Supply Chain

Best Buy CFO Attacks Cost Structure

Sharon McCollam, the struggling retailer’s new finance chief, aims to cut more fat from the company’s SG&spamp;A.
Vincent RyanMarch 1, 2013

Finance chief Sharon McCollam is determined to take a scalpel to the cost structure of ailing electronics retailer Best Buy. But the cuts could take a long time to boost the company’s bottom line, as Best Buy also needs to spend to revive stagnant sales.

In her first conference call since taking over as CFO last December, McCollam said Friday that her “early observations [are] that the SG&A infrastructure at Best Buy is too high.”

After cutting $150 million in costs in the past several weeks (primarily through reducing head count by 400 employees), McCollam plans to continue to slash Best Buy’s sales, general, and administrative (SG&A) expenses. “We’re already prepared to announce additional reductions, which we’ll talk more about in a few weeks or so,” she told analysts.

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McCollam stressed, however, that unlike the first-round cuts that removed layers of management, further rounds would “not all [be] about head count.” She said “a significant piece is going to come from nonpayroll and benefit-related reductions, and it is going to come gradually and incrementally during the year.”

Best Buy CEO Hubert Joly estimated the company has an “opportunity” to remove another $400 million from the $4.2 billion in annual North American general and administrative expenses. But it appears the cuts will only offset additional expenses Best Buy has to make to boost sales and compete with low-overhead online retailers.

The company’s domestic SG&A actually rose in its fiscal fourth quarter, to 16.5% of revenue from 15.1% last year, an increase of about $170 million. While McCollam said there were some one-time costs in the number, such as an increase in legal reserves, the increase was driven by investments in advertising and other direct-selling costs to drive in-store and online revenue, as well as an increase in field incentive compensation.

And more “incremental SG&A investments” are on the horizon. The company plans to spend $150 million to $200 million in fiscal 2014 (this year), McCollam said, “principally in the areas of online, mobile, and the multichannel customer experience.” This will be in addition to nonrecurring SG&A costs to complete the “replatforming” of next year and the insourcing of the company’s IT department.

Best Buy’s overall SG&A as a percentage of revenue, about 20%, is actually a little lower than other traditional retailers such as Barnes & Noble and Gap Inc. And McCollam’s former company, Williams-Sonoma, reported SG&A expenses of 29% of sales in its latest earnings release.

In another initiative at Best Buy, McCollam and her finance team are working to boost free cash flow by fine-tuning the company’s working capital management. For the fiscal fourth quarter ending February 2, Best Buy almost doubled the free-cash-flow number it had provided in guidance to analysts. McCollam said the improvement primarily resulted from “a study” the company did of a layer of Best Buy’s slow-moving inventory that was eligible for return to vendors. “We had a full-court press on taking this nonproductive working capital and returning it to vendors,” she said. The project yielded more than $300 million of additional cash flow, said McCollam.

McCollam, who came out of retirement to help turn around struggling Best Buy, was finance chief of Williams-Sonoma for nine years, part of that time doubling as chief operating officer.

For the quarter ending February 2, Best Buy reported a loss, after preferred dividends, of $409 million, down from $1.82 billion a year earlier. Quarterly revenue was flat at $16.7 billion, but above analysts’ estimates.

Best Buy founder Richard Schulze was attempting to line up financing to purchase Best Buy, but the buyout fell apart due to a lack of financing, according to Reuters.

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