The Best Buy turnaround won't be pain-free

The struggling electronics retailer is looking like a bad buy to some investors.

By Forbes Digital May 21, 2013 2:15PM
Video Dubbing Equipment copyright Ryan McVay, Photodisc, Getty ImagesBy Abram Brown 

If you believe making a dowdy retailer into a brand new company will come without a few uncomfortable quarters, if not years, well, you've probably been living under a rock. Or perhaps lost in the cavernous expanse of a big-box store.

The latest episode catching attention from this ongoing story of retail transformation in corporate America: the goings-on at Best Buy (BBY). The Minneapolis, Minn., company swung to a quarterly loss in the most recent period, and it warned that its efforts will impact profits again in the second quarter, too.

Best Buy says the loss totaled $81 million, 24 cents a share, compared to net income of $158 million, 46 cents a share, a year earlier. Excluding restructuring costs tied to the turnaround efforts and selling a stake in Best Buy Europe, Best Buy was profitable. It made 36 cents a share, better than the 24 cents a share that analysts expected. Revenue dropped 10.5% to $9.4 billion.

Investors expressed their unhappiness with Best Buy's progress by sinking the stock by over 3% to $25.95 in afternoon trading.

Their actions reflect a particularly distressing short-term mentality (egads, a loss!) on the part of Best Buy shareholders, who have been richly rewarded so far this year with a 126% rise in share price through Monday, and an alarming disconnect with what else has happened this year in the retail world. The absolute blow-up at J.C. Penney (JCP) --  stock down 4.5% in the face of a roaring market, empty stores and a sacked wunderkind CEO -- should reinforce something. That a period of discomfort almost always follows a new CEO's attempt to change a company.

Not that the pain shareholders experience now at Best Buy is anything like the ache-in-your-bones felt by those who bought J.C Penney anywhere near its February 2012 top. Best Buy's new CEO, Hubert Joly, isn't suggesting a radical rethinking of how the company operates. He's made some prudent choices: to shrink stores, to better train staff and to offer a price-match guarantee. Just as significantly, Best Buy isn't completely blowing past Wall Street's sales, as J.C. Penney repeatedly did. Best Buy's same-store sales fell 1.1% in the quarter. You always want to see that figure going up, but at least it's smaller than the 1.6%  drop predicted by analysts. And should you believe in the Best Buy spin, the sales decline can be chalked up to the Super Bowl falling in the previous quarter and the decision to cut down on some promotions.

All this notwithstanding, Best Buy remains a second-thought online. It says its online sales rose 7.1% to $498 million in the quarter. Solid, but it needs barn-burning growth to totally blow past top competitors like Amazon.com and eBay.

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