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Fitch Rates Best Buy $500MM Unsecured Notes Issuance 'BB-'; Outlook Negative
July 11, 2013 / 8:07 PM / 4 years ago

Fitch Rates Best Buy $500MM Unsecured Notes Issuance 'BB-'; Outlook Negative

(The following statement was released by the rating agency) NEW YORK, July 11 (Fitch) 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 shown below. 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. Rating Sensitivities 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 Stable. 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. Contact: Primary Analyst Monica Aggarwal, CFA Senior Director +1-212-908-0282 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Isabel Hu, CFA Associate Director +1-212-908-0672 Committee Chairperson James Rizzo Senior Director +1-212-908-0548 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. 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 here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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