Best Buy Feels the Pinch

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Best Buy (NYSE: BBY) continues to gird itself for a "difficult economic environment," reining in spending as it reports third-quarter results. Investors apparently took the news well today, since the stock had jumped about 15% last time I looked. I guess no one's surprised that consumer spending's looking ugly.

The electronics retailer's third-quarter earnings dropped a whopping 77% to $52 million, or $0.13 per share. The figure included an impairment charge of $0.22 per share related to Best Buy's 3% stake in The Carphone Warehouse Group, a company whose shares have plunged in the last year.

In slightly better news, revenue increased 15.8% to $11.5 billion, although same-store sales fell by 5.3%. For another positive glimmer, Best Buy improved gross profit to 24.9% of revenue, from 23.5% this time last year. Furthermore, despite all the pain, Best Buy was still able to increase its market share by 1.7% in the quarter.  

Best Buy said it plans to prepare for the nasty economic outlook by offering voluntary severance packages to employees. Involuntary layoffs may still occur, depending on how the voluntary program goes, according to the company.

In addition, Best Buy plans to slash its capital spending by 50% next year. As part of that plan, it will slow the pace of new store openings in the U.S., Canada, and China.

Best Buy deserves credit for trying to keep expenses down in a challenging environment. As painfully necessary as layoffs can be during recessions, Best Buy's voluntary severance option strikes me as a kinder way to reduce staff than most retailers would ever consider.

Meanwhile, cutting spending in response to cowering consumers and shrinking demand seems like a must for smart companies right now. In October, I took Buffalo Wild Wings (Nasdaq: BWLD) to task for a disconnected view of spending in a terrible economic climate. Many companies are currently ratcheting back expenses, including one of the legendary corporate spendthrifts of the boom years, Google (Nasdaq: GOOG).  

For the tough road ahead, I'd rather have Best Buy in my portfolio than, say, a company like RadioShack (NYSE: RSH). Trading at just nine times earnings, Best Buy is best in class, and tempting at this price. Still, shareholders might want to steel themselves for some rocky times in the short term.