Best Buy Better Follow Dell’s Way

Nicholas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Editor's Note: The original version identified revenue as profits. This version has been corrected.

Richard Schulze, founder and former chairman of Best Buy (NYSE: BBY) announced last August plans to take ailing electronics retailer private with an offer estimated at $10.8 billion. He was unsuccessful, but the board still awaits an improved offer from the former chairman. According to reports, February 28, 2013 seems to be a tentative deadline. By the way, I would not be surprised if he failed to beat the deadline with an offer this time around, as has been on a number of occasions.

Best Buy is a retailer of consumer electronics, including computing and mobile phone products, entertainment products, appliances, and related services. Its main challengers include Wal-Mart (NYSE: WMT)Target (NYSE: TGT) and Amazon.com, among others. Critics have branded Best Buy as Amazon’s showroom claiming that consumers visit its stores to test various products before purchasing them online at Amazon.com.

Jeff Macke of Yahoo! believes that Best Buy stands no chance in the market with its premium prices. The company passed a chance on price competition when it failed to adapt Wal-Mart and Target’s reduced pricing strategies, as they sought to challenge consumers’ decision to purchase products online, this would have if anything, provided a lifeline for the struggling consumer goods retailer.

Since Schulze made the move to take the company private, Best Buy has lost 20 percent of its market value. Furthermore, there are no signs of any recovery whatsoever. Indeed the challenge posed by Wal-Mart, Target and Amazon, as well as eBay and other online retail stores means that Best Buy may no longer be the Best Buy. Competing products are available at cheaper prices online, albeit with the luxury of door-to-door delivery.

Surprisingly, there are reports suggesting that Schulze may yet consider retracting his offer to take the company private. The Wall Street Journal reported that Schulze may drop his bid in favor of lining up minority positions for investors in the company. However, Macke believes that the 20 percent owner’s best chance is to follow Dell’s way; take the company private. I concur with him, and here is why.

The Retail Stores Q4 Earnings Estimates/Results

Best Buy is expected to report a decline in profits for the most recent quarter year-over-year, and consequently reduced earnings. The company is expected to report $1.53 in EPS, a decline of 38 percent from last year while profits are estimated at $16.32 billion, or a 2.1 percent decline. Best Buy has only managed to beat analyst estimates on two occasions over the last four quarters. The holiday season is now coming to a close, while the impact of the Fiscal Cliff is expected to impact on the March quarter results. The year 2013, will without a doubt provide a tougher period to this electronics seller than the previous campaign.

Wal-Mart on the other hand, reported solid results for the December quarter Revenue increased 3.9% during the quarter to $127.1 billion, slightly missing the street estimate. However, the company’s earnings of $1.67 per share beat analyst estimates after growing by 11 percent year-over year. Wal-Mart leads Best-Buy and Target in the overall retail business. Wal-Mart registered sales of nearly $75 billion during the quarter. Global sales increased by 6 percent year-over-year pre-FX impact. Unlike Best Buy, Wal-Mart sells a variety of items from foodstuffs to Clothing and apparel giving it a well-diversified portfolio.

Target is expected to announce Q4 earnings on Wednesday with a majority of analysts expecting the results to reflect the impact of the squeeze consumers are feeling from a 2 percent payroll tax increase that was rolled out last month. Target sells cheap, trendy clothes and home decor under the same roof as toothpaste and cereal. The company, which sweeps across American consumer markets, makes it a barometer of consumer spending and investors will be keen to see how the results come out. Analysts expect Target to report revenue of $22.74 billion, and $1.47 EPS compared to last year’s $1.45 earnings on revenue of $21.6 billion. This leaves Best Buy as the only retailer among its rivals expected to report a decline in revenues and earnings.

Why Best Buy Must Go Private

The company requires a radical change, which would likely take ages before a complete turnaround. Hypothetically, it is much easier to implement a turnaround in a quite environment without the back and forth hustle with shareholders. Best Buy is at the middle of technological Tsunami that is sweeping across all sectors. The e-commerce has affected adversely the company’s advancements and consequently dimmed its outlook.

Investors would want to see change happening in form of significant returns to their investment. If Schulze chooses to bring in, other investors in a minority interest capacity, then the turnaround would likely meet many headwinds. However, if he decides to take the company private, then there is every chance that a turnaround could be implemented expeditiously.

Too Little, Too Late?

Recent reports also indicate that Best Buy will make its price matching policy permanent effective March 1. However, the biggest question is whether this would be too late to make an impact. This is probably in response to actions taken by Target and Wal-Mart, as the companies seek to dissuade customers rushing to Amazon. Additionally, Best Buy also indicated that it would cut down the return policy from 30 days to 15.

Another question would be whether the price matching policy would be enough to change the mindset of consumers who tend to use the electronics retailer as a showroom, before buying at Amazon. There is no significant evidence showing the success of measures taken by Wal-Mart and Target. Furthermore, there is no reason to believe that even if it worked for target and Wal-Mart, it would also work for Best Buy. So, is the matching policy enough, or should Best Buy get more aggressive than its rivals. This would definitely infringe on margins triggering uproar from investors. Low margins would decline in profits, and hence mean returns.

Bottom Line

Best Buy’s best route is Dell’s way. Privatization seems to be the most realistic chance of a turnaround, and indeed a quick one. Therefore, Schulze should take the company private, turn it around, and then toss it back to NYSE. Historically, privatization has been associated with successful turnarounds, why not Best Buy?

 


Nmaithya has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus