Word on the street is Best Buy’s founder Richard Schulze would like to find a buyer willing to help turn around the struggling chain. But retail industry insiders question whether anyone would want to invest billions of dollars in the electronics retailer in its current state.
Schulze left his position as Best Buy’s chairman earlier this month and has reportedly hired the Credit Suisse Group to help him explore buyout options for the retailer. Schulze still owns a stake in the company valued at approximately $1.4 billion, but in order to present a viable buyout plan he would have to find a partner willing to put in anywhere from $6 billion to $9 billion of additional equity into the deal.
Given Best Buy’s lack of a clear turnaround strategy and its oversize store fleet, however, private equity players are likely to forgo such a transaction, according to Bob Phibbs, The Retail Doctor, a retail consultant based in Coxsackie, N.Y.
“It’s damaged goods,” Phibbs says of Best Buy. “The forces against them are huge. This is not a building brand and I don’t think it’s for lack of trying. It’s going to be a lot of money and how is [Schulze] going to find a guy willing to come in and do something different than what he’s been doing?”
Value proposition?
Private equity players have been investing in retail chains of late, including recent acquisitions of BJ’s Wholesale Club, kitchenware seller Sur La Table and apparel retailer Talbots. But they generally need to see some form of value proposition in the company, either through expansion potential or an attractive property portfolio.
At the moment, Best Buy offers neither. While it’s possible to envision a scenario where the chain reinvents itself as an experiential retailer in the vein of Apple, it’s still struggling to come up with the right strategy to turn itself around, says Doug Stephens, president of Retail Prophet, a retail consulting firm. In the first quarter, ended May 5, same-store sales declined 3.7 percent domestically and 10.5 percent internationally. Revenue per sq. ft. at U.S. stores stayed flat with revenue reported during the same period last year, at $854.
In April, the most recent month for which data is available, mall-based electronics retailers as a group averaged $1,937 per sq. ft. in sales, an increase of 27.6 percent over April 2011, according to ICSC.
“I think there is room in the world for Best Buy, but they have to chart a different strategy and make it a reality before venture companies say that this is a viable investment,” Stephens says. “It’s a lot of money and I think there’s more pain [ahead] for them before anyone starts looking at them as a potential buyout target.”
No flipping
Best Buy’s real estate portfolio doesn’t carry much appeal either. The company currently operates 1,105 big-box stores in the U.S., totaling 42.4 million sq. ft. It’s been trying to shed unprofitable locations, including plans to close 50 stores in calendar year 2012, but its big-box fleet remains bloated, according to Jeff Green, president of Jeff Green Partners, a Phoenix-based retail real estate consulting firm.
“It will be difficult for a buyer to reposition Best Buy because they have too much bricks-and-mortar square footage [and] much of this space is tied to long-term leases,” he says. “Best Buy is attempting to downsize most of these stores, but it has proven to be a long and difficult task for them.”
Meanwhile, there is hardly a shortage of big-box space on the market, making the possibility of Best Buy capitalizing on its closed stores less than likely.
“At the end of the day, U.S. retail is overbuilt by 20 or 30 percent,” says Phibbs. “It’s never going to go back to the go-go 80s. I don’t think real estate has proven to be a great strategy to buy a [retail] brand.”