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Dell=20 Profit Unexpectedly Falls After Turnaround Flags (Update3)=20

By Melita Marie Garza

Feb. 28 (Bloomberg) -- Dell Inc., the world's = second-biggest=20 personal-computer maker, reported an unexpected drop in = fourth-=20 quarter profit after an expansion into retail failed to = ignite=20 sales. The shares fell as much as 5.6 percent in late = trading.

Net income decreased 6 percent to $679 million, or 31 = cents a=20 share, from $726 million, or 32 cents, a year earlier, Round = Rock,=20 Texas-based Dell said today in a statement. Excluding some = costs,=20 earnings were 34 cents, missing the 36-cent prediction in a=20 Bloomberg survey of analysts.

Chief Executive Officer Michael Dell's plan to enlist = thousands=20 of retail outlets hasn't revived growth as quickly as = analysts had=20 estimated. While the company gained U.S. consumer customers, = lower=20 prices may have hurt results, said William Kreher, a St. = Louis-based=20 analyst with Edward Jones & Co.

``They made some inroads at the retail channel, though at = what=20 cost?'' he said in an interview. Kreher downgraded Dell to a = hold=20 rating from a buy recommendation in December. ``It looks = like in an=20 attempt to gain unit share they lowered prices quite a = bit.''

Sales climbed 10 percent to $16 billion in the period = ended Feb.=20 1, missing the $16.2 billion average estimate in the = Bloomberg=20 survey.

Dell fell as much as $1.16 to $19.71 in extended trading = after=20 closing at $20.87 on the Nasdaq Stock Market. The shares = have=20 dropped 15 percent this year.

`Guesstimates'

Chief Financial Officer Donald Carty said the results met = the=20 company's expectations.

``We no longer provide guidance to the analysts,'' he = said in a=20 telephone interview. ``The analysts' estimates were based on = guesstimates they made. Our results were very much in line = with=20 where we were trying to go. We are very pleased with them.'' =

Michael Dell, 43, abandoned the company's two-decade = strategy of=20 only selling directly to customers last year. By working = with=20 retailers, he aims to mimic the success of larger rival=20 Hewlett-Packard Co., which entices consumers by letting them = test-drive computers at stores.

``They still have a lot of work to do,'' Roger Kay, = president of=20 research firm Endpoint Technologies Associates Inc. in = Wayland,=20 Massachusetts, said in an interview with Bloomberg = Television. ``At=20 the moment, the momentum goes to H-P.''

Starting with Wal-Mart Stores Inc. in June, Michael Dell = put his=20 computers into 10,000 stores in the world's 10 largest = markets=20 within six months. Dell, who founded the company in 1984, = retook the=20 reins in January 2007 after former CEO Kevin Rollins lost = the market=20 share lead to Hewlett-Packard.

Overseas Effort

Dell's U.S. focus may hurt the company as that economy = slows,=20 analysts say. Dell gets more than half its sales from the = U.S.,=20 while Hewlett-Packard counts on the country for less than a = third of=20 revenue.

The company plans to generate half its sales outside the = U.S. by=20 2009. Its retail partners overseas include Gome Electrical = Appliance=20 Holdings Ltd. in China, Bic Camera Inc. in Japan, and = Carrefour SA=20 stores in Europe.

Michael Dell also fired workers to cut costs. In the past = eight=20 months, he has trimmed his workforce by 3,200, excluding the = effect=20 of acquisitions. The company's staff now totals 88,200, down = from=20 90,300 a year ago.

``We have significant work to do on costs,'' Dell said = today on a=20 conference call.

Dell redesigned its products with new styles and colors = to appeal=20 to consumers. It also released its first all-in-one desktop = PC, an=20 aluminum-and-glass device that combines a computer and = monitor in=20 one chassis. The PC, which debuted at New York's Armani Casa = store=20 in December, lets users watch television and DVDs, listen to = music,=20 and handle regular computer tasks.

Adding Colors

Dell computers -- once produced in one color, arctic = silver --=20 have been available in eight new hues since June, including = blue,=20 red, ``espresso'' and pink.

The company's share of the U.S. consumer market grew to = 24=20 percent in the fourth calendar quarter, from 17 percent in = the third=20 quarter, according to research firm IDC in Framingham,=20 Massachusetts. Hewlett-Packard's share of that market was 29 = percent.

Dell also expanded further into storage devices last = quarter. It=20 completed its largest acquisition, the $1.4 billion purchase = of=20 EqualLogic Inc., obtaining technology that lets several = storage=20 computers operate as a single device.

To contact the reporter on this story: Melita Marie Garza = in New=20 York at mgarza4@bloomberg.net=20

Last Updated: February 28, 2008 18:05 EST=20

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