By Savyata Mishra

(Reuters) -Best Buy posted a smaller drop in fourth-quarter sales than expected and beat profit estimates on Thursday, benefiting from holiday deals for big-ticket purchases and growth in paid memberships.

Shares of the top U.S. electronics retailer rose 3% before the bell as its paid membership program brought in customers and helped the company expand its gross profit.

"Paid members consistently showed higher levels of interaction with comparatively higher levels of spend at Best Buy and a shift of spend away from competitors," CEO Corie Barry said.

With subscription tiers of $179.99 per year, $49.99 per year and a free membership, the program led to better services margin rates, helping quarterly gross profit rate rise to 20.5% from 20% a year ago.

CFO Matt Bilunas expects memberships to help expand the rate by about 20 to 30 basis points in fiscal 2025, while anticipating a start to upgrades and replacements for the gadgets bought early in the pandemic.

Consumers, however, remained cautious as higher borrowing costs force them to make trade-off decisions to cover for household essentials.

Best Buy forecast an annual drop in comparable sales of as much as 3% compared to market expectation of a 0.23% rise.

"FY25 sales outlook suggests stabilizing, but uninspiring consumer electronics demand. Its guidance implies management is planning for a third straight year of comparable sales declines," John Tomlinson, a senior analyst at M Science said.

In the fourth quarter, Best Buy took $169 million in charges, mainly related to employee termination benefits tied to its restructuring plan.

The company is taking steps to "right-size parts of the business where we expect to see lower volume...whether that is the result of lower industry sales or due to decisions in...paid membership benefits," Barry said.

Best Buy earned $2.72 per share in the fourth quarter, compared to LSEG estimates of $2.52. Its comparable sales fell 4.8%, its ninth straight quarterly decline, compared to expectation of a 5.36% drop.

(Reporting by Savyata Mishra in Bengaluru; Editing by Arun Koyyur)