It seems as if everyone outside of the Best Buy (NYSE: BBY ) boardroom knew this morning's quarterly report would be terrible.
And it was.
Revenue slid 3% to $10.5 billion, weighed down by a 3.2% decline in comps. Profitability plunged 90%, but that's partly the handiwork of the store closures and layoffs that make it clear which way the company is heading. Back out all of the one-time knuckle slaps, and adjusted earnings still dived 55% to $68 million -- or $0.20 a share. Analysts were somehow holding out for a profit of $0.31 a share on $10.6 billion in revenue.
In short, the company that seemed to have legitimate buyout interest from its ousted founder earlier this summer at a price in the mid-$20s opened this morning at its lowest level in nearly 10 years.
What was Best Buy thinking?
When Schulze approached the board about taking the company private earlier this summer, he was reportedly told to hold off until after the company completed its CEO search and posted its fiscal second-quarter results.
Why would it do that? Bringing on a new CEO who would be jettisoned in privatization efforts would only lower what a potential buyer would be willing to shell out for the company. Waiting for another dreary report -- and that's all that Best Buy has been delivering for the past two years -- would only make Best Buy less attractive to the private-equity investors Richard Schulze would need in order to round up the balance of the buyout price for the struggling chain beyond his current 20% stake.
Did Best Buy think the market would forgive another quarter where Best Buy fades in relevance? Amazon.com (Nasdaq: AMZN ) operates on a different fiscal calendar, but net sales during its second quarter rose 29%, and analysts see a 28% pop during the current quarter. How does that make Best Buy's 3% slide look?
Did Best Buy think bringing in hospitality executive Hubert Joly would excite investors? Is the plan now to give anyone who buys a tablet a bedside chocolate mint?
The upside of anger
I heard an analyst on CNBC this morning argue that Schulze will have to go hostile if he still wants Best Buy. The analyst also suggests that the buyout bid will have to exceed his earlier range of $24 to $26 per share. The logic here is that investors have waited things out so long that they deserve a better price.
Waiting and rebuffing gentleman callers sure didn't benefit Circuit City shareholders.
The analyst may be right about going hostile, but there's no need for Schulze to go higher. The stock opened at $16.38 this morning. You have to go all the way back to 2002 to find the last time the stock traded this low. Do you really think the board is the one with the negotiating leverage here? Outside of Schulze -- who is probably bitter about being dismissed earlier this year and has too much pride to see his company rot away -- is there anyone out there holding out a bidding card?
Amazon obviously doesn't need physical stores. Wal-Mart (NYSE: WMT ) can just flesh out its consumer electronics departments as Best Buy stores close down. RadioShack (NYSE: RSH ) doesn't have the money, and things will get even uglier there when the fading small-box retailer locks horns with the Best Buy Mobile concept.
Outside of Schulze's Rolodex, don't hold out hope for private-equity making a bid here. There isn't a single scenario where Best Buy is worth more in three or five years than it is today, and that's going to scare away the smart money.
Off to the great unknown
If you think things can't get any worse, wait until tomorrow. The future of Best Buy isn't very promising, and even the board is starting to come around to that reality.
This morning Best Buy announced that it's suspending its stock buyback efforts. That's a sorry admission that the board has been wasting shareholder money through aggressive repurchases at higher prices on the way down to today's nine-year low. The consumer electronics laggard is also suspending its guidance.
Microsoft's (Nasdaq: MSFT ) Windows 8 was supposed to be the catalyst for a computing revival later this year, but industry watchers are no longer hopeful on that front.
Best Buy can't catch a break. Even the categories that are selling well -- smartphones, tablets, appliances, and e-readers -- are problematic. Appliances are infrequent purchases, and smartphone, tablet, and e-reader purchases are done with the intention of avoiding Best Buy's media department in the future, because the content is delivered digitally.
You would think Best Buy's board would get it. You would think it would realize that it has become the joke.
But no dice. It's not just guidance and the buyback that Best Buy is suspending: Apparently the company is also putting off reality.
"Best Buy" is anything but
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