Best Buy (BBY): Earnings, Margins and Future Outlook

Competitors like GARMIN and E-BAY are feasting on Profit Bag.

In 2022, I wrote about Best Buy (BBY), and I think back then the average stock price was at $74/ share.

Despite all the economic headwinds in 2024, they still bought back shares? Which simply means if you hold or buy more shares, you should be having more economic interest of the company. (And don’t forget 1/7 is higher than 1/8, and 2/7 is even higher.)

So, let’s assume you have 100 shares of Best Buy (BBY), and the firm has 800 shares outstandings, and it decides to buyback 100, it should have 700 remaining. Remember you have 100 shares, now with that buyback, your interest increases from 1/8 to 1/7, how much more when you buy an extra 100 for yourself?

Your interest increases from 1/7 (14.3%) profit portion of the company to 2/7 (28.6%) of the profit portion. That’s why the need for holding and/or buying more of a stock that constantly buys back shares is very crucial.

Its paid membership program increased by 20%, from about 5.8 million. Also increased quarterly dividend by 2% (which was announced in march 2024).

What does best buy do again?

It’s an American multinational that sells consumer electronics. Its long run goal is to enrich everyone’s life through technology. And that will continue to drive is course into and through 2025.

It has partnered with Bell Canada to open up 165 small CE retail stores. The Geek Squad as a service is building up, and more vendors are showing support, great extra cash streams for Best Buy.

So, when you get a refrigerator, you could always call on Geek Squad to help with the installation process. The focus for 2025 remains; ensuring customers have a great experience. It has 965 stores in the U.S, 160 in Canada.

It would be reporting its 34th consecutive year in operating profits in 2024, $1.57 billion but it’s down 12% from last year.

Best Buy (BBY) has had two phases of declines in operating performance (2023 and 2024), but that $3 billion earnings in 2022 was a quick relief from its 2014 years till 2019 when it struggled to keep half of what it made in the 2011 and 2010 era.

In 2022, BBY had $51.8 billion in sales, in restructuring its operations, it saved up $34 million but unfortunately, sales declined by 11% and 16% for 2023 and 2024 respectively. Coupled with actual expenses on restructuring, operating margins took a consecutive downstroke by 34% (for the two years). Right since 2010, it has always circled around the 3% - 5% margin level. ?

BBY has strayed, its 5-year PEG ratio (considering operating earnings) is -3.6.

The firm is currently under a cheesy price line, but intrinsic growth trends down to the negative 4% roads.

For fiscal year 2024, sales were lower than expected, but it remains focused on its purpose – enriching lives through technology.?

Surely historical trends do not fully determine a firm’s future course, as solid and economically substantial inputs reload the profit curve. Best Buy (BBY) might be having unhappy numbers but it expects to see a rebound in consumer demand for tech-based products (manufacturers are heavily innovating, and that could change future value-oriented outcomes).

But it’s crucial to look at its competitors by the way.

Best Buy, Amazon, E-bay, Garmin, Tractor Supply, Home Depot, Hasbro and Lowe’s sell some similar products. And data shows Garmin (GRMN) as the most MOAT competitive at a margin of 23%, second placing E-BAY (EBAY) at 24%.

I didn’t want to emphasize E-BAY because its majorly an e-commerce business, and I really like Garmin (GRMN) because it serves a niche market, and it’s growing exponentially. [both stocks might be reducing shares outstandings by a large sum as well.]

Shares outstandings reduced by a compound growth rate of a negative 5%, a prove that it has been constantly buying back its publicly available rights of ownership, and management gets to keep more of the profits.

Garmin sells cycling computers, indoor trainers, radar, smart watches and power meters.? ?

BBY has announced its partnerships with Advocate Health, Gesinger Health, and Mass General Brigham which is generally great to the American Gross Domestic Product (GDP) space, its 8.3% market share on North America with respect to consumer electronics is also alarming.

I am just heavily fascinated by E-bay and Garmin’s economic returns.

E-Bay was founded in 1995 in San Jose California. It majorly creates an opportunity for buyers and sellers to come together, and engage in activities that monetarily yield strong value.

It has its online and offline platforms; it recently withstood its 5-year operating margin at 24%.

It primarily makes money from paid advertising, sales, and payment processing. (These fees are collected from the sellers on its platforms).

It also competes with Best Buy (BBY) in the electronics space.

Trailing twelve-month revenue were up by 1.52%, and operating earnings at 12.6%

Bought back $1.9 billion worth of shares in 2023, [holding or buying more of a reduced outstanding share increases ownership stake].?

E-BAY is keen on solving specific and ever-changing needs of its customers, and that has caused a strong increase in its market share in all portfolio positions till date.

With the Guarantee fit feature, if you need the right size for your automotive parts, E-BAY’s got you covered. It also has other programs like the Certified by brand, and refurbished program with some SEO enhancements to ensure customers have a great experience.

For the future, it is aggressively capitalizing on AI to ensure the buying and selling process is very seamless, scaling its solutions and innovations. There we go, you have your MOAT.

On a rough sketch, fair value reads $42.3 billion (considering a blend of DCF and NPV methods), but Warren’s principled thoughts (from my observations of his assumptions), it might be around $27 billion. And remembering Charlie, I would recall – fair value for fair price.

But patience might create opportunities for prices below their intrinsic value. And now that we may be expecting rate cut this December, using the naked 10-year rate alone may cause EBAY to keep its fair value at $65 billion.

My second favorite, Garmin (GRMN), before I continue, one thing to note – consumption is unending. Add an extra 50 years we get 2074, as long as humans exist, products and services would have to be sold and purchased.

Businesses earn, the most competitive and future-focused do best. That’s why buying and keeping great businesses is forever the hallmark of fortune.

It’s a spirit for Warren, Charlie and the Value investing community. As their protégé, I will forever chant that philosophy.

Continuing on Garmin (GRMN), it breeds new products, cutting across Fitness, auto OEM, Outdoor, Aviation and Marine.

Fitness devices like the smart watches to help monitor your exercise and improve your health.

Golf devices to help improve your game, helping to manufacture original equipment (for example, a new engine that came with your car).

Garmin also designs, manufacture and sells aircraft avionics solutions well desired by major aircrafts in the world. GRMN may create new models of GPS navigators, slimline radio series, flight displays and instruments and major airlines like Southwest, United, American airlines, and/or U.S defense military aircraft manufacturers like Fairchild Republic may patronize without second thoughts.

It is also into marine products offerings like the Chartplotters, Fishfinders, Autopilots – the solid state 9-axis Attitude Heading Reference System (AHRS) causes the GHP Reactor to hold course even when your boat is unsteady in rough water, while reducing power consumption, route deviation and rudder movements as a bonus.

This guys, (GRMN and EBAY) are stroppily holding on to the future. Garmin’s (GRMN) got engineering and manufacturing teams who work hand-in-hand to foster its products innovations.

We should expect new offerings from GRMN overtime. Other competitors in the electronics space (or selling similar products) aren’t getting as much margins as these two are.

For the latest quarter, Garmin (GRMN) had $1.6 billion in sales (up 24% compared to last year’s third quarter. Operating margins got a good hit – 28% of total sales. Operating income was $437 million which was 62% higher than last year’s Q3.

Recently, it launched the fēnix? 8 series and the EnduroTM 3, getting pumped up on growing its outdoor watches business segment. it acquired Lumishore, a leader in the Marine LED lighting industry.

GRMN’s fair value be lurking around $21 billion (still considering a blend of DCF and NPV), but realistically, if rates get a 3% up, it might be $24 billion. But where there are no possible rate hikes, that value triggers $55 billion.

But rationality insists that we assume a 3% up, so its value would stay around that $24 billion area. Personally, I think GARMN is painfully expensive as of now.

Best Buy (BBY) has also made moves to partner with Bell Canada to operate 165 small-format stores. It’s still building out its Geek Squad as a Service business. Partnership and expansion may widen up earnings, but were there aren’t systems to ensure operational efficiency, margins may still remain miniscule.

But the three companies are expanding operations, which requires a lot of cash, I think the options of repurchasing shares need to be weighted upon future liquidity needs. So, if they decide to slow down on share repurchases, it might still be understandable.

Core inflation in the U.S is at 3.3%, rent inflation (been the highest) at 4.9% and the 5-year compound growth rate in price returns of each stock at -2%, 17%, and 2% for BBY, GRMN and E-BAY respectively. But in total return terms, their average is 3%, 23% and 7% respectively.

With respect to growth in how much is created in market value for a dollar in retained earnings, I think I’d prefer GARMIN(GRMN) because in 2019, it created $5.8 in market value for $1 retained, and as at now (2024), $7.4 has been created in market value for a dollar retained which gives a compound growth of 5%, compared to EBAY’s -12.5% and BBY’s 0.2%.

Overtime, stock prices gravitate towards intrinsic value, so we might expect strong discrepancies between market and book value (the longer the period, the wider the gap).

If a business is really great, even if the intrinsic value is less than the current market price, over time that intrinsic worth would gyrate upward and the market would have to reflect it as the years go by.

But if a business is finding it hard to stay competitive, where the fair value is less than the current price, market value may dip more to reflect that low intrinsic worth.

That’s why fair prices of really great businesses are still reasonable.

As of now, E-bay seems to be the most underpriced out of all the ones listed. The market currently holds it at 4x its book value, while GARMIN (GRMN) is praised more by 23% of that ratio.

BBY recently returned $1.1 billion to shareholders through dividends, E-bay paid $534 million (trailing twelve-month sense), and GARMIN served up its investors with $568 million in cash (also with a TTM calculation).

When talking more about the gains in underlying earning power, I think GRMN is doing more of the job for us.

GARMIN (GRMN) has had more gains in underlying power than E-BAY and Best Buy (BBY) though. Right since 2010, it has only had 4 years of earnings reduction, E-BAY’s and Best Buy’s got 7.

On the matter of investors’ returns, ROE for GARMIN passes the two-digit standard test, its at 18%, and E-BAY at 47% (though E-BAY runs with a couple of more debts than shareholders capital). [Let’s not forget, GARMIN’s got no debt, at least currently].

I forgot to add Best Buy’s fair value; from a realistic sense, under a 2% average growth rate in the U.S, still assuming a 3% up in the 10-year treasury, with recent free cash flow of $675 million, my value pessimistically resides at $12.9 billion. [It’s a sketch, I value based on real life assumptions].

Here’s a chart that shows their overall margins, and average price return (against inflation) from 2019 till date: ?

?

Please note, the treasury rate changes all the time, so valuation also fluctuates with that metric.

Disclaimer: insights on businesses are endless, seriously chasing the GDP. These may create opportunities for bolt-on acquisitions as value investing would be chanted forever. However, these ideas are at my own discretion, your due diligence is mostly honored.