Is Best Buy a "Best" Buy With CEO Resignation?
Now that the company's chief executive, Brian Dunn, has finally left the building, investors are jumping on the stock. Is this a sign of things to come or a temporary gain that will soon be overshadowed by additional store closures?
Days prior to Dunn's resignation this morning, Best Buy (NYSE: BBY) announced that it would close 50 stores in the United States. Many criticized this strategy as a lousy way to achieve profitability. Anyone who has taken a course in accounting knows the danger of eliminating an operation or division (in this case 50 retail locations) in an effort to reduce expenses, which in theory could increase profitability. However, the old saying, "a dollar saved is a dollar earned," is not really true. If Best Buy's reduced expenses also bring down its contribution margin, the company may not actually save a dime. In fact, it could ultimately cost more to demolish these locations than it would to keep them open.
Still, with Best Buy shares on the rise this morning, it initially appeared that investors were responding well to Dunn's resignation (the stock has since declined). But while he may have been one of the primary reasons why Best Buy is struggling, let's not kid ourselves into believing that he is the only culprit. In truth, Best Buy's troubles are the result of evolving consumer behavior.
Consumers decided long ago that Amazon (NASDAQ: AMZN) was a pretty great website, and with that decision came a massive shift in shopping trends. Instead of getting in their cars and wasting gas to physically drive themselves to a retail location, many consumers sat at home and enjoyed the luxury of free or low-cost shipping from Amazon. What Amazon lacked (in-store access to demo kiosks; quick in-person returns) the company made up for in price, convenience, and reliability.
Over the past 12 months, Best Buy has worked hard to meet or beat Amazon's best prices. But this may have been too little, too late for the retailer.
On Black Friday, I visited two Best Buy locations in Metro Detroit; one had a sizeable line, the other did not. However, neither location featured the level of traffic that you'd expect from retailer of this magnitude. Best Buy is the electronics retailer! But most consumers don't seem to care. They'd rather shop online and stay at home.
Realizing the market potential for new video games, used video games, and used electronics, Best Buy attempted to copy the GameStop (NYSE: GME) business model. This ultimately failed, as consumers do not consider Best Buy to be an important retailer for buying or selling video games. They do come to Best Buy for new game consoles, especially when they are in short supply. (Best Buy did quite well during the launches of the Xbox 360, PlayStation 3 and Nintendo Wii.) But in general, Best Buy isn't thought of as a video game retailer. Thus, this venture didn't save the company.
Best Buy has also divested its interest in (and removed store space for) DVDs and music CDs, knowing that consumers are sick of movie ownership (they prefer to stream) and would rather pirate music than pay for it legitimately. But since there haven't been any items for Best Buy to replace the CDs and DVDs with, the company is in a bit of a rut.
Granted, there is no point in stocking media that nobody wants. But how is Best Buy going to cope? What can the company possibly do?
In a typical company release, Dunn said that he has "enjoyed every one of my 28 years with this company, and I leave it today in position for a strong future."
"I am proud of my fellow employees and I wish them the best,” he concluded. Other Best Buy execs gave Dunn some praise in return.
Was his resignation led by the company's poor performance, or was this planned all along? Either way, the timing sure is convenient.
Investors might think that Best Buy can finally get back on track, and maybe it can. But it's going to take more than a new CEO for the company to thrive in this market. Never mind the economy; Best Buy's biggest threat is its long line of online competitors. The growing selection of TVs at Target (NYSE: TGT) and Wal-Mart (NYSE: WMT) couldn't be helping the situation.
Follow me @LouisBedigian
(c) 2013 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.