Rumors that founder and former chairman Richard Schulze may attempt to buy the entire company generated some investor enthusiasm recently. He owns 20.1% of outstanding shares. Best Buy probably does not have the earnings to support a leveraged deal at a price Schulze and any buyout group would have to pay. Based on Best Buy’s current market capitalization of about $7.3 billion, Schulze would need to offer a 50% premium to match the stock’s 52-week high. An offer of $11 billion would be very difficult to support based on the huge retailer’s annual net income of about $500 million.
The only way Best Buy can regain investor confidence is to demonstrate that management realizes it has too many stores to retain high margins. Best Buy made $158 million in its most recently reported quarter on revenue of $11.6 billion. Best Buy has 1,335 locations worldwide. It stands to reason that a retailer with such a tiny margin has a number of stores that operate at a loss. There is no justification for keeping all of those locations instead of concentrating on ones that make a substantial amounts of money. Best Buy could signal that it understands store volume is not the key to better profits and a higher stock price. Per-store profit is.
Best Buy will need to lay off many more than 2,400 to show it understands it has too many stores and will act accordingly.
Douglas A. McIntyre
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