Best Buy Co., Inc. (NYSE:BBY), the electronics retailer that has been engaged in a turnaround effort led by CEO Hubert Joly, recently announced that it will exit the European market. Just five years after beginning a joint venture with partner Carphone Warehouse, Best Buy will sell its stake to its partner for about $775 million. This is far less than the $2.15 billion Best Buy paid to launch the venture in 2008.
Good news or bad?
On news of the deal the stock rose as much as 10% as investors viewed this development as a positive. Of course, taking a loss on its European operations is not ideal, but Europe contributes next to nothing in terms of profitability for the company. The cash received from the deal will strengthen the balance sheet, and all of the capital expenditures associated with Europe can now be used to accelerate the domestic turnaround.
Best Buy International
In fiscal 2013, which ended in January and was 11 months long as per the 10-K, Best Buy Co., Inc. (NYSE:BBY) recorded a total of $45.1 billion in revenue. $33.3 billion of this, or about 74%, was derived from the United States, while $5.1 billion, or about 11%, was derived from Europe. The rest came from Canada, China, and other markets.
This deal will cause Best Buy Co., Inc. (NYSE:BBY) to lose about 11% of its revenue, but what will it do to profits? The whole international segment recorded an operating loss of $859 million in fiscal 2013, but this was due to large goodwill impairments and restructuring charges. Without these items the international segment recorded operating income of $83 million. Europe makes up a bit less than half of this segment in terms of revenue, and adjusted EPS for the whole company is expected to be unchanged from this transaction. It’s safe to say that Europe contributes basically nothing in terms of profit.
Will this lead to further exits from international markets? Possibly, but given the current economic conditions in Europe it probably makes the most sense for the company to pull out of this region compared to the others.
Internet sales tax
Amazon.com, Inc. (NASDAQ:AMZN), the company largely believed to have caused most of Best Buy Co., Inc. (NYSE:BBY)’s problems, has been able to avoid paying sales tax since its founding. But recently the company has begun collecting tax in some states and now the US Congress is considering The Marketplace Fairness Act, which if passed will allow states to force internet retailers to collect sales tax. This will effectively end one of the big advantages which Amazon has over brick-and-mortar retailers like Best Buy.
This is clearly a negative for Amazon.com, Inc. (NASDAQ:AMZN), as it raises the price on its products by as much as 10% depending on the state. Amazon recorded revenue growth of 22% in the first quarter, but achieved a net income margin of just 0.5%. I doubt that Amazon will be able to continue this kind of growth without lowering its prices to at least partially offset the tax, thereby further reducing margins.
Best Buy Co., Inc. (NYSE:BBY) should benefit greatly from this bill, as it brings the after-tax cost of its merchandise in line with that of Amazon.com, Inc. (NASDAQ:AMZN). And with the price-matching program announced recently, Best Buy will no longer be undercut by its internet rival.