Best Buy Says Quarterly Profit Will Fall ‘Significantly’

Best Buy Co. (BBY), the retailer resisting a takeover attempt by its founder, said fiscal third-quarter profit will be “significantly” below last year’s results as sales at established stores continue to decline.

Comparable-store sales will drop at a rate consistent with the first two quarters, Richfield, Minnesota-based Best Buy said yesterday in a statement. Same-store sales fell 5.3 percent in the first quarter and 3.2 percent in the second.

Chief Executive Officer Hubert Joly, who started last month, put himself in charge of the U.S. business after eliminating the jobs of two senior executives. He’s accelerating turnaround efforts as the world’s largest consumer-electronics retailer tries to revive slumping sales and fend off rivals such as Amazon.com Inc. and Wal-Mart Stores Inc.

“We see limited opportunity for a turnaround in sales and think gross margins will compress from an attempt to be more competitive in the fourth quarter,” Ian Gordon, an analyst at Standard & Poor’s in New York, wrote in a note. He cut his Best Buy rating to sell from hold.

Best Buy tumbled 10 percent to $15.17 at the close in New York. The shares have dropped 35 percent this year.

Founder Richard Schulze is seeking to buy the company and reached an agreement with the board in August allowing him to conduct due diligence and bring a proposal to the company within 60 days. After stepping down as chairman in June, Schulze offered on Aug. 6 to take the retailer private at $24 to $26 a share.

Buyout Chances

Best Buy said it would host a presentation for analysts and investors on Nov. 1 in New York at which Joly will assess the company’s business and discuss his plans. The event suggests directors aren’t giving “real” consideration to a possible leveraged buyout, Scott Tilghman, an analyst for Caris & Co. in Boston, wrote today in a note. He rates Best Buy average, the equivalent of a hold.

“With the management changes, structural realignment and planned investor day, it seems CEO Joly and the board are not assuming a buyout will take place,” Tilghman said in an e-mail.

David Reno, a New York-based spokesman for Schulze, didn’t return telephone calls and an e-mail seeking comment.

Mike Vitelli, president of Best Buy’s U.S. business, will retire at the end of the fiscal year, according to yesterday’s statement. Tim Sheehan, executive vice president of U.S. operations, will depart at the end of October.

Revenue Decline

Best Buy’s revenue may decline 3 percent to $49.2 billion in its current fiscal year, the average of 18 analysts’ estimates compiled by Bloomberg. The company had increased annual revenue every year since it started trading on the Nasdaq Stock Market in 1985, according to Sue Busch, a company spokeswoman.

Adjusted profit in last year’s third quarter was 47 cents a share. The average of 20 analysts’ estimates for profit in the current quarter was 36 cents.

The cost to guard against losses on Best Buy’s debt jumped to the highest on record today, Bloomberg prices show. Credit swaps tied to the company rose 2.5 percentage points to 16.6 percent upfront as of 2:30 p.m. in New York, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

That’s in addition to 5 percent a year, meaning it would cost $1.66 million initially and $500,000 annually for five years to protect $10 million of Best Buy’s debt. The contracts, which investors use to hedge against losses or to speculate on creditworthiness, rise as investor confidence deteriorates and fall as it improves.

To contact the reporter on this story: Chris Burritt in Greensboro, North Carolina, at cburritt@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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