US CREDIT-Best Buy credit may outperform in retail

By Karen Brettell

NEW YORK, June 23 (Reuters) - Best Buy Co's (BBY.N)
leverage has increased since it sold new bonds for the first
time in several years, but with a strong credit profile and
good earnings prospects, its debt is seen as likely to
outperform its peers.

The world's largest electronics retailer in May reached a
deal to pay $2 billion to create a joint venture with Britain's
Carphone Warehouse Group (CPW.L) that is expected to start
opening Best Buy stores in Europe.

To partially fund the purchase, the company sold $500
million in bonds on June 19, up from an originally planned $350
million.

The joint venture is likely to increase Best Buy's leverage
-- a measure of debt to earnings before interest, taxes,
depreciation, amortization and rent -- to as much as 2.3 to 2.4
times, according to Barclays Capital.

However, "while other U.S. retailers have not succeeded in
the competitive European retail segment, we believe that having
a local partner with ground-level experience improves the
likelihood of success for Best Buy," Barclays analysts Tom
O'Neill and Yung Chuan Koh said in a report.

Free cash flow of around $1 billion, combined with the
suspension of the company's share buyback program, should allow
the company to reduce leverage to around 2.0 to 2.2 times by
year-end, the analysts said.

Like many retailers Best Buy will be challenged to increase
sales as rising energy and food costs and falling home prices
crimp consumer spending, however the company's international
operations will help it cushion weakness in the U.S.

"Best Buy's international diversification and benefits from
foreign currency exchange will help it cushion any domestic
consumer headwinds that we are currently projecting for 2008,
more so than the company's competitors Circuit City and
RadioShack," Barclays said.

Standard & Poor's this month revised its outlook on the
company to negative, after earlier saying it may downgrade its
credit ratings, citing higher leverage and a more aggressive
financial profile.

It rates Best Buy as "BBB," the second lowest investment
grade. A negative outlook indicates a credit ratings downgrade
is more likely over the next one to two years.

Last week, Best Buy posted a 7 percent drop in
first-quarter profit, though its results were better than
expected as the company gained market share in televisions,
computers and video gaming. For details, see [ID:nN13430449]

The cost to insure its debt with credit default swaps has
risen to around 166 basis points, or $166,000 per year for five
years to insure $10 million in debt, from 147 basis points
before the earnings, according to Markit.

The reliance on new debt to fund the acquisition breaks
with its previously strong cash position, which has been
depleted by the repurchase of $3.5 million in stock in the
fiscal year ended February, Gimme Credit analyst Carol Levenson
said on Monday in a report.

"We are impressed by a high growth retailer that has
managed to fund its expansion without borrowing money, but
those days are apparently over," she said.

As European discretionary slows the timing of the expansion
could turn out to be less than ideal, though it is preferable
to continuing share buybacks, Levenson said.

"The company benefits from its scale, geographic
diversification, and range of product lines within the general
electronics category, and we view its credit profile as
stable," she said.