Best Buy Appoints A New CFO: Should This Transition Concern Its Investors?

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Recently, Best Buy (NYSE:BBY) announced that Sharon McCollam, the company’s chief administrative and chief financial officer, will step down on June 14th and will be replaced by Corie Barry, a 16-year veteran at the company and its current chief strategic growth officer. Ms. McCollam was one of the key architects of the company’s Renew Blue transformation program, where she achieved more than $1 billion in cost savings while implementing the turnaround strategy.  The company had launched this transformation program in 2012 on the back of declining margins and comparable sales, after which the company saw an improvement in profitability. It delivered better than expected revenue and higher profitability in Q1 2017, although the financial guidance for the fiscal year 2017 was weaker.  While the exit of a key executive will impact the company to some extent, we believe since the turnaround strategy has been established and is working, the transition should be smooth. The company has a strong succession plan in place and will retain Ms.McCollam as an advisor till the end of fiscal year 2017 to ensure that the transition is seamless, leading to a minimal adverse impact on the Best Buy.

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Sharon McCollam was instrumental in executing Best Buy’s turnaround strategy and worked on various initiatives to make the company’s divisions more efficient.  She also led an overhaul of its supply chain, overseeing an effort to turn all of its stores into fulfilment centers, which helped the company to reduce its shipping costs and delivery time. The company is currently in the middle of a three year effort to find $400 million in savings and the new CFO has a strong foundation to continue these efforts.

Best Buy is facing challenges to improve revenue growth in the wake of weaker electronics and smartphone sales.  Competition with online retailers such as Amazon and its low price guarantee policy are putting pressure on the company’s margins.  However, the company has been able to manage its expenses better under the initiatives of its transformation program. Strong expense management and disciplined promotional activity has ensured a higher net income for the company, despite a pressure on margins. We expect Best Buy’s U.S. gross profit margin to decline steadily from around 22% in 2016 to 19% by the end of our forecast period.

If competitive pressure and increasing sales of low margin products are not offset by cost saving measures and the gross margins declines at a faster pace, reaching 15% by the end of our forecast period, there can be a 15% downside to our price estimate.

We believe Best Buy’s erstwhile CFO has laid a strong foundation for the company’s turnaround strategy with policies and plans in place to meet the cost savings target. A new executive who is a veteran at the company should be able to build on the past success. While the transition could impact the execution of the rest of the transformation plan to some extent, it should not be a serious cause of concern for the company’s investors, given that the plan is nearing its end.

 

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