Fitch Rates Best Buy $500MM Unsecured Notes Issuance 'BB-'; Outlook Negative
NEW YORK -- July 11, 2013
Fitch Ratings has assigned a rating of 'BB-' to Best Buy Co., Inc's (Best Buy)
new 5% $500 million five-year senior unsecured notes. The Rating Outlook is
Negative. Proceeds will be used to refinance the 6.75% $500 million notes
maturing July 2013 and for general corporate purposes. A full rating list is
Key Rating Drivers
The ratings reflect Fitch's expectation that top line and EBITDA will remain
under pressure through 2013. Fitch believes that, despite having dominant
market shares in many categories, it could be difficult and expensive for Best
Buy to retain its current market share as price-conscious consumers gravitate
toward the lowest prices within the online and brick and mortar channels.
Business Model Risk: Best Buy has been struggling to defend its share against
the onslaught of competitive pressure from e-tailers and discounters.
Moreover, the online channel has grown faster, and taken share away from, the
bricks and mortar channel. As such, Best Buy has seen negative comparable
store sales (comps) for the past six of eight quarters, while EBITDA declined
20% in 2012 and 38% in the first quarter of 2013 (excluding discontinued
operations related to Best Buy Europe).
Pricing Investments Hamper Margins: Best Buy is perceived to be priced higher
than its competition. As a result, the retailer implemented a price-matching
program beginning in the 2012 holiday season, and is investing in sharper
prices. Fitch expects Best Buy will have to continue to invest in sharper
prices to maintain share over the intermediate term. However, it is unlikely
that volumes will increase enough to offset the lower pricing in the near
term, as it takes time for consumer perceptions to change. Thus, sales and
gross profit are expected to remain under pressure in the coming 12-18 months.
Leverage Expected to Increase: Fitch expects EBITDA to be around $1.7 billion
in 2013, versus $2.4 billion in 2012 and $3 billion in 2011 (excluding Best
Buy Europe). As a result, adjusted debt/EBITDAR is expected to increase to the
mid-3.5x range in 2013. Fitch currently expects leverage could creep up to the
4.0x range in 2014 on continued price investments, unless volume begins to
pick up meaningfully.
Liquidity Not a Present Concern: Best Buy had $908 million in cash as of May
4, 2013 and full availability under its $2 billion domestic credit facilities.
Free cash flow (after dividends) excluding material working capital swings is
expected to be around $300 million in 2013. However, adverse swings in working
capital compared to last year could leave Best Buy in a cash neutral position
on Fitch's EBITDA projections in 2013.
Negative Rating Action: A downgrade could be caused by the following factors,
individually or collectively: worse-than-expected sales declines in the
mid-single-digit range versus Fitch's low single-digit-range projections;
gross margin declines similar to first-quarter levels of 190 bps, without any
significant offset from cost savings, thereby putting further pressure on
EBITDA; or adjusted leverage above the low-4x range.
Positive Rating Action: Fitch would need to see stabilization in comps trends
and EBITDA that are sustainable in order to revise Best Buy's Outlook to
Fitch has assigned the following rating:
--$500 million five-year senior unsecured notes 'BB-'.
Fitch rates Best Buy as follows:
--Long-term IDR 'BB-';
--Bank credit facilities 'BB-';
--Senior unsecured 'BB-'.
The Rating Outlook is Negative.
Additional information is available at 'www.fitchratings.com'.
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, +1 212-908-0282
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Isabel Hu, CFA, +1 212-908-0672
James Rizzo, +1 212-908-0548
Brian Bertsch, +1 212-908-0549
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