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Best Buy Downgraded Over CEO Concerns, Lack of Fiscal Guidance

22 Aug, 2012 By: Erik Gruenwedel

Shares of Best Buy Co. Aug. 22 were downgraded to “underperform” from “neutral” by an analyst who cited the consumer electronics retailer’s lack of fiscal guidance in 2013 and retail experience by incoming CEO Hubert Joly, among other concerns.

Michael Pachter, analyst with Wedbush Securities in Los Angeles, said Minneapolis, Minn.-based Best Buy continues to operate a business model that is under siege by lower-cost competitors and ecommerce. Pachter said Best Buy’s store level economics place it at a 10% price disadvantage to online retailers.

Best Buy also just hired a new CEO whose primary experience is in the hospitality and hotel business — and not retail. New CEO Joly, who begins next month, takes over from interim CEO Mike Mikan who replaced Brian Dunn after the latter resigned following the disclosure of an improper personal relationship with a female employee.

The retailer is also the focus of a possible leveraged buyout attempt by founder and former chairman Richard Schulze, who holds a 20.1% stake in Best Buy. Schulze resigned his chairmanship earlier this year after being rebuked by the board for not disclosing personal knowledge of Dunn’s affair.

Best Buy Aug. 21 reported a 90% drop in net income during its most recent financial quarter despite only a 3% dip in sales. The top CE retailer, whose assets include The Geek Squad and Magnolia Home Theater centers, is in the process of downsizing the number big-box retail stores it operates in an effort to curb operating costs.

Analysts contend Best Buy has become an expensive showroom for CE products that consumers end up purchasing elsewhere, including on the Internet. The retailer cited second-half product launches in tablets, smartphones, eReaders and video games as revenue generators without giving specifics. Pachter said he remains cautious on the potential impact of these new devices on the company’s performance without additional details.

He said Best Buy is dependent upon the different manufacturers in terms of product allocations, and would likely fail to compete with online competitors (such as Amazon) and certain big box retailers (such as Walmart) on pricing. Given soft economic conditions domestically, and difficulties in Canada, China and Europe, Pachter believes consumers will once again be very price-conscious, placing Best Buy at a distinct disadvantage to its peers.

“We believe that increasingly sophisticated consumers with mobile Internet access will value lower prices over service, ultimately making Best Buy’s big-box [stores] obsolete,” Pachter wrote in an Aug. 22 note. “We expect new CEO Hubert Joly to take some time to learn the business and to formulate a turnaround strategy. In the meantime, we expect comps and profits to continue their downward trend.”

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