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Best Buy's Corporate Governance and Financial Risk Heightens
Posted by: GMI Ratings (IP Logged)
Date: October 22, 2012 11:09AM
Best Buy Co. Inc. (BBY)’s new CEO Hubert Joly faces an uphill battle in turning around the consumer electronics retailer. The company’s risk of a blowup due to accounting, governance or financial problems has worsened to dangerous levels.
To be sure, the team is fighting for a comeback. For example, they’re preparing to sell a new tablet this holiday season called the Insignia Flex for around $250, going head to head against technology giants such as Apple Inc. (AAPL) and Amazon.com Inc. (AMZN).
In an effort to prevent shoppers from merely browsing in Best Buy stores and then buying later from online retailers, CEO Joly and his team recently promised they would match some hardware product prices with those from numerous specified rivals including Amazon from Oct. 7 until Nov. 17 and from Nov. 27 until Dec. 24.
Only time can tell whether such strategies will enable Best Buy’s managers to pull the company out from the fire, but meanwhile more signs of trouble have been appearing in Best Buy’s financial statements. The company’s AGR® score has plunged to a 25, indicating higher accounting and governance risk than 75% of comparable companies. The score had been a 57 as of May, reflecting average risk, after gradually improving for several quarters from a 9 as of February 2011.
Turnover among Best Buy’s senior managers does not bode well for the future. CEO Brian Dunn left in April. The next month the company said Dunn had engaged in an "extremely close personal relationship with a female employee that negatively impacted the work environment” and board chairman Richard Schulze had failed to bring the matter to the audit committee when allegations were first raised in December 2011. The board elected director Hatim Tyabji to succeed Schulze effective in June and CEO Joly took the reins in August. Then Best Buy said this month that it is now looking for a new CFO to replace James L. Muehlbauer, who will continue through February 2013 unless earlier terminated by mutual agreement.
Schulze, who remains a board director through June 2013 and has the "honorary position" of founder and chairman emeritus, said Aug. 6 that he wants all the remaining shares of Best Buy that he does not already own. This move increases the uncertainty surrounding the company.
Sometimes transition can lead to improvement, but Joly’s compensation agreement did not include any new hope about Best Buy’s corporate governance. He received absurd payment terms such as the promise to pay him $6.25 million if he didn't take the job at Best Buy but lost his previous one at the hospitality and travel company Carlson, as we discussed in an earlier article. This suggests that Joly's supervisors will grant him significant leeway rather than keeping his powers in check.
Meanwhile Best Buy’s cash is dwindling, its market value declining and its debt burden growing larger in proportion to its equity. In October our mathematical model found that Best Buy is at a higher chance of financial distress than 92% of comparable companies, putting the retailer into high risk territory after it had been at moderate risk since February 2011 and negligible risk before that. Reviewing factors including Best Buy’s accounting and governance risk, recent events and stock price movements, this month we put the retailer on our Financial Distress Watchlist, which names companies that have heightened chances of problems such as bankruptcy.
On the brighter side, Joly and his team still could make it out of the woods. The game isn’t over until it’s over – but recent developments suggest that Best Buy’s hurdles are looming higher.
Stocks Discussed: BBY, AAPL, AMZN,