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Samsung’s Exploding Phones to Lower Best Buy Holiday Sales by $200 Million

Consumer Product Safety Commission Announces Recall Of Samsung's New Galaxy Note 7Consumer Product Safety Commission Announces Recall Of Samsung's New Galaxy Note 7
Samsung Galaxy Note 7Photograph by George Frey — Getty Images

Best Buy (BBY) said on Thursday that the recall of Samsung’s flammable Galaxy Note 7 phones would take a big bite out of its holiday season sales.

The electronics retailer, which reported strong third-quarter U.S. sales Thursday that sent its stock up 9% in premarket trading, said the recall would lower fourth-quarter revenue by $200 million, prompting the company to lower its forecast estimate for the holiday season quarter to a range of between 1% up and 1% down. But Best Buy stuck to its profit forecast, soothing investor fears.

Samsung is one of the major vendors that has branded mini-stores within Best Buy locations, part of a strategy that has helped the chain fight back at (AMZN) and stage a comeback in recent years. Other mini-store vendors include Microsoft, Sony, Apple and more recently AT&T and Verizon. Last quarter, Best Buy’s comparable sales in the U.S. rose 1.8%, well above Wall Street expectations for a 1% rise, according to Consensus Metrix.

Earlier this autumn, Samsung said it would discontinue the Galaxy Note 7, a smartphone it released in August to take on Apple’s (AAPL)iPhone 7. After many owners reported that the phone was overheating and in some cases, exploding, Samsung subsequently issued a recall. But when similar reports surfaced with its second batch, Samsung to discontinue the smartphone altogether.

Nonetheless, analysts believe Best Buy would be able to power through that problem.

“The Samsung issues will be somewhat of a drag on Q4, however we believe Best Buy will be able to overcome these and have a strong holiday and overall fourth quarter, driven in large part by continuing online acceleration,” Charlie O’Shea, a Moody’s analyst, wrote in a research note. Online sales rose 24% for the third quarter in a row.

In the third quarter, which ran through Oct. 31, Best Buy got a boost from the iPhone 7 along with sales growth in TVs and connected home products, offsetting weakness in gaming.

Best Buy’s third-quarter profit rose 55% to $194 million, up from $125 million a year earlier. Adjusted profit was 62 cents a share, beating Wall Street forecasts for 47 cents and its own forecast of 43 cents to 47 cents. Overall revenue was $8.95 billion, up from $8.82 billion in the same period a year ago.