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A Best Buy store in the United Kingdom.

Handout, Star Tribune

Best Buy to close U.K. stores

  • Article by: THOMAS LEE
  • Star Tribune
  • November 7, 2011 - 9:41 PM

Best Buy Co. Inc. certainly wants to turn that frown upside down.

First came the bad news that the Richfield-based company said it would close its lackluster big-box stores in the United Kingdom and that it will pay a hefty $1.2 billion to end its profit- sharing contract with Carphone Warehouse Group over its mobile stores.

But the consumer electronics giant offered an upside, announcing a joint venture with Carphone to advise international retailers on how to sell mobile products and services. It also said it will pay another $161 million to buy MindSHIFT Technologies Inc., a provider of data storage and other IT services to small to medium-sized businesses.

The flurry of activity indicates Best Buy's ongoing shift away from building expensive big-boxes to developing smaller format stores and selling services to businesses and consumers, two areas that offer more potential growth and profitability in the long term.

But Best Buy's decision to close down its 11 big-box stores in Great Britain is a tactical admission that its $2.1 billion joint venture with Carphone Warehouse, first announced in 2009, had not fully lived up to expectations.

Best Buy stock fell 85 cents, or 3.1 percent to close at $26.46.

Best Buy defended its strategy in Europe, with CEO Brian Dunn touting the announcement on a conference call as "all about taking Best Buy to where the growth is."

But with a weak European economy and tough local competition, the British stores struggled to gain traction, and British press had been rife with rumors that Best Buy would soon close them down. J.P. Morgan analyst Chris Horvers said Monday the move allows Best Buy to turn its attention to the shrinking "real estate footprint" of its 1,000 or so U.S. stores.

Best Buy said it would take a $250 million to $270 million charge in fiscal 2012 to close down its British stores. It will also assume another charge of $1.3 billion to write down the value of its Best Buy Europe operations.

Under their joint venture, Best Buy and Carphone Warehouse formed Best Buy Europe, in which each side owned a 50 percent stake. The company included Carphone Warehouse's 2,500 stores in such countries as Spain, France and Portugal, and new, large-format stores under the Best Buy logo in Great Britain.

The two companies had split Best Buy Mobile's profits evenly. Dunn said the company decided to buy out Carphone Warehouse's original contract so both sides can move beyond smartphones and focus on selling and connecting to other mobile devices like tablets, eReaders, and laptops.

Carphone Warehouse "has brought meaningful intellectual properties to us in how we connect around smartphones," Dunn told analysts. "And increasingly, this is moving into tablets, which we view as a new form factor for computing where we have deep, deep experience. And there is no doubt we are going to be able to go faster in our U.S. and Canadian [Best Buy Mobile] businesses in unleashing this team."

Best Buy Mobile stores will roughly generate $240 million to $280 million in pretax profits next year, or about 30 percent of Best Buy's domestic operating profits, based on sales of approximately $560 million.

Telecom giants like AT&T, Verizon, and Sprint pay Best Buy Mobile a "great bounty" to sell their data plans to mobile device customers, said Matt Arnold, a retail analyst with Edward Jones Investments in St. Louis. Best Buy Mobile is also more profitable because its smaller size and workforce require less capital, he said.

"Given [Best Buy Mobile's] success, the move will open the door to take [Best Buy and Carphone Warehouse's] partnership to the next level," Arnold said. "It's a nice opportunity."

With Global Connect, Best Buy and Carphone Warehouse hopes to take some of the magic of Best Buy Mobile and sell sprinkles of it to other mobile retailers around the world, especially Asia. Best Buy is already planning to open mobile stores within its Five Star electronics stores it owns in China. Since Global Connections is mostly a consulting service, the venture should be profitable because it requires little or no capital, Dunn said.

"It has opportunity," Arnold said. "We have to see if they have any takers."

Thomas Lee • 612-673-4113

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