Best Buy can't go on like this

The retailer's earnings are even more dismal than Wall Street had feared. Shares tumble 13%.

By Jonathan Berr Nov 21, 2012 12:34AM
Arrow Down Umbrella copyright Photographers Choice RF, SuperStockBest Buy (BBY) better hope that founder Richard Schulze and his private equity partners go through with their plans to buy the embattled consumer electronics retailer, whose future otherwise appears bleak.

The headline on the company's earnings release today says it all: "Best Buy Confirms Significant Decline in Fiscal Third Quarter 2013 Earnings." 

The company reported a net loss of $10 million, or 3 cents per share, compared with profit of $156 million, or 42 cents, a year earlier. Revenue fell to $10.8 billion, as same-store sales, a key retail metric measuring activity at stores open at least a year, fell a staggering 4.3%. Excluding one-time items, profit was 3 cents a share, missing by a long shot the 12-cent average forecast of Wall Street analysts. The revenue figure beat the $10.73 billion consensus forecast.

Shares of Best Buy, which have slumped more than 48% this year, not surprisingly plunged 13% Tuesday.

CEO Hubert Joly, who was named to the job in August, seems to have a firm grasp on the retailer's many problems which, to his credit, he isn't sugar-coating. In fact, he is quoted in the release as describing the company's financial performance as "clearly unsatisfactory." His candor is no doubt welcome by Best Buy's beleaguered investors.

But the odds of Joly succeeding are slim. In an interview with Bloomberg News, he lamented the fact that Best Buy lacked the connection with consumers that Apple (AAPL) and Amazon (AMZN) seem to enjoy. He also is trying to boost the company's lackluster online sales by vowing to match prices of Amazon and other rivals. It's a risky strategy, but given Best Buy's precarious state, one that Joly has little choice but to follow.

Unfortunately, the retailer is being forced to increasingly compete on price instead of service. There is so much information available to consumers online that many don't need a Best But expert clothed in a blue golf shirt to advise them on what to purchase. Best Buy's stores are also cavernous and often crowded on the weekends, which makes them unpleasant places to shop.  Many of the people that you see in the stores are "show-rooming" -- checking out products in the company's bricks-and-mortar stores that they will later buy online at a much cheaper price. That is a growing problem.

Time is not on Best Buy's side, particularly as it heads into the important holiday season. Wall Street will want to see some signs of improvement, tiny as they may be, or else Joly's job could be in jeopardy. Schulze and his partners will also demand better performance if they are able to finalize their plans to make an offer. If that happens, the founder should keep Joly as CEO because he seems to have a firm grasp on the retailer's problems. All Joly needs is the time -- and money -- to fix them, which is easier said than done.

Jonathan Berr does not own shares of the listed stocks. Follow him on Twitter@jdberr.


 
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