Best Buy Starts to Get Better


Today, Best Buy moved a step closer to being the lean, mean North American machine that so many investors have been hoping for. The company sold off its stake in the Best Buy Europe business that it formed with Carphone Warehouse in 2008 for $775 million, made up of cash and stock in Carphone.

It's a big move for the company, which has been streamlining its operations and trimming back its footprint over the last year. While the European segment had seen an increase in sales recently, it also pulled gross margin down last quarter. Best Buy said that it had no plans to move out of any other international markets.

Why Best Buy left Europe
The company got a few things out of the sale, but the biggest two were a simplified business and an increase in the amount of available cash. Of the $775 million received in the sale, about $650 million came in cash. That will help Best Buy as it continues to spend money on restructuring its core business, focusing more on mobile devices in the U.S.

In the announcement, CEO Hubert Joly said, "After reviewing the business and spending time with our partners, we concluded that the timing and economics were right to enter into this agreement with [Carphone Warehouse]." That suggests that this move has been on the table for some time, and that the right environment finally came along.

In its last earnings call, Best Buy made it clear that Europe was relying heavily on both promotional and wholesale activities to keep its earnings up. Not only did that drag down margins, it meant that Best Buy had two very different business models -- the domestic and the European. Now that the company is free of that restraint, it should have a more unified business plan.

What's next for Best Buy
As always, Best Buy is fighting the beast that's now known as showrooming. In its most recent releases, the company has said that it believes a new strategy of competitive price-matching will help fight that trend. On the plus side, price-matching gives the company a better reputation for being competitive, which should drive more customers into the stores. Unfortunately, it will also result in lower margins.

A new study out of Deutsche Bank found that Best Buy customers were taking full advantage of the new price-matching, and that Amazon was the most often matched company. Those matches were coming on TVs and accessories, which means that while Best Buy may lose out on those lines, it should hopefully make up for it in add-on sales throughout the rest of the store.

As far as the international business is concerned, there's still a lot of work to be done in China and Canada. Best Buy saw comparable-store declines in both markets last quarter, and it's going to take a lot more work to get those businesses back up to speed. While the European sale is great news, I'll be looking for more good news internationally soon, or else the momentum could swing back against Best Buy.

The brick-and-mortar versus e-commerce battle wages on, with Best Buy caught in the middle. After what might have been its most tumultuous year in history, there are now even more unanswered questions about the future for the big-box electronics retailer. How will new leadership perform? Will a smaller store format work out for both the company and its brave investors? Should you be one such brave investor? To help answer all these questions, The Motley Fool has released a premium research report detailing the opportunities -- and the risks -- in store for Best Buy. Simply click here now to claim your comprehensive report today.

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