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Aggressive Pricing Tactics Come Back To Haunt Dell

Posted by inet - 2005-11-01

Dell warned Monday that third-quarter earnings and sales would come in at the low end of previous forecasts because of disappointing U.S. consumer and U.K. business, sending shares in the largest maker of personal computers tumbling in late trading.

Dell said it expected to post a profit of 25 cents per share for the third quarter, including charges of $450 million or 14 cents per share related to restructuring and a defective product.

Excluding the charges, Dell said it would earn 39 cents a share. In August, the company forecast a profit of 39 cents per share to 41 cents per share, and analysts surveyed by Thomson Financial had recently expected 40 cents per share.

Dell added that sales would come in at about $13.9 billion, below its previous forecast range of $14.1 billion to $14.5 billion and below analysts' estimate of $14.3 billion.

Dell shares gained 82 cents, or 2.6 percent, to close at $31.88 Monday on the Nasdaq Stock Market. But after news of the lowered outlook, the shares fell $1.34 or 4.2 percent.

Dell shares have been sliding for about three months, as the company has struggled with weak prices for computers. Company executives have acknowledged being too aggressive in cutting prices.

Cindy Shaw, an analyst for Moors & Cabot, recently lowered her estimates of the company's future earnings and said Dell executives seemed slow to realize that aggressive price-cutting wasn't driving additional sales and to change tactics. She also said Dell's competitive position in server sales seemed to be weakening, partly because rival Hewlett-Packard Co. had narrowed a price gap over the past two years.

Of the $450 million in charges that Dell expects to take, more than $300 million are related to fixing main circuit boards in its OptiPlex business desktop PCs.

Some but not all have failed due to a bad capacitor, preventing the machine from powering up, said company spokesman Jess Blackburn. Round Rock, Texas-based Dell isn't recalling the machines but will replace the circuit board on those that fail, he said.

The rest of the charges cover severance payments to an undisclosed number of workers whose jobs were eliminated in consolidation moves, and for excess parts, Blackburn said. He declined to say how many jobs were cut, but said most were in central Texas and the United Kingdom with a smaller number in Asia.

``It's a fairly small percent of our overall work force,'' Blackburn said. ``We're not going to say how many.''

Dell is scheduled to release third-quarter results on Nov. 10.

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