The computer maker is closing all 188 stores and eliminating nearly 40% of its staff.

InformationWeek Staff, Contributor

April 2, 2004

4 Min Read

SAN DIEGO (AP) -- Gateway Inc. completed its acquisition of eMachines Inc. last month, promising quick answers to three questions: who would run the troubled computer company, where its corporate headquarters would be, and what would happen to its money-losing stores.

It answered all three in the last week, culminating Thursday with news it will close all of its 188 stores next week. The move will eliminate 2,500 jobs, or nearly 40 percent of Gateway's work force.

"Our stores have been a source of pride for Gateway since the mid-'90s, but despite enormous effort we haven't been able to run them profitably," Ted Waitt, founder and chairman, wrote Thursday in an E-mail to customers.

Wayne Inouye has quickly made his mark since replacing Waitt as Gateway's chief executive last month. Last week, he named a management team that is dominated by holdovers from eMachines, where he was chief executive since 2001. On Tuesday, he said the company was moving its headquarters north to Orange County, where eMachines is based.

Inouye, a former Best Buy Co. executive, turned around privately held eMachines and led the low-cost, home PC maker to nine straight quarters of profits on a lean operation of only 140 employees.

The rapid-fire moves are seen as something of a last-ditch survival effort for Gateway, which has posted losses in 12 of the last 13 quarters and become an also-ran against Dell Inc. and Hewlett-Packard Co. in the PC business.

Last year, it introduced an array of high-end TVs, cameras and other gadgets, but its gamble on consumer electronics has yet to spark a turnaround--or profits.

"If, after these changes, they can't return to profitability, it's beyond me what else they could do," said Rob Enderle, principal analyst at Enderle Group in San Jose, Calif.

Gateway, whose executives declined to comment Thursday, said it would discuss the financial impact of the store closures, including any charges against earnings and lost revenue, when it releases first-quarter results April 29. It will also outline details about how and where it will sell its products.

The company has adequate cash--$1.09 billion at the end of last year--to test its latest turnaround effort before running out of money, said Robert Cihra, an analyst at Fulcrum Global Partners LLC, a securities firm in New York.

Gateway's purchase of eMachines troubled some chains that sell eMachines' gear, notably Best Buy Co., the nation's largest consumer electronics retailer. Brad Anderson, Best Buy's chief executive, said last month that he worried about the link between eMachines and Gateway, whose stores compete against Best Buy's.

Shutting the stores will make major retailers more comfortable about selling eMachines, and possibly Gateway, products, said Enderle. Analysts said they expected Gateway's strong name recognition would entice some chains to carry its products.

Gateway said it will continue to sell online and over the phone. It has not said whether it will pursue sales through third-party distributors.

In January, when it announced plans to buy eMachines, Gateway said it would keep both brands but declined to say where the products would be sold.

Gateway, based in the San Diego suburb of Poway, has gradually cut its store count from a peak of 322 in the United States and slashed its work force from nearly 25,000 in 2000 to about 6,500 today.

In what turned out to be a last-ditch effort to save the stores, Gateway spent $35 million last year to remodel them.

"From day one, they never properly used the stores," said Stephen Baker, an analyst at NPD Group Inc. in Port Washington, N.Y. "They always approached it halfheartedly and treated the stores like a stepchild. It came back to bite them."

Gateway and eMachines each had about 3.4 percent of the total U.S. PC market in the fourth quarter of last year, according to research firm IDC. While the merger effectively doubles Gateway's presence, the company still badly trails Dell and HP, who together commanded more than half the U.S. market.

The Gateway stores will all close April 9. The company will launch an inventory sale on Saturday.

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