Standard & Poor's Ratings Services
said today it revised the outlook on Minneapolis-based Best Buy Co. Inc. BBY to
stable from negative. We also affirmed all of our ratings on the company,
including the 'BB' corporate credit rating. We based the outlook revision on
the company's second quarter operating results, which were better than we
expected. While we believe the company could experience some margin and profit
pressure as a result of various pricing, selling, and operational initiatives,
we think downside risk has moderated and that the company should be able to
maintain adjusted leverage in the high 2x area over the near term.
"The rating on Best Buy reflects our view of the company's business risk
profile as "weak", which we based on the inherent risks of the cyclical
consumer electronics business that depends on new products for propelling
sales growth. It also incorporates our view of the competitive environment
Best Buy faces from internet-based retail formats, discounters, warehouse
clubs, and other big-box retailers in many of its product categories," said
credit analyst Charles Pinson-Rose. "We have revised our financial risk
assessment to "intermediate" from "significant", which is based on our
forecasted credit ratios. We now believe that the company will maintain
operating lease adjusted leverage in the high 2x area over the near to
intermediate term."
The outlook is stable and incorporates our expectation that the sales trends
should improve moderately. While we expect there could be wide range of margin
performance, we expect EBITDA to remain in a range such that leverage would
remain in the high 2x area and FFO/debt above 30%, both of which are
appropriate for the current financial risk assessment.
We would consider a lower corporate credit rating if adjusted EBITDA was in
$1.4 billion area, leading to adjusted debt to EBITDA near 3.5x. This could
occur if the company's total revenues decline by about 5% in 2013 and
operating margins declined about 150 basis points.
We would raise our rating on the company if we revise our business risk
assessment to "fair" from "weak", which would mostly likely be predicated on
the company's selling initiatives gaining traction and the company growing
sales and profits meaningfully and sustainably.
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