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Gateway cuts jobs, shutters stores

The PC maker has begun notifying 1,900 employees of layoffs and intends to shutter 76 of its retail stores in the next week.

Gateway has begun laying off 17 percent of its 11,200-person staff and closing 76 of its retail stores.

The cuts, begun Monday, are part of a previously announced plan to return the company to profitability this year.

Profits, however, won't come easily. Gateway expects the layoffs and other restructuring to cost between $75 million and $80 million, resulting in a loss of 62 to 66 cents per share, the company said in a statement, a loss larger than previously expected.

The Poway, Calif., PC maker began notifying the 1,900 employees affected by the job cuts Monday morning. Gateway announced the job cuts and store closings later in the afternoon.

After these latest closings, 192 stores will be left, down from 268 earlier this month. There were 326 Gateway stores at the chain's peak. The company, which has already shuttered four stores this year, expects to complete the closings by March 24.

The cuts come as Gateway is putting a new sales strategy in place--it's third in three years. The new plan is designed to return the company to profitability by the fourth quarter of this year, despite the sluggish PC market. Worldwide PC unit shipments are expected to increase by only about 7 percent in 2003, according to IDC.

Gateway's latest plan centers on bolstering revenue by increasing PC sales; launching new consumer electronics; and lowering expenses. The company will use the job cuts and store closings to lower general and administrative expenses--the bulk of which are generally salaries and company operations, such as human resources. Simultaneously it will work to reduce manufacturing-related costs from components and things like product warranties.

Gateway expects to post a loss of between 62 cents and 66 cents per share for the first quarter, which ends March 31, the company said in a statement.

Analysts polled by First Call had been expecting the company to post a loss of 34 cents per share for the quarter.

Gateway announced that revenue for its first quarter will come in at $820 million to $850 million.

Analysts had been expecting the company to post $955 million in revenue, according to First Call.

Gateway's estimate would be down roughly 20 percent from Gateway's fourth-quarter 2002 revenue of $1.06 billion, reflecting the current status of the market, said Chief Financial Officer Rod Sherwood during a conference call following the announcement.

"The softness in revenue reflects general economic softness, as well as uncertainty related to the war," in Iraq, he said.

Gateway's last round of layoffs came a little over a year ago. The company eliminated 2,250 jobs and closed 19 stores during that January 2002 restructuring effort.

Mapping the future The company intends to trim expenses to $200 million or less, from about $250 million, and reduce overall costs by about $400 million for the year. Lowering expenses helps Gateway lower its break-even point, which will allow the company to return to profitability more easily and quickly.

Gateway's product plans involve realigning its PC business by offering the same prices in remaining stores as it gives when selling directly to customers. It also intends to bring to market new products, including business servers, a new line of consumer-electronics products and an update for the all-in-one Profile PC, dubbed the Profile 5.

"We have to strengthen our value-leadership role...across PC products and other products," Ted Waitt, Gateway's CEO said during the post-announcement conference call.

Also, he said, "there's going to be a lot of effort in terms of repositioning our retail stores. We are going to invest--we are committed to our retail sales channel--but we have to do some work." For example, he said the company will need to update merchandising methods and store layouts to boost their effectiveness.

Other new Gateway products will include notebooks, at least one new tablet PC, low-priced PCs and a new line of Gateway-branded accessories, such as keyboards, or USB storage devices. The company said it will begin releasing the gear next month and continue throughout the year.

The PC maker is also planning new services and is looking into forming new relationships with business resellers and expanding its business sales force.

Gateway intends to use its stores as a base for expanding its consumer-electronics effort. The new line of Gateway-branded products will be similar to Gateway's 42-inch plasma display, introduced in late 2002, the company recently said.

The company has also indicated that it is exploring potential new products, such as handheld devices.

Analysts have said that Gateway needs to adopt a new, more cost-conscious strategy in order to return to profitability in the current market.

"I agree with (Ron Sherwood's) strategy to close more stores and continue to run the stores that are profitable with high foot traffic," said Brooks Gray, an analyst with Technology Business Research. "Closing down the Hampton, Va., (PC manufacturing) facility, which I believe to be extraordinarily underutilized would be my second move."

But to Gateway's credit, Gray said, "I'm seeing quick, decisive action being taken by the management, right now. More than ever, I feel that the management team is taking action to hasten the path to profitability."