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Was Best Buy's Latest Decision a Bad One?

Andrew Marder
October 25, 2012

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 on