Dell Struggles To Compete

Dell is struggling to compete on price as manufacturers like Acer, HP, Lenova and notebook brands like Toshiba, LG and Samsung eat into their profitability. Even a move into CE products is not helping.

Dell shares fell 7 percent in Germany this week after the world’s largest maker of personal computers said first-quarter profit missed its forecast as price cutting drove revenue growth to the lowest level in four years.

Shares in Dell tumbled $1.75 to the equivalent of $24.68 and should the decline continue it will be the biggest slide in six months.

Dell’s preliminary report shows showed sales gained 6 percent to $14.2 billion, compared with a February forecast of $14.2 billion to $14.6 billion. Profit was 33 cents a share, from the predicted 36 cents to 38 cents, as Chief Executive Kevin Rollins sliced prices. Rollins’s plan to undercut competitors which gained market share last quarter, didn’t paid off.

Dell's getting more aggressive in pricing in order to try and regain market share, but that is hurting earnings,'' said Cindy Shaw, an analyst at Moors & Cabot.Dell just found it has lost the price advantage that used to really make it a compelling offering.”

Shares of Dell dropped $1.61 to $24.82 in extended U.S. trading yesterday after the report. They have declined 12 percent this year through yesterday. Shares of Hewlett-Packard, the No. 2 PC maker, are up 18 percent.

Twenty-one analysts suggest investors buy Dell, 10 say hold. Dell will announce results for the quarter ended May 5 on May 18. Banc of America analyst Keith Bachman cut his target price to Dell to $25.50 from $32.50. He rates Dell hold and Hewlett-Packard buy.'' </P><P>Dell's Game </P><P>Competitors are beating Dell at its own game, Shaw said. Dell vaulted to be the No. 1 PC maker in 2001, overtaking Hewlett- Packard, by offering low-priced PCs direct to the customer. Dell's lower costs, lack of inventory and decision to move customer support centers overseas helped it cut prices. </P><P>A revived Hewlett-Packard under new CEO Mark Hurd is beginning to compete and take market share. Producers such as China's Lenovo Group Ltd., with IBM's PC unit, Acer and Apple Computer. are also chipping away. </P><P>Hewlett-Packard boosted its U.S. share by almost 2 percentage points to 19.9 percent in the calendar first quarter. Dell's shipments were little changed, the first time ever Dell didn't post a gain, researcher IDC said. Toshiba, Apple and Lenovo all surpassed Dell in U.S. shipment growth in the period. </P><P>Third Misstep </P><P>The earnings misstep is the third in the past year as Rollins, 53, struggles to achieve the growth achieved by his predecessor and the company's founder, Michael Dell. The company missed its sales forecasts twice last year and backed away from a goal of reaching $80 billion in sales by 2009. </P><P>Dell's revenue growth hasn't been less than 10 percent since the first quarter of fiscal 2003, when sales grew less than 1 percent. Sales gains have averaged 18 percent in the past three years and revenue jumped 16 percent to $13.4 billion in the same quarter last year. </P><P>Discounts on some products, including best-selling notebook PCs, are weighing on margins, which narrowed to 8.2 percent in the fourth quarter from 8.8 percent a year earlier. Analysts had been anticipating sales in the first quarter to be $14.5 billion, based on the average of 24 estimates in a Thomson Financial survey. They predicted profit of 38 cents a share. Thomson declined to disclose what costs are excluded from its estimates. </P><P>Undercutting Competitors </P><P>Rollins said in a March 8 interview that he plans to keep undercutting competitors to boost revenue while sacrificing profit margins. </P><P>Dell's discounts last quarter included 35 percent off some PCs over $999, advertised on April 27, and an April 13 offer of up to $300 off some systems. On the second to last day of the quarter, Inspiron notebook PCs were being sold at about $1,000 to $1,300, down from $1,500 to $2,000. </P><P>Price reductions willreinvigorate” sales growth in the future, Rollins said in yesterday’s statement.

Competitors have also boosted their level of customer service as Dell fielded complaints from consumers about the quality of its efforts. Dell’s customer satisfaction rating fell last year to the lowest since 1998 after consumers complained of long wait times for help and trouble getting questions answered, according to a University of Michigan survey.

Service is one of the things they stepped back on to save costs,'' said Shaw.They’ve been losing customers over service and support issues and now they are having to spend to get those customers back.”

Shipments of Macintosh computers at Apple, which scored high with consumers in last year’s survey, are at their highest levels in more than five years. Apple trades at 35 times earning, compared to 16 percent for Dell and 17 percent for Hewlett-Packard.