Why I'm not buying Best Buy
CEO Brian Dunn has resigned amid allegations of personal misconduct. Can the company recover?
Best Buy (BBY) CEO Brian Dunn did a courageous and proper thing for shareholders by resigning. He was not the right person to lead Best Buy into battle against online-only competitors that use Best Buy's spacious stores as a products showroom.
Best Buy cannot have lower prices than its online competitors. Its stores also lack the selection of Amazon (AMZN), and it is at a permanent competitive cost disadvantage. One recent study showed that Best Buy's online prices are 4.2% higher than Amazon's, on average.
Post continues below.Before Dunn left, he was trying a new strategy of closing big stores and opening many smaller ones for mobile sales. But that made little sense. He was basically morphing Best Buy into a RadioShack (RSH). It would be great if this strategy had worked for RadioShack, but it didn't. RadioShack's margins are collapsing, and its stock price is at historic lows.
To make things worse, Dunn's resignation appears to have resulted from a company investigation into allegations of personal misconduct. Best Buy would not specify the issues. The news came as a shock to investors this week.
"Certain issues were brought to the board's attention regarding Mr. Dunn's personal conduct, unrelated to the company's operations or financial controls, and an audit committee investigation was initiated," a company spokeswoman told Reuters. Dunn resigned before the probe was completed.
Now the company is looking for a new CEO and has asked board member G. Mike Mikan to take the job temporarily. But Mikan has very little retail experience, having made his name as an executive with UnitedHealth Group (UNH). Best Buy shares were up nearly 3% Wednesday to $21.89 on news of Dunn's resignation.
I don't know what the solution is for Best Buy, but it starts with this: The stores need to be turned from a liability into an asset. The company needs to better integrate physical stores with its Internet presence. Maybe Dunn could perform a logistical miracle allowing Best Buy to deliver a greater range of products to customers on the day they order them.
The new strategy will require thinking that cannot be delivered by somebody who spent 28 years in the Best Buy box. It requires a Netflix- (NFLX) or Amazon-like mindset, in which management was willing to bring forward (and flawlessly execute) a disruptive strategy that undermines its current business.
Amazon did this by bringing electronic readers to the masses, which undermined its core book business. Netflix did it with streaming. I am sure I'll get plenty of dissenting emails about Netflix, arguing that we don't know if its model will be successful down the road. I admit, I don't know what Netflix's streaming business is worth. But if it did not bring out streaming, it would have been dead in three to five years. Now it has a fighting chance to survive and maybe even create value for shareholders.
I am a value investor, so when I see a stock dangling at six times earnings, I'd be lying if I told you that I did not have an inkling to seriously consider it for our portfolios. But Best Buy is not a retailer that simply missed a fad, like stacking the shelves with the wrong color shirts. Those sorts of situations often present great buying opportunities, as the problems are fixed easily.
No, Best Buy so far has missed a structural change that may make its business obsolete. It is cheap only if the earnings projected for next year actually materialize. So far the market is betting they won't, and I have no insight that encourages me to disagree with the market.
MSN Money's Kim Peterson contributed to this report.
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