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Best Buy’s Last Chance May Be Coming Soon

Best Buy LogoHave you been in a Best Buy (NYSE:BBY) lately? I have, and let me tell you what I’ve seen:

Lots and lots of people moving in and around the store, playing video games, listening to CD’s through expensive headphones, tap-tap-tapping on the computers lining the shelves, watching sports on the latest in HDTV inventory, and picking up cellphones to see how they look holding one in their hand.

And not so many people actually standing in what turns out to be a tediously long-wait line at the one (and there appears to be only one) checkout counter.

Those people who are in line usually have no more than one, perhaps two, items, generally of what would be considered “commodity” products — toner, ink, a room fan and perhaps an old, refurbished copy of No Country for Old Men.

You get the picture.

What people are doing is called “showrooming,” which essentially means shopping for goods in the store and going home to buy those same goods through Amazon (NASDAQ:AMZN), maybe bid on them through eBay (NASDAQ:EBAY) or, worse yet for Best Buy, get them directly from manufacturers like Dell (NASDAQ:DELL) or Hewlett-Packard (NYSE:HPQ).

It is the model that killed Circuit City, is wreaking havoc and anger with retailers like Target (NYSE:TGT) and Wal-Mart (NYSE:WMT) and is generally a woeful way to turn in-store shopping into an in-store purchase.

What’s Best Buy to do?

The most recent idea is to take the company private, away from the spotlight and glare of Wall Street analysts and pressures. Such an arrangement is apparently on the table, as multiple sources suggest founder Richard Shulze is working with the other side of the Wall Street houses, the investment bankers, to put together a management buyout.

Hmmm …

Shulze owns about 20% of the company’s 339 million shares, so at a minimum he gets a bit of a say in how this plays out, despite his being forced out in June after a scandal involving CEO Brian Dunn.

Taking Best Buy private will be an interesting challenge for Shulze, but the company’s downwards spiral is making it ripe for the play.

Recent Struggles

First and foremost, the stock has lost more than 30% of its value since 2009, almost 60% in five years, and 38% just in 2012 alone. Investors are quite unhappy.

And why not? Revenue over the last three years has been relatively flat — in the $50 billion range — but comparable store sales, the key metric for retailers, has been down now for seven straight quarters has been on the wane for five consecutive years. The trend continues so far in 2012, falling 5.3% in the first quarter — a bad sign indeed.

Net income crashed in the last full fiscal year, dropping to a loss of $1.2 billion, which according to Best Buy’s 10-K report was “mainly due to our decision to buy out of the Best Buy Mobile profit share agreement for $1.3 billion as well as the resulting $1.2 billion goodwill impairment in our Best Buy Europe reporting unit.”

Back that out and the company made some decent money, which would’ve increase cash flow dramatically. Speaking of which, Best Buy does have $1.4 billion in cash, and operating cash flow of around $2 billion.

Things are starting to look brighter, aren’t they?

Promising Plans

What else? Best Buy announced plans to shutter 50 U.S. stores and cut around 400 employees,  saving an estimated $250 million in 2013 and up to $800 million by 2015. Of course, first they’ll have to eat around $300 million in restructuring charges.

With those kind of cash flow numbers, ways to save cash and the actual cash on hand, maybe the prospect of having to service a possible $10 billion debt is feasible.

Best Buy’s enterprise value of a little less than $8 billion is about $2 billion short of what Wall Street likes to see before they take on a buyout, and the board just voted to increase the minimum ownership required to exercise a buyout, up to 25% from 10%, so first Shulze will have to scrape up another 5% of the shares to get in the game.

And of course Shulze and his management will ultimately have to figure out how to get the customers from the aisle to the cash register. But that’s perhaps for another day.

You know what, though? I think this idea just might be worth the (debt) paper it will be written on.

Marc Bastow is an Assistant Editor at As of this writing he did not hold a position in any of the aforementioned stocks.

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