Gateway Q4: It Gets Even Better
Drew:
Here is a take on Dogway from the Fool. Notice ASP went down 2% while
Dell stayed the same last quarter,will be interesting to see how Dell does in Q4 in the ASP department.Another thing to note is ROIC as compared to Dell.Very interesting and an excellent performance by Dogway but DELL will kick their ass come Feb.
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Gateway 2000 Inc. (NYSE:GTW - news) inched ahead $1 to $59 this morning after posting very impressive fourth quarter results last night after the bell. The North Dakota PC company reported fourth quarter revenues of $2.31 billion, up 16.6% year-over-year. EPS grew 37%, however, as gross profit shot up 40.3% and gross margin expanded 3.65 percentage points year-over-year and 80 basis points sequentially. That allowed the company to expand sales, general, and administrative expenses by 44.1% and still bring about a 34.5% increase in operating profit. Paying attention here to absolute dollar spending and gross profits available for operating expenditures is more instructive than looking purely at SG&A expenses as a percentage of sales. Looking at operating income, the quality of these earnings is very high and speaks to a number of accomplishments at Gateway this year.
First, the company's Gateway Country Stores concept is quite interesting. Though the connotation might be cheesy, the Gateway stores could be compared to a catalog showroom, where inventory investment in demonstration models per square foot is minimal and sales per square foot are incredibly good. These stores will also be the base for a number of outbound salespeople targeting small- and medium-size businesses. Productivity gains were driven by four key factors, some straight blocking and tackling and some strategic: 1) Better pricing discipline across product line; 2) recutting some contracts and holding vendors to contract prices; 3) better job at manufacturing execution, reducing waste and increasing margins; and 4) better product mix.
The better product mix is one of the most attractive features of Gateway and harkens back to the days of Dell (Nasdaq:DELL - news) richening its product mix and thus growing profits and cash flow much faster than the rest of the industry. This quarter, Gateway's average unit price declined only 2% sequentially versus 9% for the rest of the industry, according to Gateway. On an annualized basis, that's a big difference and points to solid performance in increasing sales of portables and servers. Asset management also improved greatly once again. Inventory investment was negative sequentially and was even better year-over-year. For the year, inventory investment was negative $81.3 million, coming from a quarterly improvement in inventory turns for three out of the four quarters this year.
Quarterly inventory turnover (annualized):
Q1: 25.6
Q2: 30.2
Q3: 32.6
Q4: 39.5
source: Motley Fool data
Through three quarters, net cash flow from operations equaled 228% of net income. For the fourth quarter, based on our look at the data, that trend accelerated, with cash flow from operations for the year equaling around 275% of net income. Return on invested capital flows from the basic fact that invested capital was flat sequentially (treating 5% of revenues as required cash) while after-tax operating profit was up 65.5%. That resulted in a return on capital performance of 79%, annualized for the quarter, up from a still very strong 48% last quarter. With excellent fundamentals as far as strategy, products, and production and financial execution go, the company's valuation is way too low at a multiple of less than 9 times enterprise value to net cash flow from operations.
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