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Suman Chatterjee
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Financial analyst-writer for the last 5 years. Writes for a number of financial publications including The Street, Motley Fool and Seeking Alpha. Completed his Bachelors in Business Administration (Finance) with GPA 3.0, currently pursuing Chartered Accountancy from ICAI, India. Specializes in... More
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  • Will The New CEO Bring Sunshine To Best Buy? 0 comments
    Aug 22, 2012 8:56 AM | about stocks: ATVI, HPQ, TGT, VZ, BBY

    Best Buy Co., Inc. (NYSE:BBY), one of the most reputed multinational retailer when it comes to consumer electronics, computing and mobile phone products, entertainment products, appliances and related services, has been going through tough time lately.

    In March, Brian Dunn, CEO and a 26 year old veteran with the company, resigned due to sexual scandal with a younger employee. Though it might have already been time, and this might have just been the right reason to severe the relationship, Brian Dunn still knew the business.

    In June, Best Buy founder Robert Schulze resigned from the Board and Chairmanship. Although it would nice to know that the person who took charge, Hatim A. Tyabji, has superior experience in the online marketing niche. And that's what Best Buy needs right now, guidance through the online world.

    Things are not really going well with Best Buy.

    …And it just announced the hiring of the French business turnaround expert, Hubert Joly, the former head of hospitality and travel company Carlson, as the new CEO on last Monday.

    Is this a smart move for the company?

    "He is a little bit older, a little bit more seasoned," said BB&T Capital Markets analyst Anthony Chukumba. "I think this is a home run for Best Buy."

    Joly, 53 years old, may not have any prior experience with retail, but he definitely has shown mettle in kick starting sagging businesses in the media, technology and services sector.

    He drove the turnaround of EDS - now part of Hewlett Packard Co (NYSE:HPQ) - in France from 1996 to 1999. He also led the restructuring and growth of Vivendi's video game business - now part of Activision Blizzard Inc. (NASDAQ:ATVI) - from 1999 to 2001. Vivendi's business at the time faced pressure from a changing marketplace, just as Best Buy's business is currently experiencing. In Vivendi's case, it overcame some obstacles by successfully tapping into the growth of online gaming. Joly's experience with Vivendi "potentially provides him with the necessary tool set to begin a turnaround at Best Buy," RBC Capital Markets analyst Scot Ciccarelli said. Moreover, his four years stint at the Ralph Lauren might be of help at this time.

    Joly said in a statement that he planned to pursue growth opportunities for Best Buy, both online and offline, through "competitive prices, superior service, new growth engines and innovations." The company said it had a new focus on services, highlighted by newly established relationships with Target (NYSE:TGT), Verizon (NYSE:VZ) and AARP.

    Will he be able to turn the business? Well, the investors certainly don't think so, with the price fall just after the decision.

    And sure they shouldn't be. If the company couldn't improve its operations under the charge of the 26-year veteran in the industry, Brian Dunn, then can it make any improvement with Joly?

    What about Brian Dunn?

    Mr. Dunn began his career with Best Buy as a store associate in 1985 when it operated only a handful of stores. From 2006 until being named to his current position, Mr. Dunn served as President and Chief Operating Officer. From 2004 to 2006, Mr. Dunn was President - Retail, North America. From 2002 to 2004, he served as Executive Vice President - Best Buy U.S. Retail. Prior to that, he served as Senior Vice President, Regional Vice President, Regional Manager, District Manager and Store Manager. During his time with Best Buy, Mr. Dunn has made significant contributions to our market share growth, employee retention, vendor relationships and customer satisfaction scores. Mr. Dunn also serves on the board of The Best Buy Children's Foundation. He previously served on the boards of Dick's Sporting Goods, a full-line sporting goods retailer, and the Greater Twin Cities United Way.

    Needless to say, Brian Dunn had superior experience in the retail industry. So did he do any justice to his experience and push the company through the cloud computing age against the Amazon "underdog"?

    The image below shows your investment of $100 in the company for a full consecutive 5-year financial period.

    So, if you were to invest $100 in Best Buy in 2007, you would get a return of $56.75 in 2012. The stock price fell 58.42% in the last 5 years. Dismal performance, I would say!

    But is it all-bad-no-good under Brian Dunn?

    • Fiscal 2012 included a net loss of $1.2 billion from total operations (including both continuing and discontinued operations), compared to net earnings of $1.3 billion in fiscal 2011. The net loss in fiscal 2012 was primarily due to our decision to buy out of the Best Buy Mobile profit share agreement for $1.3 billion (the "Mobile buy-out"), as well as the resulting $1.2 billion goodwill impairment in our Best Buy Europe reporting unit. Loss per diluted share from total operations was $3.36 in fiscal 2012, compared to earnings per diluted share of $3.08 in fiscal 2011.

    Note by me: So Brian Dunn had "mobile" plans in his mind, I guess. What if the mobile phone companies start their own stores? Best Buy needs to be wiser when taking decisions.

    • Revenue increased 1.9% to $50.7 billion. The increase was driven primarily by the net addition of 235 new stores during fiscal 2012, an extra week of revenue from stores in our Domestic segment and Canada, and the favorable impact of foreign currency exchange rate fluctuations, partially offset by a comparable store sales decline of 1.7%.

    Note by me: More number of stores just means better brand exposure, for any brick-and-mortar retailer. But will the consumer still visit a store when he can shop it online?

    • Our gross profit rate decreased by 0.4% of revenue to 24.8% of revenue. The decrease was driven by a decline in the domestic segment's gross profit rate primarily due to increased promotional activity, an increased sales mix of lower margin products, an increased sales mix of promotional items and horizontal shift from one-time service to ongoing contracts.

    Note by me: And this is due to stiff competition from the other online retailers, primarily Amazon.

    • The company repurchased and retired 54.6 million shares of our common stock at a cost of $1.5 billion during fiscal 2012, even after the $1.3mn buyout.

    Note by me: Analysts thought that share repurchase program might be retracted for the time being after the buyout.

    • We ended fiscal 2012 with $1.2 billion of cash and cash equivalents, compared to $1.1 billion at the end of fiscal 2011. Operating cash flow increased to $3.3 billion in fiscal 2012 compared to fiscal 2011 operating cash flow of $1.2 billion due primarily to changes in working capital, as capital expenditures remained relatively consistent at $766 million in fiscal 2012.

    Note by me: No capital expenditures? What are you doing with the investors' money, apart from sitting on it?

    To be honest, I don't see any good in there. If we look at the amount of cash in hand, the addition and subtraction of stores, the confused and haphazard product mixes, and the mergers, buyouts and acquisitions, it is pretty obvious that the company might be struggling at the moment. The question is when a retail veteran like Brian Dunn seemed to be clueless with Best Buy, can the company get its engine restarted under the leadership of Joly?

    Forbes contributor, Larry Downes writes, "Despite the disappearance of competitors including Circuit City, the company is losing market share. Its last earnings announcement disappointed investors. In 2011, the company's stock has lost 40% of its value. Forward P/E is a mere 6.23 (industry average is 10.20). Its market cap is down to less than $9 billion. Its average analyst rating, according to The Street.com, is a B-."

    But to change all that, you might just need one BIG decision, one big move, that's all. And I am still optimistic about it.

    One of the biggest challenges that stay ahead now is how to cope with the increased online commerce activity. People seem to browse at the Best Buy showrooms and then buy later at a much lower price at Amazon's online store.

    Not only is Amazon's customer service much, much superior to that of Best Buy's, Best Buy needs to understand one most important thing. The world is going online, and people will not even set foot outside the house to shop very soon. You can go on to adding stores here and there, but it should be in conjunction with your online presence.

    Joly said in a statement that he planned to pursue growth opportunities for Best Buy, both online and offline, through "competitive prices, superior service, new growth engines and innovations."

    Nice indeed! Can Joly do it? Let's wait and watch.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Stocks: ATVI, HPQ, TGT, VZ, BBY
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