Dude, You're Getting a Dellat Wal-Mart

The PC giant will offer two low-priced models at the retailer's stores as it abandons the direct-sales-only model

Would you buy a Dell (DELL) PC from a sales associate in a blue vest? Dell's main method for selling computers-directly from the manufacturer-isn't getting the job done, so the Round Rock (Tex.) PC maker found a partner to help push its machines: Wal-Mart (WMT).

The once-unlikely combo was announced May 24. The agreement includes the launch to two Dell Dimension desktops offered in more than 3,500 Wal-Mart and Sam's Club locations across the U.S., Canada, and Puerto Rico.

As befits a merchandising venture with Wal-Mart, the two models offered will carry a low price, each offered in a package bundle under $700. The companies expect high "consumer feedback and purchase response," Wal-Mart said in a press release.

The move helps Wal-Mart bolster its electronics business and gives Dell a new venue for PCs outside of the faltering direct-sales arena. Dell has seen its share of the global PC market slip to 17.1% recently from 18.2%, according to a report by Standard & Poor's. Dell is under pressure from Hewlett-Packard (HPQ) and low-cost Asian manufacturers. The majority of Dell's sales are from PCs (61%), but other categories are increasingly important to sales. Services make up 10% of the total, and servers, the machines that run Web sites and corporate networks, account for 9%.

Revamping sales is one of several steps Dell has taken lately to reinvigorate its brand and kick-start growth. Michael Dell resumed his role as CEO in January amid the ouster of Kevin Rollins. But the road ahead will be tricky. In addition to a loss of market share to HP, and well publicized customer service woes (see BusinessWeek.com, 5/18/07, "Cuomo Kicks Dell When It's Down"), the company suffered a black eye in August, when it announced a recall of up to 4.1 million laptop battery packs manufactured by Sony (SNE). Another headache: A probe by the Securities & Exchange Commission into Dell's accounting and financial reporting, which may prompt the company to restate past results.

After news of the Wal-Mart deal hit, investors rolled back prices of Dell shares. The stock dipped 1.6% in Nasdaq trading May 24 to $25.84, not far below its 52-week high of $27.89 reached in January. Wal-Mart shares gained 0.9% to $46.75 in NYSE trading.

Standard & Poor's equity analyst Jim Yin points out that Dell continues to face challenges, including a dearth of new products. He says the Wal-Mart deal is a "logical move," but at a price. "While this strategic move will generate higher revenues, we believe margins will decline since sales from retail stores have lower margins" he wrote in a May 24 research note.

Yin has a $28 price target on Dell shares and maintains a hold rating. (S&P, like BusinessWeek.com. is a unit of The McGraw-Hill Cos. [MHP].)

And if a big retail deal wasn't enough, Dell announced another move that signals change afoot in Round Rock. It unveiled three consumer systems -- two desktops and a notebook - running the open source Linux operating system. Customers responding to the company's request for suggestions clamored for Linux-friendly machines (see BusinessWeek.com, 2/26/07, "Customers to Dell: Give Us Linux!").

Yin thinks the company may even realize a higher profit margin out of Linux boxes, though the number of units sold will still be small. The company is "trying to listen more to its customers," says Yin. The moves also demonstrate it's also paying heed to another key constituency: shareholders.

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