The Wall Street Journal's headline says it all: "Retailer's Hire Puzzles." The retailer, of course, is Best Buy (NYSE:BBY), and the CEO is Hubert Joly, former CEO of the Carlson Companies, a global hotel, restaurant and travel business. The media are having a field day with this, and who can blame them? Best Buy has been one embarrassment after another the past few years -- in the board room and out. Bringing in a non-retail executive seems like the worst thing to do at this time. Perhaps, but I'll explain why hiring Joly isn't such a puzzling choice after all.


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What's Best Buy's Biggest Problem?

Best Buy has many problems, but the most urgent is stemming the earnings slide that's been under way for several quarters. Best Buy announced second quarter earnings August 21, and they were awful. Analysts were expecting 31 cents a share from continuing operations; it delivered 20 cents. Investopedia contributor Stephen Simpson explains just how bad its earnings were in his article Should Best Buy Shareholders Take The Money And Run? The main premise of Simpson's article is whether shareholders should seriously consider founder Richard Schulze's offer to buy the company for $24 to $26 a share, which at the high-end equates to $8.84 billion. Add in the debt, and we're talking about an $11 billion deal, by far the biggest leveraged buyout of the year.





Schulze already owns 20% of the company, so he does have a head start. The betting seems to be that shareholders won't be interested in anything less than $30. That means Schulze would have to come up with another $1.1 billion in debt financing. That's not going to be easy. Furthermore, most reputable private equity investors realize how little growth there is at Best Buy and won't want anything to do with this deal. The Best Buy board has to move forward if it has any hope of righting the ship.





Why Hubert Joly?

Joly relishes a challenge and likes living in Minneapolis. I'm serious about the first part and half-serious about the second. In his role as CEO of the Carlson Companies, Joly obviously has spent a great deal of time in the Twin Cities, and the opportunity to run a public company in a place he's already very familiar with was obviously too good to pass up. The fact that he's been successful in several different sectors of the economy suggests he's a man who's able to adapt and move forward with a plan. When he took over the entire Carlson group from Marilyn Carlson Nelson in 2008, he was the first non-family CEO. At the time of his move from CEO of Carlson Wagonlit Travel to the head of the entire Carlson empire, the travel and hotel businesses were suffering from a global recession.



Nelson said this about Joly on his departure: "With Hubert Joly's leadership through some very difficult times, Carlson is on strong financial footing. Hubert was hired as Carlson's first non-family CEO, and we are grateful for his contributions to our company." Clearly, Nelson and the rest of the board were caught off guard by Joly's resignation. Like any good leader, however, Joly had someone waiting in the wings ready to take over. Analysts might not know much about Joly, but the man knows how to make decisions, and he'll have plenty of them come September.



Bottom Line

Michael Pachter, an analyst at Wedbush Securities, calls Joly's resume "unimpressive" and suggests he doesn't have enough experience to execute a turnaround. Pachter might want to rethink his statement. In addition to 30 years of business experience, Joly's been a director of Ralph Lauren (NYSE:RL) since June 2009. The last time I checked, Ralph Lauren was still in the retail business. Besides, old school retail is what got Best Buy in trouble in the first place.



Maureen Bausch, executive vice-president for business development at the Mall of America, has worked with Joly on a presidential panel about U.S. tourism and has seen his leadership skills in action. Brian Dunn, the former CEO, obviously didn't understand that leadership wasn't just about being one of the guys. Some are puzzled by Joly's hiring - I'm not one of them. He'll do just fine, because he understands people, and retail is all about the people.


At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.




Tickers in this Article: BBY, RL

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