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Does Best Buy Deserve Its Junk Rating?

Tickers in this article: AAPL AMZN BBY COST WMT

NEW YORK ( TheStreet) -- At this time a year ago, Best Buy's bond ratings were slashed to junk status at Fitch and Standard & Poor's amid informal efforts by the company's founder Richard Schulze to take the electronics retailer private.

At the time, Best Buy was losing money and hemorrhaging cash as the big box retailer's profit margins compressed and sales dropped significantly in the U.S. and abroad.

Schulze's buyout deal never materialized and all that is left from the Aug. 6, 2012, buyout "proposal" is Best Buy's junk status at two major two bond rating firms.

Now, the company has returned to profitability and its operations are beginning to generate cash again. Best Buy's "Renew Blue" strategy under new CEO Hubert Joly and three quarters of better-than-forecast earnings that culminated in a return to profitability in the second quarter beg the question of whether the business has stabilized.

Same-store sales declines have flattened and margins appear to have bottomed, even as Best Buy put in place a program to match Amazon pricing.

Currently, stock investors appear to be pricing in a bottom, if not a recovery.

In premarket trading Tuesday, Best Buy shares rose to their highest level since late 2010 and they now sit within striking distance of a pre-crisis stock price above $40 a share.

Still, it is unlikely Best Buy's bond ratings are going to change in the short-term. While some agencies took quick action on Schulze's buyout proposal, they are likely to wait for clear signals of improvements in Best Buy's earnings before any upgrades.

Moody's currently holds Best Buy at an investment grade rating of Baa2, but with a negative outlook. Fitch and S&P, meanwhile, attach a negative outlook to their already sub-investment grade ratings of BB- and BB.

A firm investment grade rating might signal that after years of predictions of Best Buy's eventual demise, the company does have a sustainable footing in electronics retail even with the competitive pressures from price cutters like Amazon, Wal-Mart and Costco and the dominant presence of Apple .

A continued firming of Best Buy's earnings may force agencies that downgraded the company amid Schulze's buyout efforts to reverse course. Some figures in the company's second-quarter earnings indicate the firm is falling within the criteria of an upgrade.

Best Buy's gross profit at its domestic stores fell only 0.3% in the second quarter, even as the company implemented a price matching program with Amazon. Overall, the firm's 26.5% gross profit reflected a more than 2% rise from year-ago levels and in the first half of the year margins gained slightly. While some of Best Buy's stabilizing margins are attributable to one-time factors such as legal settlements, they nevertheless are far better than many had expected.