Best Buy Is Done With Dunn: What the News Means for Investors
Apr 10th 2012 9:48PM
Updated Apr 11th 2012 10:42AM
Big-box retailer Best Buy (NYS: BBY) today bid farewell to longtime CEO Brian Dunn. The management swap comes just weeks after the company announced plans to close 50 of its stores and lay off hundreds of employees. But will these dramatic changes be enough to accelerate a turnaround, or do they signal the beginning of the end for the big box?
End of an era
I was surprised by the sudden resignation of Dunn, who has a 28-year history with the company. While I think Dunn's departure is the right decision for the chain, I fear it's too little, too late. Best Buy board member G. Mike Mikan will take over as interim CEO until management can find a replacement.
Four months ago I laid out the argument for why Best Buy is the worst buy for investors. Since then, the company reported a quarterly loss of $1.7 billion, launched a turnaround strategy, and is now seeking new leadership. Still, nothing has changed.
A series of slip-ups
The problem for the world's largest consumer-electronics retailer is that consumers use its 58,000-square-foot stores to comparison-shop and often make purchases elsewhere online. It's hard to compete with rival e-tailers such as Amazon.com (NAS: AMZN) , which doesn't have overhead costs related to physical storefronts or the same burden of tax implications. Meanwhile, Best Buy's cost structure cripples the company with massive rent payments and wages for 180,000 employees.
Best Buy's call for $800 million in cost-cutting over the next three years seems like a step in the right direction until you take a closer look. The company's full plan also includes the addition of 100 new Best Buy Mobile stores in the U.S. by fiscal 2013. News flash, Best Buy: Investors don't want to see you attempt (and probably fail) to grow.
If Best Buy wants a real shot at a comeback, it needs to address the fundamental weaknesses inherent in the business: It's a showroom for Amazon with pushy sales staff. A change at the top alone won't reverse these underlying problems. On the flip side, Best Buy has a strong balance sheet and healthy cash flow, which will help keep the company afloat as it struggles to reinvent itself.
I think investors would be wise to let this one go. The stock's lost more than half of its value in the past five years, which has some investors buying on the hope of a rebound. I don't see that happening. We'll have to wait and see what the new management looks like, but for now I'm sticking with my thumbs-down CAPScall on my profile in Motley Fool CAPS. If you want to keep dips on Best Buy as it fights to prove relevant, simply add the stock to My Watchlist, The Motley Fool's free tool that lets you track and monitor your favorite stocks.
At the time this article was published Fool contributor Tamara Rutter owns shares of Amazon.com. Motley Fool newsletter services have recommended buying shares of Amazon.com. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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