Best Buy bests rival Circuit City

MINNEAPOLIS - Circuit City's problems in the fourth quarter were widely known, so its poor earnings report was expected. But what was a bit of a surprise was the stark contrast between its results and those of its chief rival, Best Buy.

The results reported yesterday by the nation's two largest electronics chains showed the profit for Best Buy Co. Inc. rose 18 percent in the quarter, while Circuit City Stores Inc. lost money.

The differences are striking: While Best Buy is profiting both from its operations outside the United States, including China, and from a major push into selling installation and advice in addition to TVs and iPods, Circuit City is closing 62 Canadian stores and replacing 3,400 workers with cheaper help.

"I think Best Buy is just executing on all fronts. They're clearly the winner . . . and pulling away," said Joseph Feldman, who covers electronics retailers at independent research firm Telsey Advisory Group L.L.C., of New York.

To be sure, both retailers have challenges: Price competition is fierce for their most important product, high-end TVs. Also, sales of compact discs have been falling.

But initiatives Best Buy started a few years ago, such as its international operation, its Geek Squad tech-support service, and store sections that cater to big-spending customers, are helping offset profit pressures in its core electronics business.

At Circuit City, even with the staff and store cuts, there are some bright spots. It expects revenue for its home-installation service, called "firedog," to double to $400 million this year, and it expects to open 40 or more U.S. stores this year, not counting relocations.

Feldman, the analyst, said the cost-cutting initiatives and new stores should help Circuit City's bottom line - eventually. He estimates that the layoffs alone could save as much as $35 million if Circuit City saves $5 per hour per worker.

"Even if it's half of that, $17 million, $20 million could be a lot. Every little bit does add up," he said.

The company's $12.2 million loss for the quarter ended Feb. 28 stemmed from restructuring charges, although store closings and slower-than-expected sales growth also hurt. The Richmond, Va., company said it lost 7 cents a share, compared with a profit of $141.4 million, or 81 cents a share, a year earlier.

Without the special charges, Circuit City would have earned $51.1 million, or 68 cents a share. On that basis, analysts surveyed by Thomson Financial expected 63 cents a share.

Sales rose 1 percent to $3.93 billion, but missed analysts' $4.04 billion estimate. Sales at stores open at least a year, a key retailing gauge, slipped half of 1 percent.

While Circuit City blamed TV and computer volatility for its troubles, Bank of America Corp. analyst David Strasser wrote in a note that "we believe competitive pressure from [Best Buy] is a big part of the issue."

Best Buy, of Minneapolis, said it earned $763 million, or $1.55 a share, during the quarter ended March 3, up from $644 million, or $1.29 a share, in the three months ended Feb. 25, 2006.

Revenue rose 21 percent to $12.9 billion from $10.69 billion a year earlier, driven by store openings and a quarter that was a week longer than the quarter a year earlier.

Analysts surveyed by Thomson Financial were expecting earnings of $1.52 a share on revenue of $12.67 billion.

Best Buy's revenue grew faster than its profit - meaning Best Buy profited slightly less from each dollar in sales than it did a year earlier. The company attributed that to growth in areas that carry lower profit margins, such as video game consoles, online sales, and its Five Star electronics retail stores in China.

Best Buy also said margins were pressured by tough price competition in home theater, music and movies.

The company said margins would have been worse if not for gift card "breakage," or cards that don't get redeemed. That added up to $23 million for the first three quarters of the year.

Best Buy's sales at stores open at least a year rose 5.9 percent, driven mostly by a strong increase at stores outside the United States.

Best Buy has already made moves into China, and it said yesterday that it might open test stores in Mexico and Turkey within the next year and a half.

Best Buy shares closed down $1.24 yesterday at $47.89 on the New York Stock Exchange. Circuit City shares fell 7 cents to close at $18.21 on the NYSE.