Schulze Plus Joly Equals Success?

By Will Ashworth | March 26, 2013 AAA

Best Buy founder Richard Schulze announced March 25 that he was dropping his bid for the company and rejoining the company as Chairman Emeritus. Former CEO Brad Anderson and President Al Lenzmeier will serve as Schulze's representatives on the board. Clearly Schulze sees this as his best chance to realize a greater return on his investment. With Joly and Schulze on the same side, I wonder if this makes it easier for Best Buy to succeed in its turnaround.

Hired The Right Guy

I don't need to tell you I told you so. But last August when Best Buy lured Herbert Joly away from the Carlson Companies, a global hospitality giant, the media's puzzlement over the veteran executive's hiring was overwhelming. The Wall Street Journal ran an article suggesting that the relatively unknown CEO had no retail experience and this would seriously reduce his chances of being successful. At the time of Joly's hiring, I argued that the board's decision made sense for two reasons: First, he is easily adaptable to new challenges. More importantly, he understands people make businesses great. Not to mention he'd been on the board of Ralph Lauren (NYSE:RL) for three years at that point; being a smart man he would have learned a thing or two about retail. Schulze's capitulation simply drives home the point that he's the right man for the job. Ultimately he might not be successful but it won't be for lack of ability. On a scale of one to 10, I believe wholeheartedly that Best Buy's hiring was and still is a home run.

Renew Blue

Back in November (three months into the job), Joly presented to investors and analysts how Best Buy was going to become the preferred authority and destination for technology products and services. The company had five priorities: better customer experience, energize employees, innovate through better partnerships with vendors, increase return on invested capital, and positively impact the world we live in. All five are easy to understand but some of those are harder to execute. The fifth point is a no brainer. Who doesn't want a better world? Focusing on recycling and providing teenagers with access to technology, especially those in poorer neighborhoods, it's easy to achieve. That's important when turning around; some targets shouldn't be especially difficult so as to boost employee confidence. You have to walk before you run.

Probably the hardest priority for it to achieve is improving its customer experience both in store and online. In early December Joly hired Sharon McCollum as its CFO. McCollum retired from Williams-Sonoma (NYSE:WSM) in March 2012 after more than a decade with the company including the last six as both CFO and COO. If anyone knows about online customer service, it's Williams-Sonoma, who generates 42% of their revenue from its various e-commerce websites. Getting someone so intimately aware of e-commerce was brilliant. Despite Best Buy being the 11th largest e-commerce business in the U.S., Joly readily admits its done a poor job growing online revenue.

In an effort to stem that tide, Best Buy introduced a low-price guarantee March 3 that allows customers upon checkout both online and in the stores to price check as many as 19 online competitors including Amazon (Nasdaq:AMZN), giving the customer the lowest price possible. That, Best Buy reckons, will eliminate the act of customers "showrooming" a product before buying it elsewhere online. Some wonder about margins. Long-term the increased revenue will more than offset the lower margins. Joly and company had to act on this or fear losing even more business.

Return on Invested Capital

In order to improve its ROIC, Best Buy has to grow same-store sales, increase gross margins, lower selling, general and administrative costs, reduce its real estate footprint, improve international operations and capture online market share if it hopes to return to the good old days when it was above 20%. In the midst of cutting out the fat while also trying to grow, its fiscal 2013 adjusted return on invested capital was 9.2%, 180 basis points lower than last year. It's clearly got some work to do. However, it did manage to generate adjusted free cash flow of $965 million in fiscal 2013, almost double what it expected as recently as November. So, while it's nowhere near perfect, things are going in the right direction.

Bottom Line

In October, Best Buy announced that it hired Scott Durchslag as the head of its online initiatives. Durchslag previously was President of Expedia Worldwide and before that, COO of Skype. With 25 years in the technology industry, he's another good hire by Joly. It's these kind of moves combined with Schulze's decision to join forces with Best Buy that has Barclay Capital's Alan Rifkin raising his price target to $28 from $20. Rifkin told clients: "… the determined focus of current CEO Hubert Joly and current CEO Sharon McCollum -- who are working diligently to turn the company around -- suggests that the company is indeed in good hands." In my opinion, Joly and Schulze together is the only hope Best Buy has for success. The future is now much brighter as a result.

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