Best Buy's holiday sales lift hopes for buyout

  • Article by: THOMAS LEE , Star Tribune
  • Updated: January 11, 2013 - 9:10 PM

Same-store December results held even with 2011, a sign that the retailer was able to hold off Amazon.com and Wal-Mart.

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Mike Ersfeld, general manager of a Best Buy store in Eden Prairie, carried a customer's basket full of products to a checkout desk.

Photo: Marlin Levison, Star Tribune

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Zero growth isn't usually cause for celebration. But given the dismal predictions for Best Buy Co. Inc.'s holiday sales, it gives the company good reason to exude a little more confidence.

The Richfield-based consumer electronics retailer said Friday that sales at stores open for at least a year in December were flat compared with the same month in 2011. It was viewed as a modest victory for Best Buy considering the fierce competition from Wal-Mart and Amazon over the holidays.

"I think we can conclude that flat is pretty good in this environment," said Stephen Baker, an analyst with market research firm NPD Group. "Clearly, things are not as bad as people want to believe about Best Buy."

More importantly, Best Buy's relatively strong holiday performance appears to justify its recent decision to extend the deadline for founder Richard Schulze to buy back the company to February. Schulze was supposed to have submitted a bid by Dec. 15, a deadline both sides described as final.

But at the last minute, the board requested an extension so Best Buy and Schulze could review holiday sales data before Schulze makes an offer. Some analysts suspected Best Buy had anticipated that the numbers would be good, which would help reassure Schulze's private equity investors that the business had stabilized and perhaps boost the purchase price.

Of course, Best Buy ran the risk of poor holiday sales, which would surely torpedo its stock price and possibly scare off Schulze's investors. But thanks to robust online growth, heavy investments in employee training, and a new online price-match policy, the company generated $9.9 billion in U.S. sales last month, which amounts to flat same-store sales growth vs. December 2011.

"One of our first priorities of our [turnaround] strategy is to stabilize and then begin improving our comparable-store sales," CEO Hubert Joly said in a statement. "Our holiday selling strategy allowed us to deliver these results. While it will be a journey with ups and downs, we are focused on becoming an increasingly effective multichannel retailer."

What makes the Best Buy holiday performance even more impressive is how the company held its ground without sacrificing its profit margins even as industry sales of computers and flat-screen televisions, two key product categories, continue to lag.

Unit sales of flat-panel TVs declined 1.5 percent with average selling prices dropping 8 percent to a record-low $364, according to NPD. And despite the launch of Windows 8, the new operating system did little to boost holiday PC sales or reverse the long decline of Windows-based notebook computers. From Black Friday to the end of the year, unit sales of Windows notebooks fell 10.5 percent, NPD said.

For investors, the real question is whether Best Buy has done enough to help secure a Schulze-led buyout. Some major investors think it probably will take several more months of similar performance to convince Schulze's private equity partners -- Texas Pacific Capital, Leonard Greene & Partners, Cerberus Capital Management -- that the company truly has turned a corner.

A source close to Schulze told the Star Tribune that the founder still intends to submit a bid in February or possibly this month.

One major area of concern is the company's ability to produce free cash, which Schulze needs in order to pay off the billions of dollars he will likely borrow to finance the deal. Best Buy said it now expects to generate about $500 million in free cash in fiscal 2013, down from its previous estimate of $850 million to $1.05 billion. But company officials attribute the reduction to a one-time event relating to its holiday inventory.

In any case, Schulze, his investors and the board now feel better about the company's prospects, said David Strasser, an analyst with Janney Capital Management.

"The hostility between Schulze and the board is over," Strasser said. "It's time to negotiate a deal."

Thomas Lee • 612-673-4113

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