April 11 (Bloomberg) -- Best Buy Co., after saying Chief Executive Officer Brian Dunn had resigned yesterday because the company needed new leadership, later said the resignation came amid a board investigation into Dunn’s “personal conduct.”
The shares sank 5.9 percent to $21.32 yesterday in regular trading. The Star Tribune in Minneapolis reported the company’s second statement after the market closed.
“Certain issues were brought to the board’s attention regarding Mr. Dunn’s personal conduct, unrelated to the company’s operations or financial controls, and an audit committee investigation was initiated,” Claire Koeneman, a Best Buy spokeswoman who works for H+K Strategies, said yesterday in an e-mailed statement. “Prior to the completion of the investigation, Mr. Dunn chose to resign.”
The change in management, with board member G. Mike Mikan taking over as interim CEO, was a “mutual agreement” that new leadership was needed, the Richfield, Minnesota-based company said earlier yesterday in a statement that didn’t mention the conduct probe. A committee of directors has been created to search for the next CEO, the company said.
Best Buy, the world’s largest electronics retailer, has been cutting jobs and shifting to smaller store formats amid competition from Internet retailers such as Amazon.com Inc. Dunn, who started with Best Buy in 1985 as a VCR salesman, said in an interview last month that he believed he was the “right person” to lead the company through the transition.
“Where there is smoke, there tends to be fire,” Brian Sozzi, an independent analyst in New York, said yesterday by telephone. “It may be a small-burning fire, but when Best Buy has the competitive problems that it does, you as an investor don’t want to see an audit committee investigation.” He recommends selling Best Buy shares.
Best Buy has tumbled 35 percent since June 23, 2009, the day before Dunn took over as CEO.
Dunn’s successor will grapple with consumers’ growing comfort in making purchases with smartphones, sometimes inside of Best Buy stores, as well as the popularity of buying from Apple Inc. and Amazon, said Adam Hanft, a brand strategist and CEO of Hanft Projects in New York.
“That is the triple demon that they face,” Hanft said yesterday by telephone. “They get foot traffic, but they’re not converting that into sales because people are in there with their iPads seeing if they can get a better buy.”
That type of comparison shopping is fueling U.S. online sales, which reached $202 billion last year and may climb 62 percent to $327 billion in 2016, according to Forrester Research Inc. in Cambridge, Massachusetts. At that level, online commerce would account for 9 percent of total retail sales, up from 7 percent in 2011.
Best Buy should hire an outsider who is “more of a strategic thinker and not afraid to ruffle a few feathers,” Anthony Chukumba, an analyst for BB&T Capital Markets in New York who recommends buying the shares, wrote yesterday in a note to clients.
Dunn succeeded Brad Anderson, who retired in 2009 after seven years as CEO and about 30 years at the company, starting as a stereo salesman. Richard Schulze, the company’s founder and first CEO, remains chairman.
While someone with no connections to Best Buy would be best, Chukumba wrote that he has a “highly favorable opinion” of Mike Vitelli, an executive vice president in charge of U.S. operations.
Dunn’s successor will need to move more aggressively to prevent Best Buy from sharing the fate of Circuit City Stores Inc., which closed its locations three years ago, and Borders Group Inc., which shut stores last year, Sozzi said.
“I don’t know if there is anyone who has managed a transition from big box to small box, but that’s what they need,” Michael Pachter, an analyst at Wedbush Securities in Los Angeles, said yesterday by e-mail. He rates Best Buy shares neutral, the equivalent of a hold.
GameStop Corp. CEO J. Paul Raines, who also worked at Home Depot Inc., has experience in both large and small stores, Pachter said.
“The retail landscape is changing with such velocity that the predictability of saying, ‘I want someone who did this there,’ doesn’t apply anymore,” said Hanft, whose technology clients have included Sony Corp. and Clearwire Corp. “It could be someone from the tech world who has a retail sensibility.”
J.C. Penney Co., the fourth-largest U.S. department store company, followed that course last year, Hanft said. The company hired Ron Johnson as CEO after he had run Apple Inc.’s retail business.
Best Buy last month posted a $1.23 billion net loss for its fiscal 2012, its first annual loss in more than two decades, as sales rose less than 1 percent. The company said it would close 50 U.S. big-box stores this year and expand its smaller Best Buy Mobile stores to as many as 800 outlets by its fiscal 2016, from 305 now.
“I believe I absolutely am the right person to lead the company forward,” Dunn, 52, said in a telephone interview after that announcement. “I’m really not spending a lot of time looking in my rearview mirror. I believe wholeheartedly in what we are doing.”
Mikan, who has been on Best Buy’s board since April 2008, previously served as chief financial officer of UnitedHealth Group Inc. and CEO of Optum, a UnitedHealth affiliate in health-care services.
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