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Dell the Retailer: Fools Rushing In


Dell seems to have learned nothing from the DJ Ditty debacle.


Greetings from the Kansas City airport Marriott where I'm killing time between an early week board of directors meeting and my end of the week CNBC Fast Money segment. The downsides of these weeks away from home are obvious. I miss my wife, my kids and what was once the rock group Journey's "City By the Bay" (before I moved there in 1991 and renamed the place Mack Francisco (trademark pending)). On the upside, the Hurry Up and Sit lifestyle of the Road Warrior allows me ample time to pour through daily papers with a level of scrutiny normally reserved for DaVinci Code lovers seeing The Last Supper for the first time.

It's a lousy trade but I'm making the best of it.

So it was that I found myself poring over today's Wall Street Journal with plenty of time to mentally stroll down memory lane, catalyzed by two articles. The first was an A2 piece by Alan Murray suggesting that Hewlett Packard's (HPQ) former CEO Carly Fiorina was unfairly run out of the company, allowing current HP Pooh Bah Mark Hurd to capitalize on the success of HP's merger with Compaq. The second column to catch my eye was a B2 piece reporting Dell's (DELL) decision to combat slowing sales by opening 2 retail locations.

I spent a decent portion of my life as a hedge fund manager shorting, and railing against, HP under Fiorina while jumping in and out of the long side of Dell. At the time, Dell was like a prom queen with the soul of an assassin. It was gorgeous both inside (fundamentals) and out (chart), freely, gleefully, stealing HP's most lucrative accounts and best executives as HP tottered under the reign of Carly. While I was running my hedge fund in the rugged tape of 2001 through 2003, being long Dell against a short position in HP was a beloved oasis of certainty in a world gone mad. The trade worked month in and month out and yet seemed to promise even greater gains as the Street clung to the substance-lite aura of Fiorina. HP was selling everything as a loss-leader for their ink division and Dell was openly derisive of the once and future king of the consumer PC space, taking share wherever they wanted it.

(HPQ in red, DELL in blue)

Flash forward to the present and the relationship between Dell and HP has been almost perfectly reversed. HP under Mark Hurd reversed the talent exodus to Dell and regained the trust of both the Street and, more importantly, the giant corporate accounts which form the basis of any modern PC concern (or "consumer equipment," in the case of the currently confused Dell). While HP righted the ship, Dell tried to become Apple (AAPL) with forays into televisions and iPod knock-offs. As recently as last summer Dell was still wildly confident of these efforts and mocking of those who questioned Dell's mighty direct-to-the-consumer model.

As an illustrative, if uncomfortably name-droppish anecdote, I was hosting CNBC's Squawk Box last summer when Dell announced a new leg of their foray into plasma televisions. I expressed some (light, by my standard) skepticism only to get berated off-camera by Michael Dell himself, via Joe Kernan's email. "Michael Dell says you don't get it" Joe let me know between commercial breaks. "He has one word for you, Macke: Dellevision."

One year later, I've got two words for Mr. Dell: DJ Ditty.

Consumer products are hard. Selling them effectively isn't a necessarily fungible skill-set. Just because you have been a success in build-to-order PCs doesn't necessarily mean you are a lock for success in other consumer electronics. In predictive contrast, failing in consumer electronics with a direct selling model casts more than a little doubt on a company's ability to become a retailer. Just ask Gateway (GTW).

Where do we go from here?

So, the question on the table for investors is what happens next. Based on my paying a mental visit to my old positions over the last few weeks and what the companies are doing today, I think the following:

  • Dell is going to fail in their stores initiative. The company seems to have learned nothing from the DJ Ditty debacle. They are still trying to pimp Apple by offering cut-rate knock-offs of Apple ideas. Where Apple made cutting edge i-Pods and coupled them with the best on-line music store extant, Dell flopped with the Ditty. Where Apple has been (somewhat unexpectedly, to me, I confess) successful in retail by creating fresh, exciting stores in great locations. Dell is responding with what I fully expect to be lame stores in locations on the outskirts of town. "Responding" is Rock to the Paper of "Proactivity" in the rock, paper, scissors games of life and business and, as a general rule of thumb in the PC space in particular, you don't want to be aping Gateway.

  • Don't cry for Carly Fiorina. She made something in the 9-figures for very nearly killing HP. Mark Hurd is getting enormous credit for running what was left of HP successfully but he deserves it. The HP BOD was right to boot Ms. Fiorina. Their choice was losing the rest of the company or, at the very least, losing the rest of HP's executive suite. If the board was insensitive in the manner in which they dropped the hammer, well, it wasn't anything that 42+ million bucks can't assuage.

  • These reversals of fortune tend to run in about 5 year cycles. Dell may get their mojo back but it will be by doing things that aren't yet on the table; not by running Dell-Branded stores. There's likely still time to short the former Prom Queen, Dell, and get long the quiet girl in the back of the class who always seemed to make horrible choices but is getting her act together now.

I have no positions in HP or Dell at the moment but there is something appealing in a Life as a John Hughes Movie way about getting long HP against a short play in Dell here. We may have missed the best parts of the trade in the last 12 months but the companies still seem to be running in opposite directions as fast as they can. HP continues to run towards the light while Dell staggers into the abyss.

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No positions in stocks mentioned.

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