Best Buy Co. Inc. on Tuesday reported a higher-than-expected quarterly profit, boosted by new store openings and sales of high-priced electronics, easing fears that consumers were pulling back on spending.

The consumer electronics retailer, which stood by its full-year financial outlook, said demand is robust for flat-panel televisions, an important engine of growth for the retailer.

We have not seen any decline in the consumer's interest in this important category, said Mike Vitelli, senior vice president of merchandising, on a conference call with analysts.

After an initial decline, Best Buy shares rose $3.25, or 6.78 percent, to $51.02 on the New York Stock Exchange early Tuesday afternoon.

They continue to execute very well, said Joseph Feldman, managing director of Telsey Advisory Group and an analyst who covers consumer electronics retailers.

They've proven that despite the challenging macro environment, consumers still want these advanced TVs and all the latest gadgets and will continue to spend on that.


In the second quarter ended on August 26, net income rose to $230 million, or 47 cents per share, from $188 million, or 37 cents per share, a year earlier. Analysts on average were expecting 44 cents per share.

Revenue rose 13 percent to $7.6 billion, beating analysts' average target of $7.54 billion. Revenue was boosted by the net addition of 237 new stores.

Retailers like Best Buy and Circuit City Stores Inc. (NYSE:CC - news) have benefited from strong demand for popular technology items like flat-panel TVs and MP3 music players. Best Buy is also trying to increase profits by selling services, like home-theater installation and at-home computer assistance.

But worries over how well consumer spending will hold up in the face of high gasoline prices and the prospect of a slowing housing market have pressured shares of these retailers. Since the end of June, Best Buy's shares have declined 13 percent, although they are up 10 percent for the year through Monday and gasoline prices have eased.

Best Buy said that for identical flat-panel TVs, it expects average selling prices to drop between 25 and 30 percent year-over-year, but it is not worried about the decline.

We expect that the lower prices will drive tremendous unit demand, far outweighing the negative impact of any price declines, Vitelli said.

It hired about 300 more home-theater installers in the quarter to help consumers set up their new TVs at home.

Best Buy's second-quarter sales at stores open at least a year, a key retail gauge called comparable store sales, rose 3.7 percent due to strong sales of advanced TVs, notebook computers and computer services.

But its gross profit rate decreased to 25.0 percent of revenue from 25.5 percent because of increased promotions for DVDs and notebook computers.

Sanford C. Bernstein & Co. analyst Colin McGranahan wrote in a note that Best Buy delivered a solid second quarter, but margins and comparable store sales were slightly weaker than expected.


Best Buy backed its fiscal-year earnings forecast of $2.65 to $2.80 per share, saying it still had more than 60 percent of the year ahead in terms of revenue and earnings.

Wall Street on average is expecting full-year earnings of $2.79 per share, according to Reuters Estimates.

Jim Muehlbauer, senior vice president of finance, said the conservative view does not encompass a dramatic change of consumer spending in either direction.

The retailer expects gross margins to be constrained by the lower gross margin business model of Five Star, a Chinese retailer in which it holds a majority stake, and revenue growth in lower-margin products like gaming hardware.

Best Buy trades at almost 15 times next year's earnings compared with Circuit City, which trades at 16.8 times, and the Standard & Poor's Retailing Index which trades at 13.8 times, according to Reuters data.