Schulze's best falls short of buy, Best Buy financials impress

Best Buy's future is less cloudy today -- at least the immediate future.

For now, founder Dick Schulze has dropped his months-long quest to buy the company and take it private. The retailer also reported improved financial results for the quarter that included Christmas. The company posted a loss of $400 million, much smaller than the $1.8 billion loss in the same quarter a year ago.

Schulze had a deadline of midnight Thursday to make an offer for Best Buy. Friday morning CEO Hubert Joly told analysts a bid never came. He said the company also turned down Schulze's overtures to have private equity firms invest in the company.

"Dick introduced to the company several impressive private equity sponsors, who all expressed interest in an investment in Best Buy," Joly said. "The costs of these investments, however, were determined to be excessive and dilutive to our existing shareholders."

Both sides were terse in describing the proposal, but it appears Best Buy would have had to issue new stock to the private equity firms, which would have diminished the value of current shareholders' stock.

Schulze was not available for an interview, but in a statement he said it was envisioned that each of three private equity firms would get a seat on the company's board of directors and that Schulze would nominate two members. He said the private equity firms would have provided significant capital, expertise, talent and experience to help with Best Buy's turnaround efforts.

Schulze added that he has not decided whether to make use of his right to nominate two people for the company's board.

With his quest for ownership over for now Schulze said Best Buy deserves a chance to implement its own plan. No one is more interested in the success of the Best Buy than he is, Schulze said.

Few people would question that. Schulze does own about a fifth of Best Buy's stock.

"I believe he will have some involvement with the board," said R.J. Hottovy, retail analyst with Morningstar. "Although there are rumors that he wanted to be reappointed as chairman, it sounds like that probably is not going to happen."

Schulze mounted his buyout campaign last year after he was ousted as chairman and chose to leave the company. He had been censured for not reporting former CEO Brain Dunn's relationship with a female subordinate. An internal investigation found the relationship was inappropriate.

The net loss reported today was largely due to some $1 billion in restructuring and other one-time accounting charges. Excluding those items, Best Buy earned about $900 million from its operations. That number was significantly better than Wall Street expected and was the second time in two months Joly has delivered a welcome surprise.

Hottovy said the quarterly performance indicates Joly's efforts to transform the company are getting traction. Among other things, the retailer ended a long stretch of sales declines at U.S. stores open more than 14 months. Hottovy noted U.S. online sales rose 11 percent to $1.3 billion.

"It was actually a pretty solid quarter for Best Buy," he said. "There was a lot to like and it really does give me a lot of conviction in Hubert Joly and team. This management team is much more engaged, a lot more focused on turning around this business. It is leaps and bounds from where the company was a year ago."

The fourth quarter was Joly's first full quarter as CEO.

Best Buy matched competitors' prices more aggressively during the period. Some analysts worried that would cannibalize profits but the company indicated the hit was not very great. That bodes well for Best Buy, said Edward Jones retail analyst Brian Yarbrough.

"That was the big concern that Amazon was going to compete them away and for them to be competitive they would give away all their margin and profitability," Yarbrough said. "This shows that it is possible for them to compete and still have a decent level of profitability. It's only a quarter. But it definitely looks like they're maybe heading in the right direction."

The company has embarked on an effort to cut costs by more than $700 million and strengthen itself in key areas such as mobile device and online sales. As part of that effort, the company this week announced it is cutting 400 headquarters jobs.

But cost cutting alone is not enough, said retail consultant Davidowitz.

"The real job is ahead and that is to reconceptualize your business into something that can survive with Amazon and Walmart," Davidowitz said. "If it's not done, they won't be around in a few years."

Best Buy is still a retailing powerhouse, but acknowledges its transformation will be hard as it deals with tasks from reconfiguring its stores to catching up with Amazon online. But Joly promises it will be an exciting journey. No more so, in all likelihood, than for the retailer's more than 160,000 employees.

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