Dell’s
direct sales business model growth has slowed significantly over recent years.
The company is now building a new strategic plan with an indirect sales model
and has been investing significant dollars in software, services and other IP.
The challenge for Dell will be for dell to maintain its existing profit margins
why directing resources to new products and services. To ’stop the bleeding’
dell is cutting costs and headcount (by 10%). However, by adding new services
surely the company’s high profit margins in hardware will be impacted, even
with the reduction in expenses. This will have obvious impact on the company’s
overall earnings growth.
Dell’s Profit Margins:
- Gross Margin – 17.3%
- Pre-Tax Margin – 6.1 %
- Net Profit Margin – 4.5 %
- 5Yr Gross Margin (5-Year Avg.)
– 17.8% - 5Yr PreTax Margin (5-Year Avg.)
– 8.0 % - 5Yr Net Profit Margin (5-Year
Avg.) – 5.9%
HOW WILL A SHIFT IN THE PRODUCTS
OR SERVICES YOUR COMPANY PROVIDES EFFECT YOUR PROFIT MARGIN? HOW WILL THESE
CHANGES EFFECT SHAREHOLDER VALUE?
Gartner research provides the following
‘recommendations’ to Dell and Dell’s End-users:
- Recommendations to
Dell: Cost improvements alone will not be enough for the
company to improve growth significantly. Dell needs to continue efforts to
improve its service and support offerings, partner relationships, and invest
in hardware and software that is unique to the company. It also needs to market
those capabilities effectively once they are enhanced. In combination with
those steps, Dell will need to seek cost gains where possible, to see sustained
benefits to its business.
- Recommendations to
Dell End-users: Continue to treat Dell as a reliable provider of
cost-competitive computer technology. However, expect Dell to approach you
about broader service and solution engagements. Be cautious about these engagements
until Dell establishes a track record of success.
Dell’s
Earnings Report Reflects Shift in Strategy. [Gartner]
Profit Margin Notes (see The
Bottom Line on Margins, [Investopedia] for more information):
- Gross Profit Margin
– or gross margin for short – tells us the profit a company makes on its cost
of sales, or cost of goods sold. In other words, it indicates how efficiently
management uses labor and supplies in the production process. Gross
Profit Margin = (Sales – Cost of Goods Sold)/Sales
- Operating Profit Margin
– By comparing earnings before interest and taxes (EBIT) to sales, operating
profit margins show how successful a company’s management has been in generating
income from the operation of the business. Operating Profit Margin
= EBIT/Sales