Electronics retailer Best Buy (NYSE:BBY) fell short of analysts' expectations in Q3 FY2024, with revenue down 7.8% year on year to $9.76 billion. Its full-year revenue guidance of $43.4 billion at the midpoint also came in 1.7% below analysts' estimates. Turning to EPS, Best Buy Co made a non-GAAP profit of $1.29 per share, down from its profit of $1.38 per share in the same quarter last year.
Best Buy Co (BBY) Q3 FY2024 Highlights:
- Revenue: $9.76 billion vs analyst estimates of $9.90 billion (1.4% miss)
- EPS (non-GAAP): $1.29 vs analyst estimates of $1.20 (7.9% beat)
- The company dropped its revenue guidance for the full year from $44.15 billion to $43.4 billion at the midpoint, a 1.7% decrease (EPS guidance also lowered at the midpoint)
- Free Cash Flow was -$108 million, down from $346 million in the same quarter last year
- Gross Margin (GAAP): 22.9%, up from 22% in the same quarter last year (beat)
- Same-Store Sales were down 6.9% year on year (miss vs. expectations of down 5.6% year on year)
With humble beginnings as a stereo equipment seller, Best Buy (NYSE:BBY) now sells a broad selection of consumer electronics, appliances, and home office products.
Whether you need a new gaming headset, a speaker for your home audio system, or a blender for making smoothies, Best Buy has you covered. The company can serve the tech savvy consumer, who appreciates Best Buy’s selection and competitive pricing. Best Buy can also serve the electronics novice providing expert service and advice through its knowledgeable sales associates, who can recommend products and help with technical support and installation. These sales associates, famously known as the ‘Geek Squad’, are one key way the company can compete effectively with larger competitors.
The size of an average Best Buy store is around 40,000 square feet and is typically located in high-traffic areas, such as shopping centers and malls. The stores are typically organized by product categories such as TVs, laptops and computers, home theater/audio, and home appliances among others. The mid-sized footprint, straightforward layout, and displays allow those who know what they want to easily find it but also encourage discovery among those who may be browsing. Best Buy has an e-commerce presence, launched in 1998, that allows customers to purchase products for home delivery or to pick up in-store.
Electronics & Gaming Retailer
After a long day, some of us want to just watch TV, play video games, listen to music, or scroll through our phones; electronics and gaming retailers sell the technology that makes this possible, plus more. Shoppers can find everything from surround-sound speakers to gaming controllers to home appliances in their stores. Competitive prices and helpful store associates that can talk through topics like the latest technology in gaming and installation keep customers coming back. This is a category that has moved rapidly online over the last few decades, so these electronics and gaming retailers have needed to be nimble and aggressive with their e-commerce and omnichannel investments.Retailers offering consumer electronics and home appliances include Walmart (NYSE:WMT), Target (NYSE:TGT), and Amazon.com (NASDAQ:AMZN).
Best Buy Co is a behemoth in the consumer retail sector and benefits from economies of scale, an important advantage giving the business an edge in distribution and more negotiating power with suppliers.
As you can see below, the company's annualized revenue growth rate over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was flat, or 0.2%.
This quarter, Best Buy Co reported a rather uninspiring 7.8% year-on-year revenue decline, missing Wall Street's expectations. Looking ahead, analysts expect sales to grow 1.9% over the next 12 months.
Best Buy Co's demand has been shrinking over the last eight quarters, and on average, its same-store sales have declined by 8.2% year on year.
In the latest quarter, Best Buy Co's same-store sales fell 6.9% year on year. This decrease was a further deceleration from the 10.4% year-on-year decline it posted 12 months ago. We hope the business can get back on track.
Gross Margin & Pricing Power
Gross profit margins tell us how much money a retailer gets to keep after paying for the goods it sells.
Best Buy Co has poor unit economics for a retailer, leaving it with little room for error if things go awry. As you can see below, it's averaged a 21.9% gross margin over the last two years. This means the company makes $0.22 for every $1 in revenue before accounting for its operating expenses.
Best Buy Co's gross profit margin came in at 22.9% this quarter, flat with the same quarter last year. This steady margin stems from its efforts to keep prices low for consumers and signals that it has stable input costs (such as freight expenses to transport goods).
Operating margin is a key profitability metric for retailers because it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.
This quarter, Best Buy Co generated an operating profit margin of 3.6%, in line with the same quarter last year. This indicates the company's costs have been relatively stable.Zooming out, Best Buy Co was profitable over the last eight quarters but held back by its large expense base. It's demonstrated subpar profitability for a consumer retail business, producing an average operating margin of 4%. Its margin has also seen few fluctuations, meaning it will take a big change to improve profitability.
Earnings growth is a critical metric to track, but for long-term shareholders, earnings per share (EPS) is more telling because it accounts for dilution and share repurchases.
In Q3, Best Buy Co reported EPS at $1.29, down from $1.38 in the same quarter a year ago. This print beat Wall Street's estimates by 7.9%.
Between FY2020 and FY2024, Best Buy Co's adjusted diluted EPS grew 5.3%, translating into an unimpressive 1.3% average annual growth rate. This growth, however, is materially higher than its revenue growth over the same period and was driven by excellent expense management (leading to higher profitability) and share repurchases (leading to higher PER share earnings).
Wall Street expects the company to continue growing earnings over the next 12 months, with analysts projecting an average 7.6% year-on-year increase in EPS.
Cash Is King
Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.
Best Buy Co burned through $108 million of cash in Q3, representing a negative 1.1% free cash flow margin. The company shifted to cash flow negative from cash flow positive in the same quarter last year, which happened for several reasons including (but not limited to) the stockpiling of inventory in anticipation of higher demand or unforeseen, one-time events.
Over the last eight quarters, Best Buy Co has shown mediocre cash profitability, putting it in a pinch as it gives the company limited opportunities to reinvest, pay down debt, or return capital to shareholders. Its free cash flow margin has averaged 1.6%, subpar for a consumer retail business. Best Buy Co's margin has also been flat during that time, showing the company needs to take action and improve its cash profitability.
Return on Invested Capital (ROIC)
We like to track a company's long-term return on invested capital (ROIC) in addition to its recent results because it gives a big-picture view of a business's past performance. It also sheds light on its management team's decision-making prowess and is a helpful tool for benchmarking against peers.
Best Buy Co has a strong competitive position and its management team has a wonderful track record of successfully investing in profitable growth initiatives. Its five-year average ROIC is 41.4%, placing it among the best consumer retail companies.
Key Takeaways from Best Buy Co's Q3 Results
With a market capitalization of $14.82 billion, a $636 million cash balance, and positive free cash flow over the last 12 months, we're confident that Best Buy Co has the resources needed to pursue a high-growth business strategy.
It was good to see Best Buy Co beat analysts' EPS expectations this quarter based on better margin performance. That stood out as a positive in these results. On the other hand, its same-store sales and revenue missed analysts' expectations. Full-year revenue guidance was lowered for revenue and EPS, which both missed Wall Street's estimates. Overall, the results could have been better. The company is down 2.3% on the results and currently trades at $66.5 per share.
Is Now The Time?
Best Buy Co may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
Best Buy Co isn't a bad business, but it probably wouldn't be one of our picks. Its revenue growth has been weak over the last four years, but at least growth is expected to increase in the short term. And while its stellar ROIC suggests it has been a well-run company historically, the downside is that its gross margins make it more challenging to reach positive operating profits compared to other consumer retail businesses. On top of that, its declining same-store sales suggests it'll need to change its strategy to succeed.
Best Buy Co's price-to-earnings ratio based on the next 12 months is 10.2x. We don't really see a big opportunity in the stock at the moment, but in the end, beauty is in the eye of the beholder. If you like Best Buy Co, it seems to be trading at a reasonable price.
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