Return of Best Buy Founder Might Bring Greater Focus, but Chain Needs to do More to Succeed

Return of Best Buy Founder Might Bring Greater Focus, but Chain Needs to do More to Succeed

The outlook for Best Buy’s future has become a bit brighter, provided the company’s top brass will be able to agree on its turnaround course going forward. Retail analysts responded enthusiastically to the news that Best Buy founder Richard Schulze would be returning to the fold as chairman emeritus. Most are assuming his presence will help current management adjust the chain’s operating model to a new age.

On March 25, Best Buy announced that Schulze would assume the role of chairman emeritus of its board of directors. Schulze resigned from his post as company chairman in May 2012, after it emerged that he did not inform Best Buy’s audit committee about an affair between then-CEO Brian Dunn and a female employee.

Along with Schulze, Brad Anderson and Al Lenzmeier have joined the board, and will stand for election during the company’s shareholder meeting in June.

Analysts, by and large, view Schulze’s return as a positive. First, the move means he’s not likely to sell off his 20 percent stake in the company, notes Michael Lasser, of UBS Investment Research. Second, it takes the possibility of a leveraged buyout off the table, eliminating the potential of an increased debt load, according to a research note by R.J. Hottovy, who covers Best Buy for Morningstar. Until early this month, Schulze was looking for private equity partners to help him take the chain private in an attempt to give it more leeway to right itself.

Perhaps most importantly, Schulze’s return looks like a vote of confidence in Best Buy’s current turnaround efforts, which include price matching with online competitors, exclusive customer membership programs and a $400 million cost savings plan.

“Bringing back Best Buy’s wise voices from the past should help the board and management implement the company’s strategic plan,” wrote Lasser in a March 25 note. “There is a lot of low hanging fruit to harvest in the form of cost cuts and better execution. We also hope that the company puts more clarity on how it will be repositioned to match its assets to the future of consumer electronics retail.”

For the quarter ended Feb. 2, Best Buy reported same-store sales growth of 0.9 percent and online sales growth of 11.2 percent domestically. Overall, same-store sales during the quarter declined 0.8 percent—an improvement over the 1.3 percent decline registered during the same period last year.

The company also closed 49 stores in 2012.

“I think Best Buy is fairly well positioned at the moment,” says Joseph Feldman, managing director and senior research analyst with Telsey Advisory Group, a New York City-based consulting firm. “A very important effort has been made to get price parity with Amazon and Walmart and Target and Costco. And I think tax collection is starting to happen on e-commerce sales in many states—that’s an area where you are starting to see pickup in Best Buy’s market share. At the same time, there is a huge opportunity in cost cutting and a lot of room for Best Buy to improve its operations.”

Doubts remain

Yet for all the positives tied to Schulze’s return, not the least of which his passion for helping the company survive its current challenges, it also carries with it some potential pitfalls.

One of the biggest problems for Best Buy right now is that its turnaround efforts are not enough to make it a formidable competitor to Amazon, Walmart and other sellers of consumer electronics, notes Doug Stephens, president of Retail Prophet, a consulting firm. In order to survive long term, Best Buy needs more than price matching—it needs to re-imagine its whole operating model, Stephens says. While Schulze is a very smart businessman, it’s not clear whether he can take Best Buy into the post-digital, post-mobile, post-social media world.

“They need somebody to take a clean sheet of paper and say ‘What’s the new electronics experience?” Stephens points out.

Some analysts agree that some more drastic steps are needed than so far have been executed.

“We encourage investors to balance the near-term turnaround efforts with the fact that rivals still have several competitive countermeasures at their disposal (more aggressive pricing and, in Amazon’s case, enhancements to Prime memberships),” wrote R. J. Hottovy. “As such, we will take a wait-and-see approach regarding management’s longer-term operating margin goal of 5 percent to 6 percent, which depends on much greater in-store and online traffic conversion rates.”

TAGS: News Retail
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