Best Buy 2Q profit drops 90 pct, misses estimates

[Steve williams]

Is Best Buy the next brick and mortar audio-video store the next to fold or is it going private again

By ANNE D'INNOCENZIO, AP


NEW YORK — The news just keeps getting worse at Best Buy each day.

To top off an already eventful several days for the nation's largest consumer electronics retailer, Best Buy Co. withdrew its full-year earnings guidance Tuesday after reporting a 90-percent drop in net income during the second quarter, dragged down by restructuring charges and weak sales.

The poor report comes a day after Best Buy named Hubert Joly, former CEO of the Carlson travel company and turnaround expert, as its new CEO and president. It was expected that Best Buy would pick someone with retail experience, and Wall Street didn't respond well, sending Best Buy shares fell 10 percent.

And before that, the board and Richard Schulze over the weekend waged a public fight over the co-founder and former chairman's plan to take the company private.

Best Buy has been engulfed in mounting controversy since April when former CEO Brian Dunn resigned amid a company investigation into an "improper relationship" with a 29-year-old female employee. Schulze resigned as chairman a month later after the probe found that he knew about the relationship and failed to alert the board or human resources.

The series of bad news that has followed comes as Best Buy fights to reverse a decline in its business due to a weak global economy and consumers' changing shopping habits. Best Buy's stores are becoming unprofitable as customers increasingly use them to browse for electronics, then buy them cheaper online or elsewhere. On top of that, shoppers are no longer snapping up big TVs and computers at a fast clip like they used to, instead opting for smaller gadgets like cell phones and tablets.

In fact, during the latest quarter, U.S. sales growth in tablets, mobile phones, appliances and e-readers helped offset declines in gaming, digital imaging, televisions and notebook computers. Best Buy said the international business was dragged down by lower revenue in China, Canada and increased competition in Europe.

Overall, Best Buy earned $12 million, or 4 cents per share, in the quarter ended Aug. 4. That compares with $128 million, or 34 cents per share. Revenue declined nearly 3 percent to $10.55 billion. Adjusted earnings were 20 cents per share, missing the 31 cents per share on revenue of $10.65 billion analysts had expected.

Revenue at stores open at least 14 months fell 3.2 percent for the entire business, including a 1.6 percent drop in its domestic business and an 8.2 percent decline in its international division. Analysts had expected a 2.6 percent decline for the total business.

Brian Sozzi, chief equities analyst for research firm NBG Productions, described the latest quarter's results as "ugly." He said that Best Buy management needs to turn around things quickly.

"Every day, the (business) model is changing, and it goes against Best Buy," he said.

And things don't seem to be getting any better for the company. Best Buy had said in May that it expected full-year earnings guidance to be in the range of $3.50 to $3.80, excluding restructuring charges. But the chain said Tuesday it was withdrawing its outlook to give Joly more flexibility and the opportunity to make decisions that will address broader challenges ahead.

Best Buy is counting on Joly to turn around the company. Joly, who is expected to take over as CEO in September, succeeds Mike Mikan, a board member who has served as interim CEO since April.

Mikan on Tuesday acknowledged to investors the challenges Best Buy faces. But he said that Joly, who has a track record of successfully turning around companies in the media, technology and service sectors, is up to the task.

He said consumers remain "very cautious" and sales in the industry may be dampened because some people are holding back on spending as they await new releases in Apple's new iPhones, tablets and gaming. But he said that Joly brings "tremendous experience to the job" and that he'll build on a turnaround plan that the chain has already started.

That includes steps the company has taken since before the scandal with Dunn. In March, it announced a major restructuring that includes closing 50 stores, cutting 400 corporate jobs and trimming $800 million in costs.

In early July, Best Buy said it would lay off 600 staffers in its Geek Squad technical support division and 1,800 other store workers. The company also has been shrinking store size and focusing on its more-profitable products such as mobile phones.

But analysts — and investors — have been impatient. Analysts say some of these changes are too late. They also say that Best Buy needs to close more of its big-box stores, which no longer are necessary since people have shifted from buying big computers and TVs to snapping up smaller items like tablets and mobile phones.

Wall Street has been equally unforgiving of Best Buy's timing. Best Buy shares have lost nearly 70 percent of their value since their pre-recession peak of $56.66 in May 2006. On Tuesday, shares of Best Buy fell more than 3 percent, or 64 cents to $16.40, following the 10-percent decline on the day before when the announcement of the new CEO was made.

At the same time, the company is engaged in a public battle with its co-founder. Earlier this month, Schulze, who has a 20 percent stake in the company, made a takeover offer for the chain, offering $24 to $26 per share. Best Buy had said it was considering the offer, which values the company at $8.84 billion.

Best Buy and Schulze went back and forth in public announcements over the weekend.

In a statement issued by Best Buy Sunday, it laid out certain terms for acquisition talks to proceed. Schulze rejected the terms, citing a company requirement that he forgo taking any offer directly to shareholder for 18 months as unacceptable. The time frame had been reduced to January.

 

[RogerD]

If Best Buy closes in Reno,there won't be anything left. Too bad these companies are run by sharks. I have been going short for the last 2 days,I have never seen a more bearish chart in my life.

 

[treitz3]

Hello, Steve. I always thought given the recent economy/atmosphere that it was a "given" that they would be among the next.

Tom

 

[JackD201]

Will the death of Big Box's bring back the Mom and Pop's? Time will tell.

 

[DaveyF]

Will the death of Big Box's bring back the Mom and Pop's? Time will tell.

Pretty hard to believe that if a Big Box cannot make it a Mom and Pop can. I would like to be wrong about this, BUT the web was such a game changer that it seems neither
retail models can compete with it.

 

[JackD201]

There will be a void left behind every closure. That means opportunity. I've noticed small cell phone and computer shops sprouting up again in many places. I remember such a shop when CompUSA closed, it was owned by a guy who used to work there. I'm seeing more farmer's markets too. While CE appears to be headed for online orders, shopping is still a recreational activity and people still like going out to do it. Some kinds of items however seem impossible for a Mom and Pops operation like TVs which have tiny margins.

If this all tells us anything, it's that the tandem of volume discounts and too quick planned obsolescence have come back to bite manufacturers in the ass, big time. Too many new and useless features.

 

[MylesBAstor]

Twasn't because of me

And when the glommers kill the last b&m store, where will they then go to kick tires?

Sorry this topic hits close to home when I see booksellers like Barnes and Noble make money off of magazines by allowing their customers to take magazines off the rack, have a cup of coffee and read them and then allow them, coffee stains and all, to put the publications back on the shelf. Then who wants to buy a dog eared magazine?

 

[Phelonious Ponk]

You can't run a store on the margins in mainstream TVs. Premium sets make a lot more money for the retailer. So do installs, repairs, and the customers that come with a higher quality product and a higher level of expertise. But faced, a few years ago, with the demise of all of their national competitors, instead of deciding to sieze that opportunity, upgrade their products and service, and become the national CE store of choice, where service levels are high, employees know their stuff, and installations are done fast, right and at a reasonable rate, Best Buy decided that Wall Mart was their competition, and tried to compete with them on price. And they looked for margins in worthless service plans and store credit cards. I don't know if the other path would have worked in the face of this economy. There's a good chance they would have failed anyway. But at least they would have gone down doing the right thing, and left their customers missing them. I remember going in there to buy a 32" TV for my dad and 3 people pitched me a store credit card between small TVs and the front door, in the middle of the worst debt crisis in the history of capitalism. I felt like I had to run an obstacle course to give them my money. I sure won't miss that.

Tim

 

[Phelonious Ponk]

If they close the one near me, I'll be tempted to open Bang For The Buck Electronics -- not the cheapest stuff, just the best your budget can buy. Who wants to back me ?

Tim

 

[NorthStar]

---In our country (Canada) we have Future Shops and Best Buys (same thing).
-> They are now similar to Walmarts (except for the staff's colored uniforms).

* And in the year 2012, it is hard to keep stores like that afloat.

1. Total inexperience from the staff!
2. Prices that aren't competitive with the Internet.
3. No customer's satisfaction in any aspect whatsoever.
{I can tell you stories that would stop you FOREVER to enter any one of those stores again!}

Now what? Target? ...I don't think so. The world we live in is the cyber world! :b

What is left to do when even the high-end Audio/Video stores don't exist anymore?
=> Visit the Internet, go to forums where they sell you their products or have their commandites, business partners; Amazon, etc.

 

[JackD201]

I would've bought UPS, Fedex and DHL stock 20 years ago if I'd only known things were going to be this way. Hmm. Maybe it isn't too late.

 

[Steve williams]

From the NY Times......

What the Sound and Fury Over Best Buy May Signify
BY STEVEN M. DAVIDOFF


The squabbling between Best Buy and its founder and principal stockholder, Richard M. Schulze, appears about as mature as sibling teenagers fighting over the only car.

Behind all the rhetoric, however, is a mystery. What exactly is Mr. Schulze’s strategy? And why are both parties fighting so publicly?

On Sunday, Best Buy issued a statement announcing that it had offered a plan for Mr. Schulze to perform due diligence on the company if he agreed to certain restrictions. When Mr. Schulze did not agree, Best Buy issued a release stating that “Mr. Schulze declined to participate” in the sale-vetting process Best Buy had proposed.




On Wednesday, DealBook’s Michael J. de la Merced fleshed out the give and take leading up to this announcement. Best Buy had asked for a standstill of 18 months, and then a one-year standstill. Both proposals were rebuffed. According to people close to Best Buy, the company had originally mooted a 60-day period during which Mr. Schulze would have to put up a definitive proposal.

Best Buy modified this by requesting that if Mr. Schulze did not put up a proposal during that time, he would be barred from making a proposal for a year. If he did come up with a proposal and the Best Buy board rejected it, Mr. Schulze would be barred from doing anything until after the holiday shopping season. Thereafter, Mr. Schulze could run a proxy contest to unseat the board, but it would have to be backed by a fully financed bid. In other words, Mr. Schulze could not simply seek to oust the board in order to change the direction of Best Buy or because of unhappiness with management.

People on Mr. Schulze’s side say they were blindsided by the announcement and thought they were still in negotiations. And the announcement was unusual. Typically, targets are quite skittish about publicly talking about negotiations. The reason is that this type of back and forth is unsettling for the company’s employees and operations.

So why would Best Buy take this route? Additionally, what is really behind a dispute over something that appears so minor as a time period to make a buyout proposal?

The answers are intertwined.

Best Buy is pushing strongly to take this fight to a very public arena because the bid Mr. Schulze has put on the table is not a firm one. Right now, he lacks a necessary partner to bid and even his debt financing is uncertain. Faced with an uncertain proposal and a person who may be very motivated to start a proxy contest to unseat the board, Best Buy’s best strategy right now may be to paint Mr. Schulze as unreasonable and lacking credibility. This would particularly aid the company if Mr. Schulze eventually does wage a proxy battle. The fact that his bid is half-baked may be a major reason for Best Buy’s public announcement.

From Mr. Schulze’s perspective, Best Buy is a struggling company that until this week was leaderless. To the extent that he can shake things up and keep Best Buy’s board members on their toes, this may move him toward his ultimate goal. Of course, the true nature of Mr. Schulze’s ultimate goal is really unknown at this point.

On its face, the proposal from Mr. Schulze envisions the purchase of Best Buy, but frankly that will be an uphill battle. Best Buy is struggling, and the purchase would be the biggest retail buyout since Toys “R” Us in 2005. Analysts have been skeptical that private equity firms and lenders would want to take on such risk in this economy.

So why is Mr. Schulze bidding?

I have a guess, but it is only that. He may be acting at face value. He may truly see Best Buy as an opportunity to turn around the company and profit tremendously. If he runs a proxy contest, it will take time, and if he succeeds it raises complicated legal issues for a sale to him at a later date. But by pushing the board publicly in an announcement last week, Mr. Schulze was not just trying to avoid the pitfalls of Minnesota law, but seeking to push Best Buy to run an open sale process, one that he can help steer and participate in with a buyer. This would be much easier for him that doing the hard work of lining up a semi-hostile bid, something private equity firms avoid.


Best Buy
Richard M. Schulze, Best Buy’s founder, says he wants to take the retailer private.
If the Best Buy directors are on board with a sale. Mr. Schulze probably believes there is a greater chance he can put together a consortium. The public back and forth then, is just to cow the Best Buy board into not only letting Mr. Schulze contact other parties but to cooperate in such a process. All in all, it means that Mr. Schulze thinks that even though the market disagrees, a successful bid is possible if the Best Buy board cooperates.

In its weakened state, Best Buy appears eager to play the good guy, so I expect its board will eventually accede to some arrangement that allows Mr. Schulze to pursue his bid. Indeed, the company is on shaky grounds in seeking a lengthy standstill period, a rather unusual restriction and something Mr. Schulze is unlikely to accept. This is particularly true since Best Buy knows he can initiate a proxy contest to try to unseat its director, making the board even more likely to cave in to his demands.

At the moment, Mr. Schulze’s bid appears to be a public relations attempt to pressure the Best Buy board into cooperating. Seen in this light, Best Buy’s public responses seem to be aimed at deflecting that pressure.

If Mr. Schulze fails to gain the cooperation of Best Buy’s board, this may all be a prelude to an attempt to shake up management and the board. For that reason, Mr. Schulze is most unlikely to agree to a standstill, which would deprive him of the right to run a general proxy contest.

No doubt, he wants to keep the possibility of a proxy fight in his pocket as a threat. In any event, he needs that threat not only to pressure the board to allow him to make a proposal but also to cooperate with him on the bid so it appears friendly.

And while this is speculation, Best Buy will probably acquiesce to Mr. Shulze’s stated wish. Only then will we learn whether he can actually put together such a bid. In the interim, Best Buy will continue to be buffeted by this fight.

 

[NorthStar]

---Methinks that we don't need no more Best Buys with the type of people (managers) running them stores.

They are not into the customer satisfaction business; but more into irritating them!
And I have plenty of examples...