Best Buy Co's quarterly profit missed estimates on Tuesday as sales of lower-margin products like notebook computers and promotional efforts to woo shoppers ate into the top U.S. consumer electronics chain's margins.

Best Buy, however, raised its forecast for the fiscal year as it saw sales trends improving, customer traffic stabilizing and continued to gain market share after main rival Circuit City closed its doors early this year.

The retailer, which sees domestic margins falling modestly in the year, said it has increasing confidence that traffic stabilization will continue through back half of year.

The launch of Apple Inc's latest iPhones, discounts offered on televisions and digital imaging, and efforts to stay competitive in the appliance category hurt margins in the quarter, Best Buy said on a conference call.

Best Buy's net profit fell to $158 million, or 37 cents a share, in the second quarter that ended August 29, from $202 million, or 48 cents a share, a year earlier.

Excluding a tax impact, the profit was 40 cents a share, a penny below analysts' average forecast of 41 cents a share.

The consumer electronics sector has been hit as U.S. customers spend less on nonessential items. Best Buy also faces stiff competition from Wal-Mart Stores Inc and others adding laptop computers, flat-screen televisions and similar products to their stores.

Last month, Best Buy said it expected sales during the upcoming Christmas shopping season to likely outpace last year's historically weak levels. But it did not expect consumers to abandon their frugal ways.

The retailer, which has been working on ways to tailor its gadgets to customer needs, has even joined hands with big names like Sony Corp <6758.T> to launch a collaborative line of audio products called Altus.

In another alliance, Best Buy will boost marketing and merchandising of TiVo Inc's digital video recorders in return for consistent presence in a showcase area on TiVo on-screen systems.

In the second quarter, total revenue rose 12 percent to $11.0 billion, boosted by Best Buy Europe and the performance of new stores. Sales at stores open at least 14 months, or comparable store sales, fell 3.9 percent in the quarter.

While demand for notebooks and mobile phones picked up in the all-important back-to-school season, customers still shunned gaming items, digital cameras, appliances and movies.

For fiscal 2010, Best Buy now expects to earn $2.70 to $3.00 a share, excluding items, with same-store sales flat to down 2 percent and total revenue of $48 billion to $49 billion.

It had earlier forecast earnings of $2.50 to $2.90 a share, with same-store sales flat to down 5 percent and total revenue of $46.5 billion to $48.5 billion.

Analysts were expecting Best Buy to report revenue of $47.8 billion and a profit of $2.86 for the period.

Best Buy shares were down $1.50, or 3.71 percent at $38.91 in midday trading on the New York Stock Exchange. They had touched a low of $38.68 earlier in the session.

(Reporting by Dhanya Skariachan in Bangalore, editing by Dave Zimmerman and Gunna Dickson)

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