Dell's DSI about half the level of its competitors. leading to huge savings in working capital
Jan-95 Dell Inventory to cover 32 days of Sales
Compaq 73 days of Sales
Addnl. Inventory reqd. by Dell at Compaq's DSI of 73: 1995
Dell's COS 2,737 7.60 311.71
Addnl. Inventory 312 M 20 M increase in PBT
leading to Conservation of Capital
Low component inventory reduces obsolescence risk and lowers inventory cost. Value of inventory reduces 30% p.a.
Lower inventory losses imply higher profits. Compaq had to market both new & older systems.
Older systems were discounted, leading to cannibalization of sales of new systems.
Dell able to grow sales by offering faster systems at prices of competitors' slower machines. Component shortages had order backlogs, leading to cancellation of some orders.
Dell Compaq
10.71% 20.30% Inventory as % of COS 3.212% 6.090% Inventory loss as % of COS
78.8 Addnl. Contribution to Profit for Dell due to lower component inventory & effect of price reductions
Dell able to grow sales by offering faster systems at prices of competitors' slower machines.
In USD M 5296
Incremental Sales in 1996 1,821 52%
Addnl. Operating Assets (32%) 582 4.29%
(Total Assets - ST Invest.) 227
Forecasted 1996 Balance Sheet (In USD M)
Y.E. Jan 29, 1995 % 0f 1995 Sales Current Assets: Cash 43 1.24% ST Investments 484 13.93% A/R, net 538 15.48% Inventories 293 8.43% Other 112 3.22%
Total Current Assets 1,470 42.30%
P, P & E, net 117 3.37%
Other 7 0.20%
Total Assets 1,594 45.87%
Addnl. Funding Needed 31.94%
Current Liabilities:
A/P 403 11.60%
Accrued & Other Liabilities 349 10.04% Total Current Liabilities 752 21.64%
Long Term Debt 113 3.25%
Other Liabilities 77 2.22% Total Liabilities 942 27.11% Stockholders' Equity: Preferred Stock 120 Common Stock 242 Retained Earnings 311 Other -21
Total Stockholders' Equity 652 18.76%
1,594
45.87%
As of 1995, Dell would be projected to be able to grow at 52% without increasing its leverage and issuing further equity shares. Actual 1996 Balance Sheet Compared to Projections
Y.E. Jan 28, 1996 Forecast for 1996 Fixed Liabilities Current Assets: Cash 55 66 ST Investments 591 484 A/R, net 726 820 Inventories 429 447 Other 156 171
Total Current Assets 1,957 1,987 P, P & E, net 179 178 Other 12 11 29% Total Assets 2,148 2,176
Addnl. Funding Needed 354 Current Liabilities:
A/P 466 403 Accrued & Other Liabilities 473 349
Total Current Liabilities 939 752
Long Term Debt 113 113
Other Liabilities 123 77 Total Liabilities 1,175 942 Stockholders' Equity: Preferred Stock 6 Common Stock 430 Retained Earnings 570 Other -33
49 Total Stockholders' Equity 973 879
Common stock to employees 2,148 2,176 5.10% 45 227
Dell internally funded a 52% growth in sales largely by increasing its asset efficiency and profitability.
of Sales in 1996, as compared to projected 32% 924
4.29% 1995 Actual Net Profit Margin
Growth in 1996 sales 227 Projected Net Profit for 1996
Actual net profit margin in 1995 227
2,176
Fixed Liabilities Prop. Liabilities 66 66 484 484 820 820 447 447 171 171 1,987 1,987 178 178 1,692 11 11 582 2,176 2,176 582 354 (80) (80) 403 614 211 349 532 752 1,146 113 113 -77 117 942 1,376 879 879 2,176 2,176 As of 1995, Dell would be projected to be able to grow at 52% without increasing its leverage and issuing further equity shares.
Variance Y.E. Jan 28, 1996 Forecast for 1996 Variance
Proportional Liabilities -11 55 66 -11 107 542 484 58 -135 -94 726 820 -94 -18 429 447 -18 -15 156 171 -15 (30) 1,957 1,987 -30 1 179 178 1 1 12 11 1 (28) 2,148 2,176 -28 Forecast for 1996 with Actual 1996 Sales
(80) 63 466 614 -148 124 473 532 -59 187 939 1146 -207 17.7% 113 113 0 46 123 117 6 233 1175 1376 -201 6 430 570 -33 94 973 879 94 973 (28) 2148 2,176 (28) Dell internally funded a 52% growth in sales largely by increasing its asset efficiency and profitability.
Total Operating assets at 29% 5.1% vs. 4.3% 5.14% NP Margin 1996
of Sales in 1996, as compared to projected 32% 20.15% GP Margin 1996
107
582
forecast vs. actuals
-67 63 505 Total Increase in Funding in 1996 over 1995 124
46
272 Increase in Equity w/o 49
Addnl. Sales 2,648 Addnl. Operating assets 779 Forecasted 1997 Balance Sheet (In USD M)
Y.E. Jan 28, 1996 % 0f 1996 Sales Current Assets:
Total Assets 2,148 41%
Addnl. Funding Needed 29.40%
Current Liabilities:
2,148
41% To fund the shortfall of 984 M 44 days of sales
through increased asset efficiency, Dell needs 56 days of COGS
Current CCC 40 days
CCC has to become negative to fund the shortfall of 984 M HOW?
Savings from Hypothetical WC improvements
DSI DSO
1997 Projected 14 27
Hypothetical improvements 17 15
* Daily Savings 17.6 22.1 Annual Savings 299.55 331.00 Total Savings in USD M 983 904
Improvement in Profitability in 1997 can also eliminate the shortfall of 984 M - 1% increase in margin will increase net income by 79 M. Margin improvements reduce the required working capital improvements as above - A combination of both profitability & WC improvements seems to be the only reasonable alternative to fund the shortfall.
Repurchase of Stock indicates under valuation in the market and leads to increase in value.
Actual profit margin 1997 6.68%
ST Inv. Increased to 1237 M from 591 M LT debt reduced to 18 M from 113 M
Common stock reduced from 430 M to 195 M Inventories 251 M
903 M A/C Rec., 1040 M A/c payable Actual 1997 CCC 13 37
408
Projected 1997 Net Profit 5.1%
Daily COGS 17.6 56
Fixed Liabilities Prop. Liabilities
Debt repaid & $500 Equity Buyback 779 2,927 2,927 2,927 371 (161) 984 2,927 2,927 2,927 DPO CCC 53 -12 20 17.6 352.42
Improvement in Profitability in 1997 can also eliminate the shortfall of 984 M - 1% increase in margin will increase net income by 79 M. Margin improvements reduce the required working capital improvements as above - A combination of both profitability & WC improvements
Repurchase of Stock indicates under valuation in the market and leads to increase in value.
7759 M sales, 518 M ST Inv. Increased to 1237 M from 591 M LT debt reduced to 18 M from 113 M
Common stock reduced from 430 M to 195 M Inventories 251 M
903 M A/C Rec., 1040 M A/c payable 54
(4)
