Gift Cards Help Lift Best Buy Profit 18% MARKETPLACE By Bloomberg

Apr 05, 09:59 AM

Current Headlines: By Mark Clothier

Best Buy, the largest U.S. consumer electronics retailer, said Wednesday that fourth-quarter profit rose on gift-card redemptions, while Circuit City Stores reported a loss because of holiday discounts and costs to eliminate jobs. Best Buy said its net income climbed 18 percent to $763 million. Circuit City, its closest rival, posted a loss of $12.2 million. Sales at Circuit City rose 1 percent, the smallest gain in three years. Best Buy's 21 percent jump in revenue was the most in three years.

Best Buy increased profit by offering fewer discounts as the holiday season progressed and recording more gift-card revenue. Circuit City reduced television prices to compete with Best Buy, Wal- Mart Stores and Costco Wholesale. Circuit City's loss includes expenses related to eliminating 3,400 jobs, about 8 percent of its work force.

"Best Buy is clearly out-executing Circuit City," said David Keuler, managing director at Mason Street Advisors in Milwaukee. "They're doing the things they should do and preparing for the future."

Circuit City said it expected to fill all 3,400 jobs by the end of the month with people willing to work for less. The retailer said it expected some sales volatility this year as the new employees were hired and trained.

"The cuts to Circuit City's employee base may have been the only choice they had, but I think it's going to be a problem," Keuler said. "They let go some of their most experienced people."

As a result, shoppers may find it difficult to distinguish between Circuit City and Wal-Mart, Costco or Target since Circuit City dismissed experienced workers and wants to replace them with a new slate of lower-cost employees, he said.

Shares of Circuit City have fallen 24 percent this year through Tuesday and Best Buy is down 14 percent.

Best Buy is taking sales from rival Circuit City by opening newer stores in prime locations and adding home installation services for new TV sets.

Sales for Circuit City from the quarter through Feb. 28 rose to $3.93 billion from $3.89 billion a year earlier. Best Buy's sales in the quarter through March 3 jumped to $12.9 billion from $10.7 billion.

Best Buy typically makes more than half its yearly profit in the fourth quarter, when sales are propelled by holiday gift giving. Gift cards, a growing part of Best Buy's business, are often bought in December and redeemed in January and February. Best Buy records the revenue when the card is used.

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