Don't Do It, Dell!

It's becoming terribly fashionable to throw Dell (Nasdaq: DELL  ) a lifeline these days. The company that revolutionized the PC industry with its direct sales of made-to-order computers has been a laggard lately, and everyone's dishing out the chicken soup for Dell's troubled soul.

We did it last month. And Barron's gave it a shot over the weekend with Jay Palmer's "How to Fix a Busted Icon" article.

Keep in mind that Dell needing a journalistic nudge is like Albert Pujols hitting up his Little League coach for batting pointers. Despite the brutal slide that Dell investors have suffered through over the past two years, the company remains a juicy 200-bagger over the past 16 years. Now, don't get me wrong -- I'm a realist. If you bought in February of 2005, you'd be sitting on a 48% paper loss today. That hurts, I know. But let's call off the hearse. Or the soup bowl.

How to nix a fix
Palmer's article is spot-on in many regards. Dell's customer service has gotten a bad rap in recent years, in large part due to the outsourcing of some of its call centers overseas. Suggesting that founder Michael Dell return as CEO to help usher in a turnaround -- a move that worked famously for Apple Computer (Nasdaq: AAPL  ) -- makes sense, even if I don't blame the company's slump entirely on CEO Kevin Rollins.

My beef with Palmer's roadmap comes when he suggests that "Dell must embark on some bold retail ventures" by following Apple's lead and ramping up the expansion of Dell-branded stores that actually stock computers.

It's a suggestion that feels flawed on many different levels. For starters, Apple's success is unique. Ever wonder why Gateway (NYSE: GTW  ) had to shutter its stores? Apple has been a hit, but where would it be if the iPod had never become a must-have consumer electronics appliance?

We can't kid ourselves. Apple has always made some pretty amazing machines, but even with powerful eye candy, the stock was trading for little more than the greenery on its balance sheet. Then the iPod debut created the "halo effect" that has made Apple a brand that matters -- 50 million iPods later.

That's not a battle worth fighting for Dell. Do you know anyone who owns a DJ Ditty (the company's branded digital music player)? It has done a better job of moving flat-screen television sets, but do we really need Dell stores sitting at the end of a strip mall, anchored by superstores like Best Buy, which have a wider range of merchandise at more attractive price points?

Apple works as a retail concept because it stocks unique items that folks want. If you need a Windows-powered laptop or an MP3 player, you don't need Dell. Unless it has a hit that's based on proprietary technology, what's the point in embarrassing itself? Yes, the company has a little edge to market after acquiring Alienware earlier this year, but that's a limited high-end gaming audience that wouldn't work as a mainstream retail concept.

Mourning freshness
In its current kiosk form, the Dell Direct Store concept is a lousy idea. While customers can experience many of the products, the systems are merely on display, not stocked for sale -- thus eliminating the chance for instant gratification.

Problem? Sure. But the solution isn't to make even bigger models in walled storefronts. The kiosks at least succeed as brand ambassadors. What's the point in pitching single (perhaps stale) systems to consumers when the company still depends on grander corporate purchases?

One of the keys to success has been the "just in time" nature of assembling systems as the orders come in. Keeping an inventory of dated systems would only tarnish Dell's reputation as a purveyor of freshness. In other words, it could ultimately cause more harm than good. It also wouldn't help to deal with an aging inventory of the latest Intel (Nasdaq: INTC  ) and AMD (NYSE: AMD  ) chips, which will only fall in price over time.

The best plan for Dell's rebound
We all feel Dell's pain. The shares were singled out to Motley Fool Stock Advisor subscribers in the February of 2004 issue. It was a year after the "You're getting a Dell" dude got busted for pot possession, and a year before the stock would hit its peak. That's one heckuva timeline, but the point is that a lot of us in Fooldom are pulling for the business to bounce back.

But let's cut to the chase here: Is the company broken, or is it simply toiling away in a sector that's out of favor? A lot has been made of the turnaround at Hewlett-Packard (NYSE: HPQ  ) , and it's true that HP CEO Mark Hurd has done an amazing job in shoring up margins. However, for its quarter ended in April , net revenue grew by just 5%. The top line grew by 6% at Dell over those same three months. Gateway toils away on a different fiscal calendar, but net revenue rose by just 5% during its quarter ended in June. Dell isn't the problem -- it's more like one of the victims of the sector's malaise. We can definitely argue that it could be doing a better job of squeezing more profit out of every sale, but let's not diss it too badly when the gravitational pull of the ultimate solution is now just months away.

Yes, Microsoft's (Nasdaq: MSFT  ) Windows Vista has been delayed for far too long. The years of waiting between Windows XP and Vista haven't been easy, but once the new operating system is released, fence-sitting PC and laptop buyers will buy. They have been waiting for computers to come pre-bundled with Vista, and it's not as if one can really blame them. Why buy a software platform that will feel sorely obsolete by the time the holidays come around? The upgrade migration should be a colossal catalyst for all of the industry's key players. How can it not be?

If that doesn't buoy poor Dell, well, then we can all agree that the company will have serious problems. In that case, Dell should widen its retailing efforts; the brand will have already been tarnished and the buyers will be in short supply.

Sell it all away at that point, Dell. For now, just hold tight with your hand and wait for the better cards to be dealt.

Dell and Best Buy areStock Advisorrecommendations. Microsoft and Intel areInside Valuepicks.

Longtime Fool contributor Rick Munarriz does have a pair of Gateways in his house, though he favors working on his HP computer and Dell monitor. He does not own shares in any of the companies mentioned in this story. The Fool has a disclosure policy. Rick is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.


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