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Better profit at Best Buy in holiday quarter cheers investors

A company logo is seen on a Best Buy store in Westminster, Colorado January 16, 2014. REUTERS/Rick Wilking

By Dhanya Skariachan

(Reuters) - U.S. retailer Best Buy Co Inc (BBY) reported a better-than-expected profit in the quarter covering the holiday season and said it would more aggressively cut costs this year to fund its turnaround efforts, sending shares higher in midday trading.

The news heartened investors who had been concerned about profits being squeezed during the fourth quarter, the most heavily promoted and discounted holiday-shopping season since the recession, and shares rose 5.6 percent to $27.26.

Best Buy had slashed prices throughout the holidays to thwart competition from Wal-Mart Stores Inc (WMT), Amazon.com Inc (AMZN) and other chains, and had warned last month of a bigger-than-expected drop in quarterly operating margins.

"The quarter was less bad than everyone expected," said BB&T Capital Markets analyst Anthony Chukumba, who was encouraged by Best Buy's efforts to court online shoppers and rein in costs.

The company's stock, one of 2013's hottest, is down 31 percent this year, while the larger S&P 500 Index (.SPX) index is down 0.2 percent. It trades at about 11.6 times forward earnings, while the retail sector trades at a multiple of 13.7.

The world's largest consumer electronics chain said it would more aggressively cut annualized costs, by about $1 billion. It originally planned to cut costs by $725 million in North America, a target it has exceeded by $40 million.

The retailer has earned a profit for three straight quarters, reaping the benefit of restructuring efforts spearheaded by Chief Executive Hubert Joly and Chief Financial Officer Sharon McCollam.

Under Joly, Best Buy has stripped away layers of management, cut jobs and costs, shut unprofitable stores and boosted cash by selling its stake in a European joint venture with Carphone Warehouse Group Plc (CPW.L).


Still, Chukumba said the company had further fat to cut and expected the retailer to work on trimming corporate overhead expenses and personalizing its marketing.

Earlier this week, the New York Post cited an inside source as saying the retailer could lay off more 2,000 managers. Best Buy declined comment on the report.

Other analysts see Best Buy saving more due to its recent focus on improving how it manages items returned by shoppers.

The retailer said it sees total sales and comparable store sales remaining slightly negative in the first half of the current financial year due to larger economic concerns, but did not give more details.

"There are several moving parts to their guidance for the year, but today's release maintains our confidence that the turnaround is progressing," said Janney Capital Markets analyst David Strasser.

Best Buy's overall adjusted operating margin was down 120 basis points at 4.5 percent in the holiday quarter, versus Strasser's estimate of 3.8 percent.

The company earned a net $310 million, or 88 cents a share, from continuing operations in the fourth quarter ended February 1. That follows a net loss of $461 million, or $1.36 a share, a year earlier.

Excluding special items, it earned $1.24 a share. The special items included restructuring and asset impairment charges and the tax impact of Best Buy Europe sales.

Analysts, on average, expected a profit of $1.01 a share excluding items, according to Thomson Reuters I/B/E/S.

Sales fell 3 percent to $14.47 billion, missing analysts' average estimate of $14.66 billion.

Comparable store sales, comprising revenue at stores, websites and call centers operating for at least 14 full months, fell 1.2 percent.

The company, which recently started shipping directly from its 1,400 stores to compete with rivals Amazon and Wal-Mart, said comparable online sales grew 25.8 percent at its domestic unit.

(Editing by Bernadette Baum)