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Shoe Drops for Best Buy

December 17, 2008 | Author: Ibex Marketing

Tweeter, Circuit City, CompUSA, and other consumer electronics stores have fallen by the wayside. And now we learn that Best Buy is not immune to the financial woes of a weakened economy. The company announced third quarter net earnings yesterday, which were down 77% from a year ago. That’s huge. And the company is not sitting still as it watches the water drain from the bathtub. The company has announced that “nearly all of its corporate employees are eligible for a voluntary separation package” which it hopes will help lower its overhead costs considerably. (But I have to ask, how big a severance package would it take to get you to give up a salaried position in the current job market? It could take a while to find work.)

The company has also cut about half of its planned capital expenditures for the coming year, which means fewer new stores. According to the company press release, Brad Anderson, vice chairman and CEO of Best Buy, state that “The historic slowdown in the economy and its effect on our business over the past 90 days have been the most challenging consumer environment our company has ever faced.”

Will these actions be enough to keep Best Buy going through the lean times ahead? The company’s cash and short-term investments have dropped from $1.6 billion a year ago to just $594 million, a 63% drop. In the meantime, receivables have swollen from $739 million to $2.6 billion; this is not a great time to have other people owe you money. And inventory values have increased from $7.45 billion to $8.2 billion; the hope here is that those values don’t continue to erode from further price cuts. Short and long term debt have more than doubled since last year.

Clearly, Best Buy has a rough road ahead, and its survival may hinge on just how quickly consumers are ready to start spending again.