Best Buy has become a soap operaJuly 31, 2012: 5:00 AM ET
The electronics retail giant once watched on proudly as competitors failed. Now, it appears that internal chaos -- as much as tough competition -- is tearing it apart.
UPDATE: On Monday, August 6 founder and former chairman of Best Buy Richard Schulze submitted a proposal to the company's board to acquire all outstanding shares for $24-to-$26 per share. That purchase price would represent a premium of 36% to 47% of Best Buy's closing price on August 3.
By Don Reisinger, contributor
FORTUNE -- Over the years, countless technology retailers have groaned their way toward death. Companies like Circuit City and CompUSA were once destinations for consumers looking for the latest tech goodies. Even Babbages was popular. Now, they're all gone. Although Systemax (SYX) bought the CompUSA and Circuit City brands, they're not the same. And they never will be.
Until recently, that had been good news for rival Best Buy (BBY). From headquarters in Richfield, Minnesota, the company watched competitors fail and found ways to compete with online retailers like Amazon (AMZN). It branched out, for example, into services like the Geek Squad, a sort of roving version of Apple's (AAPL) in-store "geniuses." Still, Best Buy is now itself in deep trouble. And unlike its old brick-and-mortar competitors, which died mainly from external forces, it appears that internal chaos -- as much as tough competition -- is tearing it apart.
Let's start with the chaos.
In April, then-CEO Brian Dunn resigned from his post after he allegedly engaged in "an extremely close personal relationship with a female employee that negatively impacted the work environment." An investigation by the company's Audit Committee revealed in May that Dunn had given the person $600 and had contacted her "by cell phone at least 224 times, including 33 phone calls, 149 text messages, and 42 picture or video messages."
The fallout from that relationship, which the audit committee said was "not romantic or otherwise improper," didn't end with Dunn's dismissal. The audit committee also found that Best Buy founder and then-chairman, Richard Schulze, knew of the relationship last December, and failed to inform the audit committee, human resources, or any board member. That conduct, the committee argued, was "inappropriate," and prompted Schulze to step down as chairman.
With an interim CEO and new chairman in place, Best Buy's soap opera appeared to be over. Or not.
The New York Times reported in June that Schulze, who still owns 20.1% of Best Buy, was in talks with bankers to seize control of the company and take it private. Whether he'd team with major investors to acquire remaining shares or dump his current holdings to enter into a deal with would-be buyers remains unclear. If nothing else, media reports suggested Schulze may be lurking, waiting for an opportunity that may be around the corner. Best Buy shares are down 24% since the beginning of the year and a whopping 38% since last summer. With a market capitalization of $6.04 billion as of this writing, its woes have made it more affordable than ever.
Worse yet, the company is facing all kinds of external pressures and financial struggles that could send its share price lower still. At first glance, Best Buy's financial performance might not appear to be so concerning. During the company's first fiscal quarter ended May 5, it posted a profit of $158 million on revenue of $11.6 billion. Its revenue was up nearly $300 million over the same period last year. However, Best Buy's profit was down from the $212 million it generated in the prior year.
That wasn't the only sour note. The company reported that its revenue per square foot of retail space remained unchanged year-over-year -- a major problem -- and its operating income per store was down 13%. It was that reality that interim CEO Mike Mikan acknowledged in his statement to investors accompanying the earnings report. "We know we have to better adapt to the new realities of the marketplace, and we are creating a long-term plan designed to make Best Buy more relevant with customers and position the company for sustained, profitable returns in the years ahead," he tried to reassure investors.
The issue for Best Buy is its costs are simply too high. Best Buy was paying for 42.4 million square feet of retail space last quarter – a figure that Amazon, Overstock, and other online retailers obviously don't need to worry about. And in order to generate a profit, Best Buy is forced to incorporate that cost into its products, pushing prices up and prompting consumers to go online. It's not a new issue, for sure, but it's an increasingly worrisome one.
To combat that, Best Buy announced earlier this year that it would close 50 of its underperforming stores. As of May 12, the company had closed 41 of those retail locations. The store closures are part of a broader restructuring that includes reducing costs in its corporate support function and cutting its cost of goods sold. All told, Best Buy hopes to save $800 million by fiscal 2015.
But exactly what the company will look like – and whether it'll be public – by then remains to be seen. After all, brick-and-mortar tech retailers have slid down a slippery slope before, crashing and burning in nearly every case. All without the theatrical preamble of an ousted founder.