Best Buy May Be Cut to Junk at S&P Amid Small-Store Shift

Best Buy May Be Cut to Junk at S&P as Closings Show Weakness
A Best Buy Co. store in San Francisco. Photographer: David Paul Morris/Bloomberg

Best Buy Co. may have its credit rating lowered to junk by Standard & Poor’s, which said the world’s largest electronics retailer needs to change its business model after previous steps to improve results failed.

The company’s BBB- rating, the lowest level of investment grade, was placed on credit watch with negative implications, New York-based S&P said today in a statement.

Chief Executive Officer Brian Dunn is closing 50 big-box stores and cutting staff jobs, generating savings to spend on promotions and training store employees. The company said last week it planned to add 100 smaller-format Best Buy Mobile stores in the U.S. in the current fiscal year.

“These actions underscore that its current business model is not working and that the steps taken to date have not been enough to improve performance,” Jayne Ross, an S&P analyst in New York, said today in a statement.

Traders already are treating some of Best Buy’s debt as if it was junk. The company’s $650 million of 5.5 percent notes due March 2021 fell 5 cents to 91.8 cents on the dollar to yield 6.7 percent at 3:56 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The average yield on BB-rated bonds was 5.9 percent yesterday, Bank of America Merrill Lynch index data show.

Moody’s Investors Service rates Richfield, Minnesota-based Best Buy Baa2, two levels above junk, according to data compiled by Bloomberg.

Revenue Trails

Best Buy’s revenue of $16.6 billion in the quarter ended March 3 trailed analysts’ projections of $17.1 billion after the retailer trimmed discounts following the holiday season. The company increased promotions during the Black Friday weekend in late November and in December to win sales from retailers including Inc. and Wal-Mart Stores Inc.

The closing of the 50 big-box stores in the U.S., where Best Buy operates about 1,100, is part of planned cost cuts totaling $800 million in the next three years, including $250 million this year. The retailer closed 11 big-box stores in the U.K. last year as well as outlets in Turkey and Shanghai.

“This is a sales and business-model problem more than a financial problem at the moment,” Carol Levenson, an analyst at debt-research firm Gimme Credit LLC in Chicago, said in an e-mail. Best Buy is “not in a borrowing mode” so higher funding costs won’t hurt it much, she said.

Best Buy Mobile

The company will expand its Best Buy Mobile stores to as many as 800 outlets by its fiscal 2016 from 305 now as part of Dunn’s plan to generate revenue from warranties, accessories and connections between phones, tablets and other electronics.

The speed at which Best Buy can adjust its retail model amid “the changing dynamics of the consumer-electronics industry” will influence S&P’s assessment, Ross said.

Bond traders have anticipated a downgrade for a few months, Jody Lurie, a corporate credit analyst at Janney Montgomery Scott LLC in Philadelphia, said in a telephone interview. A downgrade may impede Best Buy from executing its plan, Lurie said.

“If they get dinged into junk by S&P, it’s a lot harder for them to find the financing to make those changes,” Lurie said.

Best Buy fell 2.6 percent to $22.95 at the close in New York. The shares have declined 1.8 percent this year.

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