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Best Buy sales, restructuring disappoint

By Dhanya Skariachan

(Reuters) - Best Buy Co reported weaker-than-expected quarterly sales and said it would close 50 large U.S. stores and lay off another 400 employees, disappointing investors looking for even deeper cuts to turn around the world's largest consumer electronics chain.

The news drove Best Buy shares down as much as 10 percent to touch an intraday low of $23.97, shaving $920 million off its market capitalization to $8.4 billion. The shares were down just over 7 percent at $24.71 in afternoon trading.

Analysts said the company needs to close more than 50 of its 1,100 big box stores to cut costs at a time when shoppers are increasingly buying electronics online. The retailer, which employs 180,000 people, said it would cut 400 corporate and support jobs, but did not say how many jobs would be lost as a result of the store closures.

"These are steps in the right direction," BB&T Capital Markets analyst Anthony Chukumba said. "Beyond the weak (sales), I think what the market is telling you is that they don't think they went far enough from a restructuring perspective."

Best Buy should try to relocate more stores to smaller locations, sub-lease portions of their bigger stores and shutter more unprofitable stores, he said.

A Best Buy spokeswoman said it has yet to finalize the locations and timing of the store closings. The company expects the restructuring efforts to cut costs by $800 million in the next three years, including $250 million this year.

Overall, landlords with the biggest exposure to big-box stores are Canadian company Callowy Real Estate Investment Trust , National Retail Properties Inc and Retail Properties of America Inc, which is set to go public and was formerly known as Inland Western.

"But nearly everyone has some exposure to Best Buy at this point," said Keefe, Bruyette & Woods analyst Benjamin Yang.

THE REAL ESTATE IMPACT

Best Buy's decision to close big-box stores was not surprising to the real estate investment community, Yang said.

But the sector, particularly real estate companies that focus on big-box shopping centers, has been wrestling with filling empty stores or soon-empty stores left by the bankruptcies of Circuit City, Mervyns and more recently Sears Holdings Corp's decision to close or sell off stores.

Some landlords have filled spaces left by closings. While others, such as General Growth Properties Inc's plan to raze the big boxes and replace them with smaller, specialty stores.

"It's hard to say today who the natural replacement would be for that space," Yang said. "I think right now there are none. But longer term, down the road, it's hard to say who might take those big-box spaces or even if big-box space will be a thing of the past."

AMAZON BEATING BEST BUY?

Despite offering bigger discounts and free shipping to lure shoppers from its rivals, including Wal-Mart Stores Inc and Amazon.com Inc , Best Buy's same-store sales fell 2.4 percent in the quarter, including a 2.2 percent decline at its U.S. stores open at least 14 months.

Wedbush analyst Michael Pachter was looking for a 1.8 percent same-store sales decline in the quarter, including a 1.4 percent decline at its domestic stores.

Its sales rose to $16.63 billion, but fell far short of the analysts' average estimate of $17.23 billion, according to Thomson Reuters I/B/E/S.

Unlike the 2010 holiday season, when Best Buy held the line on discounts and promoted only expensive goods, this time it offered deep discounts on everything from flat-screen TVs to digital cameras. It also promised to match any lower prices that its brick-and-mortar competitors advertised during the season's peak and offered free online shipping.

Still, industry watchers contend that Best Buy stores increasingly serve as physical showrooms for online retailers.

Amazon enjoys its largest pricing advantage versus brick-and-mortar rivals in the consumer electronics segment, with prices 17 percent lower on average, Chukumba has estimated.

"We remain concerned about the sustainability of Best Buy's big-box model. The company is gradually becoming a physical showroom for online retailers and the prevalence of smartphones makes comparison shopping increasingly easy," Pachter said.

Best Buy lost $1.7 billion, or $4.89 a share, in the fourth quarter that ended March 3, compared with net income of $651 million, or $1.62 a share, a year earlier.

Excluding charges, it earned $2.47 a share. Analysts were looking for a profit of $2.16 a share on that basis, according to Thomson Reuters I/B/E/S.

THE SMALLER THE BETTER

Best Buy is now trying to focus on its smaller format stores. It will close 50 U.S. big-box stores and open 100 Best Buy small-format, stand-alone stores in the current fiscal 2013.

The changes should help lower the retailer's overall cost structure, Chief Executive Brian Dunn said in a statement.

Best Buy plans to invest some of the savings into improving customer service, including expanding its Reward Zone Silver loyalty program, and giving store employees more training before the next holiday season.

It will also offer competitive prices as part of its push to drive revenue, and over time, some of the savings should fall to the bottom line, Dunn said.

For the current financial year, Best Buy sees earnings of $3.50 to $3.80 a share, before items.

(Reporting By Dhanya Skariachan and Ilaina Jonas; editing by Gerald E. McCormick, Maureen Bavdek, Dave Zimmerman and Andre Grenon)

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