Best Buy facing hard times as more layoffs loom

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Today, Best Buy announced plans to lay off 250 workers at its corporate headquarters in Richfield, Minnesota. Conversely, the retailer is adding 210 new corporate positions, yielding a net loss of 40 employees. Following a difficult third quarter, with a 77% drop in profits, Best Buy is hoping that these fresh layoffs will enable it to weather the current downturn in consumer spending.

On paper, this should be a great time for Best Buy. Following the January 16th demise of Circuit City, the big blue box store was the last man left standing, and analysts were quick to predict a 7% bump in sales. The general wisdom held that approximately 30% of Circuit City's $7.5 billion in annual sales would soon be flowing through Best Buy's doors, a figure that moved William Blair to raise the company's earnings target from $2 to $2.55.



While financial writers sang funeral dirges for Circuit City, many were quick to point out that, for reasons ranging from inventory control to customer service, Best Buy was a better store, a better bet, and far more likely to weather the storms of an economic downturn.

Even so, it's a hard time for companies that specialize in big-ticket luxury purchases, and Circuit City's massive inventory liquidation seems likely to torpedo Best Buy's sales in the short term. Moreover, although many customers still prefer to buy their big-ticket electronics in stores, an ever-increasing number are moving their purchases to the internet.

On the bright side, Best Buy recently expanded its retail potential by purchasing the Jiangsu Five-Star Appliance Company, the third-largest home appliance retailer in China. This move will give it access to 161 more retail outlets and deep penetration into a largely-untapped consumer base.

In the short term, however, Best Buy is facing hard times. In December, amid declining same-store sales, the company offered a voluntary severance package to 4,000 of its corporate employees. The plan was quite generous, granting 7.5 months of severance pay, and one year of health care, life insurance, and outplacement service. While 500 employees, or 12.5% of the company's workforce, took advantage of the offer, the reduction wasn't sufficient to offset the company's predicted revenue losses in 2009. The employees laid off in today's cuts will receive a comparable package, with six months of severance and a year of health care and life insurance. They will also be eligible to apply for the company's 210 new positions.

Combined with a general uptick in the market, today's layoffs helped boost Best Buy's stock by 38 cents to $28.10.
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