News Column

Best Buy Interim CEO Blunt About Company's Issues

May 23, 2012

Tom Webb

Best Buy

Best Buy's interim CEO talked tough in his debut with investors, telling analysts the company's service and training "aren't even close to good enough."

G. "Mike" Mikan began his first earnings call as CEO with a blunt assessment of Best Buy's business, recalling the days when its big-box stores used to wow consumers and offer them something unique.

"Not anymore," Mikan said Tuesday, May 22, adding that shifting technology and changing tastes pushed Best Buy into "a marketplace we weren't prepared for."

Just six weeks into his interim job, Mikan indicated where he'll steer the Richfield-based electronics chain, which has been reeling from blow after blow this spring.

The company's long-range plan is still being drafted, but Mikan made its general direction clear. In the future, Best Buy will have much less square footage, be less focused on selling hardware and more on services, and have a Geek Squad focused less on repairs and more on relationships.

"We cannot be seen just as a hardware company," Mikan said, as he tries to make Best Buy "more relevant, more intelligent and more nimble."

Several analysts welcomed the direction, as well as the candor.

"I think a lot of his assessment of the degree of change necessary at the company was dead on," said Matt Arnold, senior consumer analyst for Edward Jones. The 50-store closing plan, outlined in March under previous CEO Brian Dunn, "should be the absolute starting point, as far as the right-sizing of

the company that needs to be done."

But how much do Mikan's views matter? He's an interim CEO only, and on the earnings call, several analysts tried to gauge how a short-term leader could develop and implement long-term changes.

"It was kind of an awkward dynamic," Arnold said. "A lot of the questions are about long-term strategy, and he's the person in charge at the moment."

Since the company's last earnings call, Dunn resigned abruptly after being involved in a relationship with a 29-year-old female employee, and company founder Richard Schulze announced he'd step down as chairman of the board.

Mikan clearly struck a different tone than previous CEOs, whose enthusiasm for the big-box model increasingly dismayed Wall Street analysts. Mikan pledged there would be "no sacred cows" when it came to a hard look at the business model.

A Credit Suisse analyst termed the blunt critique "music to our ears," but then pointedly asked Mikan, who'd served as a Best Buy director, why the board didn't embrace those changes much sooner.

Another analyst asked Mikan about his lack of retail experience. Mikan's background is in accounting and management, not retailing or online commerce.

"I'll concede the limited retail experience that I have, but we've got deep knowledge" within Best Buy about retailing, Mikan replied. "There are other things I can bring to the organization."

Mikan also noted Best Buy's strengths: it's the market leader in consumer electronics, and it has a global footprint, deep relationships with vendors and "good hard-working people."

For Mikan, who is a candidate for the permanent CEO post, the earnings call was something of an audition. In contrast to the sales-floor orientation of previous leaders, Mikan framed himself as a bit of a number cruncher.

"I focus on returns," Mikan, 41, told analysts. "I'm a return-on-investment-capital individual."

Some analysts have urged Best Buy to choose a visionary or e-commerce superstar as its next CEO, not another company insider.

"The keys to this investment story remains who will lead this chain in the future, and what will be the plan to right the ship," Credit Suisse analyst Gary Balter wrote Tuesday in a research note.

The company's first-quarter earnings seemed secondary after the nearly non-stop turmoil that has engulfed Best Buy lately, including thousands of layoffs, 50 store closures, a wave of executive departures and a slumping share price.

Net earnings were $161 million, down 37 percent, in large part because of weakness in Best Buy's international units. Excluding a restructuring change, the company earned 72 cents a share, which beat analysts' expectations.

Sales rose 2 percent to $11.6 billion, led by a jump in online revenues, but same-store sales declined 5.3 percent. Most of the decline came overseas, but even in the United States, sales at existing stores fell 3.7 percent.

Some analysts saw hopeful signs. Best Buy said it has already shuttered 41 of the 50 stores it intends to close this year, which analyst Balter felt was impressively fast.

Six of those closings came in Minnesota, partly because the Twin Cities has been chosen as the test market for Best Buy's new Connected Store strategy, which will feature fewer big-box stores, but more small Best Buy Mobile locations.

The small-store strategy does seem to be bearing fruit. Best Buy said its mobile-phone stores enjoyed sales growth of 13 percent. Sales gains in devices like tablets and mobile phones -- products sold at Best Buy Mobile stores -- more than offset declining sales of products like televisions and videogames, the company said.

Mikan acknowledged that Wall Street is clearly dissatisfied with Best Buy's business model and its future prospects. He called the company's stock "a highly undervalued asset," a minority view.

"I know there are skeptics out there," he said. "I see the share price."

Best Buy shares have fallen about 40 percent in the last year. On Tuesday, the stock rose 1.6 percent, or 29 cents, to close at $18.46.

Source: (c) 2012 the Pioneer Press (St. Paul, Minn.)

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