Best Buy Co Inc's sales promotions helped it win smartphone shoppers from its online and discount rivals and beat Wall Street estimates in its first quarter, sending shares up over 4 percent.

The retailer, seen as a bellwether in consumer electronics, also cheered investors by buying back $505 million worth of shares and backing its profit outlook for the year.

The news came just months after the biggest U.S. consumer electronics chain decided to focus more on its mobile phone and online businesses and shrink its big-box format as investors raised concerns about its huge overhead costs and oversized stores at a time when many shoppers buy their gadgets online. [nN14125517]

The results also came the same day that the government said U.S. retail sales fell in May, the first drop in 11 months.

The top line was not as bad as people expected, particularly given the continued weakness in the U.S. macroeconomic environment as well as the supply chain disruptions in Japan from the earthquake, said Anthony Chukumba, an analyst with BB&T Capital Markets.

Best Buy's sales at stores open at least 14 months fell 1.7 percent, while analysts were looking for as much as a 4 percent decline. However, margins were much below analysts' estimates.

This puts us back at the age-old question: Can Best Buy grow gross margin and comps simultaneously? The evidence remains unclear, JPMorgan analyst Christopher Horvers said.

The company said its net profit for the first quarter ended May 28 was $136 million, or 35 cents a share, compared with $155 million, or 36 cents a share, a year earlier. Analysts on average were expecting a profit of 33 cents a share, according to Thomson Reuters I/B/E/S.

Sales rose 1.4 percent to $10.94 billion, beating the analysts average estimate of $10.71 billion.

Analysts said Best Buy discounted more to woo bargain-hungry shoppers from competitors, hurting margins.

They are fighting for share a little bit harder than they were (six months ago), said RBC Capital Markets analyst Scot Ciccarelli.

Best Buy, which faces stiff competition from online retailer Inc and discounters such as Wal-Mart Stores Inc and Target Corp , promised to stay competitive heading into the back-to-school season.

We ... know that the customer is stretched thin in the current environment, Chief Financial Officer Jim Muehlbauer said on a conference call.

For the year, Best Buy continues to see earnings of $3.30 a share to $3.55 a share, excluding items.

It sees sales for the year at the high end of its $51 billion to $52.5 billion view.

Best Buy shares were up 4.5 percent at $30.11 Tuesday afternoon on the New York Stock Exchange. Option activity early in the session doesn't look all that optimistic though, said Patrick Mortimer, director of option trading at Pipeline Trading Systems. The bullish June $32 calls carry the highest open interest in all of BBY's listed options and it looks like investors are bailing out of their long positions, most likely at a loss. June options expire on Friday after the close.

(For a graphic on the retailer's results, click


In the United States, demand was strong for mobile phones, tablets, eReaders, appliances and services, while sales of televisions continued to be weak. Outside its home turf, the retailer saw strong demand in China even as same-store sales fell in Europe and Canada.

The biggest catalyst of our positive performance (in mobile computing) was the rapid growth in tablets as we successfully kicked off the launch of the iPad 2, Chief Executive Officer Brian Dunn said, adding: Tablet space is heating up now.

Best Buy is rolling out a section dedicated to tablets called Tablet Central to boost sales of these mobile computing devices further.

Back-to-school will be a microcosm of the categories that are very, very hot right now, and that is mobile connectivity, and that is smartphones and tablets, Dunn told Reuters in an interview.

From Wal-Mart to OfficeMax Inc , retailers are bullish on tablet demand heading into the second-biggest selling season of the year.

The prospects for the television business are not rosy.

For instance, Dunn does not see an end to the days of big declines in prices of TVs even as labor and material costs go up in China, a chief sourcing hub for electronics.

We remain very excited about the category, but it is in the inevitable trough behind what was an explosive adoption cycle, he said.

Earlier on Tuesday, Carphone Warehouse Group Plc , which owns 50 percent of a joint venture with Best Buy in Europe, said it has delayed a decision on the next steps for its loss-making UK consumer electronics megastores business until the autumn, mulling the wisdom of expanding as consumer demand slides.

(Reporting by Dhanya Skariachan; Additional reporting by James Davey in London and Doris Frankel in Chicago, editing by Gerald E. McCormick, Dave Zimmerman)