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Gateway Begins CE Changeover; Posts Q2 Loss

The first effects of Gateway’s much ballyhooed change from computer maker/retailer to broadline CE dealer could be seen in the company’s second quarter financial statement, where non-PC product sales increased and PC shipments plummeted.

The changes made included starting to remodel its 192 remaining stores and adding a few new CE SKUs. However, these early changes were not enough to save the company’s bottom line, as Gateway posted a $73 million net loss on sales of $800 million for its second quarter, ended June 30. This was an improvement over its performance during this year’s first quarter, when it lost $200 million on sales of $844 million, but these figures were worse than during the same time in 2002, when it lost $61 million on $1 billion in sales.

Company executives credited the increase in sales of higher margin non-computer product sales for the improved financial performance and other cost savings from the first quarter of 2003 for the sequential quarter improvement. Sales of this merchandise increased 4 percent during the second quarter and now comprise about 28 percent of Gateway total revenue. The company’s stated aim is for this figure to reach 40 percent.

“We’re pleased with the progress we’re making in transforming from a traditional PC company to a branded integrator,” said chairman/CEO Ted Waitt.

To help meet this goal, the company introduced four flat-panel TV SKUs last week. The new 50-inch HDTV and 46-inch enhanced definition plasma models will join the company’s current 42-inch set. The 50-inch unit will carry a $6,999 suggested price tag and features PIP, and 1,366 by 768 resolution, 600-to-1 contrast ratio and became available from Gateway’s online, direct and Country Store operations on July 24. The 46-inch model has a $3,799 suggested retail price and became available through and the Country Stores starting July 25. It features 852 by 480 resolution, 800-to-1 contrast ratio and the entire casing is 3.5-inches thick and has about 20 percent more screen area than the company’s current 42-inch set.

The introduction of the LCD TVs marks Gateway’s entry into this category. The 18-inch, $899 suggested retail price, model is intended for use in bedrooms and kitchens. It features 1,024 by 768 resolution, 350-to-1 contrast ratio and multiple video inputs, including PC analog, s-video, TV/CATV, composite and component. The unit is now available through all of Gateway’s channels. The 17-inch LCD offers slightly higher resolution 1,280 by 768 and a 600-to-1 contrast ratio. It will become available in August with a $799 suggested retail price.

The flip side of Gateway’s strategy could be seen in a major fall-off in PC sales. The company reported that it sold 490,000 PCs during the quarter, about 25 percent fewer then during the same period last year and down 3 percent from the first quarter of 2003. The year-over-year decline was attributed to the closing of 70 retail stores during the first quarter and because the company had shifted away from pushing quick selling entry-level models in favor of higher-end units.

The company will reverse this trend in the next few weeks when it again rolls out a new low-end desktop PC line. Gateway hopes this maneuver will help bring its PC sales operation back into the black.

In addition to the store-remodeling project, Gateway opened up its first new pilot store in San Diego’s Mission Valley on July 25. Four more are planned to open this year.