Best Buy: Forget This 'Personal Conduct' Nonsense, Let's Talk About the $2.4 Billion That Was Flushed Down the Toilet
Best Buy CEO Brian Dunn resigned due to a personal conduct probe, but that should be the least of shareholders' concerns. Plus a note on Nokia.
On Tuesday morning, Best Buy (BBY) announced that CEO Brian Dunn resigned due to "mutual agreement that it was time for new leadership to address the challenges that face the company." Furthermore, Best Buy specifically noted in the press release that, "There were no disagreements between Mr. Dunn and the company on any matter relating to operations, financial controls, policies or procedures.
However, the company followed up with a juicy revelation: Its board of directors is investigating Mr. Dunn's "personal conduct."
So what does that mean? Well, it appears that he didn't engage in any kind of financial fraud.
But did he make a pass at his secretary?
Did he swipe a $50 HDMI cable from a Best Buy warehouse?
Did he admit out loud that extended warranties are a rip-off?
Or did he do the unthinkable and order a TV from Amazon.com (AMZN) because of the great prices and fast delivery?
But it doesn't really matter, because I think Best Buy shareholders should be talking about Mr. Dunn's financial conduct -- specifically, the fact that the company wasted a whopping $2.4 billion on stock buybacks over the past two years under his watch.
Wiser men than I have noted the folly of throwing good money after bad.
Well, check out this table indicating quarter by quarter, just how aggressive Best Buy has been in buying back its stock on the way down:
And here's the same data, presented as a chart:
All told, over the past seven quarters, Best Buy has lost $767 million on that $2.4 billion cash outlay.
Now, unlike many companies that have aggressively bought back stock, Best Buy has actually managed to decrease its share count, thus boosting earnings per share.
And it's not as if Best Buy's on the verge of bankruptcy -- it generated $2.5 billion in free cash flow last year.
However, that $2.4 billion could come in handy right about now as Amazon continues to ratchet up the pressure with its "screw the margins" business strategy, and as multiple key product categories (TVs, video games, physical media) continue to decline.
Furthermore, Apple (AAPL) continues to expand its amazingly-productive retail strategy, sucking in an awful lot of consumer-electronics shoppers, easily offsetting the positive impact of Best Buy selling Apple products. And finally, if and when Apple announces a television set, it will likely freeze up that entire product category, further damaging near-term sales.
Plus, given that Best Buy's been reporting one stinky quarter after another, who knows just how long that strong cash flow can hold up. (See: Best Buy: Weak Sales, Weak Margins, More Buybacks.)
Would having a ton of dough on the balance sheet cure Best Buy's ills?
No, but it would give the company significantly greater financial flexibility during a time of flux. That could be put toward acquisitions, further investment in online operations, a buyout, or even dividends, which, unlike the buybacks Wall Street loves, provide directly measurable cash flows to shareholders.
And assuming Best Buy does manage to snag a visionary CEO who's ready to take the fight to Amazon, that person might like to have some extra cash for battle, especially if things devolve into a price war.
A Random Note
Nokia (NOK) is quite the sloppy mess this morning after the company lowered its outlook, saying that it's getting crushed by competitive dynamics in the mobile-device space.
Now, one interesting wrinkle in its report was the fact that it sold 2 million Microsoft (MSFT) Windows Phone-powered Lumia smartphones in the first quarter. This won't exactly strike fear in the hearts of Apple and Google (GOOG), but it is a respectable number.
The tricky part is figuring out the impact of the technical snafus with the flagship Lumia 900 that led Nokia to offer a $100 instant rebate, making it free at AT&T (T). What will weigh more heavily on consumers' eyes? The bad PR? Or the fact that the phone is now free at AT&T?
I've been of the opinion that Microsoft has little chance of succeeding in the smartphone market, but you never know....
Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter