or 36 cents per share, in the quarter ended May 30. That compares with $179 million, or 43 cents per share, a year earlier as stimulus checks spurred spending.

Adjusted profit was 42 cents per share. Analysts expected 34 cents per share.

"The sales environment hasn't necessarily gotten better and so it's going to be interesting to see how much Best Buy can continue to push on the gross margin and the expense line if sales deteriorate further from these levels," said Brad Thomas, an analyst with KeyBanc Capital Markets who has a "buy" rating on Best Buy shares.

The Richfield, Minn.-based company said revenue rose 12% to $10.1 billion as it opened 185 new stores and gained market share from the shuttered Circuit City StoresCCTYQ. The company said it had gained 2 percentage points of market share in the quarter and that its gains accelerated after the March 8 closing of Circuit City outlets across the country.

Circuit City's liquidation has left about $11 billion in sales for the taking, but clearly Best Buy is facing increasing pressure from Wal-Mart Stores WMT the world's largest retailer, to grab those orphan customers.

"They're definitely sort of playing defense right now, but when the consumer starts to come back they're going to be in a great position," said FTN Equity Capital Markets analyst Anthony Chukumba.

Wal-Mart is aggressively expanding its consumer electronics areas in its 3,600 stores to include higher-end brands like SonySNE, AppleAAPL and DellDELL. It's also experimenting with interactive displays for hi-definition Blu-ray and video gaming.

Best Buy's same-store sales fell 6% and the stronger dollar hurt overseas results. Same-store sales, or sales at stores open at least a year, are a key measure of a retailer's health because they measure sales at existing stores rather than newly opened ones.

Best Buy said that the same-store sales decline was fueled by a reduction in customer traffic, a flat average ticket and reflected decreases in gaming, digital cameras, appliances and movies.

Such decreases were partially offset by sales gains in notebook computers, mobile phones and repair services. Best Buy added that same-store sales of flat-panel TVs were essentially unchanged from last year as the increasing number of TVs sold offset price declines.

Best Buy, which controls about 22% of the market in consumer electronics according to a Deutsche Bank report, is hoping that its customer service will help differentiate itself from discounters like Wal-Mart. The Bentonville, Ark.-based retailer has about 14% of the market, according to Deutsche.

Best Buy said it continues to project annual earnings between $2.50 and $2.90 per share. Those estimates include restructuring charges. Analysts project $2.79 per share.

Contributing: Reuters