Best Buy Financial
9 -7 1 3 -4 0 3
JUNE 30, 2012
JOHN R. WELLS GALEN DANSKIN
Best Buy in Crisis
Introduction
At the end of fiscal 2012, Best Buy found itself in an increasingly challenging situation. Although it could still claim to be the world’s largest consumer electronics retailer with $50.7 billion in revenues, growth for the year, at 0.9% was anemic. Meanwhile, Amazon’s sales in Best Buy’s categories were growing at more than 50% p.a. and its total sales, at $48 billion, were approaching those of Best Buy. Operating profits were also disappointing having dropped 54% to $1.1 billion and net income fell into the red at -$1.2 billion. The fiscal 2012 year-end stock price fell to $24.70, down from a high of $53.86 in 2006. In five years, Best Buy had lost more than 55% of its market capitalization.1 Best Buy had slowly been losing market share to both discounters and online retailers. As WalMart cherry-picked popular items for steep discounts and Amazon encouraged consumers to compare prices using smart phones, Best Buy became a showroom for lower cost retailers. 2 Although there had been promising growth in Best Buy’s online and mobile divisions, store closures and programs to reduce the size of stores by 10% increased expenses.3 International expansion, a key pillar of a goal to double revenues in five years was struggling. Adding to the problems, the boom in digital TV sales was cooling and in 2011 mobile devices comprised a larger percentage of overall electronics sales than digital TV sets, effectively ending the sixty-year reign of television as the biggest category in consumer electronics.4 Moreover, many mobile devices were sold by telephone service providers, creating increased retail competition. To add to Best Buy’s problems, on April 10, 2012, CEO Brian Dunn resigned after an investigation into his “personal conduct” with a female subordinate. 5 Board member G. Mike Mikan took over as interim CEO. On May 14, 2012, Dick Schulze, the firm’s founder, stepped down
JUNE 30, 2012
JOHN R. WELLS GALEN DANSKIN
Best Buy in Crisis
Introduction
At the end of fiscal 2012, Best Buy found itself in an increasingly challenging situation. Although it could still claim to be the world’s largest consumer electronics retailer with $50.7 billion in revenues, growth for the year, at 0.9% was anemic. Meanwhile, Amazon’s sales in Best Buy’s categories were growing at more than 50% p.a. and its total sales, at $48 billion, were approaching those of Best Buy. Operating profits were also disappointing having dropped 54% to $1.1 billion and net income fell into the red at -$1.2 billion. The fiscal 2012 year-end stock price fell to $24.70, down from a high of $53.86 in 2006. In five years, Best Buy had lost more than 55% of its market capitalization.1 Best Buy had slowly been losing market share to both discounters and online retailers. As WalMart cherry-picked popular items for steep discounts and Amazon encouraged consumers to compare prices using smart phones, Best Buy became a showroom for lower cost retailers. 2 Although there had been promising growth in Best Buy’s online and mobile divisions, store closures and programs to reduce the size of stores by 10% increased expenses.3 International expansion, a key pillar of a goal to double revenues in five years was struggling. Adding to the problems, the boom in digital TV sales was cooling and in 2011 mobile devices comprised a larger percentage of overall electronics sales than digital TV sets, effectively ending the sixty-year reign of television as the biggest category in consumer electronics.4 Moreover, many mobile devices were sold by telephone service providers, creating increased retail competition. To add to Best Buy’s problems, on April 10, 2012, CEO Brian Dunn resigned after an investigation into his “personal conduct” with a female subordinate. 5 Board member G. Mike Mikan took over as interim CEO. On May 14, 2012, Dick Schulze, the firm’s founder, stepped down