Best Buy profit skids 90%

Best Buy's new CEO has his work cut out for him.

A day after tapping former Carlson chief executive Hubert Joly as its new leader, the electronics retailer reported that its net income plunged 90 percent in the second quarter from the same period a year ago, a far weaker performance than analysts expected.

Adding more uncertainty about its future, Best Buy suspended stock repurchases and will refrain from giving earnings guidance the rest of the year.

The latest financial report highlights the challenges for the world's largest consumer electronics retailer, which has seen sales declines two of the past three years as consumers turn to the Internet for more of their purchases. Adding to the distractions, Best Buy founder Richard Schulze continues his high-profile pursuit of the company.

Best Buy leadership has promised investors a major change in strategy, but with a new CEO, that plan may be months away. Some analysts say they are more concerned about long-term solutions than the latest quarterly report.

"Expectations are so low at this point," said Lauri Brunner, an analyst with Thrivent Asset Management in Minneapolis. "Giving investors an idea of where they are headed is the most important thing."

Joly, who spent four years as CEO of hospitality giant Carlson, will take over at Best Buy in September. In a call with analysts, Best Buy interim CEO G. "Mike" Mikan stressed that every effort would be made to ensure a smooth transition.

Best Buy posted sales of $10.5 billion for the second quarter. Absent one-time costs mainly associated with closing stores, profit was 20 cents per share. Analysts polled by Bloomberg expected earnings of 31 cents a share on revenue of $10.6 billion.

Sales at stores open at least a year, a key measure of a retailer's financial health, fell 3.2 percent. Sales at U.S. stores dropped 1.6 percent compared to last year, with declines in sales of mobile phones, notebook computers, gaming, digital imaging and TV.

Best Buy has been battling competition from Amazon and other mass merchandisers since the start of the recession. The company announced a major restructuring plan just before former CEO Brian Dunn resigned in April after allegations emerged that he had an affair with an employee. Schulze acknowledged he failed to alert the board to the allegations and stepped down as chairman.

Schulze, who owns about 21 percent of Best Buy stock, proposed to the board of directors that he buy the company for $24 to $26 a share, about $9 billion. But Schulze and the board have been at an impasse over the process for presenting a formal offer.

Citing the company's swooning stock price, Denise Chai of Bank of America Merrill Lynch said a future offer from Schulze will be substantially lower.

Best Buy has closed about 50 stores, reducing square footage by 4 percent, and slashed payroll expenses through layoffs. The company said it is seeing stronger growth in online revenue and touted deals with Verizon and a pilot with Minneapolis-based Target to put Geek Squad agents into stores, mostly in the Denver area.

"All that said, Best Buy clearly remains in a turnaround, which will take time to come out of," Mikan said.

The company must manage a leadership transition as well as cope with an industrywide slowdown in sales, which executives said was a function of shoppers waiting for new products in a time of shaky confidence in the economy.

Consumers remain stuck in a "decluttering, downsizing, needs-over-wants mode," said Thrivent's Brunner, who tracks large discretionary- and consumer-staple companies. That mind-set continues to create significant headwinds for Best Buy.

"There are a lot of moving parts around them," Brunner said, "but the sources of pain are relatively concentrated. They are struggling overall with too many stores and a strategy to target competition from Amazon."