Margins matter. The more Best Buy (NYSE: BBY) keeps of each buck it earns in revenue, the more money it has to invest in growth, fund new strategic plans, or (gasp!) distribute to shareholders. That's why I check on my holdings' margins at least once a quarter. I'm looking for the absolute numbers, comparisons to sector peers and competitors, and any trend that may tell me how strong Best Buy's competitive position could be.

Here's the current margin snapshot for Best Buy and some of its sector and industry peers, and direct competitors.

Company

TTM Gross Margin

TTM Operating Margin

TTM Net Margin

 Best Buy

24.6%

4.5%

2.6%

 Gap (NYSE: GPS)

40.9%

13.5%

8.3%

 Kohl's (NYSE: KSS)

37.9%

10.3%

6%

 RadioShack (NYSE: RSH)

45.9%

9%

5%

 Home Depot (NYSE: HD)

33.7%

7.4%

4.3%

Source: Capital IQ, a division of Standard & Poor's.

Unfortunately, that chart doesn't tell us much about where Best Buy has been, or where it's going. A company with rising gross and operating margins often fuels its growth by increasing demand for its products. If it sells more units while keeping costs in check, its profitability increases. Conversely, a company with gross margins that inch downward over time is often losing out to competition, and possibly engaging in a race to the bottom on prices. If it can't make up for this problem by cutting costs -- and most companies can't -- then both the business and its shares face a decidedly bleak outlook.

Of course, over the short term, the kind of economic shocks we recently experienced can drastically affect a company's profitability. That's why I like to look at five fiscal years' worth of margins, along with the results for the trailing 12 months, the last fiscal year, and last fiscal quarter. You can't always reach a hard conclusion about your company's health, but you can better understand what to expect, and what to watch.

Here's the margin picture for Best Buy over the past few years.


(Because of seasonality in some businesses, the numbers for the last period on the right -- the TTM figures -- aren't always comparable to the FY results preceding them.)

Here's how the stats break down:

  • Over the past five years, gross margin peaked at 25% and averaged 24.4%. Operating margin peaked at 5.6% and averaged 5.1%. Net margin peaked at 3.8% and averaged 3.2%.
  • Fiscal 2010 gross margin was 24.5%, 10 basis points better than the five-year average. Fiscal 2010 operating margin was 4.6%, 50 basis points worse than the five-year average. Fiscal 2010 net margin was 2.7%, 50 basis points worse than the five-year average.
  • TTM gross margin is 24.6%, 20 basis points better than the five-year average. TTM operating margin is 4.5%, 60 basis points worse than the five-year average. TTM net margin is 2.6%, 60 basis points worse than the five-year average.
  • LFQ gross margin is 25.9%, 60 basis points better than the prior year quarter. LFQ operating margin is 2.9%, 50 basis points worse than the prior year quarter. LFQ net margin is 1.4%, 10 basis points worse than the prior year quarter.

With recent 12-month-period operating margins below historical averages, Best Buy has some work to do.

If you take the time to read past the headlines and crack a filing now and then, you're probably ahead of 95% of the market's individual investors. By keeping an eye on the health of your companies' margins, you can spot potential trouble early, or figure out whether the numbers merit Mr. Market's enthusiasm or pessimism. Let us know what you think of the health of the margins at Best Buy in the comments box below. Or, if you're itching to learn more, head on over to our quotes page to view the filings directly.

Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. Best Buy and Home Depot are Motley Fool Inside Value selections. Best Buy is a Motley Fool Stock Advisor pick. Motley Fool Options has recommended a bull call spread position on Best Buy. The Fool owns shares of Best Buy. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.