Fitch Downgrades Best Buy to 'BB-'; Outlook Negative
NEW YORK -- November 21, 2012
Fitch Ratings has downgraded its Issuer Default Rating (IDR) on Best Buy Co.,
Inc. (Best Buy) to 'BB-' from 'BB+'. The Rating Outlook is Negative. As of
Nov. 3, 2012, Best Buy had $2.0 billion of debt outstanding. A full list of
rating actions appears at the end of this press release.
Fitch believes that Best Buy faces headwinds around market share that are
having an adverse impact on comparable store sales, profitability, and the
company's credit profile. The Negative Outlook reflects (i) the potential for
an accelerating shift in consumer electronics sales to the online channel and
(ii) Fitch's skepticism that the strategic plan laid out by new management,
which shed some light on cost cutting programs and initiatives to reinvigorate
sales, will achieve the targeted improvements and curb market share losses and
profitability declines. The ratings continue to reflect Best Buy's strong
liquidity position and free cash flow (FCF) generation.
While Best Buy has dominant market shares in many of its categories, Fitch
believes that it will be difficult and expensive for the company to retain its
current market share as price conscious consumers gravitate toward the lowest
prices within the online and brick and mortar channels. Although Best Buy has
implemented a company-wide price matching policy for the holidays, Fitch
expects it will put a burden on gross margins near term without a meaningful
uplift in overall sales as it will remain challenging for Best Buy to change
its price perception among consumers.
Best Buy's financial performance reflects the pressure on its business, as its
decline in comp store sales have accelerated to an estimated -4.2% for the
first nine months of 2012 (based on reported quarterly comps), after declining
2.1% in 2011; comps have not been materially positive on an annual basis since
calendar 2007. This figure incorporates mid-teens growth in online revenues,
which accounts for approximately 10% of total revenues, implying further
erosion in the productivity of Best Buy's retail stores.
Operating EBITDA margins were down by 125 basis points for the LTM period
ended Nov. 3, versus the comparable year ago period. Given Fitch's expectation
that comp store sales will remain negative in the low-single digit range over
the next 24 months (with possible quarter to quarter fluctuations based on new
product flow), margins are likely to compress further given pressure on gross
margin and deleveraging of fixed costs. Therefore EBITDA is expected to
decline to approximately $2.4-$2.5 billion in 2012, down 30% relative to 2011,
and could decline to the $1.5-$1.6 billion range in 2013-2014.
Financial leverage (adjusted debt/EBITDAR) was 2.9 times (x) at the end of the
third quarter, increasing from 2.6 at the end of 2011, and Fitch expects it
could move up to the 4.0x range in 2013-2014.
Best Buy's liquidity remains strong with year-end cash balances expected to be
in the range of $1.5-$1.6 billion versus $1.4 billion in 2011, as free cash
flow is still expected to be in the $850 million to $1 billion range in 2012.
In addition, the company has $2.5 billion in undrawn revolving credit
facilities. Going forward, Fitch expects FCF to be in the range of $300 to
$400 million annually; EBITDA would have to fall to an estimated $1 billion
range for Best Buy to become FCF neutral assuming no material swings in
working capital. Best Buy has suspended share buybacks. Upcoming debt
maturities include $500 million of unsecured notes in 2013, which Fitch
expects the company could refinance or pay down with cash on hand.
While an LBO of the company by Best Buys's founder, Richard Schulze, and a
consortium of private equity firms remains an overhang, Fitch believes
significant challenges stand in the way of consummating such a deal given the
headwinds in the business. Please see the special report 'Best Buy LBO -
Significant Hurdles Remain' published Nov. 8, 2012 for more detailed analysis
What would trigger a Rating Action:
A downgrade could be caused by the following factors, individually or
--Sales declines are worse than expected in the mid-single digit range versus
Fitch's low single digit range projections.
--Gross margin declines are similar to third quarter levels of 150 bps without
any significant offset from cost savings, thereby putting further pressure on
--Adjusted leverage is expected to track above 4x going forward.
In order to revise Best Buy's Outlook to Stable, Fitch would need to see
stabilization in comparable store sales trends and operating margins that are
Fitch has removed from Rating Watch Negative and downgraded Best Buy's ratings
--Long-term IDR to 'BB-' from 'BB+';
--Bank credit facility to 'BB-' from 'BB+';
--Senior unsecured to 'BB-' from 'BB+'.
The Rating Outlook is Negative.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
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Monica Aggarwal, CFA
One State Street Plaza
New York, NY 10004
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