Best Buy Shares Quiet as S&P Issues Mid-Day Note Affirming Ratings, Raising Outlook to Stable Following Q2 Results
Standard & Poor's Ratings Services said today it revised the outlook on Minneapolis-based Best Buy Co. Inc. (NYSE: 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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