Gateway to realign business strategy

The PC maker is not planning layoffs, Brad Shaw, senior vice president of corporate communications, said Monday. However, the company will evaluate the performance of its retail outlets and "may elect to relocate or close some," he said.

Gateway would not comment on the positions that new executives may fill. But Shaw said executives likely will be added to direct the company's efforts in consumer electronics and its services businesses, among others.

"We're in the process of realigning our organization to bring better focus on accountability across our business segments, products and (sales) channels and adding operational expertise in key strategic areas," Shaw said.

While 2002 holiday PC sales were reasonably good for many manufacturers in the United States, Gateway said its sales did not measure up through the Thanksgiving holiday weekend.

Gateway CEO Ted Waitt told attendees at a conference Dec. 4 that unless sales improved soon, the company could be forced to cut its fourth-quarter outlook.

Since Waitt's speech, Gateway has introduced a series of promotions to spark sales, including a PC trade-in offer and a buy-one, get-one-free program. The company has also recently announced new consumer products such as an inexpensive 42-inch plasma display.

Elsewhere, Gateway has already begun some executive reshuffling. Late last year, the company hired Joe Formichelli, an alumni of IBM and Toshiba, as executive vice president of operations. Formichelli will serve as Gateway's manufacturing czar. Before that, Waitt replaced then-CEO Jeffrey Weitzen in early 2001. Around the same time, several other executives also left the company.

Like all PC makers, Gateway was hit hard by the PC market slowdown, which began during the fourth quarter of 2000. The company reacted at first by selling more expensive PCs. But after suffering a disastrous performance in the fourth quarter of 2001, it shifted gears, launching its current strategy, which combines TV advertising with aggressive prices to build up unit shipments and capture market share.

The success of that strategy hinges on cost cutting and driving up unit shipments. But despite an increase in unit sales this year, the company has yet to reach its stated goal of 1 million units per quarter. Gateway sold 729,000 units during the third quarter, up 12 percent sequentially, but down 19 percent year over year, according to its quarterly earnings release.

Tough times ahead
Going forward, Gateway faces difficulties in an intensely competitive market, analysts say. The company must stabilize its revenue and continue to cut costs to match it.

"Ultimately, if (Gateway's) revenues are declining, it needs to get its cost structures in line...and this involves more than just who makes the decisions," said Roger Kay, an analyst with IDC. "Even if it does manage to get its costs in line with revenues, it still needs a way to stabilize its revenue."

Kay said that closing stores as well as moving to outsource manufacturing, could help Gateway save money. Another possible way to stabilize revenue would be to expand sales of consumer electronics.

But as it stands, the best-case scenario for Gateway is a net loss for the fourth quarter that hits the lower end of its previously stated estimates. During the company's third-quarter conference call with analysts in October, the PC maker said net losses would come to between 10 cents and 13 cents a share, while revenue would increase from the $1.41 billion achieved in the third quarter.

The October projections, though, represent a revision downward from previous estimates. In October, Gateway said it expected full-year revenue to be $4.3 billion to $4.5 billion, with a pretax loss between $310 million and $330 million, excluding special charges. In July, the company forecast full-year revenue of $4.5 billion to $5 billion and a pretax loss of $200 million to $250 million.