This week, Best Buy announced fast-track plans to sell its Musicland operations, which include 736 Sam Goody stores (500 or so are mall stores, the rest are rural locations), 383 Suncoaststores and 76 Media Play locations. The sale follows a round of 128 store closings Best Buy announced for the division in fourth quarter 2002. Wall Street analysts say selling the underperforming division will allow Best Buy to refocus on its core business -- big-box electronics -- and return to profitability.
While Musicland saw modest profit levels in 2002 and flattening sales in 2003, Best Buy as a whole has outperformed its peers, weathering the tough economy with tight expense controls and successful promotions campaigns, analysts say. Best Buy has 12 months to sell the entire entity before being required to put the assets back into its profit and loss statements. "While this is not entirely 'new', the aggressiveness of the action is a positive surprise, as some believed that a complete exit of the business was unlikely," says Deutsche Bank Securities analyst Michael Baker in his report on the announced sale. "Our view had been, the greater the magnitude of the exit from Musicland, the better. After all, it's a money losing business, with trends likely to get worse than better."
Best Buy bought Musicland in January 2001 for $696 million as an additional avenue of growth and expansion; a decision management has come to regret. Best Buy was aware of the competition pre-recorded music retailers faced from the Internet, but the company planned to shift Musicland's product mix toward the fast-growing video game and DVD categories.
But music downloading proliferated at a faster pace than anticipated, and changes in merchandise mix were only moderately successful, according to Thomas Wiesel Partners analyst Kelly Chase. In fourth quarter 2002, Musicland's sales decreased some 15 percent to $580 million, with same-store sales declining 13.3 percent. Chase says the Suncoast Video chain is Musicland's only profitable operating segment, with almost all losses stemming from mall-based Sam Goody stores.
"Given industry-wide and business-specific trends, Best Buy may experience some difficulty attaining a multiple similar to what it originally paid for the Musicland business," Bear Stearns analyst Dana Telsey notes in her report.
So who's a likely buyer for Musicland? Chase says Trans World Entertainment. The chain operates more than 900 stores under the FYE, Coconut's, Strawberries and Planet Music brands. Trans World generated $1.3 billion in sales last year and has close to $225 million in cash on its balance sheet and debt of only $9.5 million. Other potential buyers include Tower Records and Virgin Megastores.