Dell Appears to Turn a Corner

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Dell's products are now sold in 13,000 stores, including Wal-Mart Stores (WMT), Best Buy (BBY), Staples (SPLS), and Costco Wholesale (COST). Dell also signed up Suning Appliance, a consumer-electronics chain in China, which Dell predicted would become the world's biggest retail market for PCs.

But the march into retail has exacted a toll on profit margins. The average selling price of Dell PCs has been falling. It reached $1,470 during the first quarter. Gross margins were 18.4% of sales, down from 19.3% a year ago, and a bit less than analyst Wu says he expected. The U.S. superstores may be outlets for less-expensive machines than Dell is used to selling, says Wu. "They're driving volume, but it seems like they're driving a lot of lower-end volume."

The New CFO Faces Challenges

Part of Dell's challenge is that it's duking it out in the price-sensitive retail market while cutting costs to keep margins afloat. Dell is eliminating 8,900 jobs, or 10% of its workforce, as part of a goal of cutting $3 billion in spending each year by fiscal 2011. Dell is also chopping design, manufacturing, and materials costs. "The culture we have is we're cutting costs every day for the rest of the life of this company," said Chief Financial Officer Donald Carty.

Future fat-trimming will fall to new CFO Brian Gladden, a former General Electric (GE) executive Dell hired on May 19. Gladden, the company's third CFO in a year and a half, will take over when Carty steps down from the role June 13. Carty, who will remain on Dell's board, took the job amid a Securities & Exchange Commission probe that led Dell to announce last August that its finance staff had misstated numbers to inflate its results (BusinessWeek, 8/17/07). The company had to restate more than four years of sales and profits. The company has also been distracted by legal matters; a New York court found on May 28 that Dell's service and financing arms deceived consumers.

What's the prescription for Dell to complete its turnaround? First, the company needs to gain an even greater share of the fast-growing consumer and notebook markets. Just 18% of Dell's computer sales are to consumers.

Dell increased its retail PC market share in the U.S. to 8.1% in April, according to market researcher the NPD Group. But Dell still lags HP's 38.9% share. It also trailed Apple (AAPL), Acer, and Toshiba. Dell's share of notebooks in April was even worse: Dell at 7.6%, vs. 39.1% for HP. "They've done a good job for someone who for the past 20 years tried to put a stake in the heart of the retailers," says NPD analyst Stephen Baker. But it's taking time for Dell to learn how consumers buy in stores, and time its ads and incentives correctly.

Operating with Less Customer Information

Second, Dell needs to figure out how to operate with less information about its customers than it had when it relied almost completely on direct sales, and less ability to sell customers up to more expensive models, says Barry Jaruzelski, vice-president and lead marketing officer in the technology practice at consultancy Booz & Co. Selling through stores also makes it tougher to quickly put together discounts as component prices change. "They were always skimming the cream," Jaruzelski says. "The bigger they got, the more they had to go down deeper into the glass of milk."

There are positive signs on the horizon. Dell may be soon entering the market for popular ultra-portable notebooks like ASUSTeK Computer's Eee PC. CEO Dell was spotted at a conference in California this week carrying an unreleased, red mini-notebook bearing a Dell logo. "Everybody's looking at that category," says Roger Kay, founder and president of industry researcher Endpoint Technologies Associates.

And while Dell described the environment for corporate technology spending as cautious, CFO Carty said many orders would eventually be filled. "We haven't seen anything falling off a cliff here," he said.

Dell has pulled itself back from the precipice. Now, investors are waiting to see whether it can climb back to its former lofty heights.

Ricadela is a writer for BusinessWeek.com in Silicon Valley.