Best Buy Is Dunn For

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Why do so many stocks rally when even their own CEOs give up?

Shares of Best Buy (NYSE: BBY  ) moved higher this morning after the company revealed that CEO Brian Dunn is stepping down.

This morning's press release claims that the parting was cordial. "There was mutual agreement that it was time for new leadership to address the challenges that face the company," reads the press release.

Then again, it's hard to take the press release seriously when the very next paragraph is a chipper quote from Dunn himself. "I have enjoyed every one of my 28 years with this company, and I leave it today in position for a strong future," he claims.

We know the future won't be strong. Best Buy is in the process laying off hundreds of its employees at the corporate and support level. It will close 50 of its superstores, focusing instead on smaller mobile-centric openings.

Perhaps nothing is more telling than its choice to temporarily replace Dunn at the top. Board member Mike Mikan -- a former health-care services executive -- will serve as interim CEO until the board lands a new helmsman.

Why not a health-care pro? Best Buy is ailing at best and dying at worst.   

Scan and scram and slam
It doesn't take a retailing guru to figure out the problem at Best Buy. You can call it "scan and scram" or showrooming, but (Nasdaq: AMZN  ) is eating Best Buy's lunch by offering speedy delivery at prices that Best Buy can't touch.

Forget the sales tax advantage that Amazon and smaller e-tailers have over physical stores in many states. That's chump change that will eventually go away as revenue-hungry tax codes get beefed up. The real problem is that it's impossible to run brick-and-mortar stores and sell stuff at comparable prices to nimble Web-based retailers. Folks can wait two days for a laptop. Best Buy bulls who say that shoppers can't wait are starting to rue those words as the digital delivery of books, CDs, DVDs, and video games is faster -- and often cheaper -- than a trip out to the store.

Best Buy's strategic response to its gradual obsolescence is to "increase points of presence, while decreasing overall square footage." Closing superstores and opening Best Buy Mobile locations even though that the same approach is crushing RadioShack (NYSE: RSH  ) is a dead end. If there is a way out -- and there may very well not be -- it won't be found by following RadioShack.

Chasing Conn's (Nasdaq: CONN  ) and hhgregg (NYSE: HGG  ) into appliances, furniture, and other areas that are harder to Amazon-ize will help, though even that is only a temporary solution.

Dunn's doozy
The company is in a downward spiral. It can't compete on prices. Matching prices means harassing customers with insulting extended warranties and protection services to turn a profit, even though it's the hard sell that's turning them off even sooner. 

It's bad enough that you're overpaying for an HDMI cable at Best Buy. Do you really want to have to shake your head when the pitches come for product warranties, Best Buy card applications, Geek Squad tech support memberships, and the ridiculous buyback protection program?

Dunn didn't do himself any favors three months ago, defending the company in Best Buy's corporate blog. It was brazen but delusional, and the employees and customers let him have it.

Here's a tip for the next CEO: Don't post on the company blog. If you do, turn the response feature off until you're comfortable that the reactions will be largely positive.

Spoiler alert: The reactions will not be largely positive.

Best Buy is not a good buy
I entered a bearish CAPScall on Best Buy in Motley Fool CAPS four months ago. The call is beating the market so far -- because Best Buy is not. If you want to play nice with the trends that will pay off in the future, forget Best Buy and begin reading up on the stocks that smart investors are buying. It's a free report, but it will only be available for a limited time, so check it out now.

The Motley Fool owns shares of RadioShack. Motley Fool newsletter services have recommended buying shares of hhgregg and The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

Read/Post Comments (2) | Recommend This Article (11)

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  • Report this Comment On April 10, 2012, at 3:24 PM, Myrddraal wrote:

    Here is what Best Buy should have as a business model, because warehousing 100's of Millions of dollars worth of inventory is not working:

    1) Have "ONE" of the items in a store, so people can come look at it, touch it, play with it,... whatever.

    2) Person places an order for items. Best Buy processes order in 2-3 days.

    3) Person picks up merchandise from store when it gets there.

    Last point to make, charge-back to the manufacturers for "display" space in store and basically off-set the lease/cost of the store to the manufacturers.

    The current model doesn't work - and will continue to lose money. Smart shoppers go to the store for research - then go online to buy what they want - ultimately at a lower price than what Best Buy offers. The End.

  • Report this Comment On April 15, 2012, at 12:35 PM, cabanadj wrote:

    What Best Buy needs to do is focus on what sets it apart from amazon and internet sites GEEKSQUAD !

    yes you can buy that TV at amazon, get it home then what ? Do you know who to set it up ! and optimize it. All new electronics come with tons of menus that need to be set up correctly or you don't get the value of the product that you bought. So think before you buy on the internet.

    I have been to peoples homes because they can't hook things up they bought a $4,000 HD SMART TV and they have a sat. or cable box hook to the TV with a coax cable i wanna say serves them right !

    best buy employee

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