S&P Considers Cutting Best Buy Credit Rating to “Junk”

S&P said that Best Buy's recently announced cost-cutting measures, which involve closing 50 big-box stores and opening 100 smaller Best Buy Mobile stores, indicate that "its current business model is not working and that the steps taken to date have not been enough to improve performance."

Richfield-based Best Buy Company, Inc., suffered another setback Wednesday when Standard & Poor's (S&P) ratings services placed the electronics retailer's credit rating on watch “with negative implications,” meaning the company's rating might be downgraded.

S&P's announcement came a week after Best Buy reported poor fiscal 2011 earnings and announced plans to shutter 50 of its big-box stores, add 100 new smaller Best Buy Mobile stores, and cut 400 positions-measures the company hopes will save it $800 million over the next five years.

“In our view, these actions underscore that its current business model is not working and that the steps taken to date have not been enough to improve performance,” S&P said in a statement.

Best Buy currently has a BBB- credit rating, the lowest investment-grade rating for corporate credit, according to a Star Tribune report. If S&P decides to downgrade Best Buy's rating, the company will have a BB+, which is classified as non-investment grade, or “junk” status. The downgrade would reportedly increase Best Buy's borrowing costs.

S&P spokeswoman Fabienne Alexis told Twin Cities Business that the agency expects to decide “in the near term” whether to downgrade Best Buy's rating after discussions with Best Buy about its business strategy, cost reduction, growth initiatives, and financial policies.

S&P Director Jayne Ross told the Star Tribune that when a company is put on credit watch, there is generally a 50 percent chance that its current rating won't be altered and a 50 percent chance the rating will be downgraded. She added that the agency is concerned about whether Best Buy's restructuring plan is sufficient to deal with rapid changes in the industry.

S&P said that in determining whether to downgrade Best Buy's credit profile, it will take into consideration factors including changing industry dynamics and Best Buy's ability to improve its business model.

In an e-mailed statement, Best Buy said that it plans to have a “detailed discussion with S&P to help them understand our business strategy and our strong overall financial position-including our consistent record of generating operating cash and free cash flow, and our $2.5 billion credit facility with major banks. In addition, with the excess cash we generate and our conservative capital structure, we continue to enjoy a high degree of financial flexibility and financial preparedness.”

For the fiscal year that ended in January, the company reported a loss of $3.36 per share, compared to a net profit of $3.08 per share during the previous year. Revenue totaled $50.7 billion for the year, compared to $50.3 billion the prior year.

Shares of Best Buy's stock fell about 2.5 percent on Wednesday after S&P's announcement, closing at $23.55. The company's stock was trading at about $22.86 on Thursday morning.