“Showrooming” Trend Runs Over Best Buy

If there’s one word that strikes fear into the hearts of brick-and-mortar retailers, it’s “showrooming.” That’s where customers come into the store, have a look at an item and then buy it online for less money—often from a competitor like Amazon.com (NasdaqGS: AMZN).

Showrooming is tough for retail chains to fight because they’re up against websites that don’t have the overhead costs—such as paying sales staff and building and maintaining stores—that chain stores face. Retailers can fight back by matching online sellers’ prices or improving customer service, but both of those also increase their costs.  

A June study by comScore found that 35% of Americans showroom when they’re making purchasing decisions. Of those, 50% live in urban areas, and their average age is between 25 and 34 years old. The retailers with the most to lose from the trend? Sellers of apparel and consumer electronics.

That puts Best Buy (NYSE: BBY) in a particularly tough spot. The company, which operates 1,400 mostly big box electronics stores, estimates that 40% of its customers visit its outlets with no intention of buying anything at all. Worse, the Best Buy website is an also-ran in the online electronics market, with just a 14% share, trailing second-place Wal-Mart (NYSE: WMT), with 22%, and leader Amazon, which dominates with 60%.

How Best Buy Lost Its Way

If that wasn’t a big enough challenge, Best Buy has been facing a long list of internal problems—many of which are self-inflicted—in the past year.

In March, the company announced plans to slash $800 million in costs and close 50 of its stores in the wake of a disastrous earnings report. Then, just two weeks after announcing that plan, CEO Brian Dunn resigned. “There was mutual agreement that it was time for new leadership to address the challenges that face the company,” said Best Buy in its statement announcing the departure.

Investors reacted negatively to the news. The company’s choice as a replacement didn’t seem to inspire confidence, either, as Investing Daily’s Jim Fink wrote at the time:

“Best Buy’s new interim CEO is a member of the board named Mike Mikan, whose background is in health care. Excuse me? How does a health care background help you run a consumer electronics company? It doesn’t. No wonder Best Buy’s stock fell 5.9% on Tuesday when the story broke. I think the negative reaction wasn’t just about Dunn’s resignation but also disappointment in the selection of Mikan.”

But that was just the beginning: it was later revealed that Dunn, who is married, had actually resigned from Best Buy after an investigation revealed that he had had an inappropriate relationship with a female employee.

To top it off, when board chairman and company founder Richard Schulze found out about this relationship in December 2011, he kept it quiet instead of bringing it to the board’s attention—a move that also cost him his job.

“Talk about a palace coup,” said Sanford Bernstein analyst Colin McGranahan.

Blue Christmas Looms for Best Buy

The company has since hired Hubert Joly, who led corporate turnarounds at Vivendi’s former video game business, tech firm EDS and Carlson Wagonlit travel, as its new CEO. Joly plans to combat showrooming by matching online retailers’ prices throughout the Christmas shopping season. He’s also expanding the company’s “Geek Squad,” which offers product knowledge and helps customers solve computer problems.

In addition to the service improvements, Best Buy is testing a new, smaller-concept store to reduce its overall square footage. It’s also shifting toward sales of smartphones and tablets to cut its reliance on larger items, like TVs. However, the cost of both the restructuring and price matching will put further pressure on its profits in the coming months.

Meanwhile, the company’s business continues to deteriorate. The stock has fallen 53% in the last 12 months, to its current level of $12.92.

In its latest quarter, Best Buy lost $13 million, or $0.04 a share, compared to a profit of $173 million, or $0.47 a share, a year earlier. Excluding restructuring costs, the company earned $0.03 a share, falling well short of the consensus forecast of $0.12. Sales were down 3.5%, to $10.75 billion. Same-store sales fell 4.3%. That marked the company’s ninth same-store sales decline in the last 10 quarters.

Best Buy’s cash reserves are also dwindling. It ended the quarter with cash of $309 million, down sharply from $2 billion a year ago.

Best Buy’s Only Hope? Go Back to the Future

In the background is the possibility that Schulze, who still owns 20% of Best Buy, will lead a buyout of the company and take it private. He is apparently working with three private-equity firms on such a deal. His group had been considering a buyout price of $24 to $26 a share, but given the stock’s recent plunge, that figure is likely to be much lower.

Even so, a deal still may not come to pass. Bloomberg Businessweek recently reported that Best Buy’s plunging share price could be making it harder for Schulze to firm up his bid. In August, he received the company’s permission to examine its financial information for a period of 60 days; he has reportedly asked for a 30-day extension.

“Schulze is an insider and doesn’t need more time for due diligence,” Erik Gordon, a business and law professor at the University of Michigan in Ann Arbor, told Bloomberg. “He needs more time to line up financing. Unfortunately for Schulze, the time he needs to line up solid financing is working against him because the news at Best Buy is getting worse.”

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