Best Buy CEO is dumping stock to pay for his divorce

Best Buy CEO Hubert Joly is selling $10 million of stock in his company, but experts predict Best Buy's stock will continue to rise in price. So why is the Best Buy CEO selling now? It's personal.

Even though Best Buy's stock has tripled this year, riding on the success of CEO Hubert Joly's turnaround strategy, many on Wall Street think the retailer's resurgence isn't over. So why is the Best Buy CEO selling? 

"This sale reflects only one thing: Mr. Joly has recently gone through a divorce and needs to sell a portion of his holdings in order to cover the costs of that unfortunate event," spokesman Jeff Shelman said in a statement. "He remains heavily invested in Best Buy."

Joly raised about $10.4 million through a share sale to help cover costs for his recent divorce, a regulatory filing showed. He sold his shares at about $37 per share. 

Investors and analysts say Joly's turnaround initiative – anchored by sharp cost cuts – could boost the stock further, especially because shares still trade at a discount compared with peers. The US-based electronics chain faces fierce competition from the likes of Wal-Mart Stores Inc and Amazon.com Inc but is showing signs it can compete against them.

Analysts say Joly can boost earnings further if he takes more costs out, strikes favorable deals with more vendors and change the perception among many shoppers that Best Buy's prices are higher than those of Wal-Mart and Amazon.

How times have changed. A year ago, Best Buy's share price was near a nine-year low, sales were in free fall and management was in disarray after the departure of Chief Executive Officer Brian Dunn under the cloud of an ethics probe into his inappropriate relationship with a female employee.

Fast-forward to this summer, when the company posted its first profit in a year, confirming that Joly's turnaround plan for the world's largest consumer electronics chain is working. Net earnings rose to $266 million in the second quarter ended Aug. 4, up from $12 million in the same quarter a year earlier.

Joly, who took Best Buy's helm in September 2012 after heading hospitality firm Carlson for four years, has already cut $390 million in costs by removing layers of management, eliminating hundreds of jobs and closing some unprofitable stores.

He also persuaded vendors Samsung and Microsoft to open their own boutiques in Best Buy stores, making more efficient use of space and improving customer service.

Joly and Chief Financial Officer Sharon McCollam have also boosted cash by $1.2 billion, including $650 million from the sale of Best Buy's stake in a European joint venture with Carphone Warehouse.

"We are very happy with the progress we have seen to date," said Benjamin Nahum, a portfolio manager with Neuberger Berman LLC, which owns and plans to stick with Best Buy's shares. "We think there's more to come."

Wall Street sees Best Buy stock rising further to touch at least $50, up from its current level of $38. The stock trades at 14.4 times forward earnings and represents a 17.3 percent discount to the peer average, suggesting it has room to rise.

"It is a relatively cheap stock," Janney Capital Markets analyst David Strasser said. "It still provides the most compelling value in my space."

Charlie O'Shea, a senior analyst at ratings agency Moody's, sees the electronics giant more than holding its own this holiday season. He says the launch of new gaming systems, Best Buy's promise to match rivals' prices and its decision to let key vendors run their own boutiques in its stores are helping sales.

O'Shea also welcomes the retailer's stepped-up focus on encouraging shoppers to buy online and pick up their purchases in stores, which he says encourages more impulse buying. He likes its recent decision to test shipping more online orders from some stores close to shoppers, rather than from warehouses.

Out of almost two dozen analysts covering the chain, 13 urge investors to buy the stock, nine have a "hold" rating and one has a "sell" rating, according to Thomson Reuters. At least three - Alan Rifkin at Barclays, David Strasser at Janney Capital Markets and Gary Balter at Credit Suisse - have called Best Buy their top pick.

Best Buy has transformed "from a hated stock to one of their best ideas," said Dimitri van Toren, who manages the U.S. portfolio of Syntrus Achmea, which owns Best Buy shares.

Risks aplenty? 

Not everyone is as optimistic. Morningstar analyst R.J. Hottovy said the market was overestimating Best Buy's ability to profitably increase sales when its rivals have "competitive countermeasures at their disposal" like their own loyalty programs, digital content libraries and competitive prices.

Ratings agency Fitch analyst Monica Aggarwal worries that many of the products offered by Best Buy, such as laptops and televisions, are falling out of vogue with shoppers, leaving mobile devices, tablets and appliances as the only bright spots.

Moody's has an investment-grade rating on Best Buy but said there was a chance of a downgrade over the next 12 to 18 months if it failed to boost credit metrics such as its interest coverage ratio, a measure that helps investors determine how successful a company has been at meeting its interest payments.

"Some of the credit metrics are a little weak for the rating category, and they need to get better," O'Shea said.

Best Buy spokesman Matt Furman said the company's balance sheet and credit profile have improved significantly under Joly. He cited the example of a bond it floated recently, priced in investment-grade range and "significantly oversubscribed," as a sign of confidence in the company.

As of Aug. 3, the retailer, which has still not reinstated share buybacks after suspending them last fall, had cash of $1.9 billion, versus $680 million a year earlier. It has no short-term debt and has long-term debt of $1.6 billion.

Since Best Buy no longer offers earnings forecasts, some investors say it is hard to gauge long-term trends.

"After such a run and without clear indication that the turnaround plan is indeed working, I would be shy of getting in," said Ariel Aharonovich, portfolio manager at The Guardian Opportunities Leveraged Fixed-Income Fund.

But others, such as van Toren of Syntrus Achmea, say they will hold their Best Buy shares at least until they reach the low 40s.

"The good thing now is that the sales seems to be stabilizing. If you believe all the things they are going to do, then of course there is a lot of room for higher margins," he said.

(Editing by Jilian Mincer and Douglas Royalty)