Quick to pounce on the struggling Best Buy (NYSE: BBY ) , many lambast the recent choice of Hubert Joly to head the retail electronics store. Sure, Joly has little to zero retail experience, but that’s exactly why the company’s selection makes sense: retail is dead, long live retail!
A firm decision
Best Buy had to select a CEO. After former CEO Brian Dunn, and founder and chairman Richard Schulze left earlier this year due to a scandal, an interim CEO was put in place. But, that title alone speaks to the uncertain future of the company. Establishing a CEO without the interim nature at least gives investors, employees, and customers a sense of some permanence to the company.
Should Best Buy have waited until figuring out its back and forth dialogue about a potential buyout with Schulze? I think the value of having an established CEO is a good hedge against the possibility that buyout talks don’t end well.
Has establishing a CEO hurt the chances of a potential buyout? Probably not, based strictly on additional costs. Schulze is reportedly trying to put together a $10 billion deal to take the company private. According to former CEO Dunn’s involuntary termination compensation, he would have received a little over $3 million. Even if Joly’s contract gives him three times the payout if he’s involuntarily removed, it would only represent about 0.1% of the deal value.
The $24 to $26 per share that the private buyout offered shareholders is a nice premium, but for long-term investors, the stock was at those levels less than six months ago. Additionally, even though shareholders won’t have a stake in it anymore, what could Schulze offer the company after a buyout? Yes, he made the company the largest electronics store in the country, but as quarter after quarter proves, a new retail game is needed.
Schulze presided over the expansion of the store, more than doubling locations over the past decade. This will be the first year, at least since 2002, that Best Buy will not increase the number of warehouse locations. The company will need different thinking and management to survive in the new retail climate, and in a period of rebuilding instead of outright expansion.
Joly doesn’t have retail experience, and that will help him think outside the (big) box. As seen, even JCPenney’s (NYSE: JCP ) Ron Johnson, known for his retail mastery at Apple, has had trouble with turning around the traditional retailer. After getting rid of coupons, opting instead to always discount items, same-store sales dropped more than 20% in the last quarter. Johnson’s move to get rid of the retail staple of coupons shows just how little previous experience matters -- big, bold, and different ideas are needed to fight off the demise of brick-and-mortar stores.
Currently, Best Buy’s plan seems to be based on smaller footprint stores. Either management forgot about Radioshack (NYSE: RSH ) , or it thinks it can race to the bottom faster. As opposed to Best Buy, Radioshack has been closing stores over the past decade, with about 18% fewer stores since 2002. Radioshack also has a partnership with Target (NYSE: TGT ) for its Target Mobile centers. The mobile stores are unprofitable, but Radioshack hopes to improve that by working with Target to improve staffing, and adding prepaid cell phones.
The CEO Best Buy deserves
Joly’s previous experience ranges from video games, information technology, travel management, hotels, and restaurants. If there’s one thing he understands from his former employer, it’s customer service -- something that Best Buy desperately needs to differentiate itself from online competitors, like Amazon.com (Nasdaq: AMZN ) . Instead of having brick-and-mortar stores be a liability, he could turn it into an asset, and leverage the fact that a trip to Best Buy comes with human interaction as opposed to a few clicks on a computer. Otherwise, Amazon will continue to enjoy its pricing advantage, while delivering an experience many prefer to waiting in a physical line.
If you don’t believe in Joly shaking things up for the better, then you can watch Best Buy’s climb or descent from the sidelines. Meanwhile, take a look at three Peter Lynch-style stocks in your copy of our free report: “Middle-Class Millionaire-Makers: 3 Stocks Wall Street’s Too Rich to Notice.”