Battery Recall May Ding Dell Reputation

Dell's battery recall couldn't have come at a worse time, with customer service waning and Wall Street increasingly growing impatient with the PC giant's earnings misses. The good news: Dell's 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 Dell's reputation has taken another hit as it is losing market share and its once high-flying shares are wallowing near five-year lows. It's 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 company's 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 today's recall, the news comes at a difficult time for the company."

View: eWeek

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 Dell's 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 Dell's 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 Dell's enterprise segment is also a key unknown at this time. We fear that the company's 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

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