Dell's direct sales model and tight cost controls leave it the best-positioned PC maker to survive the industry slowdown. The computer king stands to emerge from the economic slowdown a stronger company with more market share relative to the competition.
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PC maker Dell (Nasdaq: DELL) maintained fiscal first-quarter (ended May 4) guidance yesterday, but stayed cautious about the rest of the year. The company also announced several cost-cutting initiatives, including up to 4,000 layoffs. The latter is the result of aggressive pricing tactics. To offset shrinking gross margins, the company is cutting operating expenses. The Austin, Texas-based company expects to meet its lowered earnings forecast of $0.17 per share, down from last year's $0.19. Revenue will increase 10% year-over-year to $8 billion, in line with lowered estimates. Dell failed to give additional insight into the rest of the year, but with PC demand still dwindling the company may report further caution when it reports full results May 17. Facing slowing revenue and earnings growth, Dell's cost-cutting efforts include: Yesterday's announcement followed a 4% workforce reduction announced earlier this year. The company will take a onetime charge of $250 million to $300 million because of the job reductions and organizational restructuring. Dell's hardly the only PC maker trimming costs, however. Compaq (NYSE: CPQ) and Gateway (NYSE: GTW) recently announced workforce reductions of 7,000 and 3,000, respectively. (For more on the hardware sector, visit our InDepth page on the subject.) Dell was the first PC maker to significantly lower costs last year. When left with the choice of engaging in a price war, the competition initially said "thanks but no thanks." Nonetheless, after watching Dell reap the fruits of its strategy and gain additional market share, the competition changed its mind. Compaq is lowering prices and has cut costs -- outsourcing some manufacturing operations -- to support that strategy. Dell's direct sales model and tight cost controls leave it the best-positioned PC maker to survive the industry slowdown. The strategy not only allows the company to take prices where no PC maker has gone before, but also gives it tremendous flexibility. In other words, the direct model allows it to quickly adjust its offerings in accordance with demand through rapid product change. More importantly, product transitions don't leave it stuck with reams of inventory. While price cuts are helping Dell gain market share, they aren't spurring PC demand: the market share gains are coming at the expense of the competition, not industry growth. As such, Dell's reduced cost structure also reflects slowing industry growth prospects. As the low-cost producer of the PC industry, its strategy of aggressive pricing for market share growth is the right one. The company is poised to emerge from the slowdown with more market share relative to the competition. Increased demand for storage and server products and international opportunities also bode well for future growth. But with the PC industry now engaged in a price war, it's unclear as to whether or not further price cuts will benefit Dell as much as they had previously. The Rule Maker Portfolio team recently discussed Dell in its Motley Fool Rule Maker Top 25 report. The Rule Maker managers have covered a wide range of industries to find companies with repeat purchase businesses, growing sales, strong cash flow, and little debt. For those who are interested, the report is available as an electronic download product. Mike Trigg models his ping pong game after John McEnroe. To see his holdings, view his profile. The Motley Fool is investors writing for investors.
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