by Marc Bastow | July 31, 2012 11:15 am
The news seems to keep getting worse at Best Buy (NYSE:BBY), doesn’t it?
As reported by Bloomberg Businessweek, a compensation consultant to Best Buy’s board quit after the electronics chain awarded more than 100 managers retention bonuses without tying them to performance. Lump-sum payments and the awarding of restricted stock options are indeed a nice little perk, even if the stock has lost over 20% of its value so far this year, but it mostly feels like rearranging the deck chairs on the Titanic.
I guess this is the way Best Buy hopes to alleviate any brain drain or at least keep whatever leadership exists at the company in Minnesota while it figures out how to replace ex-Chief Executive Officer Brian Dunn, who was relieved due to some unethical conduct with a fellow employee, and how to deal with ex-Chairman Richard Schulze, whose actions in handling the matter forced him to resign shortly thereafter.
Man, this is getting ugly. Where is Best Buy going?
Let’s start with Schulze, who still owns a nearly 20% stake in the struggling retailer. He’s made no bones about wanting to get back into the game by taking his baby private, and he’s actively recruiting former BBY executives to form a new management team.
Truthfully? It’s a long shot. Estimates on how much Schulze would need to get the job done vary, but a fair estimate (OK, my fair estimate) of $30 per share comes to around $11 billion, of which perhaps up to $9 billion would be debt. I know borrowing costs are down, but I suspect a lead bank would like a fairly hefty interest rate.
The harder sell, of course, is the franchise’s ability to support the debt long-term. First of all, the bricks-and-mortar big-box electronics/computer retail model is in some deep doo. I realize that RadioShack (NYSE:RSH) isn’t quite the same, but Best Buy should take a lesson from this smaller fish: Cost-cutting and price discounting isn’t exactly a strategy. Just try to find a Circuit City (PINK:CCTYQ)
Here’s another example that might be just a little bit closer. Amazon (NASDAQ:AMZN) is working mighty hard to figure out how to get all that computer gear and any other items BBY sells out to its customers as quickly as possible. InvestorPlace Editor Jeff Reeves sees Amazon pushing aside Costco (NYSE:COST) in the not-so-distant future, so how can a Best Buy compete in that world? Not well is my guess.
On the financial front, lenders to a private company are going to look at the most recent posting of a net loss of $1.23 billion on revenue of $50.7 billion for the fiscal year that ended in March. I recognize that is BBY’s first annual loss since 1991, but same-store sales have declined in seven of the last eight quarters.
Cash flow was crushed along with the loss. Sure, distributing $1.5 billion in dividends may keep investors around for a while because that equates to a very sweet 3.8% yield. But handing options out like candy to managers and company insiders with no tie to performance is bound to make some people mighty angry, especially when those dividend checks get cut.
These factors come into play for BBY regardless of whether a private play pans out. Perhaps the bigger question is: Who might be a good merger or takeover partner?
Despite the challenges they face, some big-box retailers will survive and thrive long-term, for instance, Target (NYSE:TGT), which already has a number of in-store tie-ins with lines BBY sells. Another possibility is eBay (NASDAQ:EBAY) or even Google (NASDAQ:GOOG), which could easily absorb Best Buys stores and use them as showrooms while cutting back on the number of stores to save costs.
Any way you look at it, however, the battle for survival is going to get tougher, with shareholders waiting for action on righting this ship, not just repositioning the deck chairs.
Marc Bastow in an Assistant Editor at InvestorPlace.com. As of this writing he does not hold a position in any of the aforementioned securities.
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