Best Buy CEO Resignation is Good Move, but Future Remains Uncertain

Best Buy CEO Resignation is Good Move, but Future Remains Uncertain

Best Buy CEO Resignation is Good Move, but Future Remains Uncertain

Best Buy Co., Inc. (NYSE:BBY) CEO Brian Dunn did a courageous and proper thing for shareholders by resigning.  He was not the right person to lead Best Buy into battle against online-only competitors that use Best Buy’s spacious and beautiful stores as the showroom for their products.  To make things even worse, smart cell phones make comparison shopping so much easier nowadays, and structurally, Best Buy cannot have lower prices than its online competitors.

Its stores also lack the breadth of selection of Amazon and they are at a permanent, competitive cost disadvantage.  The new strategy Dunn announced a few weeks ago of closing big stores and opening a lot of smaller stores for mobile sales makes little sense.  It is basically morphing Best Buy into a Radio Shack.

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It would be great if this strategy had worked for Radio Shack, but it didn’t.  Radio Shack’s margins are collapsing, and that is why its stock is scratching as-far-as-my-chart-goes-back lows.

I don’t know what the solution is for Best Buy.  It must involve a much tighter collaboration of physical stores and its internet presence – the stores need to be turned from a liability into an asset.  Or maybe a logistical miracle that would allow Best Buy to deliver a much, much greater range of products (like, hundreds of thousands) to its customers on the day they order them.  One thing is for certain: the new strategy will require thinking that cannot be delivered by somebody who spent 28 years in the Best Buy box.

It requires a Netflix or Amazon-like strategy, where management was willing to bring forward (and flawlessly execute) a disruptive strategy that undermines its current cash cowing business.  Amazon did this by bringing electronic readers to the masses, which undermined its core book business.  Netflix did it with streaming.  I am sure I’ll get plenty of dissenting emails about Netflix: “We don’t know if its model will be successful down the road,” etc.  I’ll admit, I don’t know what Netflix’s streaming business is worth.

But one thing is for certain, if it did not bring out streaming it would have been dead in three to five years.  Now it has a fighting chance to survive and maybe even create value for shareholders.

I am a value investor, and so when I see a stock dangling at six times earnings I’d be lying if I told you that I did not have an inkling to seriously consider it for our portfolios.

But Best Buy is not a retailer that missed a fad (stacked the shelves with wrong-color shirts, etc.) – those sorts of situations often present great buying opportunities, as the problems are easily fixed.  Best Buy is a retailer that so far has missed a structural change that may make its business obsolete.

It is only cheap if the “E” projected for next year will be there.  So far the market is betting that it won’t, and I have no insight that encourages me to disagree with the market.

Vitaliy N. Katsenelson, CFA, is Chief Investment Officer at Investment Management Associates in Denver, Colo.  He is the author of The Little Book of Sideways Markets (Wiley, December 2010).  To receive Vitaliy’s future articles by email, click here or read his articles here.

Investment Management Associates Inc. is a value investing firm based in Denver, Colorado.  Its main focus is on growing and preserving wealth for private investors and institutions while adhering to a disciplined value investment process, as detailed in Vitaliy Katsenelson’s Active Value Investing (Wiley, 2007) book.

Reminder: The VALUEx Vail conference is June 20-22 in Vail.  This is not your typical conference – think of it as the TED of value investing.  Though this is a not-for-profit event, I hope what you’ll learn from attending will generate profits for you.  You can find out more about VALUEx Vail here.

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I was born and raised in Murmansk, Russia (the home for Russia’s northern navy fleet, think Tom Clancy’s Red October). I immigrated to the US from Russia in 1991 with all my family – my three brothers, my father, and my stepmother. (Here is a link to a more detailed story of how my family emigrated from Russia.) My professional career is easily described in one sentence: I invest, I educate, I write, and I could not dream of doing anything else. Here is a slightly more detailed curriculum vitae: I am Chief Investment Officer at Investment Management Associates, Inc (IMA), a value investment firm based in Denver, Colorado. After I received my graduate and undergraduate degrees in finance (cum laude, but who cares) from the University of Colorado at Denver, and finished my CFA designation (three years of my life that are a vague recollection at this point), I wanted to keep learning. I figured the best way to learn is to teach. At first I taught an undergraduate class at the University of Colorado at Denver and later a graduate investment class at the same university that I designed based on my day job. Currently I am on sabbatical from teaching for a while. I found that the university classroom was not big enough for me, so I started writing and, let’s be honest, I needed to let my genetically embedded Russian sarcasm out. I’ve written articles for the Financial Times, Barron’s, BusinessWeek, Christian Science Monitor, New York Post, Institutional Investor … and the list goes on. I was profiled in Barron’s, and have been interviewed by Value Investor Insight, [email protected], BusinessWeek, BNN, CNBC, and countless radio shows. Finally, my biggest achievement – well actually second biggest; I count quitting smoking in 1992 as the biggest – I’ve authored the Little Book of Sideways Markets (Wiley, 2010) and Active Value Investing (Wiley, 2007).
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