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Best Buy Seeks to Reinvent as Smaller, Nimbler Reseller

By    |   Thursday, 19 July 2012 01:52 PM

Best Buy (BBY) once reigned supreme in an enviable niche, selling high-end electronics to the mass market in big-box retail stores, much in the style of large hardware and department stores. Now, however, online sales from competitors such as Amazon.com (AMZN) has reduced the cavernous showrooms to places where many people still shop but fewer actually buy. It remains to be seen, analysts warn, if the electronics and housewares chain can reinvent itself as a smaller, nimbler reseller.

Best Buy is a multinational retailer of consumer electronics, computing and mobile phone products, entertainment products, appliances and related services. It operates retail stores and call centers and conducts online retail operations under a variety of brand names, such as Best Buy, Best Buy Mobile, The Carphone Warehouse, Five Star, Future Shop, Geek Squad, Magnolia Audio Video, Pacific Sales and The Phone House.

During fiscal 2012, BBY operated two reportable segments: domestic and international. The domestic segment is comprised of the operations in all U.S. states, districts and territories, operating under various brand names including, but not limited to, Best Buy, Best Buy Mobile, Geek Squad, Magnolia Audio Video and Pacific Sales.

The international segment is comprised of operations in Canada, Europe, China and Mexico.

In fiscal 2007, Best Buy developed the Best Buy Mobile concept through a management consulting agreement with U.K.-based The Carphone Warehouse Group. Best Buy Mobile provides a comprehensive assortment of mobile phones, accessories and related services using experienced sales personnel in Best Buy stores as well as in stand-alone stores.

“In the future, we expect to see a reduction in the number of large-format stores, a reduction in square footage for certain of our large-format stores and a continuation of the growth in small-format Best Buy Mobile stores,” management said in a recent filing.

In fiscal 2012, the company acquired mindSHIFT Technologies, a managed service provider for small and mid-sized businesses, providing cloud services, data center services and professional services throughout the United States.

BBY management spoke directly to the change in its prospects in a recent call with analysts.

“Not that long ago, Best Buy was the authority in this market. Our stores wowed consumers. They were places where innovation met convenience with a broad assortment of products and knowledgeable people who knew how to make things work. Best Buy provided a unique customer experience that gave us a clear edge over competitors. Not anymore,” interim Best Buy CEO George Mikan told analysts.

“Today's marketplace is different. From my perspective, it is a marketplace we weren't prepared for. Best Buy's customer experience is no longer unique as it once was, and it is no longer a distinct competitive advantage.”

Best Buy has a market cap of $6.41 billion in a sector, specialty retail, where the average company size is $5.92 billion. Its projected earnings per share growth for the coming year is 2.49 percent, compared to a sector average of 15.34 percent.

Limited visibility

Analysts are mixed on BBY, with buy or outperform calls from Ford Equity Research and Columbine Capital Services and sell or underperform ratings from Merrill Lynch and market Edge.

“The company is, and needs to be in a turnaround mode, in our view. However, with recent management changes and the potentially temporary nature of current leadership, we believe visibility is limited in the near future and we do not expect the market to give BBY much credit for improved performance given the fundamental challenges facing the company,” Standard & Poor’s Equity Research analysts wrote May 23.

Best Buy next reports on Aug. 23.

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Thursday, 19 July 2012 01:52 PM
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