Shares of Best Buy (BBY +1.3%) open higher against a weak tape with the intention of founder...

Shares of Best Buy (BBY +1.3%) open higher against a weak tape with the intention of founder Richard Schulze over his 20% stake looking as a big question mark. JPMorgan's Christopher Horvers says that although the bear case on BBY remains intact, he sees a leveraged buyout led by Schultz as a possibility after he crunched the numbers on a deal.
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  • Seeking Beta To Your Alpha
    , contributor
    Comments (456) | Send Message
    If the LBO scenario has legs, than it means that Schulze is at odds with current BBY management and looking to take greater control by taking the company private.


    If the rumors related to an LBO are not accurate than the 20.1 percent share stake is up for liquidation.


    Either scenario will bear (pun intended) out to be a bad situation for BBY in the near to mid term. If Schulze is successful in trying to take the firm private, then he will be at odds with current management - forcing the company to deal with another distraction rather than focusing on dealing with the real problems it is currently facing.


    If Schulze is not taking the firm private then the shares will be up for liquidation, and will add additional downward pressure on the stock price.


    While I believe the former situation is unlikely (current credit market conditions will make finding the amount of equity necessary to close the deal hard), if it does happen, it is probably better for the company in the long term.


    In either scenario though, there will be downward pressure on the stock price in the near to mid term, meaning that there should be better entry points for the stock.


    *I am short BBY.
    8 Jun 2012, 11:59 AM Reply Like
  • billddrummer
    , contributor
    Comments (1761) | Send Message


    A near-term bearish prospect, indeed.


    However, I'd like to post a rejoinder to one of your assertions. You stated that BBY didn't need appliances in its stores.


    As I shared with you privately, in my store, that department was the one that posted the highest year over year sales growth.


    The company emphasized appliance sales during the past fiscal year, and actually increased its revenue contribution from 6% to 10%. A portion of that increase resulted from sales incentives, such as free delivery and set-up for refrigerators, washers and electric ranges within a store's service area.


    But part of the increase resulted from having well-trained salespeople who understood what buyers were seeking, and matched their needs with the company's offerings.


    It appeared that our success came at the expense of SHLD. And when potential buyers found out that Kenmore appliances were rebadged offerings from LG, GE, Whirlpool and Samsung, BBY was able to effectively compete.


    I believe there is a place for appliances, if only because the average BBY store devotes 15% of its floor space to appliances. If the company truly wanted to leverage its floor space, it would make store managers accountable for having the appliance space represent 15% of store revenue.


    Too often, the appliance department is staffed with the weakest salespeople, and considered nothing more than an expensive albatross by store managers.


    Margins are better on appliances than any other product in the store, and they are easier to protect than margins on computers and televisions.


    As you can see, the appliance piece can be an integral part of a full-service store.


    How much better would it be for new homeowners to stop at BBY, purchase their flat panel TVs, computers and gaming systems for their new home, and while delivery arrangements are being handled, pick up a fridge, washer and dryer at the same time?


    Our store did that on several occasions. Management liked to call it 'convergence,' but I prefer to call it solving customer problems in one stop.


    (I had a marketing idea to target new homebuyers with a coupon good for a discount on bundled purchases, but the idea went nowhere and the recession soon followed.)


    If managed properly, appliances can strengthen the gross margin and contribute to a stable revenue stream. Especially if marketed in conjunction with the items BBY is already a leader in: computer technology, flat panel video displays, audio and gaming.
    8 Jun 2012, 08:41 PM Reply Like
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