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S&P cuts its rating on Best Buy (BBY +15.1%) to BB+ from BBB-, saying a buyout led by founder...

S&P cuts its rating on Best Buy (BBY +15.1%) to BB+ from BBB-, saying a buyout led by founder Richard Schulze would "materially weaken" the company with the substantial amount of debt it would add to the retailer's balance sheet. The ratings agency says depending upon the nature of a finalized buyout, it could lower its ratings by several more notches.
Comments (11)
  • Clayton Rulli
    , contributor
    Comments (2860) | Send Message
    LOl a bit premature isnt this? the deal isnt official is it?
    6 Aug 2012, 03:53 PM Reply Like
  • billddrummer
    , contributor
    Comments (1734) | Send Message
    No, the deal isn't official, but the agency appears to think the company's prospects aren't any better even if the takeover bid fails.


    If Mr. Schulze is unsuccessful in his bid to take the company private, all the problems which have been identified at length will remain--compressed margins, falling FCF, diminished close rates, more lookers than buyers, a continuing trend of showrooming for high margin product, and C-suite confusion.


    Add to these issues the higher interest carry on the company's debt, and current coverage ratios seem under pressure, no matter what happens with the bid.


    It's almost as if the rating agency is trying to prevent the same things which tarnished its reputation during the mortgage debacle--being proactive rather than reactive.


    We will see what happens.


    Time will tell, as it always does.
    6 Aug 2012, 11:43 PM Reply Like
  • Matt Blecker, CFA
    , contributor
    Comments (172) | Send Message
    Diminishing free cash flow? Really? FCF last year was about $2.5 billion, a record for the company, as was the operating margin if you adjust for the non-cash, non-recurring impairment charge related to Best Buy Europe.


    If the takeover does go through at the suggested range, Mr Schulze will make a killing long-term.
    7 Aug 2012, 11:30 AM Reply Like
  • billddrummer
    , contributor
    Comments (1734) | Send Message
    I can't argue with you that FCF was at an all-time high.


    I would question, however, the quality of that FCF.


    According to the 2012 10-K, $735 million of FCF arose from non-recurring items-- a decrease in receivables and inventory ($161 million), and an increase in accounts payable ($574 million).


    Page 66, BBY 10-K.


    I submit that it is not likely that the company can continue to shrink inventory while stretching payables on a recurring basis.


    And then there was that restructuring charge--I frankly haven't spent much time analyzing the 2012 income statement, but the GPM did drop compared to 2011--from 25.2% to 24.8%.


    If BBY had maintained its GPM, FCF would have been $204 million higher.


    Margin compression is real. Other issues will be revealed with time.


    Which always tells.
    7 Aug 2012, 08:51 PM Reply Like
  • Matt Blecker, CFA
    , contributor
    Comments (172) | Send Message
    Even adjusting for the working capital items you mentioned above, true free cash flow (net income plus dep and amort minus cap ex plus or minus major non-recurring one-time items like the non-cash impairment charge related to Best Buy Europe) was still nearly $1.5 billion. And although the operating margin slipped somewhat it was still within a normal range, 4.5% adjusted for the non-cash, non-recurring impairment charge related to Best Buy Europe, which is the only major one-time non-recurring item. Adjusted EBITDA was actually higher than the previous year (adjusted for the BB Europe impairment charge). Best Buy's operating margin has actually been fairly stable and is much higher than Costco's or Amazon's and way higher than Circuit City's ever was. Margins were inflated in the mid 2000s bc of the housing bubble and are now back to pre-bubble levels.


    In terms of payables, Best Buy has a fairly stable payables period of about 50 days compared with Amazon's which was over 90 last year.


    Bill, I take from your comments that you have had some bad experiences working for Best Buy, but I invite you to look at the true company fundamentals and the cheap price relative to earnings and cash flow, as opposed to the groupthink mostly present on this board, mostly based on broad generalities, not facts.


    Lastly, Best Buy's market share has not fallen much at all if data from their and Amazons filings and the Dept of Commerce is examined.


    Boy typing this on a tablet is annoying lol.
    8 Aug 2012, 03:09 PM Reply Like
  • billddrummer
    , contributor
    Comments (1734) | Send Message
    Thanks for reading my posts.


    Your take on the financials is sound, and I applaud your educational accomplishments and career trajectory.


    My position on the company doesn't spring from a spate of bad experiences at Best Buy (though they were nothing to brag about). Rather, it's a reaction to the seeming lack of focus and clear direction from the C-suite.


    I'm waiting for compelling, innovative business solutions from the management team. So far, what is being proposed has not excited either the investment community or its customer base.


    Perhaps there will be more concrete proposals when the 2nd quarter earnings are released (8/21/12).


    We shall see, and thank you again.
    8 Aug 2012, 08:02 PM Reply Like
  • Matt Blecker, CFA
    , contributor
    Comments (172) | Send Message


    Appreciate the kind words and your valuable contribution to the discussion.


    On a side note, my wife and I purchased a camera at Best Buy today. Best Buy's prices were equal to Amazon's in all cases, actually slightly better in one. Next to each camera were reviews from the internet, just as you would see on Amazon. There is also an area now in many stores for online purchase pick up. The sales staff was good and fairly knowledgeable, although not fabulous. On an A through F scale, I would give them a B. The showcasing of items such as tablets and televisions was also a positive.


    The company can certainly cut down on square footage, something they are working on and would certainly do more aggressively if taken private. They can easily cut square footage by 1/3. The key will be negotiating the leases effectively.
    8 Aug 2012, 11:46 PM Reply Like
  • billddrummer
    , contributor
    Comments (1734) | Send Message
    I'm glad you had a positive experience at Best Buy.


    The uneven experiences many have relayed may stem from the character of the store GM. It is common knowledge that the conduct and attitude of the GM is the single most important thing that separates an average or below-average store from a superior store.


    I absolutely agree with you that taking the company private could make it easier to cut square footage, adjust pricing and realign staffing.


    I also agree with you that cutting the store footprint without effectively negotiating exits on the leases would prove counterproductive.


    As I have posted in the past, I believe the company should look critically at stores opened during the commercial real estate boom (2004-2008), when developers signed anchors like BBY with below-market lease rates to lure other subanchors and line tenants.


    It seems to me that those stores are entering their first rent reset cycle, and if marginal locations are subject to increases in fixed costs, profits could turn quickly to losses as new lease rates take effect.


    Identifying those stores vulnerable to higher fixed costs seems key to the company's future performance.
    9 Aug 2012, 09:57 PM Reply Like
  • coolshaps
    , contributor
    Comments (48) | Send Message
    From a trends and US perspective, WMT / TGT / Costco > BBY.


    Lower prices, less corporate sales mentality, though less knowledgable staff. I prefer to shop at WMT / TGT / Costco. Best Buy used to be cool, but now that I do my own research on electronics, I don't need to be fed the same elementary pitch about TVs. LED / Plasma, refresh rate, blah blah blah.


    Price is the bottom line, though not all consumers are created equal. I am staying short throughout Schultz PR pump. There's a reason he doesn't own the company.
    7 Aug 2012, 02:24 AM Reply Like
  • bill333
    , contributor
    Comments (17) | Send Message
    Bottom line is Schultz is trying to jack up a sinking ship and bailing like crazy. He may follow Martha to the jail.
    7 Aug 2012, 09:28 PM Reply Like
  • billddrummer
    , contributor
    Comments (1734) | Send Message
    First of all, his name is Richard Schulze.


    There may be an ulterior motive to artificially increase the stock price to provide him a short term gain.


    But considering he's already spoken with several individuals about becoming part of the 'New Best Buy' management team, and sent out feelers to investment banks about arranging financing for a buyout, provides a different message altogether.


    That he's more interested in turning around the company than liquidating his position for a tidy profit.


    I do believe, however, that a $30-31/share price would prod investors to act.


    At $24-$26/share, only the most pessimistic would be interested.


    Interesting that an avowed outsider pegged that price in May, back when this idea was first being propagated:



    I was one who suggested the $31/share price, which represented approximately a 60% premium to the share price at closing on that date.


    It's a 56% premium to today's close--which just goes to show that things go up, and then go down, but don't change much.
    7 Aug 2012, 11:37 PM Reply Like
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