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Best Buy Sheds Musicland

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By LouAnn Lofton (TMF Bling)
June 16, 2003

Sometimes businesses make really stupid decisions. That's what Best Buy (NYSE: BBY) did two years ago when it acquired mall-based music and movie retailer Musicland. Today, with its disposal of Musicland, it has redeemed itself.

Originally, Best Buy had intended to grab younger customers through Musicland's web of mall locations, but the plan never played out that way. In what can only be described as colossally bad timing, Best Buy got into the music business just as CD sales really started to slide. When Musicland's chains (Sam Goody, Suncoast, and Media Play) started shifting more to DVDs and video games, those lower-margin items weighed on profits.

The confluence of the music business' difficulties and the growing presence of lower-margin goods squeezed results. Musicland's sales dropped to $1.73 billion in fiscal 2003 from $1.89 billion the prior year. The division recorded a 2003 operating loss of $72 million vs. operating profits of $31 million in 2002. And the number of its locations also dropped, to 1,195 at 2003's year-end. The chain had 1,309 locations when Best Buy bought it.

Best Buy finally cried "Uncle!" and put it up for sale back in late March. Today, it announced that it has unloaded Musicland to private investment firm Sun Capital Partners.

Best Buy practically gave the chain away, which is hardly surprising. Sun Capital acquired all of Musicland's stock, and instead of giving Best Buy cash, it assumed responsibility for Musicland's liabilities and lease obligations.

You have to applaud Best Buy for not slumping along with Musicland on its back because of some misguided hubris. The company recognized that it flubbed and decided to act.

Of course, it would have been nice had it never shelled out for it in the first place, but that can't be helped now. What's important for Best Buy, and its shareholders, is what the future holds: The company can now get back to focusing its efforts and resources on its core consumer electronics business.

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