March 28, 2001 2:15 PM PST

Gateway shuts 10 percent of U.S. stores

Gateway has closed 27 of its Country stores as the company looks to cut costs, CNET News.com has learned.

The store closings happened two days ago, the company confirmed Wednesday. They affect about 500 employees, who will be given the opportunity to take other positions within the company.

"We've decided to close about 10 percent of our stores in the U.S. that for the most part are in very close proximity to another Gateway Country store," said Bart Brown, senior vice president of Gateway's consumer division.

Gateway closed nine stores in California, mostly in the Los Angeles area; three in Virginia; two each in Florida, Illinois, New Jersey, New York and Texas; and one each in Georgia, Indiana, Oregon, Tennessee and Utah.

With the closings, Gateway now has 299 stores in the United States and additional outlets in other countries. "With this, we think we have the U.S. covered," Brown said. "We think this is the right thing to do for our cost structure."

San Diego-based Gateway indicated at its Feb. 28 analysts conference that some store closings would likely be forthcoming. At the time, the company also put plans for 60 new stores on hold.

In a research note in late February, Prudential Securities analyst Kimberly Alexy said she expected as many as 50 stores to close.

"It appears to me it's part of their overhaul strategy to reduce cost," Technology Business Research analyst Brooks Gray said Wednesday. "They've been cutting back on both employees and their assets."

Gray said cutting multiple stores in large metropolitan areas makes sense. "I questioned whether they were building out too many stores in the U.S.," he said. "Once you go after the major cities, you pretty much have it covered and your return becomes much less in certain areas."

But finding the right balance is essential for Gateway, Gray emphasized. "The stores have provided Gateway a lot over the last two years," he said. "Without them, the company could be in a lot more trouble. I've seen a shift from Gateway.com to Country store-based sales."

Gray estimated that Gateway's revenue from telephone and online sales dropped from 76 percent of total revenue in the first quarter of 2000 to 65 percent in the fourth quarter. Country Store and dealer revenue, by contrast, increased from 24 percent to 35 percent of total revenue during the same period.

Gateway notified employees on Monday of the closings, which were immediate. But some stores will maintain limited cleanup operations to fulfill training or service commitments. For now, the company said, the bloodletting is over.

"We are not planning any other U.S. closings in the near future," Brown said. "We're looking at international and other indirect efforts, as we continue cost-cutting measures."

The Country stores have played an important role in Gateway's beyond-the-box strategy of selling services, software and training. These non-hardware products tend to pull in much higher margins than do PCs, analysts say. During the fourth quarter, beyond-the-box revenue accounted for 100 percent of Gateway's earnings.

Going forward, Gateway faces a number of challenges in getting its cost structure in line and boosting sales at a time when the U.S. PC market is slowing.

But ARS analyst Toni Dubois noted that Gateway "is pricing more carefully" than it had before founder Ted Waitt's return as CEO. "It's clear they're being aggressive, but not so much as to lose money."

As Gateway retrenches, Brown said the Country stores will be playing an important role in the company's overall selling strategy.

"We're going to shift a significant number of our marketing (dollars) to the stores this year," he said. "In fact, you'll see some new television ads hitting in the next 10 days that are Gateway Country store focused."

 

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