Best Buy Co. Inc. shares tumbled 2.55 percent Wednesday as its corporate credit rating took one step closer to being tagged with "junk" status.
Standard & Poor's Ratings Services placed the Richfield-based electronics retailer on credit watch "with negative implications.'' The announcement comes a week after Best Buy disclosed plans to close 50 of its big box stores and take related measures that will result in hundreds of layoffs and $800 million in savings over the next five years.
Best Buy currently has a BBB- credit rating, the lowest investment-grade rating for corporate credit. The next step down is BB+, classified as non-investment grade or "junk" status. A downgrade would likely increase borrowing costs for Best Buy.
"We believe the restructuring of operations underscores the problems that Best Buy is having with its current business model," Jayne Ross, director at Standard & Poor's Ratings Services, said in a news release announcing the move.
Ross said in an interview with the Star Tribune that when the agency puts a company on credit watch, there is generally a 50 percent chance the company's current rating won't be altered and a 50 percent chance the rating will be downgraded.
In an e-mail, Best Buy responded: "We are aware that S&P has issued a credit watch for Best Buy, and we look forward to 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."
Best Buy declined an interview request to have company officials discuss the rating.
If a company does not take steps to explain or alleviate factors that led to a credit watch, the credit agency may make a downgrade within 90 days. Standard & Poor's expects to resolve the credit watch listing with Best Buy after discussions with its management regarding the company's strategy.
Ross acknowledged that consumer electronics is one of the toughest segments of the retail industry. Looking ahead, she wonders if the restructuring plan is sufficient to deal with changes in the industry.
"Our concerns are more on the business side," Ross said. "How is Best Buy changing to address rapid changes in the industry?"
Some Best Buy investors have been anticipating bad news at the big retailer for months. The number of Best Buy shares being "shorted" has risen 59 percent since December. As of March 15, the number of shares in the hands of short sellers stood at 47.8 million shares, or 17 percent of trading shares. Short sellers are investors who profit when shares of a company fall.
Patrick Kennedy • 612-673-7926