Best Buy's Best Days Are Probably Over

A quixotic offer to take the big retailer private won't necessarily save it.

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The share price of the huge electronics retailer Best Buy surged by nearly 20 percent after the company's founder and former chairman, Richard Shulze, said he has a plan to take the company private. But some on Wall Street think Schulze is bluffing, with his offer reflecting a sense of desperation over how to right the struggling retailer.

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Like other chains, Best Buy has been retrenching as shoppers move to the Web and anxious consumers pinch pennies. Some critics have dubbed its stores "Amazon's showroom," because shoppers go to a local Best Buy to check out the merchandise, then use mobile apps to search for better prices on the Web, and order from there.

As a takover battle buffets the firm, Best Buy undoubtedly has Border's on its mind. The bookseller overcommitted to retail stores a decade ago while falling behind in its online strategy, which ultimately led to its liquidation in 2011. Before that, Best Buy's former competitor Circuit City imploded, another victim of wrenching change it never saw coming.

For the moment, Best Buy is in better shape than the doleful list of retailers that have gone bust. It posted a loss in 2011 but is profitable so far this year, a trend analysts expect to continue. The company is growing quickly in China, which bolsters slower sales in Europe and the United States. It has an established website and ought to benefit as tablet computers and smartphones become ubiquitous.

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The failure of Circuit City in 2008 helped too, since it basically left Best Buy as the last man standing in a big segment that remains important. "The retail landscape can continue to support at least one big-box electronics specialist," Standand & Poor's says in a recent report on the company. "We believe Best Buy's digital product focus, knowledgeable sales staff and effective marketing campaigns position the company to ultimately succeed."

Yet Best Buy still suffers from woes familiar to many struggling retailers. Same-store sales have been falling—a worrisome sign for any chain—and the company plans to close about 50 of its 1,100 locations. Even with Circuit City gone, Best Buy faces tough competition from Wal-Mart, Apple's specialty stores, and Amazon, which has no bricks and mortar to contend with.

Best Buy's stock, which peaked in 2006 at about $58, has been mostly falling ever since. Even with the recent jump, the stock price is down 13 percent for the year, to about $20, while the overall market is up by about 10 percent. Like other retailers, Best Buy's survival strategy involves shrinking its traditional business while transforming itself into a nimbler hybrid firm with express outlets, growing online sales, and tie-ins with hot gadget makers.

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The pressure has caused turmoil in the company's upper ranks. In April, CEO Brian Dunn resigned, after reportedly having an improper relationship with a female employee. The company said business strategy had nothing to do with Dunn's departure, yet it came as the share price was falling and a restructuring plan seemed to be languishing. A month later, the company's CFO left for another job. Then in June, Schulze, who was serving as chairman, also resigned, over allegations that he concealed the controversy involving Dunn.

Since then, Shulze, who still owns about 20 percent of Best Buy's shares, has made clear that he wants to regain control of the company he started in St. Paul, Minn., in 1966. Under his latest offer, he'd take the company private by buying outstanding shares at somewhere between $24 and $26 a share. Schulze would pony up $1 billion of his own money, while raising several billion more from other funders.

But Schulze hasn't identified the other funders, and Wall Street skeptics wonder if he's perpetrating a "pump-and-dump" by floating a rumor likely to temporarily boost the share price, then taking advantage of the bump to sell shares at a higher price than he (or family members) would ordinarily get. Analyst Brian Sozzi of NBG Productions points out that Schulze and various family members have business interests that contract with Best Buy, and could lose out if new management were to direct those contracts elsewhere. "Not only could Schulze be trying to preserve the company he founded and annual income streams," Sozzi wrote to clients, "he could also be attempting to keep family members profitably involved."

That's the kind of corporate infighting Best Buy can't afford. Surviving against competitors such as Amazon, Apple, and Wal-Mart is hard enough without internal distractions that the other guys don't have.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.