For years, the Dell Computer Corp has charmed investors and new-economy converts by selling directly to customers, online and via the phone. Such an approach allowed it to sell PCs more cheaply and efficiently than its competitors had, thereby moving the company from also-ran to market share leader.
For just as long, investors have listened to the promises of Dell's rivals, most notably the Compaq Computer Corp, which has pledged to sell more of its products directly to consumers and corporate customers, and at least slow Dell's march to dominance. As those promises remained unfulfilled and the computer market slumped, Compaq's stock price tumbled, leaving Dell the lone star of the Texas-based PC makers, and leaving Compaq to pin its hopes on a merger with Hewlett-Packard.
But there are signs that Compaq is coming around, if a little slowly. Not only did the company far exceed analysts' expectations in its latest earnings announcements -- reporting earnings of US$0.05 a share despite a sluggish PC market -- but executives said its direct-selling approach had finally kicked in. Without it, the company said, the recent results would not have been possible.
Michael J. Winkler, Compaq's executive vice president for global business units, said 59 percent of the company's sales in the US were made online or by phone and shipped directly to customers in the fourth quarter, compared with 43 percent in the similar period a year earlier.
Winkler said that by relying less on resellers to handle inventory, and by streamlining its internal manufacturing processes, Compaq had US$2.5 billion less of inventory sitting on its shelves and those of resellers in the fourth quarter of last year than in the similar period in 2000. (Roughly US$1.7 billion of that inventory had been held by resellers.)
The inventory management savings alone, Winkler said, cut US$28 from the cost of each PC sold. "When you ship over four million units in a quarter," as Compaq did in the final quarter of last year, "you're talking over US$100 million a quarter in savings," he said. In part because of those savings, he said, the company increased profit margins on all PCs by three percentage points in the fourth quarter. (Compaq would not disclose its actual profit margins.)
Not only is less inventory sitting on the shelves, Winkler said, but it is sitting for less time. In the fourth quarter of last year, Compaq sold off its inventory at about the same rate as Dell, analysts said, and twice what Compaq achieved a year earlier.
Depending on which analyst you choose to listen to, Compaq's direct-selling assertions are either worthy of praise or pessimism.
Dan Niles, an analyst with Lehman Brothers, is among the believers. "They've definitely started to turn the corner," Niles said. "They could've made themselves look better this year by not getting rid of excess inventory, but you have to do that to get to a model that's closer to Dell's."
Niles said the company spent much of last year selling off excess inventory at prices that virtually guaranteed losses. "But since they suffered for about a year, they're going to reap rewards the rest of the way," he said. "They need to get the PC business to the point where they're running at even a slight profit."
He estimated that US$3.7 billion of Compaq's US$8.5 billion in sales in the fourth quarter were PCs. It also sells servers and other computer equipment. "If you take care of the PC side, the rest of the business, which has higher margins, should be able to come through."
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