By Jackie Crosby, Star Tribune (Minneapolis) –
MINNEAPOLIS — Best Buy’s new CEO has his work cut out for him.
A day after tapping former Carlson Chief Executive Hubert Joly as its new leader, the electronics retailer reported that its net income plunged 90 percent in the second quarter from the same period a year ago, a far weaker performance than analysts expected.
Adding more uncertainty about its future, Best Buy suspended its stock repurchases and will refrain from giving earnings guidance for the rest of the year.
The latest financial report highlights the challenges surrounding the world’s largest consumer electronics retailer, which has suffered sales declines in two of the past three years as consumers turn to the Internet for more of their shopping. Adding to the distractions, Best Buy co-founder Richard Schulze continues his high-profile pursuit of the company.
Best Buy leadership has promised investors a major change in strategy, but with a new CEO just getting started, that plan may be months away. Some analysts say they are more concerned about the company’s long-term solutions than the latest quarterly report.
“Expectations are so low at this point,” said Lauri Brunner, an analyst with Thrivent Asset Management in Minneapolis. “Giving investors an idea of where they are headed is the most important thing.”
Joly, who spent four years as CEO of hospitality giant Carlson, will take over at Best Buy in September. In a call with analysts, Best Buy interim CEO Mike Mikan stressed that every effort would be made to ensure a smooth transition.
During trading Tuesday, Best Buy shares sank to a nine-year low of $16.25 before closing the day at $17.91, a drop of 1.4 percent. The decline followed a 10 percent drop the previous day as Wall Street offered a lukewarm response to Joly’s appointment.
Overall, Best Buy posted sales of $10.5 billion for the second quarter. Aside from one-time costs, mainly over closing stores, profits were 20 cents per share. Analysts polled by Bloomberg expected earnings of 31 cents a share on revenue of $10.6 billion.
Sales at Best Buy stores open at least a year, a key measurement of a retailer’s financial health, fell 3.2 percent. Sales at U.S.-based stores dropped 1.6 percent compared to last year, with declines in mobile phones, notebook computers, gaming, digital imaging and TV.
Best Buy has been battling competition from Amazon and other mass merchandisers since the start of the recession. The company had announced a major restructuring plan when former CEO Brian Dunn resigned in April after allegations emerged that he had an affair with an employee. Schulze acknowledged that he failed to alert the board about the allegations and agreed to step down as chairman.
Schulze, who owns about 21 percent of Best Buy stock, proposed to the board of directors that he could buy the company for $24 to $26 a share, or roughly $9 billion. But Schulze and the board have been at an impasse over what the process for presenting a formal offer.
Citing the company’s swooning stock price, Denise Chai of Bank of America Merrill Lynch said a future offer from Schulze will be substantially lower. Chai said industry challenges will continue to outweigh efforts to control costs.
“More importantly, cash flow is seemingly eroding by the day,” Chai said.
Best Buy has closed about 50 stores, reducing square footage by 4 percent, and slashed payroll expenses through layoffs. The company said it is seeing stronger growth in online revenue and touted deals with Verizon and a pilot with Minneapolis-based Target to put Geek Squad agents into stores, mostly in the Denver area.
“All that said, Best buy clearly remains in a turnaround, which will take time to come out of,” Mikan said.
The company must manage a leadership transition as well as an industry-wide slowdown in sales, which executives said was a function of shoppers waiting for new products and their shaky confidence in the economy.
Consumers remain stuck in a “decluttering, downsizing, needs-over-wants mode,” said Thrivent’s Brunner, who tracks large discretionary and consumer staple companies. That mind-set continues to create significant head winds for Best Buy.
“There are a lot of moving parts around them,” Brunner said, “but the sources of pain are relatively concentrated. They are struggling overall with too many stores and a strategy to target competition from Amazon.”
