Why Is Best Buy’s Stock Up Over 90% Since 2017, Despite Only A Small Revenue Jump?

Best Buy stock (NYSE: BBY) has gained a large 93% in the last 3 years or so (as of May 26). What’s surprising is that its revenues have increased by only 11% between fiscal 2017 and 2020 (year ended January 2020). The large stock price gain in the company’s stock can be attributed to Best Buy’s earnings margins (profits as a percent of revenues), expanding from 3.1% to now close to 3.5% over the last few years. Also, Best Buy’s P/E multiple has expanded from 12.2x to 14.4x over this period. Our interactive dashboard Why Is There A Mismatch In The Rate At Which Best Buy’s Revenues And Stock Price Have Changed? gives a detailed picture of how stock and revenue moved for the company over recent years.

So how did Best Buy’s earnings margin expand? This growth has likely been driven through improved cost management as opposed to revenue growth. Since fiscal 2017, SG&A expenses have decreased from 19.2% of revenue to 18.3%. The company also saw a decline in interest expense from $72 million to $64 million in between fiscal 2017 and fiscal 2020.

However, the company’s net income margin fell from 3.1% in fiscal 2017 to 2.4% in fiscal 2018, due to the following charges. In fiscal 2018, the company’s operating income included an $80 million expense related to a one-time bonus for employees and a $20 million charge related to a one-time contribution to the Best Buy Foundation, and a $9 million charge related to asset write-downs in operating income.

The reason for BBY’s stock outperformance over recent years can also be attributed to the company executing its two multiyear strategic plans, Renew Blue and Best Buy 2020. The company has shut down stores, exited regions, and looked to cut internal costs in order to compete in the Amazon-dominated retail market. In addition, it has been emphasizing using its stores as a vehicle for differentiated customer service as well as fulfillment centers. The retailer has been executing on its strategy to cut costs, optimize square footage, grow online sales, and stabilize its revenue stream. It should be noted that the company returned to real growth in fiscal 2018, with revenue growth of 7% y-o-y. This growth followed largely flattish revenue growth in previous fiscal years. Here’s more on Best Buy’s revenues: how the Domestic segment is helping in its growth.

Overall, a combination of margins going from 3.1% to now close to 3.5%, and revenues growing about 11%, meant earnings per share grew from $3.86 in fiscal 2017 to $5.82 a share in fiscal 2020. Although P/E expanded over the years, it stands depressed to the levels of 13.7x currently, down from the 14.4x level in 2019, due to the Covid-19 crisis.

Wondering how a strong competitor like Amazon has done during this time, and over the last few years? Its stock rose triple-digits in the last 3 years, primarily driven by a significant jump in its revenues as well as net income margin, but here’s more on What Factors Drove The 165% Growth In Amazon’s Stock In The Last 3 Years?

In addition, our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

See all Trefis Price Estimates and Download Trefis Data here

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams