Best Buy closes higher on strong sales and earnings report

Best Buy's sales and earnings for the most recent quarter were better than expected, helping send the stock up 7 percent on Thursday.

In announcing the results, Best Buy delivered the kind of nice surprise that Wall Street investors like to hear. Company officials had predicted yet another drop in sales at stores open for at least 14 months. Instead, they announced a rare sales increase for those stores — of 2.4 percent.

"That's effectively the best same-store sales growth the company has posted in four years," Piper Jaffray analyst Peter Keith said. "The business saw broad-based strength across consumer electronics, gaming, computing and mobile, and appliances. So, Best Buy seems to be set up for a relatively good holiday season."

But CEO Hubert Joly is trying to contain expectations. He told analysts competition for shoppers will be intense during the holiday shopping season.

Joly said sales also could be held back by the limited supply of some hot products and possible labor strife at a key West Coast port where many products arrive in the United States. He forecast flat sales for the current quarter, which includes Christmas.

For the most recent quarter, Best Buy's total sales rose less than 1 percent to $9.4 billion. Net income totaled $107 million, about double earnings in the same quarter a year ago.

Sales of services, tablets and phones were weaker, despite the launch of Apple's iPhone 6 in September. But phone sales would have been even weaker were it not for the iPhone 6 rollout occurring in the quarter, Wedbush Security analyst Michael Pachter said.

"Everybody who wanted an iPhone that was coming off contract in May, June and July figured they would wait," he said. "They waited until the iPhone came out and then they bought it."

Continuing costs cuts also benefited Best Buy in the quarter, as it works toward its goal of reducing annual expenses by $1 billion.

But Pachter, a long-time Best Buy skeptic, said the company is running out of things to cut without hurting the business.

Some analysts argue falling gas prices are giving retailers like Best Buy a boost. Prices for fuel have been dropping since the summer and are the lowest they've been in years. That's had a powerful impact, retail consultant Howard Davidowitz said.

"I think that changed the mood of the consumer," he said. "That put money in the consumer's pocket. I think that benefited Target, Walmart, Best Buy and lots of companies."

Davidowtiz said Best Buy is also reaping rewards for efforts to improve its operations and competitiveness.

"Best Buy has taken a number of steps from a product, marketing pricing, store development point of view," he said. "Well, when you do those things and business gets a little better, you're going to benefit."

But the payoff may not be as big as Best Buy's leaders are hoping for. Company executives say tough price competition, among other industry factors, will make it harder to make the business as profitable as they want.