Best Buy sees weaker holiday margins, shares fall

NEW YORK (Reuters) - Top U.S. electronics chain Best Buy Co reported a higher-than-expected quarterly profit, but its shares fell after it said gross margins in the current holiday quarter would be lower than it had expected.

Shares of the company fell 4.9 percent in premarket trade.

The retailer's margins have come under scrutiny as investors are concerned its efforts to win market share and woo shoppers through aggressive promotions and discounts could weigh on its margins.

With Circuit City out of business and local chains curtailing growth, Best Buy has gained share in the bricks-and-mortar side of the business. However, it still faces stiff competition from online retailers like Amazon.com and retail giants like Wal-Mart Stores Inc .

Best Buy said it expected improved revenue for the fourth quarter, but that it would be driven by lower-margin products like notebook computers and lower-priced flat screen televisions.

The retailer offered "Black Friday" promotions on certain models of flat panel televisions and other home theater products a week before the big shopping day this year to lure consumers.

Net profit rose to $227 million, or 53 cents a share in its third quarter that ended on November 28, from $52 million, or 13 cents a share, a year earlier.

Revenue rose 5 percent to $12.02 billion. Same-store sales rose 1.7 percent.

Analysts on average were expecting a profit of 43 cents a share on revenue of $11.98 billion, according to Thomson Reuters I/B/E/S.

While Best Buy saw strong demand for notebooks, flat panel televisions, mobile phones and appliances, sales in the gaming, movies and music categories were weak.

Best Buy's domestic segment reported a gross profit rate of 24.1 percent in the third quarter, a 30-basis-point decline over the prior-year period.

In a bid to differentiate itself, the retailer has upped the ante on customer service recently. It has promoted Twelpforce to answer consumer queries on Twitter and hired more seasonal workers this fall. It is also providing services such as its Geek Squad repair assistance to shoppers.

For fiscal 2010, Best Buy raised its profit outlook to about $3.00 to $3.15 a share, up from its prior forecast earnings of $2.70 to $3.00 a share, excluding items. Analysts were expecting it to earn $2.96 a share.

(Reporting by Dhanya Skariachan, editing by Dave Zimmerman)

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