Best Buy's turnaround plan shows promise

Better-than-expected results defied the naysayers. And with founder Schulze no longer a buyout player, that strategy is the retailer's best hope.

By Jonathan Berr Mar 1, 2013 11:56AM
Shoppers move through a Best Buy store on November 23, 2012 in Naples, Florida (© Spencer Platt/Getty Images)Best Buy (BBY) shares rose this morning in early trading before turning flat after the consumer electronics retailer posted better-than-expected quarterly results. The report indicates that the turnaround begun by CEO Hubert Joly has gained momentum even as founder Richard Schulze failed to take the company private.

The Richfield, Minn.-based electronics retailer reported a net loss of $409 million, or $1.21 per share, compared with a year-ago loss of $1.81 billion, or $5.17 per share. Revenue rose 0.2% to $16.71 billion. Excluding one-time items, profit was $1.64 per share, beating the $1.54 average forecast of Wall Street. Best Buy's sales were better than the $16.34 billion consensus forecast.

Under Joly, Best Buy has slashed inventory levels and increased employee training as competition from rivals such as (AMZN) continues to intensify. The big-box store also recently announced plans to cut 400 workers from its headquarters. Still, even under the most optimistic scenarios, the chain has a tough road ahead.

Gross profit rate fell 10 basis points as Best Buy began matching prices of rivals to prevent "showrooming." That's the practice of shoppers looking at merchandise at retailers' bricks-and-mortar stores only to make their purchases at online sites that offer a lower price. Of course, Amazon -- a prime beneficiary of showrooming -- has more flexibility to cut prices further than Best Buy because it doesn't have the costs of physical stores.

The chain's improving fortunes, ironically, may be bad news for Schulze, who was unable to get financing to take Best Buy private. According to Reuters, Best Buy also turned down an offer by Schulze and two private equity partners to make a $1 billion minority investment. It remains unclear what steps Schulze will take next.

Best Buy has no choice now but to proceed with Joly's turnaround strategy because it didn't receive a formal acquisition offer from Schulze by a deadline the company had set.

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

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