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Dell Should Forget About Consumers

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I think it's time for Dell (Nasdaq: DELL  ) to rip a page from the playbook of IBM (NYSE: IBM  ) . No, I don't mean that Dell should diversify into every sector of the IT industry, the way Cisco Systems (Nasdaq: CSCO  ) and Oracle (Nasdaq: ORCL  ) are doing. But I do think the company should get out of selling consumer-level desktops and laptops, like IBM did years ago.

Last night's fourth-quarter report tells you all you need to know: Dell's consumer products division reported strong sales of $3.5 billion but at an operating margin of 0.2%. The holiday quarter tends to bring in an avalanche of consumer sales while also lowering margins, because without generous promotional pricing, Dell's prospective customers would be further enticed to get a system from Lenovo, Hewlett-Packard (NYSE: HPQ  ) , Toshiba, or Apple (Nasdaq: AAPL  ) instead. On top of that effect, Dell also saw component costs increase. Memory sticks, LCD displays, and graphics cards were all in short supply and high demand during the quarter, which drives up the cost of building a system.

CFO Brian Gladden took pains to "re-emphasize Dell's strategic commitment to the consumer business," because Dell runs at a negative-36-day cash conversion cycle and likes to put those passing cash flows to use. But I'm not buying that argument. To a penniless pauper, that cash-flow management focus makes sense, but Dell has more than $11 billion in the bank and is not in any danger of running out of working capital. Total sales in the fourth quarter stopped at $14.9 billion, 11% above the year-ago period, and non-GAAP earnings came in at $0.28 per share. Servers, storage systems, and support services can clearly support Dell just fine without the consumer segment.

I hear that Acer is interested in growing market share, and Samsung could use a retail foothold in Dell's core North American market, for example. Dell's cost structure is about as lean as it will ever get, but an operator with larger scale or in-house component manufacturing like Samsung might be able to squeeze more blood from this stone than Dell can. Dell claims the consumer business gives it scale that helps out its other business units, but I’m starting to question whether these benefits are worth the headache.

I think Dell is doing its shareholders a disservice by hanging on to this business unit. Would you be more likely to buy Dell stock if the company refocused on business-class servers and services? For me, that's a no-brainer. Discuss in the comment box below.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. This article was written on a Samsung-branded laptop, decked out in Motley Fool stickers. Apple is a Motley Fool Stock Advisor recommendation. The Fool owns shares of Oracle. Try any of our Foolish newsletters today, free for 30 days. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.

Read/Post Comments (5) | Recommend This Article (4)

Comments from our Foolish Readers

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  • Report this Comment On February 19, 2010, at 4:45 PM, Jobo59 wrote:

    I agree with most points of this article, however, and I think this is an overlooked point, is by disbanding the consumer market Dell could also take a hit on the business side. The reason being very simple, those that buy on the business side tend to do so based also on what they buy or have already experienced on the personal or consumer side. So even though the consumer side margins are ultra low it brings people into the higher margin business side store.

  • Report this Comment On February 19, 2010, at 5:03 PM, bimmayute1 wrote:

    Dell is a slowly declining company, like GM has been for the past number of decades. They were supposedly the most efficient producer of PCs.

    But that is where their competitive advantage begins and ends. The brand isn't that illustrious, even with the cute design makeover they are attempting. This means they can forget about producing portable music players, TV etc.

    The consulting/outsourcing bit with Perot System is attempt to delay the inevitable. They have no clue how to run this business and don't have the products or expertise to take full advantage. IBM, HP, Oracle have been doing it for years.

    Several years ago Michael Dell was a guest speaker at a university taking about how great the company was and how the Compaq/HP merger was a disaster in the making etc. He was very arrogant about everything. Not to mention Fortune magazine worshipping him as the youngest guy to ever do anything.

    So it's just amusing to me to see him is this situation. I guess he figured the company could churn out PCs til the end of time and everything would be OK. He even left the company for a while, then had to return.

    In retrospect, I don't think the direct to consumer model was all that genius after all. It was a good idea for the times as everyone was fascinated with the internet. But I could never really understand people buying a product they couldn't physically see beforehand.

    In my opinion, I would short Dell...

  • Report this Comment On February 19, 2010, at 6:36 PM, DefunctAcct wrote:

    I agree with Bimmayute.

    If investing means expecting reasonable growth, Dell has shown no strategies for continuing reasonable, if slow, growth.

    Dell has not responded well to the mobile device challenges. It has no offering in the iPad or tablet arena that is soon to become the next big consumer electronics segment. It has no software capabilities to deliver something compelling beyond Windows or Mac OS. Dell-Consumer is but a cheap box maker competing by being as cheap as possible. How is that a model worth anything in a rapidly changing high-technology world where today's new powerful features are replaced in three to five years. What is new today often become common place in two years and then free in three more?

    As an investor, I will ask how is Dell organized to address such challenges? Not just in consumer but in Enterprise? Where are its software capabilities to innovate and differentiate and have meaningful value-added offerings? Dell continues to be just another company offering just another service others are offering. Dell competes only on prices but not on anything significantly unique or innovative. It is like GM keep making bigger and bigger trucks. It knows only one thing and so it keeps doing the same.

    If I must invest in companies like Dell, I would prefer IBM or HP or even Sony. IBM and HP have software capabilities ranging from business software to SDKs to operating systems. Sony is a well diversified company in to all sorts of consumer electronics. What does Dell offer that can match this group? Nothing. I bought IBM when it was $55 and what is it today? Compare that to Dell? I won't bother.

    There are many examples of GM in the high-tech world and Dell is one of them. Dell is the lone leftover of an age when home ownership of PC was dawning and maturing. That age is long gone. Cheaper manufacturing now makes it the world of Acer and LG and HTC. Unless Dell can evolve itself beyond that world, it will die a slow death but it will die that death.

    Why bother investing in Dell and why even discuss Dell as a viable long term investment opportunity?

  • Report this Comment On February 20, 2010, at 12:13 PM, c7772 wrote:

    Dell has already begun to leave the consumer market weather they know it or not. They have elected to employ outside services to handle help requests on thier site.

    When I tried to use it for a software problem, I was connected to a "hardware specialist" who would be happy to transfer me to a "software specialist" after I paid $14.00 for a hardware checkup and purchased any required hardware.

    I had 3 networked Dell computers at my workplace' Now only 2 and am currently setting up my new Sony.

  • Report this Comment On February 22, 2010, at 2:28 PM, kgeechee wrote:

    I'm sorry, but I cannot be respectful to Dell right now. I reciommended their computers to many persons and clients...back in the day.

    One person mentioned that he (Michael Dell) was very arrogant about everything and that is the way his entire company operates now. I was shafted by Dell Finance and forced to return a fully paid 'buy out lease'. No one at Dell cared that THEY had made the mistake.

    To boot, the plush mega-computer was a nightmare, a hard drive failed completely, another crashed every other week ("wait until it goes again and call us then"). I did not want Vista, but was required to buy it because of their deal with MS, etc., etc.

    Never, never, never Dell again.

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