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Best Buy warns on profit; U.S. unit head to leave

Mike Vitelli, U.S. business president for Best Buy Co., speaks at the Reuters Retail and Consumer Summit in New York June 17, 2008. REUTERS/
Mike Vitelli, U.S. business president for Best Buy Co., speaks at the Reuters Retail and Consumer Summit in New York June 17, 2008. REUTERS/

By Dhanya Skariachan

(Reuters) - Retailer Best Buy Co Inc warned that earnings and same-store sales would fall for its third quarter, and said the head of its U.S. business will leave as the world's largest consumer electronics chain starts to restructure under a new CEO.

The news, which pushed its shares down 6.8 percent in after-hours trading, came less than a month before the unofficial start of the biggest selling season of the year.

U.S. business president Mike Vitelli will exit at the end of the current fiscal year in early February with a lump-sum payment of $1.45 million, and the executive vice president of U.S. operations, Tim Sheehan, will leave the company at the end of this month.

The move is the first big structural change under new CEO Hubert Joly, who was brought in as the company grapples with the rising trend of shoppers who treat its stores like showrooms for cheaper online retailers.

While a new chief executive will often overhaul management, especially at an underperforming company, the restructuring will leave Best Buy's retail and online businesses, as well as other groups, to report to Joly, who most recently headed hospitality and travel company Carlson.

"The one thing that Joly does not have is retail experience. So you would think that he would really kind of lean on Vitelli," BB&T Capital Markets analyst Anthony Chukumba said. He added that Vitelli, a retail veteran was "very well respected on the Street."

Joly, who also drove the turnaround of the French unit of EDS, now part of Hewlett Packard, and led the restructuring of Vivendi's videogame business, said the elimination of the top layer of U.S. operations management was meant to streamline the organization.

"One thing I have learned in helping turn companies around is that a business needs to have a nimble organization," Joly said in a news release on Wednesday evening.

Analysts were also troubled by Best Buy's forecast.

Best Buy said it now expects earnings for the fiscal third quarter ending November 3 to fall "significantly below" those of a year earlier, excluding one-time items, due to falling margins and declines at sales at established stores.

"You start to wonder, 'Are the wheels kind of coming off here?'," said Chukumba, who added that the retailer's outlook for the quarter was worse than what Wall Street was expecting.

WAITING FOR SCHULZE

As part of the executive shuffle, the company named Shawn Score as the head of its U.S. retail channel. Score was formerly the president of Best Buy's mobile business.

The changes in the executive suite came two months after Best Buy suspended profit forecasts and share buybacks for the year to give its newly named chief executive time to construct his own turnaround plan. In early October, the company said CFO James Muehlbauer had decided to leave as well.

The company is also waiting for its former CEO and largest shareholder, Richard Schulze, to decide whether he can put together a buyout bid.

Schulze, who is trying to take the company private, is expected to make his next move in mid to late November. That move could be in the form of a formal bid along with other private equity partners or a request for more time to prepare a formal bid, a source close to the matter said on Wednesday.

The source declined to be named as the information is not yet public.

One analyst said the most troubling news of all was a decline in the company's gross margins, which suggests how aggressive it has become with promotions to lure customers.

"If they try to compete on price they are doomed. Their cost structure doesn't allow that," said Wedbush Securities analyst Michael Pachter. "They have to figure out how to charge a higher price and make shopping in their stores a rewarding experience."

Analysts polled by Thomson Reuters I/B/E/S on average had expected earnings per share of 36 cents in the quarter. In the fiscal third quarter a year earlier it earned 47 cents per share on an adjusted basis.

"I think people were looking for more out of the third-quarter results given that we had some big product launches," said Morningstar analyst R.J. Hottovy. "Even though it was toward the end of the quarter, you had the iPhone 5 out there."

Analysts were hoping the consumer electronics industry would get a boost from the recent or upcoming debuts of Windows 8, the iPhone 5, the Nintendo Wii U video game console, and stronger videogame title releases this year.

On Wednesday, Best Buy also warned same-store sales would decline in the low-to-mid single digits for the third quarter. The retailer has already posted same-store sales declines in eight of the last nine quarters.

Best Buy shares fell to $15.77 in after-hours trading from a $16.92 close on the New York Stock Exchange. The company also said Wednesday that it would hold an investor day on November 1 to discuss Joly's plans for the future.

(Reporting by Dhanya Skariachan, Martinne Geller and Phil Wahba in New York and Brad Dorfman in Chicago; Writing by Ben Berkowitz and Dhanya Skariachan; Editing by Gary Hill, Leslie Adler, Tim Dobbyn, Andrew Hay and Phil Berlowitz)

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