Debt Analysis of Bestbuy

DeAndre Jackson

HW #3

Kyle Allen

Finance 303

Boise State University

DEBT COMPOSITION

The major components of accrued liabilities are state and local tax liabilities, advertising accruals, loyalty program liabilities, rent-related liabilities and self-insurance reserves. The major components of long-term liabilities are unrecognized tax benefits, income tax liabilities, rent-related liabilities, self-insurance reserves, deferred compensation plan liabilities and deferred revenue from service contracts. Currently the ROE ratio stands at 32.08%. This means Best Buy has not taken on leverage, and its above-average ROE is driven by its ability to grow its profit without a huge debt burden.

Returns are usually compared to costs to measure the efficiency of capital. Best Buy’s cost of equity is 8.49%. Since Best Buy’s return covers its cost in excess of 21.42%, its use of equity capital is efficient and likely to be sustainable. Simply put, Best Buy pays less for its capital than what it generates in return.

PLAN

In the context of improved performance and the expected savings brought about by tax reform, Best Buy is increasing the level of investment in the enablers necessary to propel our strategy. Specifically, this includes investments in specialty labor, improvements to employee benefit programs, and an increase in fiscal 2019 capital expenditure plans to $850 to $900 million from the expectations we shared at Investor Day of $750 to $850 million. This compares to an average capital expenditure of $640 million over the last three fiscal years. Capital expenditures typically include investments in our stores, distribution capabilities and information technology enhancements (including e-commerce). During fiscal 2018, $688 million in property and equipment, primarily related to upgrading our information technology systems and capabilities and store-related projects was invested. Non-cash capital expenditures are comprised of capitalized leases, as well as additions to property and equipment included in accounts payable.

INTEREST RATES

Cash primarily consists of cash on hand and bank deposits. Cash equivalents consist of money market funds, commercial paper, corporate bonds and time deposits with an original maturity of 3 months or less when purchased. The amounts of cash equivalents at February 3, 2018, and January 28, 2017, were $524 million and $1,531 million, respectively, and the weighted average interest rates were 1.1% and 0.5%, respectively.

ISSUES

Any future downgrades to our credit ratings and outlook could negatively impact the perception of credit risk and thus our access to capital markets, borrowing costs, vendor terms and lease terms. Our credit ratings are based upon information furnished by us or obtained by a rating agency from its own sources and are subject to revision, suspension or withdrawal by one or more rating agencies at any time. Rating agencies may change the ratings assigned due to developments that are beyond control, including the introduction of new rating practices and methodologies.