Five Ways Best Buy May Be Able to Turn Around Its Business

June 11, 2012 — -- intro: With news that Best Buy's largest shareholder, founder and chairman Richard Schulze, has resigned from the retailer's board, Best Buy's future may hang in the balance even more than previously.

With competitors like Amazon, Walmart, and Costco offering lower prices, Best Buy's sales have floundered. The company announced in March the closure of 50 stores.

Shares of Best Buy closed up 2.25 percent on Friday to $19.98. Its 52-week high is $32.85.

Schulze, 71, controls 20.1 percent of Best Buy shares and has the ability to move the company toward becoming a private firm.

Until 2002, Schulze was Best Buy's CEO, chairman and director for 36 years. Last month, Best Buy announced Schulze would step down as board chairman in June 2012 after the company discovered he failed to inform the board about the allegation former CEO Brian Dunn had an inappropriate relationship with a female employee. Serving as interim CEO is Mike Mikan, who was a Best Buy director since April 2008.

Before Thursday's announcement that he would resign immediately, Schulze planned to stay as director through the company's 2013 annual meeting.

The company said it will unveil a more formal long-term strategy later this summer. So what's an electronic big box store to do these days?

Here are five ways Best Buy, whether public or private, could begin to turn around its business.

quicklist: title: Cut prices. text:

"At the end of the day, what consumer electronics shoppers are really looking for are the lowest priced products," said R.J. Hottovy, Morningstar's equity analyst.

Even if pricing parity is achieved, Hottovy said he has a "hard time" envisioning a scenario in which Best Buy's operatingmargins don't continue on a downward trend toward the 2 to 3 percent range.

Morningstar has designated Best Buy with a "negative outlook."

quicklist: title: Provide better service. text:

Hottovy said Best Buy is trying to differentiated themselves based on services, but he said "that's a tough sell."

Best Buy has marketed its exclusive tech support, Geek Squad, acquired in 2003, as the first national 24-hour task force with "20,000 trained professionals servicing all of your tech needs."

Stores also feature Magnolia home theater departments in the store, complete with couches and specialists to answer questions about sound systems and larger-than-life televisions.

But customer service in the rest of the giant stores has been lacking, with too many products and not enough sales people trained about them.

"We think the lowest prices will win out in consumer products," Hottovy said.

quicklist: title: Strengthen online presence. text:

Best Buy allows customers to buy online, skip the shipping charge and pick up orders in stores, but some items are excluded, like music, DVDs, special orders, select video games and "online only" items, according to the Best Buy website.

That's a big problem if the retailer wants to compete with the likes of Amazon.

Schulze

"There is an urgent need for Best Buy to reinvigorate growth by reconnecting with today's customers and building pathways to the next generation of consumers," Schulze said in a statement upon his resignation.

quicklist: title: Close more stores. text:

Though the company announced the closure of 50 stores, Hottovy and other analysts say that is nearly not enough.

As recently as the 2012 fiscal year, the company opened 135 new stores in the U.S. for a total of 1,103 stores in the U.S. by the end of the fiscal year. The store also has about 300 Best Buy Mobile stand-alone stores.

"Although we acknowledge they've taken a lot of good first steps to change business, closing stores and refocusing on the customer experience and online channel, to this point we haven't seen measures that are nearly aggressive enough to impove business and address two big issues," Hottovy said.

First, Best Buy needs to catch up or get ahead of aggressive competitors like Apple, Costco and Walmart.

Second, the company needs to wake up to the fact that customers are buying more media products digitally.

"Once upon a time, DVDs and CDs would be required in-store but they can now be easily downloaded," he said.

quicklist: title: Have smaller stores. text:

If the company doesn't close more stores, it can also downsize them.

Best Buy's management has committed to reducing the square footage of its traditional big-box format stores during the next three to five years through store closings, subleasing and increased smaller-format openings.

"Ultimately, we believe additional store closings and a more competitive digital media platform will be necessary to return the company to delivering excess economic profits," Hottavy said in a note to investors on Thursday.

Otherwise, products that aren't selling lead to "unproductive square footage in their store," he told ABC.

Those products are slower at turning merchandise or have lower profit margin.

"The end game is reducing square footage – whether that requires closing stores, rotating or adopting smaller formats, not necessarily decreasing the number of units. But there are just too many square units for the business," he said.

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