Best Buy Co Inc, the No. 1 U.S. electronics chain, slashed its profit forecast on Wednesday, the latest sign that the deepening economic crisis may bring a bleak holiday season, sending the company's shares down 7 percent.

Best Buy's warning comes just two days after smaller rival Circuit City Stores Inc filed for bankruptcy, falling victim to reduced consumer spending and tighter credit terms from suppliers.

"It's pretty gloom and doom. It's scary," said Joseph Feldman, managing director with Telsey Advisory Group.

The global financial meltdown and rising unemployment have led consumers to severely curtail their buying, especially on big-ticket items that are typically bought on credit.

With the U.S. economy in what many economists say is a recession, most retailers, whether they sell clothes or higher-end electronics, are seeing sales pressured.

"People selling $30 pairs of jeans are struggling, so imagine trying to sell a $3,000 television," said Jon Fisher, portfolio manager at Fifth Third Asset Management.

Regional electronics seller hhgregg cut its full-year forecast last week, and Best Buy last month said it had seen reduced demand for wide-screen TVs and appliances.

SEISMIC CHANGE

"Since mid-September, rapid, seismic changes in consumer behavior have created the most difficult climate we've ever seen," Best Buy Chief Executive Brad Anderson said in a statement. "Best Buy simply can't adjust fast enough to maintain our earnings momentum for this year."

The company, which analysts expect to benefit in the longer term as the electronics retail industry consolidates, said it expects to end the third quarter with higher inventory levels, short-term borrowings and accounts payable than previously projected due to the drop in consumer spending.

"In 42 years of retailing, we've never seen such difficult times for the consumer," Best Buy President Brian Dunn said. "People are making dramatic changes in how much they spend, and we're not immune from those forces."

Electronics retailers face increased competition from discounters such as Wal-Mart Stores Inc, which has stepped up its product selection and advertising.
But fire sales at Circuit City and Tweeter, a smaller chain, are also expected to pressure Best Buy's results over the next few months. Circuit City is currently liquidating 155 U.S. outlets, and Tweeter is shutting down its 94 stores.

Best Buy said sales at stores open at least 14 months, or same-store sales, fell about 7.6 percent in October after falling 1.3 percent in September. Same-store sales from November 2008 through February 2009, when its fiscal year ends, could decline 5 percent to 15 percent, leading to an annual same-store store sales decline of 1 percent to 8 percent, it added.

The retailer said it now expects full-year earnings of $2.30 to $2.90 per share, down from a prior view of $3.25 to $3.40. Analysts, on average, had expected $3.03, according to Reuters Estimates.

The company earned $3.12 per share in fiscal 2008.

Richard Hastings, consumer strategist at Global Hunter Securities LLC, said Best Buy's earnings warning was a little more drastic than he was expecting.
"Typically, consumer electronics would be a positive note during a weaker holiday season. And instead, consumer electronics will be one of the weaker spots this holiday season and continuing along a much weaker trend next year," he said.

Best Buy now expects annual revenue of $43.7 billion to $45.5 billion, down from a prior forecast of $47 billion. Analysts, on average, expected $46.3 billion.
The company said it is working with vendors to adjust its inventory levels and its near-term working capital position and expects year-over-year domestic inventory to be flat by the end of the fiscal year.

"They're not going to lose money next year," said Fifth Third's Fisher. "But they, like everyone else, need to tighten down their spending."

Best Buy said it has a new $150 million committed U.S. credit facility, which expires on December 17. The facility was undertaken in part because one of the participants in its existing $2.5 billion revolving line of credit, Lehman Brothers, went bankrupt, effectively cutting the amount available to the retailer.

Best Buy shares were down $1.69 at $22.19 in midday New York Stock Exchange trading. The stock, which touched a year low of $20.55 in October, has fallen 57 percent so far this year.

Shares of hhgregg also took a hit, falling 33 cents, or 6.6 percent, to $4.69.

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