Moody's Upgrades Best Buy (BBY) to 'Baa1'; Notes Changes to Capitalizing Operating Leases Approach
Moody's Investors Service upgraded all ratings of Best Buy (NYSE: BBY) ("Best Buy"), including the Senior Unsecured rating, which was upgraded to Baa1 from Baa2. A stable outlook was assigned. This concludes the review for upgrade that commenced on June 16, 2015.
Upgrades: ..Issuer: Best Buy Co., Inc.
.... Issuer Rating (Local Currency), Upgraded to Baa1 from Baa2
....Senior Unsecured Regular Bond/Debenture (Local Currency) Aug 1, 2018, Upgraded to Baa1 from Baa2
....Senior Unsecured Regular Bond/Debenture (Local Currency) Mar 15, 2016, Upgraded to Baa1 from Baa2
....Senior Unsecured Regular Bond/Debenture (Local Currency) Mar 15, 2021, Upgraded to Baa1 from Baa2
Outlook Actions:
..Issuer: Best Buy Co., Inc.
....Outlook, Changed To Stable From Rating Under Review
RATINGS RATIONALE
"The upgrade largely reflects the reduction in adjusted debt due to changes in Moody's approach for capitalizing operating leases, which reduced the lease multiple to 5 times from 8 times." stated Moody's Vice President Charlie O'Shea. The updated approach for standard adjustments for operating leases is explained in the cross-sector rating methodology Financial Statement Adjustments in the Analysis of Non-Financial Corporations, published on June 15, 2015. "As a direct result of this change, Best Buy's debt/EBITDA has reduced to under two times, while RCF/Net debt has increased to over 50% and EBITA/interest has improved to around 7.5 times," O'Shea added. "Best Buy continues its successful transformation into a true multi-channel retailer, and we believe the company will continue to benefit from its deep vendor relationships with world-class partners such as Samsung, Sony, Microsoft, Apple, and Amazon. Of note, Apple recently-selected Best Buy as the only non-Apple retailer to sell the Apple Watch, which we believe is a reflection of Best Buy's retail strength."
The Baa1 rating reflects the positive impact on Best Buy's quantitative credit profile of the reduction in lease multiple to 5 times from 8 times, with metrics that are now all well into the A rating category. The rating also continues to reflect the company's position as the largest dedicated consumer electronics retailer, its highly diversified product line, its deep partnerships with key vendors including Samsung, Apple, Microsoft, and Sony, and excellent liquidity. Ratings support is also provided by the company's demonstrated ability and willingness to reduce share repurchase activity in order to maintain its ratings, and it is our expectation that this will continue at the new rating level as well. Other key rating factors include the presence of internet retailers, primarily Amazon, and discounters such as Walmart and Target, as primary and formidable competitors, especially around the key Holiday and Super Bowl selling season, as well as the highly-promotional nature of the consumer electronics segment in general. The stable outlook reflects our expectation that Best Buy's competitive position will remain formidable, with requisite favorable impact on operating results. Ratings could be upgraded if operating performance continues its recent trends and financial policy remains balanced such that debt/EBITDA was sustained around 2.25 times, RCF/net debt was sustained above 35%, and EBITA/interest was sustained around 7 times. Qualitative factors that would be considered would include the company's market share across various product categories, its penetration into services adjacent to its product categories, and its ability to handle any changes in product or technological innovation within its sector. Ratings could be downgraded if either deterioration in operating performance or a more aggressive financial policy resulted in debt/EBITDA exceeding 3 times and RCF/net debt fell below 25%, or if EBITA/interest falling below 5 times.
The principal methodology used in these ratings was Global Retail Industry published in June 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.