Top Stories: Gateway to Uncertainty
By Eric Moskowitz
Staff Reporter
10/22/98 9:14 AM ET
Flashy advertisements are one thing, but Wall Street wants to see a return to predictable earnings before it declares its love for Gateway (GTW:NYSE).
Investors are trying to get a read on the PC maker before it announces third-quarter earnings after the market's close today. Analysts expect the company to earn 47 cents per share in the quarter ended in September. Normally a predictable earnings machine, Gateway surprised investors by earning 38 cents a share in its June quarter, missing estimates by 6 cents. The news sent the stock down 10%.
Gateway is betting that by building brand awareness in the consumer and small-business markets outside its direct business model, it can continue expanding at its five-year annual growth rate of 23%. But Condor Capital President Ken Schapiro says Gateway is up against some tough competitors: the ultraefficient Dell (DELL:Nasdaq) on the direct end and the business services giants Hewlett-Packard (HWP:NYSE) and IBM (IBM:NYSE) on the other.
Last year, the North Sioux City, N.D., PC seller embarked on a consumer-oriented retail campaign to further its brand name by introducing a line of Gateway Country stores. Today, the company has 96 Gateway Country stores in strip malls and suburban outposts across the country and plans to add 40 more by the end of the year.
This spring, Gateway furthered this initiative by introducing its largest publicity campaign ever, YourWare, which allows customers to buy PCs and suites of PC-related products such as peripherals, software and Internet access while paying over a two-year period.
While analysts such as Gerard Klauer Mattison's Lou Mazzucchelli love the company's Country stores, others believe these retail PC outposts are a big step in the wrong direction. Gateway's direct model is where "Dell just really clobbers them," says Condor Capital's Schapiro, whose firm doesn't have a position in Gateway or Dell.
Mazzucchelli, who rates the stock a buy and has done no underwriting for Gateway, insists that the Country stores hold no inventory and need to sell just 100 PCs a week to break even. "It's a great way to build customers," he says. "I believe they want to have hundreds of stores in the U.S."
Steve Massey, store manager of a Gateway Country store in Latham, N.Y., agrees. "I think it's a plus for Gateway because, for one thing, each store has software training classes that are 100% profit," he explains. Massey says his store inside the Latham Mall, complete with a cow motif and a floor-to-ceiling barn silo, is doing good business, and the company told him to expect to see hundreds more, "including three or four in Manhattan."
While the stores make up a negligible part of Gateway's revenue at this point, some investors are concerned about the direction that the company is taking with these stores. "We just don't think management understands the economics of retail," worries one New York-based money manager who requested anonymity. He sold his Gateway shares after visiting with a number of the company's senior managers.
Jim Poyner, an analyst with Oppenheimer, says that Gateway will disappoint investors Thursday because its operating expenses on business operations for segments like its Country stores are just too high. Poyner, a longtime bear on Gateway, upgraded the company from an underperform to hold last week but notes he still is puzzled about Gateway's upcoming quarter.
"Gateway has gotten more aggressive than it was in its second quarter and its factories are running full out, but I think they are selling cheap boxes," says Poyner, whose firm hasn't done any Gateway underwriting. He predicts the company will earn 44 cents, which is 3 cents below consensus estimates. Mazzucchelli, however, says his sources are telling him that this will be a strong quarter for the company and sees it earning 50 cents a share for the quarter.
In last year's third quarter, the company took a $114 million charge for excess inventory and an acquisition, and reported a loss of 8 cents per share. This should make its year-over-year comparisons unusually robust this quarter.
A seemingly great quarter may lift the company's stock price. But beware. Three out of the last four times Gateway's stock price has hit a temporary peak, there was a rash of insider selling by some of Gateway's key executives.
Most recent was an options-related sale of stock by Vice President Richard Snyder on Sept. 23, which called a short-term top on the company at 56 1/4, according to Baseline. A month before that another vice president, Bartholomew Brown, made an options-related sale at another top of 58 3/16. And all the way back in May, CEO Ted Waitt sold more than $21 million worth of shares at a temporary high of 57 11/16. Soon after the sale, Gateway's stock dropped all the way to 43. (The stock closed yesterday at 47.) So investors may want to keep an eye on insider selling if Gateway's stock makes another run.
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