Best Buy, the American multinational consumer electronics corporation, was in for a shock on Wednesday, May 25, 2016, when its stock lost some sheen owing to a downgrade in rating that it received from Deutsche Bank, as reported by Benzinga. The investment bank’s analyst, Mike Baker, lowered the company’s rating from buy to hold, reflecting poor investor confidence. Consequently, the target price of the stock also saw a decline of $6 from $38 to $32.
The consumer electronics retailer, which is a leading provider of technology products, services and solutions, as reported by Yahoo! Finance, was founded in 1966 and headquartered in Richfield, Minnesota. Best Buy currently has a market capitalization of $9.65 billion and, apart from the U.S., where it is presently based, the company also actively operates in Canada and Mexico through two segments: domestic and international It offers products through 1,200 large-format and 400 brick-and-mortar stores, websites and call centers.
The poor rating which triggered the development seems to have resulted from faulty business decision-making, which the company has resorted to in the recent past.
This is aptly reflected in the following three reasons that Baker cited for the downgrade, as reported by Benzinga, the CWRU Observer and CNBC alike:
The primary concern is that long-time and highly popular CAO/CFO Sharon McCollam, who, according to CEO Hubert Joly, “has already helped the company save $1 billion annually till now, with another round of $400 million in cuts underway,” is expected to make an exit from the company on June 14, 2016.
McCollam, who joined Best Buy in December 2012, was a popular face among the retail executives, besides being “the key architect behind the company’s turnaround and cost savings initiatives,” as stated by JP Morgan’s Chris Horvers on Tuesday, May 24, 2016. Her imminent departure seems to have taken away some of the sheen from Best Buy’s stock and has left it unappealing. This is evident from Horvers’ comment that “the loss of McCollam should be troubling to investors.”
The exiting CFO would be replaced by the company’s current Chief Strategic Growth Officer, Corie Barry, a 16-year veteran who has handled several corporate finance and operations roles. However, McCollam will remain with Best Buy in an advisory role until January 28, 2017, to help the firm undergo the new leadership transition smoothly.
This automatically indicates even the company’s cognizance of the fact that, despite Barry’s excellent qualifications to fill the position, she is a less proven candidate to step into McCollam’s shoes, considering her predecessor’s past performance record, something that the investor community seems to have quickly deciphered.
The secondary concern is that the company could see potentially less cost-cutting in the future than is actually required to reinvest in competitiveness. This is despite having had a “robust and well-executed” cost-cutting program, which was designed by its top management for helping the firm recoup its lost market share. This is because the company witnessed a decline of 2.6 percent in its CAGR on account of dwindling sales figures, which are down from $42.6 billion to $39.4 billion.
Finally, the consumer electronics firm is heavily relying on the mobile category for witnessing improvements in its 2H sales outlook, which, according to CNBC, accounts for nearly 50 percent of Best Buy’s U.S. revenue. According to Baker, this “may be a risky proposition,” especially since that particular business has seen a sequential decline, with the company’s comparable sales in the domestic computing and mobile phone segment facing a decrease of 3.5 percent in the first quarter of 2016. The fact that this slump is an improvement over the 6.8 percent drop witnessed by the company in the fourth quarter of 2015 does not help, since it is more pronounced than the dip experienced in the previous year.
Alhough the company will need to take some time to acclimatize itself to its new leader, the above scenario definitely indicates that Barry has a two-fold daunting task: to fill the void created by McCollam’s departure and to restore investors’ shaken faith and confidence in the company.
By Bashar Saajid
Benzinga.com: Three Reasons to Downgrade Best Buy
Benzinga.com: Analyst: Selloff In Best Buy’s Stock Due To Management Change
CNBC: Best Buy and Macy’s really aren’t so different
Yahoo Finance: Best Buy Co. Inc. – Business Summary
CWRU Observer: Best Buy Co. Inc. (NYSE:BB) Got Downgraded
Top, Featured and First Inline Image Courtesy of Mike Mozart’s Flickr Page – Creative Commons License
Second Inline Image Courtesy of Kaleb Fulgham’s Flickr Page – Creative Commons License