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BEST BUY SAYS ‘BYE BYE’ TO SCORES OF MALL STORES

BY JIM MCCARTNEY

Best Buy closed 90 Sam Goody stores, most of them in malls, in January.

Music retailing these days is a bit like musical chairs: Every time the music stops, there are fewer players in the game.

The latest victim is Musicland Group, whose parent, consumer electronics giant Best Buy, decided in January to shut 110 Sam Goody and Suncoast Video stores. That’s nearly 10 percent of the chain’s 1,200 Sam Goody and Suncoast Video stores, though the stores represent only 5 percent of the Musicland division’s sales, which were $1.7 billion in the third quarter.

Most of the closed stores are located in malls. Altogether, the units represent 450,000 square feet of space, about 5 percent of Musicland’s total real estate.

It’s not that the music has stopped so much that it’s just not selling (see story). This year appears to offer “continued deterioration of music sales, further reductions in mall traffic and increased competition,” said Best Buy CEO Bradbury H. Anderson at the time the closings were announced.

In closing the 90 Sam Goody and 20 Suncoast stores, all of which had monthly or expiring leases, Best Buy laid off about 600 employees across the United States. Sam Goody primarily retails CD and audiocassette music, while Suncoast sells mainly videocassette and DVD movies.

Analysts weren’t all that surprised. The company had said that the Musicland division’s same-store sales were down 14.7 percent in December and 7.9 percent for the year to date, and that it would post an operating loss of up to $85 million. Several analysts had issued reports predicting the store closings, among them Morgan Stanley’s Matthew Ostrower and Lehman Bros.’ Alan Rifkin.

Mall operators were likewise not surprised, Ostrower said, and were probably to some extent even prepared for the closings. That’s because the shortly expiring leases may have had them already thinking about replacement tenants anyway, he said. A Morgan Stanley ranking of companies with the highest exposure to Musicland shows The Macerich Co., General Growth Properties and Simon Property Group are the top three REITS (see table).

According to Best Buy’s list of closings, the states hardest hit are California, with 13 affected malls; Texas, with nine; Illinois, with eight; and Indiana and Minnesota, each with seven.

Best Buy also said it will fold the division into its U.S. operations as a way to boost productivity and profits. The company dismissed Musicland President Kevin Freeland and eliminated his post.

Wall Street was initially positive about the news, driving the stock of the Eden Prairie, Minn.-based company’s stock up 12 percent to $27.34 on the day of the announcement. But analysts have indicated that they expect more closures and might not be satisfied until Musicland is dismantled entirely — not least because of the bleak outlook for music retailing.

“We view the announced store closures as a positive step in the right direction as we continue to look for full divestiture,” said Rifkin. He predicts that more Sam Goody stores will close as some 54 percent of its 521 leases in malls (down from 594) expire over the next two years or so. He’d like to see Best Buy get away from the Sam Goody brand name.

“The Sam Goody brand continues to garner a reputation as overpriced,” said Rifkin. The Sam Goody mall stores are more expensive to operate than its 227 rural stores (down from 244). Rent averages about $8 to $10 per square foot at these rural stores, he said, compared with $40 to $45 per square foot at the mall units.

Rifkin speculates that the company could open smaller stores in rural areas — 2,500 square feet, instead of the current 6,000. These models would be a kind of “Best Buy Entertainment” format, he said, offering a smaller, more selective set of categories, including entertainment software, cell phones and digital cameras. There could be as many as 1,000 of these stores, as long as the company ditches the Sam Goody brand name, he added.

Musicland’s December double-digit gains in sales of DVD movies and video games were not enough to offset soft sales of recorded music. Best Buy has had trouble with Musicland since it bought the independent, publicly traded retailer almost two years ago for $685 million. Best Buy tried to retool Sam Goody’s merchandise mix to emphasize the more popular DVD movies and video game software.

CEO Anderson has said that the company is “looking at all alternatives.”

But as much as Rifkin desires to see Sam Goody divested, he acknowledges that there seem to be few prospective buyers out there. There may be some interest in the Suncoast stores, he said, which are doing well enough (no breakdowns are available, but Rifkin says same-store sales are somewhere in the double digits). At about 1 percent to 2 percent of overall Best Buy sales, however, Suncoast doesn’t add much and would only be a “distraction” to the core business, especially if Sam Goody is cut loose, he said.

Rifkin thinks the company may also sell off Media Play, Musicland’s large-format concept, given that few of them appear readily convertible into Best Buys.

Not all the news from Best Buy is bad: The company says it will open up to 85 U.S. and Canadian stores under its own name over the next 12 months.

Best Buy expects its total sales to increase by as much as 12 percent in fiscal 2004 to about $25 billion. That growth would be fueled in part by Best Buy’s newly announced plans to open 80 to 85 new stores in North America during fiscal 2004, which begins this month. Approximately 60 of these will be Best Buys in the United States, where the chain is expanding in existing markets. About 20 will be new Best Buy and Future Shop stores in Canada. In addition, Best Buy is part of a consortium of six retailers that are setting up a store to sell music via Internet downloads.

Best Buy’s same-store sales rose 0.4 percent in December compared with the same month a year earlier. Total December sales, meanwhile, were $4.24 billion, an increase of 10 percent above the record results of the same month the prior year.

These gains were the result of increased traffic on the company’s Web site and at its consumer electronics stores. Online channel BestBuy.com, contributed significantly to the 2.1 percent rise in December comparable-store sales for Best Buy’s consumer electronics division, driven by site improvements, expanded selection and a free shipping offer. BestBuy.com more than doubled its December sales versus the same month a year earlier, the company said. Best Buy does not break down numbers for its online business. The company’s Canadian stores, meanwhile, posted a 3.5 percent same-store sales increase for the month.

Before the recent closings, Best Buy had already shut 40 Sam Goody stores. The company now operates 546 U.S. Best Buy stores, eight Best Buy Canada stores, 104 Future Shops, 19 Magnolia Hi-Fi stores, 76 Media Play units, about 740 Sam Goodys and 387 Suncoast stores.

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