TEXT-Fitch affirms Best Buy's 'BBB-' at IDR;outlook to negative
Apr 16 - Fitch Ratings has affirmed its Issuer Default Rating (IDR) on Best Buy Co., Inc. (Best Buy) at 'BBB-' and revised the Rating Outlook to Negative from Stable. As of March 3, 2012, Best Buy had $2.2 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 same store sales, market share and competition that are more pronounced than other 'BBB' rated retailers with similar leverage. The revision in the Outlook to Negative reflects the potential for an accelerating shift in consumer electronics sales to the online channel and the possibility that Best Buy's restructuring efforts, including accelerated store closings and a reengineering of its operations to take excess costs out of the system, will prove to be insufficient to offset the pressures facing its business. The departure of Best Buy's CEO adds an additional element of uncertainly surrounding the company's management team and future operating strategy.
The ratings continue to reflect Best Buy's strong free cash flow (FCF) generation, ample liquidity and reasonable leverage profile.
While Fitch believes that Best Buy's market share was stable on an overall basis in 2012, it will be difficult for the company to maintain market share as price conscious consumers gravitate toward the lowest prices within the online and brick and mortar channels. Macro headwinds such as unemployment, housing and higher gas prices are likely to continue to hamper consumers, particularly for large ticket discretionary purchases.
Best Buy's financial performance reflects the pressure on its business, as its comp store sales fell 1.7% in fiscal 2012 (ending March 3, 2012), and have not been materially positive since calendar 2007. This figure incorporates strong 18% growth in domestic online revenues, implying further erosion in the productivity of Best Buy's retail stores.
Operating EBIT margins were down by 40 basis points in fiscal 2012, and, given Fitch's expectation that comp store sales are likely to continue to be negative in the low-single digit range, margins are likely to compress further given deleveraging of fixed costs.
The company's plan to take $800 million out of its cost structure over the next three years (including $250 million in the current year), will provide some support to margins, though much of the savings are expected to be invested in improved customer services and sharper prices as Best Buy seeks to improve its competitive position vis-a-vis pure online retailers.
Financial leverage (adjusted debt/EBITDAR) was 2.5 times (x) at end-fiscal 2012, compared with 2.4x at end-fiscal 2011, and Fitch believes that it could move up modestly from these levels as margins gradually contract while debt levels remain flat.
Best Buy repurchased $1.5 billion of its shares in fiscal 2012 and $1.2 billion in fiscal 2011, and has indicated that it will repurchase $750 million to $1 billion in fiscal 2013. This compares with Fitch's expectation for healthy FCF after dividends of about $1 billion in fiscal 2013. Going forward, Fitch expects Best Buy will continue to dedicate most of its FCF to dividends and share repurchases.
Best Buy has ample liquidity with $1.2 billion in cash, short-term investments and zero draw under its $2.5 billion revolving credit facility as of March 3, 2012. 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.
Fitch affirms Best Buy's ratings as follows:
--Long-term IDR at 'BBB-';
--Bank credit facility at 'BBB-';
--Senior unsecured at 'BBB-';
The Rating Outlook is Negative.
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