Shares in electronics retailer Best Buy (NYSE:BBY) jumped 5% this week on news that its founder Robert Schulze is looking to buy out the company he founded. Schulze already owns about 20% of the company's shares. Earlier this month, Schulze resigned from Best Buy as its chairman of the board.
Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.
A Surprise Move
Schulze's news came as a surprise to investors. When Schulze resigned, analysts suggested that he would be looking to unload his block of shares to a potential buyer, perhaps even a private equity firm. Indeed, the only news is that he is exploring options regarding his 20% stake. Therefore, in the end, a sale of that stake may be what happens. However, Mr. Schulze may have other plans for the company that he founded. Regardless of what those plans may be, Best Buy is no longer operating in the same environment as it once did. Shares are currently trading for $20, down over 40% from where they were a year ago. Once viewed as the dominant big-box electronics retailer that was responsible for the demise of Circuit City, Best Buy finds itself now competing in a different world.
While demand for electronics remains robust, consumer preferences have changed dramatically. Best Buy has become a physical catalog as people visit the store to examine the product only to turn around and purchase it for less money online.
Furthermore, online retailing giants like Amazon (Nasdaq:AMZN) can carry a lot more inventory at a fraction of the cost. If that weren't enough, today's hottest selling electronics are small handheld items like smartphones and tablet computers. Those products require very little shelf space, which further destroys Best Buy's big-box concept. In 2010, Apple's (Nasdaq:AAPL) retail stores generated over $5,000 per square foot, while Best Buy generated around $830 per square foot. Today, that gap has likely grown wider and more profitable for Apple, and more painful for Best Buy.
The Bottom Line
Going forward, regardless of whether the company is sold, bought out or stays public, Best Buy can no longer operate the same way. Amazon changed how consumers buy books and that has all but eliminated traditional bookstores. Netflix (Nasdaq:NFLX) led to the bankruptcy of Blockbuster video. Best Buy doesn't have to turn out like Blockbuster, but the company will have to adapt sooner rather than later.
At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.