Best Buy Founder Resigns as Chairman, Share Price Tumbles

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Best Buy Co Inc founder Richard SchulzeBy Jessica Wohl and Phil Wahba

Best Buy (BBY) founder Richard Schulze said on Thursday he is exploring all options for his 20.1% stake in the electronics retailer, leading him to immediately relinquish his roles as chairman and a director.

Shares of Best Buy, rocked earlier this year by the abrupt departure of its CEO Brian Dunn amid a probe that later found he had had an improper relationship with a female employee, were down 8.3%, or $1.66, at $18.23 in morning trading.

"That's a lot of shares suddenly on the market, you have increased supply, that's going to drive the price down," said BB&T Capital Markets analyst Anthony Chukumba.

A leveraged buyout of Best Buy would not make sense, he said.

"Even as depressed as their share price is right now, to (make an offer for) Best Buy, you're talking about probably a $10 billion deal," said Chukumba. "That's a much larger deal than I think is feasible in the current market environment."

As of Wednesday, Best Buy's market capitalization was $6.56 billion.

"I continue to believe in Best Buy and its future - and care deeply about its customers, employees and shareholders," Schulze, 71, said in a statement. "There is an urgent need for Best Buy to reinvigorate growth by reconnecting with today's customers and building pathways to the next generation of consumers."

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Best Buy Founder Resigns as Chairman, Share Price Tumbles

Showrooming -- the troublesome practice for local store owners that finds potential buyers kicking the tires of products before buying them cheaper online -- isn't going away.

Amazon.com (AMZN) reported a 34% spike in net sales during its first quarter on Thursday. Best Buy doesn't operate on the same fiscal calendar as the leading online retailer, but analysts feel that the company's top line will inch less than 3% higher when it reports next month.

It's not Best Buy's fault. A company with the overhead of manning physical stores can't afford to sell at the prices that nimbler Web-based retailers can offer. The wide availability of the Internet as a research tool also makes the hands-on perspective that local retailers provide less necessary, and in some cases even less desirable.

Some real-world chains are fighting back through exclusivity. Cheap-chic discount department store operator Target (TGT) has been a strong player in stocking up on items that are only available through Target.

Best Buy doesn't have that luxury.

Best Buy confirmed on Thursday that it's killing Best Buy Connect, the retailer's private-label mobile broadband service. It never took off, and the service reportedly had just 11,000 customers. Yes, the company has private labels for home theater and other consumer electronics, but it's not as if the merchandise is considered unique. This isn't Sears (SHLD) with brand equity for its Craftsman tools and Kenmore appliances.

Walk into a Best Buy and check out the racks of CDs, video games, books, and movies. All four of those media platforms are losing physical appeal as those industries go digital.

In Thursday night's quarterly report, Amazon revealed that nine of the 10 best-sellers were digital products. Best Buy may think it's scoring a sale when it sells a tablet or a smartphone, but it's really simply handing over the tools that will result in that shopper relying less on in-store purchases.

Another nugget in Amazon's report is that 130,000 of the books in its virtual marketplace are exclusive to the Kindle Store. Yes, a lot of that is vanity press stuff from authors who couldn't land real publishing deals, but 16 of Amazon's 100 best-selling e-books were exclusive to its store.

Apple (AAPL), on the other hand, is the poster child of the modern ecosystem. The success of iTunes has turned Apple into the country's largest music retailer. There are now hundreds of thousands of apps in the company's iconic App Store.

Best Buy has tried its hand at digital distribution of music and movies -- even to the point of buying Napster and CinemaNow -- but that hasn't panned out. Brick-and-mortar chains just don't have the high-tech appeal to launch cool digital ecosystems.

The worst part about movies, music, books, and games going digital isn't just the empty space that Best Buy will have to fill. The company has enough sharp retail vets to put the space to work with store remodeling plans that are currently in the works.

The worst part of the migration is that these are the items that forced shoppers to come back to Best Buy. You may only need a new washer once every 10 years, but there are always new DVDs hitting the market every Tuesday. New video games, CDs, and books are also always coming out. As more people replace physical media with digital -- and you do realize that Apple and Amazon are selling millions of tablets every passing quarter -- Best Buy will be a less frequent stop for even its most loyal customers.

Best Buy conceded in its most recent report that it will have to get serious about lowering prices in the future. Its aggressive expense-shaving efforts will be partly passed on to shoppers in the form of better pricing.

"We intend to invest some of these cost savings into offering new and improved customer experiences and competitive prices," Best Buy explained last month.

The problem is that it will probably never be able to cut its overhead to the point where it's truly competitive with Amazon and even cheaper e-tailers. This will force Best Buy into sacrificing margins on products, but hoping to make a profit by selling extended warranties, obsolescence insurance, and Geek Squad services. It's a plan that sounds fine on paper, but consumers are already tiring of the hard sell during the checkout process for services that they may never need. If Best Buy sees this as its future, it's underestimating what shoppers do when they're annoyed.

They stop coming back!

hhgregg (HGG) and Conn's (CONN) are some of the rare survivors in this field, and it's because they key in on heavy appliances, furniture, bedding, and even lawn care equipment that's harder to secure cheaper online, given the bulk of the items.

Best Buy naturally sells appliances, but that's just 5% of its business. If Best Buy wants to emphasize big-ticket items that are purchased very infrequently -- thereby taking on the smaller hhgregg and Conn's -- it would probably have to close all but a store or two in each of its major markets. There just isn't enough business for these products to justify Best Buy's existing store base and square footage.

In short, it's not going to happen.

Best Buy may be in the process of closing nearly 50 stores over the next few weeks, but there will be more of that in the future unless trends reverse and positive catalysts emerge.

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Best Buy named Hatim Tyabji as chairman, two weeks earlier than planned. Tyabji has been a Best Buy director since 1998. He is also chairman and CEO of Bytemobile Inc and chairman of Jasper Wireless Inc.

Schulze previously planned to step down as chairman after the 2012 annual meeting on June 21 and remain a director through the 2013 annual meeting.

Best Buy said in May that Schulze would step down as chairman after he failed to tell the board about Dunn's relationship.

Schulze served as Best Buy's CEO, chairman and a director for 36 years, until 2002. Since then, he had been chairman and a director.

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