Gateway: Promotions Will Not Save Holiday Season

Gateway (NYSE: GTW) has revealed that its fourth-quarter earnings will not meet expectations because a flurry of promotional offers, including a first-ever two-for-one offer on PCs, failed to lift sales.

Gateway said it expects to book sales of US$1.06 billion for the last three months of 2002, well short of its earlier estimate of $1.2 billion. Also, its net loss will be higher than anticipated, and the company could take an additional hit because of a dispute over payments to a partner.

In a conference call, Gateway CEO and chairman Ted Waitt said the fourth quarter was "very different" from past years in terms of how consumers bought PCs and related products. "A lot of that is driven by the economy," he added.

Market Bullies

The company sold 720,000 units during the period, 5 percent more than in the fourth quarter of 2001, but because of price promotions, it reaped less revenue. Waitt noted that all of Gateway's competitors fought for market share in the quarter with steep price discounts and other promotions.

For its part, Gateway unveiled a two-for-one offer on some desktop and notebook computers in mid-December, hoping to spur purchases by reluctant shoppers. Offers such as this did have a positive effect on sales, the company said, but they also drove down profit margins, contributing to the larger-than-expected loss. Gateway will release final Q4 numbers later this month.

Shares of Gateway fell about 11 percent to $2.83 in early trading Wednesday.

Cost Structure Eyed

Analysts have long been concerned that Gateway holds the most tenuous position of all the PC giants in the current price-war environment, largely because of internal cost structures, including its network of more than 270 U.S. retail stores.

Gateway chief financial officer Rod Sherwood said the company plans to evaluate the performance of all of its channels -- stores, phone and Web -- in an effort to make them all profitable again. But Waitt said there are no plans to alter the company's cost structure by eliminating a large number of stores.

However, Waitt added, "If it is necessary, we will do whatever it takes. We will make this business profitable."

Market Share Questions

IDC analyst David Daoud told the E-Commerce Times that Gateway faces not only a sluggish PC market that is expected to pick up only slightly in 2003, but also the danger of losing market share to competitors that are better able to slash prices.

"In this environment, the ability to make adjustments quickly is important," Daoud said. "Consumers have a lot of choices."

Plasma Heaven

There was some good news about the fourth quarter, primarily involving non-PC items. For example, Gateway said it has captured a double-digit share of the emerging market for plasma television sets, which is expected to see 50 percent growth in 2003.

The company also said sales of digital cameras and other accessories and devices were strong, particularly at the beginning of the holiday season and just before Christmas, when last-minute shoppers grabbed those items.