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Analysts, investors frown on Gateway

Analysts are wary after the company warns that it expects to lose money all year as it tries to reverse a trend of declining sales.

Analysts and investors took a dim view of Gateway on Thursday after the company warned that it expects to lose money all year as it tries to reverse a trend of declining sales.

During an analyst conference at its Poway, Calif., headquarters, Gateway said that after a slow January, sales were picking up slightly. But the company also warned that it expects a pre-tax loss of between $100 million and $120 million, not counting $75 million to $100 million in restructuring charges. For the year, the company said it expects a pre-tax loss, excluding charges, of $200 million to $250 million.

The outlook was perceived as even more negative than the view presented in January, when the company announced it would slash more jobs and close stores amid a steep decline in sales.

The No. 2 direct PC seller has been spending heavily on marketing, including a huge blitz during the Olympics. However, many have questioned the company's latest strategy, which is focused on driving sales at the expense of profits.

"We continue to be wary of Gateway," Bear Stearns analyst Andrew Neff said in a research note. "The company appears engaged in a difficult and risky strategy of offsetting its eroding market share by trying to make it up in volume and maintaining a cash-flow-neutral position. To us, it is unclear whether this 'treading water' strategy will work, as we see the potential for further disappointments and are forecasting operating losses for the foreseeable future."

Investors also reacted negatively to Gateway's forecast. In midday trading, shares were at $4.61, off 49 cents, or more than 9 percent.

Neff said the best thing Gateway has going for it is that the company has $3.56 per share in cash, but added, "If its strategy falters, that could be at risk as well."

see special report: Gateway CEO's painful homecoming Gateway is trying a few new tactics, including a pilot program in which about 40 percent of Gateway's 275 stores are carrying inventory. The stores involved are stocking three different configurations, one each from Gateway's three main desktop lines. Gateway, which has traditionally used its stores as a showroom rather than a distribution point, previously carried inventory only at peak holiday times.

However, some analysts say more drastic changes are needed if the company is to endure.

"We felt that there was a lack of new strategic initiatives, given the difficult position the company is in," Merrill Lynch analyst Steven Fortuna said in a research note. Fortuna also said Gateway is basically trying to "do a better job" in the same areas in which it has struggled to improve over the past two years--things like marketing, and targeting small- and medium-size businesses.

Needham analyst Charles Wolf had planned to upgrade the stock after the meeting, but said Thursday he was dismayed that the company's profit margins will be even lower than he previously expected.

"We had anticipated upgrading from a hold to a buy because of the company's modest after-cash valuation," Wolf said. "But in view of Gateway's latest guidance that postpones profitability until 2003 and the prospects of a weak consumer PC market in 2002, we are maintaining our hold recommendation."