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Best Buy sees investments squeezing near-term profits

A Best Buy logo is seen at the company's store during Black Friday in San Francisco, California November 23, 2012. REUTERS/Stephen Lam
A Best Buy logo is seen at the company's store during Black Friday in San Francisco, California November 23, 2012. REUTERS/Stephen Lam

By Dhanya Skariachan

(Reuters) - Best Buy Co Inc reported lackluster sales in the first quarter and warned that efforts to entice shoppers could squeeze profits in the near term.

The news overshadowed its better-than-expected, first-quarter profit and sent shares of the world's largest consumer electronics chain down 4 percent on Tuesday.

Under Chief Executive Officer Hubert Joly, who took the helm last fall, it has been matching rivals' online prices, dedicating more in-store space to faster-growing products such as smartphones and tablets, and investing in employee training and revamping stores.

Joly has also removed layers of management, cut jobs, closed some underperforming stores and decided to shed non-core assets such as its stake in a European joint venture with Carphone Warehouse Group to lower costs.

The results showed Best Buy might need to cut costs further to compete more effectively with the likes of Wal-Mart Stores and Amazon.com.

"The company has plenty of fat to cut, which management can then reinvest into improved price competitiveness; upgrading its e-commerce capabilities; and better customer service," BB&T Capital Markets analyst Anthony Chukumba wrote.

On a conference call, Joly told investors that Best Buy has taken a host of steps to boost its online traffic and sales. It has invested in targeted marketing and added more relevant product recommendations.

The retailer plans to invest more to make its website easier to navigate and replace its decade-old search platform with one that will produce more relevant results.

Best Buy's financial chief, Sharon McCollam, said she did not expect any financial benefits from the new platform for bestbuy.com until the next financial year, which begins on February 1, 2015.

"While many of these online initiatives may sound like just basic functionality upgrades, they are actually game changing for an online retailer of our size as we have historically underinvested in the online channel," Joly said.

ONLINE BATTLE

Some critics have in the past complained that Best Buy had become a showroom for Amazon.com Inc and other online chains as shoppers go to its stores to check out electronic items like televisions, but then buy them elsewhere for less.

Best Buy expects that to change as Amazon starts collecting sales tax in more states by the end of the financial year January 2014.

"In states that are already collecting we're seeing an incremental benefit in our online and retail store sales," Joly said on Tuesday.

Critics of Amazon argued it had an unfair advantage because brick-and-mortar retailers, including Best Buy, Wal-Mart and Target, have had to collect state sales tax on online sales for years because they have stores and other physical operations in these locations.

The U.S. Senate voted overwhelmingly earlier this month to give states the power to enforce sales tax laws on online purchases, but the legislation faces a tougher fight in the Republican-controlled House of Representatives.

Best Buy's net earnings from continuing operations fell to $97 million, or 29 cents a share, from $169 million, or 49 cents a share, a year earlier. Excluding restructuring charges but including Europe, it earned 36 cents a share, above the analysts estimate of 25 cents, according to Thomson Reuters I/B/E/S.

Its sales fell 9.6 percent to $9.38 billion. Sales at stores open at least 14 months fell 1.3 percent, including declines domestically and internationally.

Best Buy tied the revenue weakness partly to a shift in the timing of Super Bowl-related sales. Football's Super Bowl took place on February 3, when the first quarter began, so pre-game sales of big-screen televisions happened in the fourth quarter.

(Reporting By Dhanya Skariachan; Editing by Maureen Bavdek and Leslie Gevirtz)

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