Best Buy (BBY) shares were strong in early trading on Tuesday driven by the company's decision to pull the plug on European expansion plans. The embattled Minnesota-based electronics retailer said it is selling out to joint venture partner Carphone Warehouse for roughly $775 million in cash and stock.
Best Buy CEO Hubert Joly says the retreat shouldn't be taken as a sign that the company is pulling back from all foreign markets; only the ones that don't make financial or strategic sense.
Joly's move illustrates the advantage of bringing a fresh set of eyes to the corner office. An entrenched CEO would likely have given more rope to a partnership generating more than $5.5 billion in revenues and is less than 5 years old. To Wall Street the European excursion was just a distraction from rotting operations in the US. Killing such legacy operations are exactly what turnaround CEOs are supposed to do.
As Joly chips away the dysfunction at Best Buy, investors are left to wonder if there will be anything left when he's done. Lee Munson of Portfolio LLC thinks Best Buy is going to have to keep shrinking in order to stay alive.
"Best Buy used to be a place where you could go and get great information about the products and I think that's slipped over the years," Munson says in the attached video. "To get your profit margins up you've got to provide a value added experience for people."
As a trade Best Buy has come a long way in a short amount of time. Shares are up over 120% year-to-date, driven by the end of distracting talks of buyouts and faith in Mr. Joly's ability to find whatever value there may be in the chain. Munson is a skeptic on the stock until he sees an improvement in US fundamentals and margin expansion.
To existing shareholders a healthy dose of contraction is cause to applaud; shares are up almost 10% for the day.
