Best Buy Co posted a 23 percent drop in quarterly profit, but its shares rose after the retailer's adjusted results topped Wall Street estimates, and it forecast full-year profit above expectations as it benefits from the closure of former rival Circuit City.

Best Buy, the top U.S. specialty consumer electronics retailer, also said that during its recently completed fourth quarter, consumer demand was stronger-than-expected, and sales and traffic improved as the quarter progressed.

Investors cheered the report, which demonstrated that despite a recession and rising unemployment, consumers are showing a willingness to buy more than just necessities like food. Best Buy shares rose 12 percent, while the Standard & Poor's Retail Index <.RLX> advanced 5.1 percent.

Consumer demand improved pretty significantly in January and February over December levels, which could have broader implications for the overall economy, said FTN Equity Capital Markets analyst Anthony Chukumba.

He said that Best Buy's strong full-year profit forecast reflects anticipated market share gains now that Circuit City is out the picture.

For the fourth quarter ended February 28, earnings came to $570 million, or $1.35 a share, down from $737 million, or $1.71 a share, a year earlier.

Excluding restructuring and impairment charges, Best Buy said adjusted earnings were $1.61 per share. Analysts, on average, had been expecting it to earn $1.40 per share, according to Reuters Estimates.

STRONG DEMAND MEANS SOME EMPTY SHELVES

Best Buy has taken several steps to counter the U.S. recession and fend off increased competition from discounters such as Wal-Mart Stores Inc , which has expanded its product offering and cut prices. It has cut jobs and slowed new store openings while also expanding sales of mobile phones.

Analysts were watching to see if Best Buy's sales would be pressured in the fourth quarter as Circuit City, which filed for bankruptcy protection last year, liquidated its inventory and closed its doors.

But Best Buy said that consumer demand was stronger-than- expected, and it found itself out of stock in some categories in the quarter. The retailer said it is now working with vendors to remedy that.

Its quarterly revenue rose 10 percent to $14.7 billion, helped by the opening of new stores and the inclusion of its European operations.

Sales at stores open at least 14 months, or same-store sales, fell 4.9 percent. U.S. same-store sales fell 2.5 percent in the combined January and February period, an improvement from the 6.8 percent decline notched in December.

Its gross profit rate improved, as sales of high-margin mobile phones helped to offset demand for lower-margin laptop computers.

Best Buy said it intends to win more than its fair share of business from former Circuit City shoppers and said it will work to attract shoppers in categories where it used to overlap with the Circuit City, like high-end home theaters.

SLOWING GROWTH AS CLIMATE REMAINS VOLATILE

Best Buy said it expects to open approximately 65 net new stores this current fiscal year, compared with the recently completed fiscal year when it added 213 stores.

In its international operations in Europe, China and Canada, Best Buy said it will focus more on getting the most out of its existing locations rather than opening new stores.

We expect consumer spending to remain challenging in fiscal 2010, said CFO Jim Muehlbauer in a statement, referring to its current fiscal year.

For the full year, Best Buy expects revenue of $46.5 billion to $48.5 billion, and same-store sales to be flat to down 5 percent.

Best Buy forecast earnings of $2.50 to $2.90 per share for its current fiscal year, while analysts, on average, were expecting $2.45 per share. (Reporting by Nicole Maestri, editing by Dave Zimmerman and Gunna Dickson)

S&P Best buy Walmart