Best Buy (NYSE:BBY) Interim CEO G. Mike Mikan can talk the talk, but it’s way too soon to say if he can walk the walk that’s needed to revitalize the beleaguered electronics retailer.
Speaking Tuesday to Wall Street analysts, Mikan, who replaced CEO Brian Dunn after he was forced to resign for having an inappropriate relationship with a female employee, sounded the alarm bells. He vowed there will be “no sacred cows” in his overhaul of the Richfield, Minn., company.
Mikan really piled it on when he said: “Not that long ago, Best Buy was the authority in this market; our stores wowed consumers. Not anymore. Today’s marketplace is different. From my perspective, it’s a marketplace we weren’t prepared for.” He also vowed to “make sure Best Buy is never caught flat-footed again by a marketplace that is evolving rapidly and will continue to do so.”
Blunt speech from a new CEO is hardly unique. When Stephen Elop first took over Nokia (NYSE:NOK) in 2011, he likened the troubled cell phone maker to a “burning platform.” Hewlett-Packard (NASDAQ:HPQ) CEO Meg Whitman recently said, “We didn’t make the investments we should have during the past few years to stay ahead of customer expectations and market trends.” All the blunt talk hasn’t moved the needle much yet at either Nokia or HP, which just announced it’s laying off 27,000 employees.
Of course, talk is cheap, and investors should always be leery about grand statements made by CEOs under pressure. Nonetheless, there are many reasons why investors should be especially suspicious of Mikan, who provided nothing more than a promise to get working on a turnaround plan, with announcements to come later.
For one thing, he’s no stranger to Best Buy. He first joined the retailer’s board in 2008 and was a member of the Audit Committee and the Compensation & Human Resources Committee, so he’s had an up-close view of the company circling the drain.
Best Buy has posted declines in same-store sales in seven out of the past nine quarters and saw its share price plunge 62% over the past five years, as the board did nothing. In fact, in Best Buy’s 2011 proxy, the company praised now-disgraced former CEO Dunn, noting that during his tenure “Mr. Dunn has made significant contribution to our market share growth, employee retention, vendor relationships and customer satisfaction scores.”
The Best Buy board in its infinite wisdom also gave Dunn a 10% raise in his base salary in fiscal 2011, commending him for being a “strong motivator and leader” with an “established record of building markets while living and teaching company values.” That year, Dunn was paid base salary of $1.1 million and received an options award valued at $3.2 million for a total compensation package of more than $5 million.
In 2010, Best Buy was even more generous to Dunn, awarding him a pay package of more than $10 million, including an options award valued at $6.2 million.
Mikan is not only skilled at drawing up generous pay packages for others, he does right by himself too. Corporate governance experts have blasted the pay package that Best Buy awarded its neophyte CEO as being overly generous.
According to the Minneapolis Star-Tribune, “Best Buy also will pay Mikan based on the annual performance bonus that Dunn could have earned last year: $2.2 million. But unlike a regular performance bonus, in which a CEO will only get paid if the company hits certain financial benchmarks, Mikan gets paid regardless of how the Richfield-based company performs.”
To make matters worse, Mikan’s background outside of Best Buy’s board isn’t in retail or technology. No, the 41-year-old recently worked at UnitedHealth Group (NYSE:UNH). If investors have learned anything during the Great Recession it’s that success in one industry is no guarantee of success in another. The same holds true among companies in the same industry. J.C. Penney (NYSE:JCP), which hired Apple (NASDAQ:AAPL) retail guru Ron Johnson as CEO only to see his strategy get off to a painfully slow start, is learning that lesson the hard way.
Tough times lie ahead for Best Buy. Costs need to be cut. The electronics retailer generates a paltry $307,635 in revenue per employee, well below the industry average of $13.6 million, according to Reuters. That situation is untenable, but whether Mikan is the right person to fix this and BBY’s other problems remains to be seen. One thing’s for sure: It’ll take more than tough talk.
Jonathan Berr doen’t own shares of any companies mentioned here. Follow him on Twitter @jdberr.