Best Buy Warns of Profit Pressure--4th Update

By Drew FitzGerald 

Best Buy Co. on Thursday warned that weak demand for consumer electronics and declining prices will weigh on sales over the next six months, rekindling investor worries about the chain's long-term profitability and sending its shares tumbling.

The electronics chain said domestic sales would be flat to negative for the first half of the year. At the same time, Best Buy also said its profitability will suffer during the period as it plans to spend heavily on store improvements.

Shares of Best Buy plunged 14%, its biggest one-day fall since a year ago, when the company reported a dismal 2013 holiday season that erased nearly a third of its market value.

The expected slowdown this year overshadowed its results for the holiday season when domestic sales rose 3.4%, excluding newly opened and closed stores, for the nine-week period ending Jan. 3. The company credited popular home-theater systems and mobile phones for those gains.

Best Buy had warned that the holiday season would be highly promotional and that sales in the fourth quarter would be flat. The company has eked out stronger profits thanks largely to cost cuts, but the business still faces pressure from online rivals and discounters like Wal-Mart Stores Inc. and Target Corp., chains that can forgo some profits on electronics to attract shoppers who will stay to buy clothing and groceries.

The company also said rivals' price cuts and fewer purchases of extended warranties, a highly profitable business, would hurt earnings in the coming year. The same TVs and handsets that helped boost Best Buy sales over the holiday won't continue at the same level, Best Buy Chief Financial Officer Sharon McCollam said in a statement. "We are also appropriately cautious about the pressures," Ms. McCollam said.

Best Buy didn't detail how it will target its new investments, though executives have pumped up spending in recent months on marketing, delivery infrastructure and worker training. The company is slated to report quarterly results in March.

Write to Drew FitzGerald at [e-mail]

Access Investor Kit for Best Buy Co., Inc.

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=US0865161014

Access Investor Kit for Target Corp.

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=US87612E1064

Access Investor Kit for Wal-Mart Stores, Inc.

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=US9311421039

Subscribe to WSJ: http://online.wsj.com?mod=djnwires