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Best Buy Suspends Profit Forecast as Net Income Falls

Best Buy Co. (BBY), the retailer resisting a takeover attempt by its founder, reported second-quarter profit that trailed analysts’ estimates and suspended providing an earnings forecast as sales of computers and televisions dropped.

Net income fell 91 percent to $12 million, or 4 cents a share, from $128 million, or 34 cents, a year earlier, the Richfield, Minnesota-based company said today in a statement. Excluding restructuring charges and other items, profit was 20 cents a share. Analysts’ average estimate was 31 cents.

Best Buy yesterday named Hubert Joly as its new chief executive officer to oversee a turnaround plan that entails shifting to smaller locations in a bid to fend off Amazon.com Inc. (AMZN) and Wal-Mart Stores Inc. (WMT) The results, which included a 3.2 percent same-store sales decline as shoppers bought fewer televisions and notebook computers, may bolster founder Richard Schulze’s case that the company needs urgent change.

“The new strategic plan that they’re trying to execute does not seem to be gaining material traction,” John Tomlinson, an analyst at ITG Investment Research in New York, said today by telephone. His firm doesn’t rate shares. “The struggle between the former chairman and current management isn’t something that is going to go away any time soon.”

Best Buy sank 1.4 percent to $17.91 at the close in New York. The shares have tumbled 23 percent this year.

Forecast Suspended

Best Buy said it won’t forecast profit for the second half of the fiscal year because of the new CEO, lowered expectations for industrywide sales and uncertainty associated with several expected product introductions. The company, which also suspended share repurchases for the year, said it still expects to generate free cash flow of $1.25 billion to $1.5 billion. Best Buy defines free cash flow as cash provided by operating activities minus additions to property and equipment.

Second-quarter sales fell 2.8 percent to $10.5 billion. The average estimate of 19 analysts was $10.6 billion.

Gross margin, or the percentage of sales left after deducting the cost of goods sold, narrowed to 24.3 percent from 25.4 percent a year earlier after the retailer used more discounts to spur sales.

“This is really a bad signal about the business, implying much more promotion than in the past,” Michael Pachter, an analyst at Wedbush Securities in Los Angeles, said today in an e-mail. He rates Best Buy neutral. “The factors leading to the decline don’t look like they’re going to decline any time soon.”

Recruiting Executives

Schulze, 71, has been recruiting executives and seeking the support of private-equity firms after resigning in June. He left after the board found he failed to relay allegations that then- CEO Brian Dunn was having an inappropriate relationship with a female employee.

Last month, Schulze offered to take the retailer private for $24 to $26 a share and said he would contribute $1 billion in equity from his approximately 20 percent stake in the company. Credit Suisse Group AG (CSGN), his financial adviser, said at the time it was highly confident it could obtain financing for the bid.

Schulze declined an offer from the board to give him access to confidential financial information, which would have required him to wait until January to take his bid directly to shareholders, Best Buy said Aug. 19. Schulze said in a statement that he will continue pushing his proposal and was disappointed by Best Buy’s “abrupt public termination” of talks. Best Buy interim CEO Mike Mikan said today on a conference call that the due diligence offer to Schulze stands.

Schulze’s ‘Leverage’

Today’s results give Schulze “leverage in his negotiations with the company’s board of directors in his quest to potentially take Best Buy private,” Anthony Chukumba, an analyst at BB&T Capital Markets in New York, wrote today in a note. He rates Best Buy hold.

Joly, CEO of hotel operator Carlson Cos., will take over in September, replacing Mikan, Best Buy said yesterday. The company said in March that it would close 50 big box stores to reduce costs and that it would add more smaller-format Best Buy Mobile locations to spur growth.

“Joly needs to quickly formulate a bold turnaround plan and sell it to stockholders,” Erik Gordon, a University of Michigan business professor, said today in an e-mail. “If they don’t buy his plan, they will sell their shares to Schulze, with or without board approval.”

To contact the reporter on this story: Chris Burritt in Greensboro at cburritt@bloomberg.net

To contact the editor responsible for this story: Kevin Orland at korland@bloomberg.net

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