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Best Buy and RIMM in a Downward Spiral

March 30, 2012 | About:

Two fallen giants reported earnings last night. Best Buy (NYSE:BBY) and Research in Motion (RIMM) both disappointed investors with murky guidance. Both companies have followed a similar trajectory as their business models are now under siege.

For 2012, Best Buy expects to earn $3.65 a share, on sales of $50.5 billion. Sales are expected to fall from last year. Analysts were expecting Best Buy to earn $3.69 a share on sales of $51.89 billion.

Subsequently, Best Buy is in cost cutting mode and is now closing closing 50 big stores.

The problem for Best Buy is largely competition from Amazon (AMZN). If you walk through the stores at Best Buy you can see that a lot of their products will soon be sold exclusively online. DVDs, music and video games will all move towards digital sales platforms as download speeds improve. Hence, why does Best Buy need massive warehouse space?

Secondly, the Internet is destroying margins. Shoppers use comparison pricing services and find the absolutely rock bottom price for a plasma television or home stereo system. This is not an environment where Best Buy can enjoy comfortable 25% gross margins.

The problems at Research In Motion are similar.

The company reported fourth quarter profit and revenue below analyst estimates. The company reported a net loss of $125 million, or 24 cents per share, on a GAAP basis, on revenue of $4.2 billion, 19% lower than a year earlier. The company shipped 11.1 million BlackBerry units and 500,000 PlayBook tablets. Analysts had expected $4.54 billion in revenue and earnings per share of 81 cents on a non-GAAP basis.

Sales are slowing at RIMM because the product lineup is inferior to Apple and Android phones. The competition is relentless for smart phones and there is little market share for a No. 3 player.

Some value investors might look at RIMM and BBY as deep value turnaround stories. However, a turnaround is an exception and not the norm. These companies look to be following in the footsteps of Blockbuster and Palm.

Rating: 3.0/5 (10 votes)


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