Gateway Closing Stores, Revamping Lineup

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Computer maker Gateway Monday cemented plans to close 76 of its retail stores, reduce employee headcount and make other adjustments in an attempt to save itself from extinction.

As previously reported, the Poway, Calif.-based company said it was considering cutbacks in the face of sluggish PC sales and increasing competition from Dell Computer and Hewlett-Packard .

However, this is Gateway’s third restructuring in as many years. Analysts are getting concerned that the company’s direction is leading them nowhere.

“While we are encouraged by Gateway’s actions to reduce costs and diversify its revenue stream, and believe that investors could view these steps positively, we continue to believe that visibility on sustainable profitability remains cloudy and few additional catalysts are apparent,” Deutsche Bank Securities analysts said in a statement to investors.

To make the grade, Gateway said it would close the underperforming Gateway Country Stores on March 24 including six in California. The number includes four previously announced closures, representing a total of 80 stores or 29 percent of the company’s current outlets. Gateway originally started with 120 shops and service centers in the United States.

The company said it would also eliminate 1,900, or 17 percent of its positions, including store staff. In the future, Gateway said it would continue to look closely at how well the stores are performing and is considering cutting some of its non-labor staff and making its marketing message more efficient in the process.

With the adjustments, Gateway said it would save more than $200 million annually; approximately $125 million in 2003.

“We’re taking the tough but necessary steps to continue our transformation and get back to healthy growth,” Gateway chairman and CEO Ted Waitt said in a statement. “We have the right team and the right level of urgency to get it done fast. The result will be a much better Gateway, one that’s going to lead the industry with the best products, the best value and the best customer experience in the marketplace.”

In addition to cutting back, Gateway said it would invest time, energy and money into re-engineering its product lines.

Starting in April the company expects to relaunch its server and storage product line for enterprise. Gateway said it will add tablets, convertibles and handhelds to its mobile product mix, currently dominated by its notebooks. In addition, the company said it will add to its institutional sales and service workforce and expand its relationships with network service providers and value added resellers.

Based on its success selling 42-inch Gateway Plasma TV and Digital Display over the last holiday season, Gateway said it will roll out a wide range of high-ticket digital displays, audio products and video gear — including plasma displays and consumer electronics — during the remainder of the year.

The overall idea is to “focus on quality, service, support and total system value, not solely the lowest price,” Gateway said in a statement.

The company said it is also upgrading its store layout and merchandising in its stores to better reflect the new products. Gateway is also expected to pilot several new retail concepts before year-end. The company said details of which will be announced this spring.

Gateway also announced that revenue for the first quarter of 2003 will be approximately $820 to $850 million, which in part reflects the company’s sharpened focus on higher-margin PC sales and the current weak demand environment. Gross margin dollars in the first quarter are expected to be $112 million to $120 million. Including restructuring costs of $75 million to $80 million discussed above, earnings per share in the quarter are projected to be at a loss of $0.62 to $0.66.

Waitt said he hoped the cuts will help Gateway return to a positive operating cash-flow position by year-end and finish its fiscal year with more than $1 billion of cash and “marketable” securities.