DUFF & PHELPS ASSIGNS 'BBB-' RATING TO BEST BUY PROPOSED DEBT OFFERING AND UPGRADES SUBORDINATED NOTES TO 'BB+'
CHICAGO, Sept. 21 /PRNewswire/ -- Duff & Phelps Credit Rating Co, has assigned a "BBB-" (Triple-B-Minus) rating to the proposed $125 million senior subordinated note offering of Best Buy Co., Inc. Additionally, the rating on Best Buy's subordinated notes has been raised to "BB+" (Double-B-Plus) from "BB" (Double-B). Approximately $147 million of debt is affected by the rating actions. Best Buy's consumer electronic retail strategy appears to have struck a chord with consumers allowing it to grow rapidly and successfully over the past several years. This consumer acceptance and a growing store base have fueled a tripling of sales since 1990. Comparable store sale were 19 percent in fiscal 1993 and year-to-date have been 21 percent. The company's Concept II store format offers consumers a wide selection of name brand products at low prices. Important parts of Best Buy's strategy include targeting home office -- including computers, peripherals, and computer software -- and entertainment software products (videotape and compact disc), clustering its stores to maximize its distribution and advertising resources, and offering a non-commission shopping environment that reduces labor cost and offers a pressure-free shopping experience for the customer. Since 1989, Best Buy has added 70 new stores, including successful entry into the competitive Chicago and Detroit markets. Best Buy expects to add 40 new stores annually over the next several years with expansion into the southeast and west. While D&P's rating recognizes the historically successful expansion and the attractiveness of Best Buy's retailing strategy, D&P also recognizes risks inherent in this period of rapid growth. The rating also recognizes that the discount retailing industry will remain highly competitive. Price competition makes being the low cost provider critically important. Consolidation within the discount retailing industry while providing growth opportunities for Best Buy, ultimately may result in fewer but stronger low-cost competitors. Rapid growth by these major competitors may lead to a more competitive environment, pressuring margins and cash flow in the future. Best Buy historically has been conservatively financed with strong cash flow from operations allowing the company to internally fund a significant portion of their expansion. The company also has issued new common equity ($88 million in November 1991; $86 million in March 1993) to limit the amount of financial leverage required to fund the growth. With the new debt issue, Best Buy's pro forma fixed obligation ratio (including operating leases) will increase to 56 percent but the ratio is expected to decline relatively quickly through growth in retained earnings. New common equity issues are not anticipated over the next several years. Fixed charge coverage approached 3.0 times in 1993 and Duff & Phelps expects it to continue to strengthen from that level. -0- 9/21/93 /CONTACT: David W. Eisinger, CFA, of Duff & Phelps Credit Rating Co., 312-368-3145/ (BBY)
CO: Best Buy Co., Inc. ST: Minnesota IN: REA SU: RTG
TW -- NY067 -- 4235 09/21/93 14:12 EDT
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|Date:||Sep 21, 1993|
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