Best Buy Co. laid off 400 employees Tuesday at its corporate headquarters in Richfield, the first major salvo in CEO Hubert Joly’s campaign to transform the lumbering $50 billion giant into a more nimble retailer equally at home in malls and cyberspace.
Joly made the downsizing move just days ahead of what could be a crucial point in the company’s 47-year history. Founder Richard Schulze faces a Thursday deadline to make an offer to buy the company. Schulze’s decision will have profound consequences on the future of Best Buy, which is only starting to revive itself after losing much ground over the past few years to online retailers such as Amazon.
Best Buy said the 400 job cuts announced Tuesday are on top of the 400 corporate jobs the company eliminated last summer. Best Buy still maintains a global workforce of 160,000, including about 8,000 in Minnesota.
Best Buy said the layoffs were part of a series of cuts that saved the company $150 million, and more cuts are in the works this year to streamline operations. In a statement, Best Buy made clear that the moves were just “the first phase” in a continuing effort to eventually shave $750 million off the company’s balance sheet in the years to come.
“They are making some dramatic changes,” said David Strasser, a retail analyst at Janney Capital Management. “There is a lot more accountability now.”
Best Buy’s move was also notable for what the company decided not to cut — its stores and Blue Shirt employees. Despite calls from some critics that Best Buy needs to close stores and reduce its workforce, Joly and his leadership team have decided to invest more money into its American stores through remodeling and employee training.
“Best Buy remains focused on delivering its customer promise: to provide the latest and greatest devices and services in one place, impartial and knowledgeable advice, the ability for customers to shop when and where they want,” the retailer said in a statement.
The company declined to make executives available for interviews.
The latest layoffs and Schulze’s impending buyout deadline are the latest twists in a drama that began nearly a year ago.
In May, the Best Buy board forced Schulze to resign as chairman after it determined the founder withheld information about allegations that then-CEO Brian Dunn had an affair with a female employee. Soon afterward, Schulze said he wanted to acquire the company and enlisted former CEO Brad Anderson and former President Al Lenzmeier to help him. He also recruited a group of private equity firms to finance the deal, including Texas Pacific Capital, Leonard Greene & Partners and Cerberus Capital Management.
At the time, much of Wall Street believed G. “Mike” Mikan, who was named interim CEO, would get the job permanently. But in a surprise move, Best Buy in September named Joly, Carlson’s CEO, as its new leader.
Joly has since worked hard to improve Best Buy’s relationship with Schulze, who said the company needed better leadership when he began his pursuit of the company. At the behest of the board, Joly had arranged for Schulze’s buyout team to speak to executives throughout the company. Joly also kept Schulze updated about key hires, including Sharon McCollam as chief financial officer and Shawn Score as U.S. retail chief.
In November, Joly outlined his “Renew Blue” strategy to investors, a program that could help the company generate about $1.7 billion in additional operating income by reducing costs and boosting sales.
In fiscal 2012, Best Buy paid about $41 billion in selling, general and administrative costs, which includes its corporate workforce, in North America alone. That’s an enormous amount even for a company as big as Best Buy, analysts say. Reducing that cost by just 5 percent could yield savings of $400 million, Joly noted.
But Renew Blue isn’t just about cutting costs. The company must grow sales through its stores and website. For example, in fiscal 2012, the company converted only 1.3 percent of the 1 billion Web visits to bestbuy.com into actual sales. Boosting that performance by just 1 percentage point could generate an extra $250 million in operating income.
However, the real opportunity lies within Best Buy’s 1,000 or so stores in the United States. The company has spent millions of dollars retraining its Blue Shirt employees in a manner based on its highly successful Best Buy Mobile format.
The Blue Shirts “are the last people they want to lay off,” said Strasser, the analyst.
Best Buy said it would match competitors’ prices for the rest of the year. In addition, the company is trying to devote more store space to higher-growth products like appliances, smartphones and tablets. Taken together, Best Buy estimates, these moves could bring in another $350 million.
Stores get protection
That’s why Best Buy is protecting its Blue Shirts and store base, analysts say.
“They want to invest in the stores,” said Colin McGranahan, a retail analyst with Sanford Bernstein & Co. “Cutting stores never made any sense. When you start to cut into customer facing costs [like stores and employees], there always be a negative sales impact.”
Joly’s approach sharply contrasts with his predecessors, Mikan and Dunn. In early 2012, under Dunn, the company closed 50 big-box stores. A few months later, under Mikan, Best Buy cut 2,400 jobs, including 600 Geek Squad tech support specialists and 1,800 store employees.
That’s not to say Joly will not cut stores. The company recently said it will close 15 stores in Canada, including seven Best Buy big boxes and eight Future Shops. But Joly has made it clear that he will not dramatically slash its U.S. store count. For one thing, it would cost Best Buy a lot of money to terminate a lease before it expires.
Under McCollam, who is also in charge of the company’s real estate portfolio, Best Buy will look for ways to renegotiate rents, move stores to smaller locations, or sublease space. Such moves could save the company $125 million over three years and add 25 cents per share to earnings, Alan Rifkin, a retail analyst with Barclays, wrote in a recent research report.
The Renew Blue program already seems to be paying off. The company said sales at stores open for at least a year in December were unchanged from the same month in 2011, a stronger than expected performance given intense competition from Wal-Mart and Amazon.com. Analysts also expect robust January sales.
As a result, Best Buy stock since December has jumped over 40 percent to Tuesday’s close of $16.46. The higher stock price may complicate any bid from Schulze, who founded the company in 1966 as a fledgling music store in St. Paul.
Schulze will have to pay significantly more to purchase the company than when the stock was trading at closer to $12 a share, which may scare off his investors. Analysts have said it could cost somewhere between $5 billion and $10 billion to buy the company.
Whether Schulze ultimately makes a bid for Best Buy by Thursday’s deadline remains unclear. Now that the company no longer appears to be in crisis, Schulze and his team are weighing other ways to strengthen his sway over the company without buying it.
In a nod to the building speculation about a Schulze bid, Best Buy decided to push back its earnings announcement and conference call with investors from Thursday to Friday.