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Best Buy's Dunn: More Retail Trauma Ahead

The soon-to-be CEO tells BusinessWeek that while Best Buy is taking hits, it'll come through. Others, he says, could meet Circuit City's fate

The incoming head of retail giant Best Buy (BBY) expects more consumer electronics retailers to follow Circuit City into the dust bin of history this year.

Brian Dunn, a 22-year company veteran who will take the reins from Brad Anderson in June, told BusinessWeek on Jan. 29 that "there will be other storefronts that close this year" because of what he termed a "lethal" retail environment. That environment grew even worse on Feb. 2 with news that consumer spending dropped 1% in December, worse than the 0.8% drop that economists had expected.

Best Buy has struggled along with its retail brethren, reporting a 6.5% drop in same-store sales in December amid a decline in store traffic. The company is cutting costs left and right to boost profitability, slashing its $1.2 billion capital expenditure budget in half by opening fewer stores in Canada, China, and the U.S. Even though 500 workers in its Minneapolis corporate headquarters agreed to leave voluntarily under an enhanced severance program announced in December, the company said on Jan. 27 that it would have to resort to involuntary layoffs as well. An unknown number of employees will be let go on Feb. 19.

No Joy in Rival's Demise

Despite its struggles, Best Buy should benefit from Circuit City's disappearance—indeed, Anderson said in Davos last week that Best Buy was actively scouting vacant Circuit City store sites. "I didn't open a bottle of champagne when Circuit City closed," said Dunn, who has been at the company long enough to remember when Circuit City, not Best Buy, was the dominant player in electronics retailing. "I take no joy in it, but I have every intention of capitalizing on the opportunity."

If Dunn's forecast holds, there will be even more carcasses for Best Buy to pick at in the coming months. "The notion of just hanging on is very difficult," he said. "Strong brands come through this. Brands that aren't strong, with good financial and cultural strength and a meaningful position with consumers, will have a difficult time coming through this." When asked to name specific retailers who might go under, Dunn demurred, but said, "There's a list of them."

Radio Shack (RSH) is no doubt on that list. "I don't want to make pronouncements on [Radio Shack's] future, but they are struggling to find a new reason for being," says Alan Wolf, senior editor at industry newsletter TWICE. Wolf notes that Radio Shack's core mobile-phone business has been eroded by the growth of retail outlets from carriers like Verizon (VZ) and Sprint (S) as well as by Best Buy's burgeoning mobile-phone business.

Radio Shack does brisk business in set-top digital converter boxes, but those sales will dry up once the switch from analog to digital goes into effect later this year. CEO Julian Day has said that the sales generated by converter boxes "significantly contributed to our results during the last two quarters." Radio Shack will announce results for its fourth quarter and full fiscal year on Feb. 24.

Eventually, Big Opportunities

Best Buy's new leader said he's positioning the company "not just to duck and cover, but to come out of this and grow. There will be huge opportunities coming out of the back side of this difficulty." TWICE's Wolf agrees, saying that "there will be pent-up demand, and the guys still standing will do very well." Best Buy would be at the top of that heap, Wolf says, along with Wal-Mart Stores (WMT) and (AMZN).

Boyle is deputy Corporations editor for BusinessWeek.

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