How Many Stores Can Best Buy Close?

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Best Buy Co. Inc. (NYSE: BBY) founder Richard Schulze

Source: thinkstock
, who was thrown off the retailer’s board, may be about to return with a new offer to buy out the company. Reuters reports that he will take his case to the board, with a bid below $8 billion, which shows how little future he thinks Best Buy has in its current state. Earlier estimates had the offer as high a $8.8 billion. Schulze says he has a plan for moving forward. The plan would have to include shutting down a number of stores.

The best way to turnaround Best Buy has to be making it competitive with rival Amazon.com Inc. (NASDAQ: AMZN). That is impossible. Amazon already holds the high ground in the online electronics sales industry, and there cannot be any reasonable argument it would have to abandon that place. Best Buy has no leverage to get more traffic to BestBuy.com. Best Buy cannot sell products at prices much below Amazon’s, unless it wants to lose huge sums in a battle it cannot win. Amazon has too many resources and too strong a brand. Bad public relations almost certainly have damaged Best Buy’s reputation with consumers, while Amazon’s is pristine.

Absent the chance to make up ground online, the only approach that may work at Best Buy is to make it smaller. Its revenue in its most recent quarter was $10.5 billion, down 3% from the same period a year ago. Same-store sales fell more than 3%. The company had paltry net income of $12 million. And Best Buy currently is up against its most important sales period — the holidays.

In the retail industry, not all stores are created equal. Best Buy has just over 1,100 stores in the United States. It has more than 2,800 overseas, where same-store sales fell 7% in the most recent quarter. Based on the law of averages, some Best Buy locations must be highly profitable while others must lose a great deal of money. With a net income of $12 million, that analysis has to be right.

Under the current circumstances, Best Buy’s fastest way to profitability is to close several hundred stores worldwide. That would leave locations that make a reasonable amount of money. Best Buy’s revenue would fall, but that would hardly matter to investors who would benefit from high margins at the locations that remain.

Schulze can press for an improved online presence and sales. It will not work. Even if Best Buy makes the most modest gains in e-commerce, it will not solve the company’s problem. Best Buy has expanded beyond the point at which it can make money, and it needs to reverse that as soon as it can. But Schulze already knows that.

Douglas A. McIntyre

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