Was Best Buy's Latest Decision a Bad One?

For Best Buy (NYSE: BBY  ) , the bad news seemingly has no end. Today, the company updated third quarter guidance, and announced the departure of the head of U.S. operations, Mike Vitelli. In the release, CEO Hubert Joly said, "One thing I have learned in helping turn companies around is that a business needs to have a nimble organization." The departure marks the beginning of a whole new structure for Best Buy, which the company hopes will be better attuned to customers and employees. If the stock price is any indicator, the market is doubtful.

Changes at the top, failure at the top
The company is moving to a new structure that focuses on the channel of delivery, instead of on geography. Now, Best Buy will operate two channels, online and retail. A similar move was recently made by Gap (NYSE: GPS  ) , though the circumstances for that restructure were less desperate. Best Buy's new forecast is for third quarter earnings per share to fall "significantly below the prior-year period." The company is blaming the fall on declining same-store sales and a growth in expenses. Investors were understandably troubled by the announcement, and the stock is down 10% at midday.

Best Buy has been on the rocks all year and, last quarter, it posted a 3% decline in same-store sales. Revenue also fell 3%, and the company brought Joly on board in September to try and turn the chain around. One of his reported strengths is in dealing with large, international brands and workforces. Joly's announcement today emphasized that the current structure was getting in the way of the company moving quickly and connecting with customers.

It looks more like Joly wants more control over the company. In the older structure, Vitelli would have had a lot of say in the management of the company, and changes could probably be held up at his level without too much oversight from Joly. Now, the heads of retail and online will report to Joly in a more direct fashion, giving the CEO the ability to quickly act on projects that he thinks are worthwhile.

The loss
What Best Buy is losing is a veteran retailer in Vitelli. As BB&T analyst Anthony Chukumba said, "The one thing that Joly does not have is retail experience. So you would think that he would really kind of lean on Vitelli." Vitelli came from 23 years with Sony, and he has been with Best Buy since 2004. The background on Joly's resume is largely from the service industry.

With Vitelli gone, Joly is going to be reliant on the new head of retail, Shawn Score. Score has 27 years of experience with Best Buy, and it's no surprise that he comes from the division of the company focused on mobile services and devices. In its last quarter, Best Buy sold fewer TVs, game consoles, and other large items, but saw a 35% increase in same-store sales for mobile products. Unfortunately, these lower ticket, lower margin products are not replacing the sales from the traditional electronics.

The bottom line
As odd as it seems, I don't think this move from Best Buy is a sign of desperation. Instead, I think Joly is trying to make his mark on a company that needs something to change. Best Buy continues to lose ground to Amazon (Nasdaq: AMZN  ) , and it needs to buy more time to grow the new businesses it's developed. One of the company's newest ventures is with Target (NYSE: TGT  ) , where Best Buy is staffing some stores with its Geek Squad. That's a model that shows a lot of potential, and it diversifies the range of services that Best Buy can offer.

But to get that program rolling, Best Buy needs to weather the next quarter with more strength than its recent announcement alludes to. It's new online price matching was undercut by Target's similar announcement, and it looks like the company has little to offer that Amazon can't match. That's why it needs to get its services department, including the Geek Squad, as strong as possible. It's a real differentiator, and could be the difference between a boom and a bust.

Hopefully the rationale behind the move will become clearer on November 1st, when Best Buy hosts an investor day to explain Joly's plan. Unless something magically happens -- and I'm talking about actual, Gandalf-style magic here -- I'm expecting Amazon to maintain its top dog position. You can get a full rundown on the company, along with a list of the three things investors much watch out for, by signing up for the Motley Fool's premium report on Amazon. We update the report as new information becomes available, so click here to get your copy today.


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