It's A-OK for Dell (Nasdaq: DELL) to miss sales targets -- as long as the computer maven compensates with fatter margins.
Dell has always run its operations close to the bone. Its high-volume, thin-margin model should remind you of Wal-Mart or Sysco, because it's the same idea: skimming a tiny commission off untold billions in quarterly sales will make you rich. For a more relatable analogy in the same vein, go watch Office Space, and pay special attention to the central salami-slicing ruse in that movie.
The misplaced decimal point in Office Space shows how widening those sliver-thin margins quickly adds up to tremendous profits. That's what Dell is doing right now.
The holiday-themed fourth quarter tends to come with even lower margins for Dell, as the company joins the mad, seasonal rush to put more computers under your tree than Hewlett-Packard (NYSE: HPQ), Apple (Nasdaq: AAPL), or Lenovo. Not so in 2010. Net margins, already on a positive trend, beat their third-quarter counterparts by 60 basis points.
The changes start at the top of the income statement: Dell hasn't seen 21% gross margins since the October quarter of the year 2000. Thanks to that generous starting position, Dell splurged a bit on operating costs and still came out with nearly triple the year-ago period's GAAP earnings. Its 5% revenue growth, plus a newfound focus on high-margin sales, generated 182% earnings growth.
Dell's revenue mix is getting more and more attractive, as the company shifts its attention from the notoriously cost-sensitive consumer market and into more profitable sales to corporate and government customers. Yes, even in the holiday quarter.
This is the result of a conscious choice to land high-margin contracts and let competitors capture less profitable sales. Also helping is the everlasting slide in component prices, particularly memory modules and LCD panels, which Dell is getting stingy about passing on to its customers.
It doesn't take big changes to make an enormous difference when you're working with huge numbers, as Wal-Mart, Sysco, and Michael Bolton all can attest. Dell is making all the right moves again after a few lean, stumbling years.
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