These Two Retailers Need to Dump Their Money-Losing International Operations

Best Buy (NYSE: BBY  ) and Staples (NASDAQ: SPLS  ) have both been trying to turn around their respective businesses while their comparable-store sales continue to decline. But international operations have been the weakest points for both companies, and shedding those businesses in order to focus on the US could help both retailers' turnaround efforts. Best Buy has already rid itself of its European operation and now it's looking to do the same in China, while Staples stubbornly holds onto its money-losing international business. Here's why both companies should exit their underperforming international markets and focus on the United States.

Best Buy has the right idea
Best Buy's turnaround efforts have been making progress in the United States, but its international operations remain a drag on the company. In April last year, Best Buy sold its stake in its European operations for $775 million, which strengthened its balance sheet as it rid itself of a business with about $5.5 billion in annual revenue and immaterial profit. This allowed CEO Hubert Joly to focus on turning around the business in the United States without having to worry about the struggling European economy.

Best Buy still has operations in Canada, Mexico, and China, and recent reports suggest that the company is looking to sell its Chinese operations. In fiscal 2014, China represented a small portion of Best Buy's total revenue:

Geographic Segment

Fiscal 2014 Revenue (Millions)

United States

$35,831

Canada

$4,522

China

$1,806

Other

$251

Source: Best Buy 10-K

Best Buy's international operations are far less profitable than its US operations, and its comparable-store sales have been declining more rapidly in international markets. During fiscal 2014, the US contributed $1.12 billion of adjusted operating profit, or 3.1% of revenue, while international operations contributed $48 million, or just 0.7% of revenue. In the most recent quarter, while comparable-store sales in the U.S. declined by 1.3%, the company recorded a much larger decline of 5.8% in international markets.

While operating in Canada and Mexico may make sense, Best Buy should not focus on attempts to compete in China. In the United States, Best Buy has the advantage of being the only national consumer electronics retailer left standing besides the rapidly collapsing RadioShack, and that scale is very important. With just 190 locations in China, Best Buy doesn't have the scale to sell commodity products at a profit.

If Best Buy sells the Chinese operations at the same percentage of sales that it got for its European operations, the company could get $250 million, and this would add to its already strong balance sheet. This could lead to share buybacks later this year, as management has already indicated with its recent dividend raise that Best Buy is in good enough financial shape to return more cash to shareholders.

Staples needs to focus on the US
Staples is dealing with a contraction in demand for the office supplies it's known for, and its retail stores performed poorly during the most recent quarter. Its comparable-store sales declined by 4% in the US as growth in new product categories has yet to make up for declines in others, and the company recently announced the planned closure of 225 stores. Two bright spots in the US were the commercial delivery segment, which grew sales slightly in the quarter, and online sales, which rose by 6%.

As bad as the U.S. business seems right now, the international business is doing worse. While Staples' US business is profitable, the international operations are dragging down its profitability. During the first quarter, it reported $229 million of operating profit in the US while the international segment recorded an operating loss of $25 million, more than twice the loss it saw in the first quarter of 2013.

Staples has advantages in the U.S. due to its scale, but with international operations making up just 17% of its total revenue, it makes little sense for Staples to continue to lose money abroad. Fixing both the US business and the international business at the same time would be a difficult task, and selling off its international operations makes a lot of sense. If Staples could sell its operations at the same price-to-sales ratio that Best Buy got for its European operations, then the company could fetch nearly $600 million. That would give Staples breathing room while it works through its currently tough situation in the United States, and it would allow management to focus solely on its most important market.

The bottom line
Both Best Buy and Staples have the advantage of scale in the United States, but attempting to compete internationally makes little sense for either company. Margins abroad are far lower, or nonexistent, for both companies compared to the domestic market, and turning around the businesses in the United States will be a difficult enough task on its own. Exiting the international businesses will immediately boost profits and free management from dealing with multiple problems at once, and both of those things are good for shareholders.

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