Will Retailer Best Buy Draw Closer toward a Bankruptcy Scenario?

Posted on 04/16/2020

On April 16, 2020, luxury retailer Neiman Marcus Group Inc. skipped a US$ 5 million bond coupon payment, as the company would have to restructure its debt profile or file for bankruptcy. As embattled J.C. Penney recently missed an approximate US$ 12 million bond payment, Best Buy Co., Inc. is being grouped with other U.S. retailers, facing uncertainty from the economic fallout of the Wuhan coronavirus pandemic. Despite some successes in selling computer monitors, kitchen appliances, and freezers, Best Buy recently decided to plan on furloughing about 51,000 employees. Best Buy seeks to cover the total cost of their health benefits and pay their tuition reimbursements for at least three months. In the April 15, 2020 company press release, “From the first days of the pandemic, the company made these decisions related to its employees: (1) Best Buy employees do not have to work if they do not feel comfortable doing so; and (2) they should stay home if they are feeling sick, knowing they would be paid. All retail and field employees whose hours were eliminated when the company shifted to the curbside service model are being paid for their regularly scheduled hours through April 18.”

Reality has struck the retailer. Since March 22, 2020, Best Buy’s stores across the America have been closed and the company suspended all in-home delivery, installation, and repairs. Best Buy still has curbside pickup at its stores.

Financial Stress

On April 17, 2018, Best Buy entered into a US$ 1.25 billion five year senior unsecured revolving credit facility agreement with a syndicate of banks including U.S. Bank, JPMorgan Chase Bank, BBVA Compass, and Citibank. The credit facility permits borrowings of up to US$ 1.25 billion and expires in April 2023, with no borrowings outstanding as of February 1, 2020, and February 2, 2019.

Before closing all stores, on March 19, 2020, Best Buy drew down the full amount of the US$ 1.25 billion credit facility to increase its cash position. During that period, the price of a 5-year credit default swap on Best Buy skyrocketed.

At February 1, 2020, operating lease obligations for less than 1-year were at US$ 738 million, while operating lease obligations for 1-3 years were at US$ 1.199 billion.

Best Buy does have hope in online store sales to offset costs such as leases and other liabilities.

Institutional Shareholders

At December 31, 2019, the largest institutional shareholders in Best Buy included the major fund houses like Vanguard Group Inc, FMR LLC, BlackRock Inc., State Street Corporation, and JPMorgan Chase & Co.

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