* Q2 EPS ex-items 40 cents misses Street est 41 cents
* Promotions, product mix weigh on margins
* Sees domestic margins falling modestly in the year
* Raises fiscal year outlook
* Shares down 5 pct (Recasts lead, adds analyst comments)
By Dhanya Skariachan
BANGALORE, Sept 15 (Reuters) - Top U.S. electronics chain Best Buy Co BBY.N reported a lower-than-expected quarterly profit as sales of lower-margin products such as notebook computers and promotional efforts to woo shoppers ate into margins.
It also said it saw further pressure on the profits of its domestic business.
The news sent Best Buy shares down about 5 percent, as investors were concerned the company would rely heavily on price promotions heading into the all-important holiday season.
Analysts said Best Buy, which benefited from the demise of rival Circuit City early this year, was poised to gain additional market share through the strategy.
“The biggest issue affecting Best Buy today is the weaker- than-expected margins,” Oppenheimer analyst Brian Nagel said.
“What Best Buy is doing is just reminding customers, ‘Look, we are here! If you were shopping at a Circuit City store that is no longer in business, we are in business.’ Long-term, it’s a good strategy. It could be problematic for the stock near-term.”
The consumer electronics sector has been hit as U.S. customers spend less on nonessential items. Best Buy also faces stiff competition from Wal-Mart Stores Inc WMT.N and others adding laptop computers, flat-screen televisions and similar products to their stores.
Best Buy’s net profit fell to $158 million, or 37 cents a share, in the second quarter that ended Aug. 29 from $202 million, or 48 cents a share, a year earlier.
Excluding a tax impact, the profit was 40 cents a share, a penny below analysts’ average forecast of 41 cents a share.
The company raised its forecast for the fiscal year as it saw sales trends improving and customer traffic stabilizing, but the higher outlook had already been anticipated by Wall Street.
For fiscal 2010, Best Buy now expects to earn $2.70 to $3.00 a share, excluding items, with same-store sales flat to down 2 percent and total revenue of $48 billion to $49 billion.
Analysts were expecting Best Buy to report revenue of $47.8 billion and a profit of of $2.86 for the period.
Best Buy earlier forecast earnings of $2.50 to $2.90 a share, with same-store sales flat to down 5 percent and total revenue of $46.5 billion to $48.5 billion.
In the second quarter, total revenue rose 12 percent to $11 billion, boosted by Best Buy Europe and the performance of new stores. Sales at stores open at least 14 months, or comparable store sales, fell 3.9 percent in the quarter.
While demand for notebooks and mobile phones picked up in the back-to-school season, customers still shunned gaming items, digital cameras, appliances and movies.
The launch of Apple Inc’s AAPL.O latest iPhones, discounts offered on televisions and digital imaging, and efforts to stay competitive in the appliance category hurt margins in the quarter, Best Buy said on a conference call.
Best Buy is banking on the debut of Microsoft Corp’s MSFT.O Windows 7 later this year and an array of products such as new smartphones to attract shoppers this holiday season.
“We believe the moves to gain market share are appropriate given the industry’s changing dynamics, but investor concerns regarding margins may linger for a awhile,” RBC Capital Markets analyst Scot Ciccarelli said in a note.
Last month, Best Buy said it expected sales during the upcoming Christmas shopping season to likely outpace last year’s historically weak levels. But it did not expect consumers to abandon their frugal ways and sees price promotions as a way to secure loyalty to its stores.
Best Buy shares closed down $2.09 at $38.32 on Tuesday on the New York Stock Exchange. They touched a low of $37.95 earlier in the session. (Reporting by Dhanya Skariachan in Bangalore; editing by Dave Zimmerman; Gunna Dickson and Andre Grenon)