Uncategorized
Potential upgrade of Best Buy highlights relative value
admin | November 22, 2019
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
Moody’s placed Best Buy’s (BBY) Baa1 rating on review for an upgrade, highlighting the company’s consistent operating performance coupled with its conservative financial policies and strong credit metrics relative to peers. Despite the potential for an upgrade to the low A category, BBY continues to trade at a considerable discount to its mid-to-high BBB retail peers. A particularly attractive retail swap is out of ORLY 3.9% 6/1/29 into BBY 4.45% 10/1/28: investors shorten maturity by 8 months, pick up 60 bp (g-spread), while staying within the same ratings category (Baa1/BBB) and deal size.
Exhibit 1. BBB/BBB+ Retail Space – 7-10yr (excluding department stores)

Source: Bloomberg; APS
Best Buy’s debt/EBITDA currently stands at 0.4x with lease adjusted leverage at 1.0x. Leverage that low is indicative of much higher ratings – for example, Target Corp. (TGT – A2/A/A-) and Ralph Lauren Corp. (RL – A2/A-) are currently levered on a lease adjusted basis at 1.85x and 1.7x, respectively. Most BBB retail peers (Exhibit 1) have been operating with lease adjusted leverage in the 2.2x-2.5x range, while both Dollar General (DG) and Dollar Tree (DLTR) operate closer to 3.0x.
The right strategy
Despite the consumer electronics business being highly promotional and competition from the likes of Amazon (AMZN A3 (p)/AA-/A+ (p)), Walmart (WMT Aa2/AA/AA) and TGT, BBY has found the right strategy to resonate with customers. The company has become a trusted retailer for consumer electronics vendors including Apple, Amazon, Google, Microsoft, Samsung and Sony. Management’s vision to properly utilize square footage to showcase products that consumers typically like to test prior to purchase, coupled with investments in its staff and a strong and growing services business, has helped differentiate BBY from its competition. BBY is also forging a path in healthcare services for aging seniors, with its recent acquisitions of GreatCall and Critical Signal Technologies (CST). These devices and services not only help seniors live longer in their homes, but also help to reduce health care costs for their customers. Furthermore, they are a great complement to BBY’s Geek Squad and In-Home Advisors services as more customers are demanding “smarter” homes.
Balance sheet remains strong
BBY moved to a net cash position in the summer of 2013 and maintained a net cash position while executing its Renew Blue Transformation. During the transformation, management felt that a cash position of at least $3.0 billion was the right approach in order to provide the company with financial flexibility while reinvesting in the business and reducing debt. Now that the transformation is complete, management is operating with less cash on the balance sheet. However, with the exception of fiscal 2Q19, BBY has remained in a net cash position, which as of 2Q20 was $348 million. This is after completing the acquisition of CST on 6/4/19 for $125 million in cash. It is likely the company will maintain a similar level of cash on the balance sheet going forward, with the potential for some temporary declines as BBY continues to expand its services business. The strong cash position, untapped $1.25 billion revolver (maturing 4/17/23) and estimates for over $2 billion of free cash flow this year puts BBY in an exceptional liquidity position. Furthermore, BBY has no debt maturing until 3/15/21, when $650 million comes due.
Exhibit 2: BBY cash vs. debt

Source: BBY Company Reports
Financial Goals Achieved Early
At the company’s investor day back in September 2017, BBY listed financial targets that they expected to achieve by FY2021. BBY was still in the midst of its Renew Blue Transformation program and felt that 4 years was ample time to achieve what was considered somewhat aggressive goals given the competitive and changing retail landscape. Retailers were not only heavily investing in omni-channel at the time which was pressuring margins, but also left in a position where promotional activity was necessary to both compete and grow the top line. Despite the headwinds, BBY achieved its financial goals two years ahead of target. Furthermore over the same time period, BBY increased its share of wallet by over 200 bp.
Exhibit 3. BBY Financial Goals

Source: BBY Company Reports
The growth in the online business, which now accounts for 17% of BBY’s top line was a big part of the company’s ability to hit its targets early, as supply chain and omni-channel investments have paid off. BBY has centralized access to its inventory and can fulfill an online order from a store or distribution center, depending on the customer’s preference for shipping speed. BBY noted that 80% of customers are now located in a zip code where next day deliveries are available. Additionally, 42 markets now have access to same day service, and customers wanting a buy online/pick up in store option can typically pick up their item within 30 minutes or less post online purchase. This speed in delivery/pickup provides a convenience factor which is highly valued by the consumer.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2025 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.