Best Buy Earnings Disappoint, But Hot Tech Could Boost Second Half

Best Buy (BBY) posted disappointing first-quarter results this morning, falling well short of analysts' expectations.

Sure, customers bought iPads and smart phones. The retailer's U.S. sales rose 5% in the quarter to $7.9 billion driven by increased sales of notebook computers, mobile phones and appliances. However, those gains weren't enough to make up for lower sales of TVs, video games and movies.

However, customer behavior at the world's largest consumer electronics store chain could offer clues to consumer spending broadly. CEO Brian Dunn said customer traffic into Best Buy stores varied from week to week and month to month. Dunn said cautious consumers seem to be basing their buying patterns on the most current signs of how the economic recovery is progressing. And yet, when they spend, consumers are willing to spend on bigger-ticket items.

"Customers are taking cues from the broader environment ... [spending] is running parallel to the economic recovery," said Dunn in a call with investors to discuss earnings.

The Minneapolis-based chain reported that its profit-per-share in the first quarter remained unchanged at 36 cents. Analysts were expecting a profit of 50 cents a share, according to Thomson Reuters. Sales climbed 7% to $10.8 billion from $10.1 billion. Overall, sales at stores open at least a year or more were up 2.8%. Disappointed investors beat down Best Buy shares, which were off 6.87% to $38.23, just before noon.

Investing in the Future Cuts Current Profits

Much of Best Buy's miss can be attributed to increased SG&A -- selling, general and administrative expenses -- in this case, the company's increased spending on payroll and administration. The retailer attributed those costs to new stores and some key growth initiatives. Michael Lasser, an analyst at Barclays Capital noted that the expenses were so high that it overshadowed the company's better performance on its gross margin.

Dunn expects sales to pick up with new innovations like the tablets from Apple (AAPL). He says that the "back order situation in these new categories" is a good indication that "consumer demand is out there. Production capability has to catch up to it."

Best Buy's overseas stores performed much better. Executives say they are ramping up to expand internationally, where consumers are spending at a faster pace. Same-store sales in China jumped 30%, while sales for Best Buy Europe rose 5%. CEO Dunn said that its third store in the U.K. outside of London had the "largest grand opening weekend in the history of Best Buy."

Despite the big overall earnings miss this quarter, Dunn sought to assuage investors by saying that the company is positioning itself better for a future which will include smart TVs and a more connected world. "Best Buy will shape that market," he says.

Dunn also says that he's excited about the changes in the gaming businesses coming in the second half of the year. That's when Microsoft's (MSFT) new Kinect gaming add-on to the Xbox 360 will launch. The add-on is Microsoft's answer to the Nintendo Wii, which translates players' motions into game action in a TV screen.