Analysts are expecting some big changes from Best Buy

  • Article by: THOMAS LEE , Star Tribune
  • Updated: March 28, 2012 - 9:45 PM

The Richfield retailer reports fourth-quarter earnings Thursday morning.

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“Black Friday” at a Best Buy store in California. Analysts expect a restructuring that could include store closings.

Photo: Jae C. Hong, Associated Press

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Speculation is building among analysts that Best Buy Co. Inc. will unveil plans Thursday to cut costs as the company struggles to boost profits and recapture market share from competitors.

At least two analysts predict the Richfield-based retailer will announce a more aggressive restructuring strategy that could include store closings, relocating to smaller retail spaces, subletting existing stores and layoffs. The electronics retailer will report its fourth-quarter earnings at 7 a.m. Thursday.

A Best Buy spokeswoman did not respond to a request for comment.

Best Buy had previously told investors that it wanted to reduce its U.S. square footage footprint by more than 10 percent over the next three to five years. But Dave Strasser, an analyst with Janney Capital Markets, says the company will likely go further.

"We anticipate a more aggressive approach than that as the environment changes," Strasser wrote. "This will improve profitability and margins. We have to believe that management has seen the impact that this type of action had on the shares" of Lowe's and Home Depot.

Indeed, Best Buy stock seems to have already benefited from the reported restructuring redux. Since mid-March, Best Buy shares have jumped nearly 11 percent to Wednesday's close of $26.62.

UBS analyst Michael Lasser said a major restructuring plan could help better shape Best Buy's rather gloomy image of late.

"We think a bold step such as this would change the narrative on the story, and the debate would turn to whether or not it can work," Lasser wrote.

Best Buy needs to find ways to preserve its profit margins after CEO Brian Dunn last year said the company would shift its focus to battling competitors like Amazon for market share. In order for Best Buy to effectively promote its digital efforts and sell higher-margin services like Geek Squad, Dunn has concluded the retailer must first drive people to its stores.

Fighting for market share usually means discounting and smaller profits. If that's the case, Best Buy might need to subsidize its price cuts with cost savings from store closings and layoffs, analysts say.

At the same time, Best Buy wants to speed up its digital sales, one of the company's fastest-growing businesses, but a relatively small unit compared to revenue from the company's physical stores. Earlier this month, the retailer hired former Starbucks chief information officer Stephen Gillett to oversee its digital operations, including online and mobile offerings.

Thomas Lee • 612-673-4113

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