Best Buy

Analysts take skeptical view of Best Buy
BBY
$17.765
-0.145 -0.81%
AMZN
$243.70
+4.25 +1.77%

Released : Wednesday, August 22, 2012 2:29 PM

NEW YORK -- Best Buy's shares were down for the third day in a row Wednesday, as investors continue to be bearish on the nation's largest consumer electronics chain.

Best Buy, which is grappling with a big spending shift to the Web, withdrew its full-year earnings guidance Tuesday. That came as it reported a 90 percent drop in net income during the second quarter, dragged down by restructuring charges and weak sales.

On Monday, Best Buy named Hubert Joly, former CEO of the Carlson travel company and turnaround expert, as its new CEO and president. It was expected that Best Buy would pick someone with retail experience, and Wall Street didn't respond well, sending Best Buy shares down 10 percent.

And before that, the board and Richard Schulze over the weekend waged a public fight over the co-founder and former chairman's plan to take the company private. Talks remain at a standstill.

Shares were down 13 cents to $17.78 Wednesday. Best Buy shares have lost nearly 70 percent of their value since their pre-recession peak of $56.66 in May 2006.

In a note published Wednesday, Michael Pachter, an analyst at Wedbush Securities, downgraded Best Buy's stock to "Underperform" from "Neutral." He also believes that Best Buy's shares will be trading at $14.50 in the next 12 months. He had previously expected $20.

"We believe the lack of fiscal 2013 guidance adds to uncertainty over the company's future," wrote Pachter. "In our view, the lack of guidance reflects the company's lack of confidence in its core business, and highlights the many difficulties that it faces."

Pachter also described Joly's resume as "unimpressive" and believes he "lacks sufficient experience to engineer a turnaround at Best Buy." Joly doesn't have any prior experience in retailing, but has a track record of successfully turning around companies in the media, technology and service sectors.

Pachter also noted that Best Buy has been slow to reduce its big-box footprint in the U.S. Time is of the essence as competition from online retailers particularly Amazon.com is only heating up. Amazon.com has rolled out distribution centers in California, and New Jersey. It is expected to offer same-day delivery in California, New York, New Jersey and Pennsylvania in the next year at prices that are lower than Best Buy's, even with sales tax, he noted.

"As Amazon grows its business in these states, we expect continued erosion of Best Buy's market share," Pachter wrote.

Dan Wewer, an analyst at Raymond James, wrote in a report published Wednesday that he was maintaining his "Market Perform" rating on Best Buy. While he believes that the company faces big challenges, he was encouraged by the board's pick of Joly.

Best Buy's naming of Joly, he believes, "may serve as a catalyst for an accelerated and more innovative turnaround strategy."

Still, Wewer reduced his full year earnings estimate for fiscal 2013 to $3.07 per share from $3.65 per share.

Best Buy has been engulfed in controversy since April when former CEO Brian Dunn resigned amid a company investigation into an "improper relationship" with a 29-year-old female employee. Schulze resigned as chairman a month later after the probe found that he knew about the relationship and failed to alert the board or human resources.

The series of bad news that has followed comes as Best Buy fights to reverse a decline in its business due to a weak global economy and consumers' changing shopping habits. Best Buy's stores are becoming unprofitable as customers increasingly use them to browse for electronics, then buy them cheaper online or elsewhere. On top of that, shoppers are no longer snapping up big TVs and computers at a fast clip like they used to, instead opting for smaller gadgets like cell phones and tablets.

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