To top off an already eventful several days for the nation's largest consumer electronics retailer, Best Buy Co. withdrew its full-year earnings guidance Tuesday after reporting a 90-per cent drop in net income during the second quarter, dragged down by restructuring charges and weak sales.
The poor report comes a day after Best Buy named Hubert Joly, former CEO of the Carlson travel company and turnaround expert, as its new CEO and president. It was expected that Best Buy would pick someone with retail experience, and Wall Street didn't respond well, sending Best Buy shares fell 10 per cent.
And before that, the board and Richard Schulze over the weekend waged a public fight over the co-founder and former chairman's plan to take the company private.
Best Buy has been engulfed in mounting controversy since April when former CEO Brian Dunn resigned amid a company investigation into an "improper relationship" with a 29-year-old female employee. Schulze resigned as chairman a month later after the probe found that he knew about the relationship and failed to alert the board or human resources.
The series of bad news that has followed comes as Best Buy fights to reverse a decline in its business due to a weak global economy and consumers' changing shopping habits. Best Buy's stores are becoming unprofitable as customers increasingly use them to browse for electronics, then buy them cheaper online or elsewhere. On top of that, shoppers are no longer snapping up big TVs and computers at a fast clip like they used to, instead opting for smaller gadgets like cellphones and tablets.
In fact, during the latest quarter, U.S. sales growth in tablets, mobile phones, appliances and e-readers helped offset declines in gaming, digital imaging, televisions and notebook computers. Best Buy said the international business was dragged down by lower revenue in China, Canada and increased competition in Europe.
Overall, Best Buy earned $12 million, or 4 cents per share, in the quarter ended Aug. 4. That compares with $128 million, or 34 cents per share. Revenue declined nearly 3 per cent to $10.55 billion. Adjusted earnings were 20 cents per share, missing the 31 cents per share on revenue of $10.65 billion analysts had expected.
Revenue at stores open at least 14 months fell 3.2 per cent for the entire business, including a 1.6 per cent drop in its domestic business and an 8.2 per cent decline in its international division. Analysts had expected a 2.6 per cent decline for the total business.
Brian Sozzi, chief equities analyst for research firm NBG Productions, described the latest quarter's results as "ugly." He said that Best Buy management needs to turn around things quickly.
"Every day, the (business) model is changing, and it goes against Best Buy," he said.
And things don't seem to be getting any better for the company. Best Buy had said in May that it expected full-year earnings guidance to be in the range of $3.50 to $3.80, excluding restructuring charges. But the chain said Tuesday it was withdrawing its outlook to give Joly more flexibility and the opportunity to make decisions that will address broader challenges ahead.
Best Buy is counting on Joly to turn around the company. Joly, who is expected to take over as CEO in September, succeeds Mike Mikan, a board member who has served as interim CEO since April.
Mikan on Tuesday acknowledged to investors the challenges Best Buy faces. But he said that Joly, who has a track record of successfully turning around companies in the media, technology and service sectors, is up to the task.
He said consumers remain "very cautious" and sales in the industry may be dampened because some people are holding back on spending as they await new releases in Apple's new iPhones, tablets and gaming. But he said that Joly brings "tremendous experience to the job" and that he'll build on a turnaround plan that the chain has already started.
That includes steps the company has taken since before the scandal with Dunn. In March, it announced a major restructuring that includes closing 50 stores, cutting 400 corporate jobs and trimming $800 million in costs.
In early July, Best Buy said it would lay off 600 staffers in its Geek Squad technical support division and 1,800 other store workers. The company also has been shrinking store size and focusing on its more-profitable products such as mobile phones.
But analysts — and investors — have been impatient. Analysts say some of these changes are too late. They also say that Best Buy needs to close more of its big-box stores, which no longer are necessary since people have shifted from buying big computers and TVs to snapping up smaller items like tablets and mobile phones.
Wall Street has been equally unforgiving of Best Buy's timing. Best Buy shares have lost nearly 70 per cent of their value since their pre-recession peak of $56.66 in May 2006.
On Tuesday, shares of Best Buy fell 1.4 per cent, or 25 cents, to close at $17.91, following the 10-per cent decline on the day before when the announcement of the new CEO was made.
At the same time, the company is engaged in a public battle with its co-founder. Earlier this month, Schulze, who has a 20 per cent stake in the company, made a takeover offer for the chain, offering $24 to $26 per share. Best Buy had said it was considering the offer, which values the company at $8.84 billion.
Best Buy and Schulze went back and forth in public announcements over the weekend.
In a statement issued by Best Buy Sunday, it laid out certain terms for acquisition talks to proceed. Schulze rejected the terms, citing a company requirement that he forgo taking any offer directly to shareholder for 18 months as unacceptable. The time frame had been reduced to January.
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