Best Buy Shareholder Claims Board Members Made ‘Illegal Insider’ Trades

The suit, filed in June in U.S. District Court, Wilmington, Del., by Salvatore Talluto, claimed board members had “actual or constructive knowledge” that the chain’s financial condition was “misrepresented” in a period starting 2009. Schulze, who founded Best Buy, garnered $24.9 million in proceeds [in essence the total selling price] in three stock sales that started with 500,000 shares in November 2009, the suit said. Dunn received $1.88 million from stock sales, including 43,123 shares sold in April that produced $1.29 million, the suit said. Others named in the suit include board member and attorney Elliot Kaplan, who in three transactions between February and October 2010, garnered $1.42 million, the suit said. Best Buy disclosed Talluto’s suit in a 10-Q July 1. A Best Buy spokesman declined to comment.

Talluto’s suit contains many of the same allegations as one filed in February by the IBEW Local 98 Pension Fund that alleged Best Buy made false and misleading statements regarding demand for CE products and the chain’s overall financial condition. The pension fund’s suit, filed in U.S. District Court, Minneapolis, was combined in June with a separate action filed by shareholder Rene LeBlanc, according to court records.

The suits argue that Best Buy raised its fiscal 2011 earnings forecast to $3.55 to $3.70 per share in September 2010 from $3.45 to $3.60 in March 2010, despite the chain’s executives knowing that sales had been weak or declining since June 2010. In December 2010, Best Buy slashed its fiscal 2011 earnings forecast to $3.20 to $3.40 in the face of declining TV, mobile computing and videogames sales, the suit said. The lowering of its earnings forecast came despite Dunn telling Bloomberg in late November that Black Friday customer traffic was better than in 2008 and Web site traffic surpassed that in 2009, the suit said. Best Buy cut the fiscal 2011 same-store sales growth forecast in September to one to two percent from one to three percent in March 2010. The missed financial forecasts were misleading and represented a breach of fiduciary duty and gross mismanagement by the Best Buy 12-member board, the suit said. Best Buy executives in September also “deliberately disregarded” evidence that the chain wasn’t going to meet annual earnings per share forecasts of $3.55 to $3.70, the suit said.

Meanwhile, Best Buy will take $10 million to $15 million in charges against earnings during the remainder of fiscal 2012 tied to restructuring U.S. and international businesses, the chain said in its 10-Q. Less than $5 million in costs will be incurred in “non-cash facility closure charges” for U.S. stores, while about $10 million will be used to continue restructuring international operations, it said. The $10 million is largely tied to Best Buy’s closing the Turkey locations, a spokesman said.

Best Buy, which earlier this year moved to close two stores in Turkey and eight in China, recorded $2 million in related charges against fiscal Q1 earnings. The chain also closed 26 stores in Europe in Q1 while opening 15 as part of its joint venture with Carphone Warehouse, ending the quarter with 2,429 Carphone Warehouse and The Phone Store locations. Best Buy’s Five Star chain in China opened five stores to end Q1 with 171. Best Buy’s Q1 international operating income rose to $48 million from $15 million a year earlier, as revenue rose to $3.08 billion from $2.86 billion.

In the U.S., Best Buy opened three stores to end Q1 with 1,099 and closed one standalone Magnolia Home Theater outlet to finish with six outlets, the chain said. The closed standalone Magnolia in San Jose was relocated to a nearby Best Buy. Best Buy bought 21-store Magnolia for $85 million in 2001 and shrank it to 13 in 2007, before dropping the chain to seven outlets two years later (CED Feb 13/09 4). Best Buy has installed Magnolia Home Theater sections in its U.S. locations. Best Buy also has shut its five remaining standalone Geek Squad stores. Best Buy Mobile added 21 standalone locations during the quarter to end with 198.

Best Buy’s U.S. operating income slipped to $234 million from $298 million as sales dropped to $7.85 billion from $7.92 billion on a 2.4 percent drop in same-store sales. CE same-store sales declined six percent in Q1 as flat TV sales TV unit sales couldn’t offset a decline in average selling price, Best Buy said. CE declined to 35 percent of Best Buy’s Q1 U.S. sales from 37 percent a year earlier. Best Buy’s PC and mobile phones business posted a 4.7 percent same-store sales increase as the segment grew to 40 percent of total U.S. revenue from 37 percent. Entertainment recorded a 13.1 percent same-store sales decline amid a drop in DVD and CD sales. The downturn in Q4 vidogames sales “moderated” in Q1 with the arrival of Nintendo’s 3DS handheld gaming system, the retailer said.