4th Quarter results

Best Buy (NYSE:BBY ) on Friday announced its fourth quarter results. The company’s loss had reduced to $409 million from loss of $1.82 billion the previous year for the fourth quarter. On a per share basis, that’s a loss of $1.21 per share against a loss of $5.17 per share last year. The revenue earned last year was $16.67 billion, while for this year it increased negligibly to $16.71 billion. Some of the reports stated that, The financial results of the company beat analyst expectations. That raises a very big question. I won der just how bad ex pectations were in the first place that such below average results are termed as having ‘beaten expectations.’

The founder and ex-chairman

The most important announcement made by the company was that a deadline announced by the board (which was initially set for December and then extended to February end) had passed without a bid from the company’s founder and ex-president Richard Schulze. Richard Schulze had founded Best Buy back in 1966 and was the CEO of the company until 2002. He still owns 20% of the company’s shares. He was asked to step down from his position of the chairman by the board of directors because of him getting caught in a juicy scandal at the company. An intra-company investigation had found that Schulze was aware of then CEO Brian Dunn’s relationship with a female employee, however had not reported it. Since then Schulze made numerous efforts to get back in the company. Schulze reported that he would make a bid worth around $8 billion to take the company private. Among the various private equity investors he had met included Cerberus Capital Management LP CBS.UL, TPG Capital TPG.UL and Leonard Green & Partners. Schulze even made a proposal to the board with an offer of $24 to $26 a share last August. However, he had failed to gather the necessary financing.

Failed offer — the end?

Just because Schulze has not submitted a bid, does not mean he has given up on the company. He has already had talks with the directors to include him in the board. However, the talks have reportedly reached an impasse, as he wants the chairmanship while the board is only ready to consider giving him a seat as one of the directors. Schulze may also come up with another offer to take the company private at a later stage. Clearly, it’s more of a matter of pride for him rather than an investment opportunity. And this should be a cause of concern for the investors. A shareholder holding around 20% of a company’s stock is not really bothered about return of investment but about personal pride. However, in an unlikely scenario, if Schulze does make a hostile takeover bid, then the stock price will definitely go up as usually is the case in hostile takeovers. The most interesting thing to note is that a few of Schulze’s p rivate equity sponsors had independently made a bid for a minority stake in the company and at one point of time the offer had even reached $1 billion.

New leadership

The company announced the appointment of Hubert Joly as the new CEO of Best Buy in September 2012. Joly has been lauded for his efforts by the analysts all across. He had started his work at Best Buy by spending the first week in the stores of the company, trying to gauge ground level reality. Joly had come out with the strategy of matching competitor’s online prices in the stores. This strategy has indeed reaped dividends as seen in the recent quarter results. Joly has also made intense efforts to cut down costs. He had cut approximately 400 jobs at the company’s headquarters expecting to save approximately $150 million. The CEO had also announced that the company plans to close 5 to 10 big-box stores in the coming fiscal year and has called this a ‘transitional year’.

Intense competition

Best Buy’s biggest challenge is to thwart competition from online retailers such as Amazon (NASDAQ:AMZN ) and stores such as Wal-Mart (NYSE:WMT ) and RadioShack (NYSE:RSH ). Joly has to counter what is now commonly known as ‘showrooming’, where customers visit the stores such as that of Best Buy to test the products and then buy them online at cheaper rates. Joly has to come up with a strategy of converting these potential customers to buyers. Amazon has significant advantage over Best Buy in pricing as it does not have to make large investments in buying / leasing property for the stores nor invest in employees for these stores. Amazon has also been able to create a huge loyal customer base by offering cheap pricing with convenience and reliability as its Unique Selling Proposition. Although Best Buy has the potential advantage that it can reward its customers with delivering products instantly, the company seems to have done a very shabby job at customer service. The internet is full of praise for Amazon’s customer service and loaded with complaints of Best Buy’s customer service. Additionally, many companies such as Apple (NASDAQ:AAPL ) have started opening their own stores all across, thus reducing the customers for Best Buy. Even cell phone operators such as AT&T (NYSE:T ) sell new mobile phones in their own stores. Even Wal-Mart has started paying more attention on its electronics and appliances section, thus drawing away potential customers from Best Buy.

Way Ahead

Best Buy needs to take immediate steps to control the damage to its brand name amon gst the customers, to try and increase its revenues, if not margins. The company also needs to have a better online presence and couple that with enticing the customers visiting its stores with better customer service. However, th e road ahead for Joly is very long. As an investor, one should also not forget about the potential power struggle by Schulze. To conclude, I would suggest that Best Buy is at a very critical stage, where one needs to wait and watch if the company is going to go uphill or downhill. Holding on to the stock seems to be the right strategy. If you want to buy, wait for the company’s performance in the next quarter to see its future. If you want to sell, keep an eye on the Schulze saga for the right timing.

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.

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