Has Best Buy Evaded Europe’s Curse?
America’s largest companies have posted record profits in recent quarters, but hidden beneath those gains is evidence of a concerning slowdown in sales growth. From International Business Machines (NYSE:IBM) to 3M (NYSE:MMM) to Xerox (NYSE:XRX), many businesses have missed revenue forecasts for the most recently reported quarter, as results have been hurt by a combination of European economic weakness, a stronger dollar, and sluggish consumer spending.
But Best Buy (NYSE:BBY) seems to have avoided the European malaise. The consumer electronics retailer has decided to exit Europe by selling its 50-percent stake in a mobile-phone venture to partner Carphone Warehouse Group for 500 million pounds, or $778 million. The deal — that dissolves the partnership formed in 2008 — will be comprised of 420 million pounds in cash and 80 million pounds in Carphone Warehouse stock.
Initially, Best Buy and Carphone Warehouse — the largest independent mobile-phone seller in Europe — planned to build American-style big box electronics stores in Europe, but weakening conditions prompted the U.S. electronics retailer to begin unraveling the partnership and abort its plans for big box stores in 2011.
Chief Executive Officer Hubert Joly — who was hired by Best Buy’s board at the beginning of September to strengthen its operational and financial performance — is not just looking to get out of Europe. The sale will free up cash and resources to drive his revival efforts in the United States, where business has hurt by competition from Amazon (NASDAQ:AMZN) and Wal-Mart (NYSE:WMT).
Amazon, in particular, has posed quite a threat to the electronic retailer’s profitability. Budget-conscious customers have increasingly used Best Buy’s brick-and-mortar locations to test out electronics before purchasing them from the Internet retailer at a lower price, a practice known as showrooming.
“This transaction allows us to simplify our business,” Joly said in a statement, adding that it will also strengthen Best Buy’s return on invested capital and the company’s balance sheet. But the European withdrawal “should not suggest any similar action in our other international businesses,” he said.
For the current fiscal year year, Best Buy projected revenue of $5.5 billion to $5.6 billion in Europe, while adjusted earnings per share are “expected to be immaterial.” In fact, divesting its European unit might even help Best Buy’s results. In the fiscal year ended February 2, the retailer’s international segment posted an operating loss of $881 million on revenue of $12.8 billion. Overall, sales totaled $49.6 billion.
Best Buy and Carphone Warehouse will also be terminating a venture that sells laptops, mobile phones, and tablets outside of Europe and North America. Best Buy said it will pay its London-based partner 29 million pounds to satisfy obligations.
After the news was made public Tuesday, shares rose as much as 3 percent, and ended the day up 7.4 percent at $25.99. As investors have become more confident in Joly’s leadership abilities in recent months, the stock has more than doubled in value, trailing only Netflix (NASDAQ:NFLX) in the Standard & Poor’s 500 Index.
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