Behind the turmoil, Best Buy shows upside

Don't count out Best Buy just yet.

Though it is beset with the distractions of leadership turmoil and a slumping stock price, Best Buy Co. Inc. remains a global powerhouse -- a company that sells more televisions, computers and tablets than any other retailer in the world.

Combined with its investments in e-commerce, Geek Squad and smaller mobile stores, Best Buy has ample time and money to thrive in the Internet age, just as it conquered traditional retailing with its ubiquitous big boxes, industry analysts say.

"Best Buy remains the only consumer electronics category killer out there," said Carol Spieckerman, president of Newmarketbuilders, a retail consulting firm. "I still think there's a huge opportunity for them to take advantage of their stores."

To be sure, Best Buy faces myriad challenges. The company has been struggling to grow sales as shoppers migrate to the Internet. Its stock price continues to fall, closing Friday at $18.02. Over the past couple of months, the retailer has lost several key leaders, Geek Squad founder Robert Stephens, Chief Marketing Officer Barry Judge and international finance chief Dave Deno.

Former CEO Brian Dunn resigned in April amid a board investigation that he carried on an inappropriate relationship with a female employee. The investigation eventually concluded that founder and Chairman Richard Schulze withheld information about Dunn's behavior from the board. As a result, Schulze will relinquish his chairman post next month and his board seat in 2013.

Yet Best Buy still has plenty of advantages, first and foremost its 1,100 big-box stores. While sales at stores open for at least a year have been falling, they still generate impressive numbers.

In 2011, Best Buy's average sales per square foot of retail space totaled $847, according to Janney Capital Management. Comparable rivals don't come close: Target ($293), PetSmart ($227), Home Depot ($299) and Lowe's ($255). Best Buy also generates a hefty operating profit of $41 per square foot. By comparison, Target's operating profit per square foot totaled $20. As a result, Best Buy generates about $1.5 billion a year in free cash flow.

Best Buy stores "sell way more stuff than people give them credit for," said Stephen Baker, vice president of industry analysis for consumer research firm NPD Group. "They drive significant revenue, and that kind of [revenue] just doesn't go away overnight."

Smaller-store format a hit

Best Buy also dominates in almost every major consumer electronic category. For example, the retailer is the country's top seller of tablets, Windows and Apple notebooks, and flat-panel televisions above 50 inches, according to NPD data. Last year, Best Buy saw its share of smartphone sales increase by 50 percent.

Some analysts blame Best Buy's weak sales growth on manufacturers for not making anything new and exciting to sell. Best Buy normally benefits from big product launches, such as Apple's next generation iPad and iPhones and Microsoft's upcoming Windows 8 operating system.

People are spending less on consumer electronics because they see less-compelling products, said Christopher Horvers, a retail analyst with JPMorgan. As a result, Best Buy has way more space than it needs and therefore must shrink, Horvers said.

Enter Best Buy Mobile. The smaller-store format, developed in partnership with Carphone Warehouse, has been a big hit for the retailer by focusing mostly on tablets and smartphones and connecting those devices to the Internet. Best Buy expects such "connections" to grow by 15 percent this year.

"It's a good format," said Colin McGranahan, a retail analyst with Sanford Bernstein & Co. "They have built a compelling platform for consumers."

Analysts say carriers such as AT&T, Verizon and Sprint pay Best Buy a good deal of money to sell their data plans. The company doesn't break down specific numbers for Best Buy Mobile. The format will roughly generate $240 million to $280 million in pretax profits this year, or about 30 percent of Best Buy's domestic operating profits, based on sales of approximately $560 million, according to Carphone Warehouse filings.

Best Buy now operates about 305 stand-alone Best Buy Mobile stores in the United States and plans to open 100 more this year. Best Buy also plans to open Best Buy Mobile shops within existing big-box stores, including its Five Star chain in China.

While the format can't entirely replace the sales of a big-box store, Best Buy Mobile will help insulate the company's profits as it moves to reduce its retail space.

The Geek that roared

But perhaps Best Buy's most valuable asset is not a format, but rather a name: Geek Squad. Ever since Best Buy purchased the little-known computer repair firm in 2002, Geek Squad has been the public face of Best Buy as it seeks to recast its image from a merchant of electronics to a merchant of expertise.

Geek Squad has grown from 60 employees and nearly $3 million in sales to the world's largest tech-support operation with annual revenue that exceeds $1 billion, analysts say.

Best Buy has used Geek Squad to expand its highly profitable service offerings. Today, Geek Squad technicians do everything from installing and connecting devices to performing energy audits and customizing cars.

Geek Squad has now set its sights on the $40-billion-a-year small-business market. In March, Geek Squad said it will partner with third parties to offer tech support to small businesses, including repair services, data backup and network security. Last year, Best Buy acquired MindShift Technologies for $175 million. The company, based in Waltham, Mass., provides information technology expertise, including cloud services, to small businesses.

Geek Squad has proved to be an enduring brand, said Burt Flickinger, managing director of Strategic Resources Group, a consulting firm in New York.

"Geek Squad is still Best Buy's salient strength," Flickinger said. Geek Squad agents "have a high level of product, consumer and technological knowledge that Best Buy is now using to upsell to corporate customers. Geek Squad is still better than what competitors have."

In a way, Geek Squad is Best Buy's raison d'être, analysts say. True, Amazon is rapidly gaining market share, but the Internet retailer can't yet provide services to its customers.

"Customers still want to see the products," McGranahan said. "They still need solutions and services. Amazon can't solve problems for you."

Best Buy has its work cut out for it. As the retailer inevitably closes stores and lays off workers, Best Buy needs to convince investors and customers that it is still the No. 1 place to shop for consumer electronic-related goods and services, analysts say.

"While there are challenges ahead," Baker said, "Best Buy remains the dominant retailer and in the best position to succeed in the coming years."

Thomas Lee • 612-673-4113