Best Buy Feels the Pinch

In a "difficult economic environment," Best Buy (NYSE: BBY) reported thirdquarter earnings down a whopping 77 percent, though revenue rose 15.8 percent to $11.5 billion. Gross profit margin increased to 24.9 percent of revenue, and market share advanced by 1.7 percent.

In this tough environment, the company is offering voluntary severance packages to employees, with involuntary layoffs possible later, if needed. In addition, Best Buy plans to slash its capital spending by 50 percent next year. As part of that plan, it will slow the pace of new store openings in the U.S., Canada and China. Cutting spending in response to cowering consumers and shrinking demand seems like a must for smart companies right now.

The company stands to benefit from the bankruptcy of competitor Circuit City, but it's also competing with Wal- Mart, which has been slashing prices on its electronics offerings. Meanwhile, Best Buy is expanding its digital music business by buying Napster.

Trading at just nine times earnings, Best Buy is best in its class and tempting at recent prices. Still, shareholders might want to steel themselves for some rocky times in the short term. (The Fool owns shares of Best Buy.)