Best Buy Has a Credibility Problem

What do Greenlight Capital's David Einhorn and a Best Buy (NYSE: BBY  ) compensation consultant have in common?

They both decided to wave bye-bye to Best Buy.

In Einhorn's case, it's simply an investing decision. The rock star hedge fund manager unloaded his stake in Best Buy during the second quarter, according to an investor note obtained by Reuters. Einhorn's fund posted a loss of 3.2% during the quarter as lucrative shorts -- including a smart call betting against Green Mountain Coffee Roasters (Nasdaq: GMCR  ) , which shed more than half of its value during the period -- weren't enough to offset the price declines on his long positions.

Einhorn admits to selling the consumer electronics retailer at a loss, but he should probably consider himself lucky.

An iconic hedge fund manager calling it quits on Best Buy is bad enough, but a consultant bolting is even worse.

Don Delves isn't a household name like Einhorn, but he was an independent consultant for the retailer's compensation committee for seven years before resigning last month.

Delves didn't comment publicly on his departure, but sources tell Bloomberg that he quit after Best Buy decided to give more than 100 managers retention bonuses that aren't tethered to performance targets. In other words, they are receiving bonuses just to stick around.

Think about that for a bit.

This is a company that has announced store closures and layoffs. Comps and profitability have been sluggish for two years. How is morale going to be when employees realize dozens of managers who watched this all happen are being paid more money without a tangible incentive to get it right?

For years, most observers have argued that Best Buy's biggest problem is Amazon.com (Nasdaq: AMZN  ) . The online retail leader offers lower prices than Best Buy in nearly every category -- without the pushy sales staff trying to tack on overpriced services and extended warranties.

However, it's starting to become clear that the real enemy here is Best Buy itself.

"Best Buy" is anything but
I entered a bearish CAPScall on Best Buy in Motley Fool CAPS last year. 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 Green Mountain Coffee Roasters, Best Buy, and Amazon.com. Motley Fool newsletter services have recommended buying shares of Amazon.com and Green Mountain Coffee Roasters. Motley Fool newsletter services have recommended creating a lurking gator position in Green Mountain Coffee Roasters. 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, except for Green Mountain. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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  • Report this Comment On July 25, 2012, at 1:12 PM, CM4C wrote:

    The author of this article really hit the nail on the head. Best Buy's biggest problem is indeed Best Buy. And how's this for employee morale. My husband worked for Best Buy for twelve years in various capacities. He was never fully appreciated. He was always expected to "go above and beyond" the scope of his job responsibilities in order to "prove himself" to his superiors in hopes of being promoted. At one point he was promised a corporate spot, but within a year it was forgotten about completely. In fact he was demoted instead of promoted for all his work. Now he is being forced out of his position yet again due to a restructure. He was given three weeks to apply for jobs within the company he was over qualified for and of course was not offered any position because he is paid over cap (due to the demotion without a pay cut) and keeping him employed goes against Best Buy's so called cost saving plan. Basically, Best Buy would rather give bonuses to corporate stooges than keep a twelve year employee that has only improved the company's operations. They're getting rid of part time employees that cost almost nothing, but desparately hold on to corporates employees who ultimately contribute very little to the company's earnings. This company seems to be wildly over managed. Perhaps "house cleaning" should start from the top. I'm just so glad I was smart enough to see the writing on the wall and advise my husband to dump his employee stock plan before it got to the point it is now.

  • Report this Comment On July 26, 2012, at 1:49 PM, 48ozhalfgallons wrote:

    CM4C: I am sorry for your loss. However, your husband's experience is not news in corporate reality. Any employee regardless of loyalty, dedication, talent and education always must consider his condition of employment as a moving target and prepare for at least 5 careers and pray to God that Social Security/Medicare remain intact.

    Corporate loyalty to its employees is a myth. Employee loyalty to a corporation is naive, and only a schmuck would believe that his loyalty and hard work will save the day. If a working couple today cannot live at 80% or less of their means, then their economic future will be dismal. Today's economy is such that the 20+% cushion will be consumed between jobs. I'm deeply sorry for reality.

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