Best Buy reported lower-than-expected sales and profit, hurt by rising costs to expand its business and signs of weaker consumer demand, sending its shares down 6 percent.

The top U.S. electronics chain said shoppers proved more tentative in a seasonally weaker quarter for sales. That theme has played out for many retailers as unemployment remains high and Europe's economic troubles weigh on a global recovery.

Consumer spending has been episodic and (it) appears that our customers are operating on cues from the broader environment, CEO Brian Dunn said on a conference call.

Best Buy posted a low single-digit decline in same-store sales of televisions during its fiscal first quarter as well as weak sales in its video gaming, music and movie categories.

Analysts also focused on a 12.3 percent rise in selling, general and administrative costs, adding pressure to margins as Best Buy continues to fight a fierce price war against larger retailers Wal-Mart Stores Inc and Amazon.com .

It is definitely a significant worry. When you think about pricing... there is Amazon and Wal-Mart and a number of other major retailers that are focused on this category and they predominantly compete on price, Edward Jones' Matt Arnold said.

Net profit was $155 million, or 36 cents a share, for the three months ended May 29, compared with $153 million, or 36 cents a share, a year earlier.

Analysts on average were expecting a profit of 50 cents a share, according to Thomson Reuters I/B/E/S.

Selling, general and administrative expenses rose to 23 percent of revenue in the quarter from 21.9 percent a year ago. The company said that increase was driven by new stores, higher investments to boost sales and foreign currency fluctuations.

I am not pleased with our overspend in the first quarter, CEO Dunn said in an interview, adding: That being said ... Q1 is 10 percent of our year. This was a good place for us to make some investments to set us up for the balance of the year.

Despite the huge miss, Best Buy backed its outlook for the full year. Some analysts however remain skeptical.

Oppenheimer's Brian Nagel, who termed the company's outlook as aggressive, worried that Best Buy's expectations might be a stretch.

I usually applaud companies for making revenue and margin-enhancing investments... The concern I have though is that the degree to which Best Buy expects what seems to be an immediate payoff from these investments, Nagel said.

CEO Dunn said while there may be no rapid huge paybacks, he expected a steady return from the new initiatives.

GADGET WARS

In the first quarter, Best Buy's net revenue rose about 6.9 percent to $10.79 billion, missing analysts' expectations of $10.93 billion. Sales at stores operating for at least 14 months increased 2.8 percent.

It expects a slower rate of expense growth in dollar terms in subsequent quarters, with costs for full fiscal year 2011 up 6 percent to 6.5 percent from a year ago, excluding restructuring charges from fiscal 2010.

Best Buy, which has benefited from being the only other reseller of certain Apple products, is in for more challenges from its rivals.

Wal-Mart on Tuesday confirmed it would sell the fourth-generation iPhone on launch day. The retailer, which prides itself on featuring everyday low prices, declined to comment on how it will price the new iPhone.

In a separate statement, Best Buy announced a new program to allow gaming enthusiasts to exchange old games for Best Buy giftcards. The news weighed on shares of GameStop .

Best Buy reiterated its forecast for fiscal 2011 earnings of $3.45 to $3.60 a share on revenue of $52 billion to $53 billion.

Best Buy shares were down 6 percent to $38.57 in afternoon trading on the New York Stock Exchange.

(Reporting by Dhanya Skariachan, additional reporting by Brad Dorfman; editing by Dave Zimmerman, Maureen Bavdek, Tim Dobbyn and Gunna Dickson)

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