Slowing online sales hurt Best Buy's second quarter, shares drop

By Nandita Bose

(Reuters) - Best Buy Co Inc on Tuesday reported a drop in quarterly online sales growth and offered a profit forecast for the current quarter that fell short of analyst estimates, sending its shares down more than 5 percent in afternoon trading.

Chief Executive Hubert Joly in a conference call cited a maturing online consumer electronics business for declining web sales growth and said rising transportation costs may pressure current quarter earnings.

Best Buy shares, which have risen over 20 percent since the start of the year, fell as much as 8.4 percent on Tuesday.

The stock price decline was fueled by a combination of factors like a slowdown in online sales, the impact of future expense plans and investor fears the recent strength in performance may not be sustainable, Jason Benowitz, analyst and senior portfolio manager at The Roosevelt Investment Group said.

"Investors fear that (Best Buy) could be vulnerable to further digital disruption or any signs of a peak as the tax cut stimulus fades and the Federal Reserve continues to tighten monetary policy late in the economic cycle," he said.

The U.S. consumer electronics retailer said in a statement that domestic online sales rose 10.1 percent in its second quarter ended Aug. 4. That compared with 12 percent in the first quarter and 31.2 percent in the same period a year ago.

Best Buy's third-quarter profit forecast also disappointed some investors. The retailer said it expects adjusted earnings per share of 79 cents to 84 cents, lower than analyst estimates of 92 cents per share.

Joly said on the conference call that consumer electronics is a more mature category online, in discussing the slow uptick in online sales in the second quarter.

"Consumer (electronics) is one of the first categories that started to move online. So the overall penetration is higher than in other categories," Joly said.

The company's investments in making its stores more competitive are bringing more shoppers to its brick-and-mortar locations for products like appliances and large screen televisions, he added.

Joly said higher transportation costs could pressure profits in the third quarter. However, he added investors should find comfort after the retailer raised its annual sales and earnings guidance.

Moody's lead retail analyst Charlie O'Shea agreed with Joly.

"I think it is important to look at the whole picture with Best Buy and not pieces, more people are shopping at their stores, their overall performance this quarter is strong and that is something the street needs to understand," O'Shea said.

Online sales make up 15 percent of the company's total domestic sales and represented a 15 percent share of the U.S. consumer electronics market as of March. The company has doubled its web business in the past five years.

The retailer expects full-year comparable sales to grow 3.5 percent to 4.5 percent versus its original guidance of flat to 2 percent. It also revised its earnings outlook upward to a range of $4.95 to $5.10 from $4.80 to $5.00 per share.

The company said it expects a dip in its third quarter operating income, consistent with its expectations from the start of the year.

The company's online sales and profit forecast for the current quarter overshadowed second quarter sales and profit performance helped by a strong economy.

Excluding charges, Best Buy earned 91 cents per share in its second quarter. Analysts expected 83 cents, according to Thomson Reuters I/B/E/S.

Revenue rose to $9.38 billion, beating estimates of $9.28 billion.

Earlier this month, the Richfield, Minnesota-based retailer said it would buy health services provider GreatCall Inc for $800 million in cash, its largest acquisition ever, hoping to sell health-related products and services to an aging U.S. population.

(Reporting by Nandita Bose in New York; Editing by Steve Orlofsky and Chris Reese)