Can the 'Dream Team' Save Best Buy?

 | Mar 26, 2013 | 1:30 PM EDT  | Comments
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If you can't beat them, join them. After a failed attempt to take Best Buy (BBY) private, founder Richard Schulze was named chairman emeritus. This comes less than one year after Schulze, who holds 20% of the stock, exited as chairman due to withholding information from the board regarding former CEO Brian Dunn's inappropriate relationship with an employee.

It looks like everyone is willing to play nice now, after a period of high tension. And shareholders get the best of both worlds.

On one side are CEO Hubert Joly and new CFO Sharon McCollam (formerly of Williams-Sonoma (WSM)) leading the charge to cut costs, drive the lagging online business and increase accountability. On the last conference call, Joly described the quarter as "driven, not given." That seems like an appropriate characterization. A perfect example? Last quarter management returned unproductive inventory to vendors, freeing up $300 million in cash flow. Why wasn't anyone pressing this program before? We could also ask why BBY is built for growth in terms of costs. I don't think anyone would argue that growth is not on the horizon anytime soon. It seems like there is plenty of opportunity on the chopping board.

Re-enter Schulze as chairman emeritus, who brings to the table what the new team cannot: history and loyalty. Schulze also brings to the board former CEO Brad Anderson (he left June 2009) and his 37-year history with the company. Sounds like a dream team.

The Street agrees that the dream team can solve the problem, evidenced by a string of upgrades and daily praises. But here is the problem: Some things that cannot be controlled. We now "get" the cost-cutting story (we have gone through this before at BBY). We also understand the sense of urgency to drive conversion rates online, which lag behind Amazon's (AMZN) and represent probably the most significant revenue opportunity (we have heard this before, too).

What we cannot control is that price matching is the new reality, so volume may come at the expense of margins (fourth-quarter margins were down only 10 basis points but boosted by 30 basis points due to a warranty program). While there may be a need for a brick-and-mortar player, can BBY shrink capacity quickly enough? Is this more than a low-hanging-fruit story? For now, that seems to be enough for investors. But history shows us that comps will rule in the end.

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