If Dell (DELL) Says Business Is Good, Someone Else’s Is Not

July 28, 2008 by Douglas A. McIntyre

Dell20logoIn an interview with BusinessWeek, Dell (DELL) founder, chairman and CEO Michael Dell said that the company’s turnaround efforts are bearing fruit. He said growth rates for the second half of 2008 could exceed the first half: "We’ve kind of reignited the thing. . . We’re going to have a big second half."

The company has boosted sales and market share by moving into retail channels — including Wal-Mart. A year ago Dell computers couldn’t be found in any store — now 13,000 carry them. Dell also said that the industry is being buoyed by strong overseas growth but that, with the exception of Dell, sales in the United States are flat.

What that means is that Dell is, at least for now, winning in a zero-sum game. Competitors like Hewlett-Packard (HPQ) and Acer, which recently acquired Gateway, can’t be thriving too. However the market may have already priced the disparity in, with shares of Dell up 23% over the past 3 months while HPQ is down 8%.

But long-term, I’m still not sold on the Dell turnaround. The company appears to be achieving sales growth by expanding into retail stores (In its latest 10-Q, the company didn’t break down how much of its growth was driven by its push into retail but did say that its "mobility growth in this segment can be partially attributed to our entrance into retail distribution arrangements) — a sign of desperation because, since its founding, Dell has stayed out of that business.

It’s not like it just occurred to Michael Dell that you could also sell Dells in stores. It’s too soon to tell what the negative consequences of achieving sales growth (although in the latest 10-Q shows gross margins down from 19.3% to 18.4%) that way will be but it may be that Dell’s status as a strong brand will decline — having your computers in Wal-Mart (WMT) tends to do that. And if the brand weakens, so could the margins.

Zac Bissonnette

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