Fitch downgrades Best Buy credit rating

June 27, 2011 - 2:30 PM

NEW YORK (AP) — Fitch Ratings on Monday cut its long-term default rating on electronics retailer Best Buy Co. by two notches to the lowest investment-grade rating. The agency cited weak sales trends at established stores, tough competition and a battle for market share as more shoppers buy electronics online or at discount retailers.

Fitch also noted that Best Buy is facing a consumer pressured by high unemployment and housing costs and rising gas prices. The agency lowered the rating to "BBB-" from "BBB+" with a stable outlook. As of May 28, Best Buy had $2.1 billion of debt outstanding.

Earlier this month, Best Buy reported first-quarter profit and revenue above Wall Street expectations, as a renewed focus on hot-selling gadgets such as smart phones and the iPad and a larger presence in China helped boost results. Yet even as industry analysts lauded the nation's largest specialty electronics store for its ability to keep costs down and maintain its financial outlook, they said they also see a threat to margins going forward, with consumers increasingly heading online or to discount stores for the best deals and mainstays like flat screen televisions and DVDs no longer selling like they once did.

The company also has had to spend more to promote its top products, putting profit margins under pressure.

And Fitch noted that sales at stores open at least a year, an important metric for retailers, was down 1.7 percent for the quarter ended in May. So-called same-store sales haven't been materially positive for the retailer since calendar 2007 and the agency expects they will remain in negative territory.

Fitch did say that the investmen-grade rating reflects Best Buy's solid free cash flow generation, ample liquidity including $2.2 billion in cash and reasonable debt profile. It also noted that Best Buy's profits haven't suffered much despite the sales pressures. However, Fitch expects that Best Buy will put much of its free cash flow toward paying out dividends and buying back shares to please shareholders.

The company doesn't have debt coming due until 2013 ($500 million worth of unsecured notes), which Fitch expects the Best Buy to refinance or pay down with cash on hand.

In midday trading, Best Buy shares fell $1.05, or 3.2 percent, to $31.44.