Best Buy Strategic Plan On Hold

Alan Wolf On Aug 21 2012 - 8:58am




Minneapolis – Best Buy’s much-anticipated turnaround plan has been put on hold as the company awaits the arrival of its new CEO, Hubert Joly.

On a second-quarter earnings call, interim CEO and board member Mike Mikan said Joly will inherit “a good deal of advanced work” on the strategic plan he spearheaded. He noted that Joly’s appointment comes ahead of the board’s projected timetable and will bring stability to the company.

Mikan, who had openly vied for the position, also promised a smooth transition when Joly assumes his new post in early September.

But mixed reaction to Joly, a turnaround specialist with no retail experience, and lower than expected financial results, sent Best Buy shares down to nine-year lows following Tuesday’s earnings announcement.

Mikan said Best Buy has also suspended earnings guidance and its share repurchase program to give Joly more latitude, although Janney Montgomery Scott analyst David Stresser believes the latter was intended to thwart further acquisition attempts by founder and former chairman Dick Schulze.

Best Buy reported a 91 percent slide in net income, to $12 million, for its fiscal second quarter, ended Aug. 4, due to restructuring charges and increased sales of low-margin TVs and smartphones. Excluding the charges, net earnings fell 47 percent to $68 million for the period due in part to a reduced gross profit rate.

 On the earnings call, Best Buy chief financial officer Jim Muehlbauer said increased sales of higher-priced smartphones drove down the margin rate, as did a consumer preference for small and midsized TVs that carried lower price points and afforded fewer opportunities for attachment sales. He said consumers may also be delaying purchases in advance of significant product launches in the second half, including Windows 8.

Total revenue declined 3 percent to $10.5 billion, and worldwide comp-store sales fell 3.2 percent.

In the U.S., revenue declined 2.2 percent to $7.8 billion and comp-store sales slipped 1.6 percent — up from a 4.1 percent drop during the year-ago quarter — while online sales increased 14 percent. The company said it maintained its U.S. market share quarter over quarter.

The comp decline was driven by weakness in gaming, digital imaging, TV and notebook computers, the chain reported, and was partially offset by comp sales gains in tablets, mobile phones, e-readers and majaps.

Majaps enjoyed the strongest performance, with comp sales increasing 9 percent, while the computing and mobile phone category, Best Buy’s largest segment, grew 8.2 percent, driven by a 35 percent spike in mobile phone comps, to comprise 44 percent of the sales mix. Services, including repairs, installation and sales of extended warranties and service contracts, edged up 1.2 percent, while comps for the core CE category, including TVs and digital imaging, fell 9.6 percent, and entertainment, including music, movies and gaming, dropped 22.1 percent.

Still, the company dramatically lowered its costs (selling, general and administrative expenses) by 2 percent year over year, Muehlbauer said, by making organizational changes at headquarters and in its field operations, by closing stores, and by reducing store labor to match demand.

The chain also reduced its big-box square footage by 4 percent to 41 million square feet while increasing store productivity 1 percent to $857 per square foot.

In a marketplace assessment, Best Buy U.S. president Mike Vitelli observed that unilateral pricing policy (UPP) is succeeding in stabilizing pricing, and that the greater bottom-line focus by TV and other vendors will lead to a better balance between demand-driving promotions and profitability in the fourth quarter.

Vitelli noted that consumer interest remains strong in mobile, tablets and computing, and that the slowdown in TV sales — reflecting higher unit volume offset by lower average selling prices (ASPs) — was anticipated and is “playing out literally around the globe.”

Internally, Vitelli said the company is enthused by a new store operating model that incentivizes team-based performance within the mobile, computer/tablet and home departments; by increased training for sales associates; and by the first batch of new “connected” format stores. Customer and employee reaction to the new stores has been positive, as have comp sales and services growth, he said, fueled in part by the new operating model that provides incentives and training for sales associates, supervisors, coaches and assistant managers to focus on the services, connectivity and home categories.

Nevertheless, the company lowered its full-year earnings outlook based on “lowered expectations for industrywide sales and the uncertainty associated with several key product launches” in the second half.

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