SOARING PRICES FOR

gas and food, falling home values and lousy consumer confidence should be a toxic combination for any seller of gadgets. So it is with some relief that

Best Buy

that handily beat the Street.

Thank goodness for low expectations.

That doesn't mean it was a particularly good quarter. Revenue grew at a decent clip but profit fell as consumers gobbled up a greater number of lower-margin goods like notebook PCs and gaming consoles. It's also worrisome that although traffic picked up compared with last quarter, it still continued to decline.

Give some credit to management for being nimble in the face of a horrid spending environment as well as for being realistic about it. Jim Muehlbauer, the company's chief financial officer, acknowledged that Best Buy has no idea how this year is going to play out. "We know the consumer environment on spending is going to be choppy," is how he (rather mildly) put it on a conference call.

But give even more credit to all that walking around money from Uncle Sam. Best Buy said that the stimulus checks helped sales, though it doesn't know by exactly how much. Investors in gadget stocks have been very keen to see whether consumers would spend their tax rebates on apples or Apple iPods.

At least some of them are still shelling out for stuff they don't necessarily need. Flat-panel TVs continued to move, as did laptops and cellphones. Entertainment software was another bright spot, abetted by the runaway success of Take-Two Interactive's "Grand Theft Auto IV" and other cool new games. That figures. A Sony PlayStation 3 or Microsoft Xbox 360 costs a few hundred bucks and "GTA IV" goes for $60, but that's still cheaper than going out.

As promising as the revenue gain seems, it came at a troubling cost: Gross margin and operating margin both declined. Best Buy could reverse those margin trends, especially as it cycles against easier comparisons, but it's hard to see how any player in the wholesale or retail gadget space is going to have much pricing power this year.

Intense competition and commoditization of everything from digital cameras to flat-panel TVs to PCs is increasingly making the whole industry a volume business. That's good news for consumers discounts and zero-percent financing only make their tax rebates go farther.

But it's an ominous sign for Best Buy and the rest of the industry. What happens once the last of the stimulus checks go out in July?

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