Battery Recall May Ding Dell Reputation

Dell's battery recall isn't a financial problem, but it could quickly become a brand issue.

Dells battery recall couldnt have come at a worse time, with customer service waning and Wall Street increasingly growing impatient with the PC giants earnings misses. The good news: Dells main supplier, Sony, is expected to foot most of the bill for recalling 4.1 million batteries, analysts said.

Late on Aug. 14, Dell announced a voluntary recall of laptop batteries that could pose a danger to users. The recall comes amid Web video of exploding Dell laptops. Add it up and analysts said Dells reputation has taken another hit as it is losing market share and its once high-flying shares are wallowing near five-year lows. Its unclear whether the recall will hurt future demand, but analysts such as Moors & Cabot Capital Markets analyst Douglas Crook said it is possible.

"We believe the battery recall is mostly a PR issue that will need some attention in terms of customer service and brand management," said Arun Sharma, an analyst with UBS Equities. "The timing of the recall is unfortunate given recent consumer share losses. We expect Dell to continue to invest more in the customer experience in order to improve its image over time."


According to Sharma, the financial impact to Dell is expected to be immaterial to the companys earnings. Analysts said they expect Sony to help pay for the recall.

J.P. Morgan analyst Bill Shope in a research note said, "While Dell should not be financially affected by todays recall, the news comes at a difficult time for the company."

The recall is just one more data point in the struggles of Dell, which reports second-quarter earnings on Aug. 17 and is expected to report earnings of 22 cents a share and revenue of $14 billion, according to Thomson Financial. Analysts have been skeptical of Dells plan to cut prices and profit margins to gain share, especially after the PC maker issued a profit warning.

These skeptics also note that the competition is a lot better and has largely nullified Dells manufacturing advantage. "In the last several quarters, Lenovo, Acer, and more importantly HP have all improved their product functionality and manufacturing operations," said Cowen & Co. analyst Louis Miscioscia, who started coverage Aug. 15 with a neutral rating.

In a research note, Shope said Wall Street will be looking for Dell to offer further detail on the following: any operational issues; the impact of more aggressive pricing on profit margins; and enterprise demand, which is the current wild-card.

"The health of Dells enterprise segment is also a key unknown at this time. We fear that the companys current weakness in corporate PCs may hamper its ability to cross-sell enterprise solutions, and if this did not occur in the second quarter, it could represent an incremental risk factor for coming quarters," wrote Shope.

Too much dumping on Dell?

What remains to be seen is whether Dell can rebound as it did in 2000 and 2001 when it faced a series of missteps. Miscioscia said Dell can recover some of its lost magic, but its hard to quantify when. For starters, Dell will have to make more inroads into new markets including storage, printers and TVs. Until those new markets develop, it will be left to defend its core PC turf with a direct sales model that isnt as much of an advantage anymore.

On its second-quarter conference call, Dell will be expected to detail the battery recall efforts as well as its standing in the PC market share race. Miscioscia, however, said Dell is most likely to use its Sept. 12 and 13 analyst meeting in New York to "lay down details of the four-part turnaround plan."

Shope added that Dell needs "major structural and strategic actions. These changes should include, but not be limited to the following: substantial changes in business leadership structure; significant refinements to the direct model in the consumer space; restructuring initiatives to lower discretionary spending and product cost structure; and a more substantial move to AMD," said Shope.


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