Shoppers ignored Best Buy Co Inc's promotion of pricey 3D televisions and other high-end gadgets this holiday season as they chased bargains elsewhere, hammering the company's profits.

The top electronics chain, seen as a bellwether in consumer electronics, surprised investors by reporting a drop in quarterly sales at existing stores and lower-than-expected earnings on Tuesday as demand for top-of-the-line televisions plunged. Its shares tumbled 14.8 percent.

The dismal report also pressured the shares of competitors such as RadioShack Corp and GameStop Corp, television manufacturers such as Sony Corp and television components makers such as Corning Inc, and raised concerns about holiday demand for gadgets.

The newer technologies, like 3D and IPTV (Internet Protocol TV), which we assort more broadly than anyone, have been slower to take hold, Best Buy Chief Executive Brian Dunn said on a conference call.

The lackluster showing also cast a shadow over the strength of the recovery in the consumer-driven U.S. economy, in contrast to better-than-expected November retail sales reported by the U.S. Commerce Department on Tuesday. Shoppers told Reuters this week they were buying more, but focusing on simpler merchandise such as sweaters.

But later on Tuesday, the Federal Reserve said the U.S. economic recovery was still too feeble to cut unemployment, highlighting the fragile nature of the economy.

Best Buy did not go deep enough discounting in TVs on Black Friday, likely the result of their desire to protect gross margins. We believe the mass merchants, particularly Target , were the incremental share gainers this year, Janney Capital markets analyst David Strasser said.

Cliff Draughn, president & chief investment officer at Excelsia Investment Advisors in Savannah, Georgia, said: So the consumer this Christmas may be buying more and boosting a little bit in the retail side. The big ticket items, like the flat-screen TVs, the stereo systems -- it's not there. They can't afford those types of items.

The television that sold for $5,000 three years ago sells for $1,500 today -- how many people need four flat-screen televisions in their apartment?

Best Buy said it is now changing tack, promoting lower-priced 32-inch TVs in December and making price adjustments in its computer section after realizing the consumer is definitely showing propensity at the low end.

I think the U.S. consumer is carefully considering his or her wallet and what they are going to buy for their holiday gift-giving, Dunn told Reuters in an interview, adding he expects sales volumes to be enormous in the 10 days before and after Christmas.

Following Best Buy's disappointing earnings, Reuters analyst John Kozey does not like Best Buy as an investment and says shares could fall further in the near term.

Best Buy is a stock to be traded, not invested in the long run, Kozey said.


In its second holiday season after the bankruptcy of archrival Circuit City, Best Buy faces stiff competition from online retailer Inc and discounters such as Wal-Mart Stores Inc and Target Corp.

Best Buy also said its U.S. market share fell 1.1 percentage points in the quarter on weaker-than-expected sales of TVs, laptops and video games. It blamed some of those losses on a decision to shift away from promoting lower-priced goods, then seeing shoppers gravitate to those brands anyway.

For fiscal 2011, Best Buy cut its profit per share forecast to about $3.20 to $3.40 a prior view of $3.55 to $3.70.

In the fiscal third quarter that ended November 27, net profit was $217 million, or 54 cents a share, compared with $227 million, or 53 cents a share, a year earlier. Analysts on average had forecast 61 cents a share, according to Thomson Reuters I/B/E/S.

Sales fell 1 percent to $11.89 billion, missing analysts' average estimate of $12.45 billion. Domestic comparable-store sales declined 5 percent.

Best Buy shares closed down $6.18 at $35.52 on the New York Stock Exchange.

(Reporting by Dhanya Skariachan; additional reporting by Chuck Mikolajczak; editing by Gerald E. McCormick, Dave Zimmerman, John Wallace and Andre Grenon)