Gateway Posts Loss but Touts New Best Buy Deal

Gateway Inc. reported Thursday that its second-quarter loss widened because of charges from shutting its retail network but said that a deal to sell computers through Best Buy Co. stores would help steer the company to profitability.

The Poway, Calif., company, which is developing a new retail strategy after its March acquisition of rival EMachines Inc., said it would begin selling Gateway-brand desktop and laptop computers in Best Buy stores this summer and expected to add more retail partners in the coming weeks.

Gateway posted a loss of $339 million, or 91 cents a share, compared with its loss of $73 million, or 22 cents, a year earlier. Revenue rose about 5% to $838 million from $800 million.

Much of the loss reflected a $289-million one-time charge to cover restructuring costs, which amounted to 78 cents a share. Excluding that, the company lost $49 million, or 13 cents, its lowest operating loss in 10 quarters, Chief Financial Officer Rod Sherwood told analysts in a conference call.

Analysts said Gateway is on the right track.

Martin Reynolds, an analyst with technology market research firm Gartner, praised the company for cutting operating expenses to 15% of revenue, from 27% in last year’s second quarter. Its rival Dell Inc. boasts operating expenses of about 9%, he said.

“It’s something they really have to do when you look at what the competition is doing,” Reynolds said.

Gateway Chief Executive Wayne Inouye touted the Best Buy deal in a conference call with analysts, saying the electronics retailer’s network of 600 stores would more than make up for the closure this spring of Gateway’s 188 retail outlets. Inouye spent several years managing the PC business for Best Buy before taking over EMachines in 2001.

Analysts speculated that Gateway would soon announce distribution deals with Wal-Mart Stores Inc., CompUSA Inc., Circuit City Stores Inc. and Fry’s Electronics.

“I think we could see a big surprise in the third quarter,” said Les Santiago, an analyst with Piper Jaffray.

Gateway also is hoping to streamline its business by paring its product line, CEO Inouye said in an interview.

“We are focused on rebuilding our core business,” he said. “Our route to profitability is to fix our core business, and that’s PCs and PC-related products.”

Under Gateway founder Ted Waitt, the company expanded its offerings to include flat-screen TVs, DVD players and other devices. The company already has shed some products, such as a digital camera, a camcorder and at least two MP3 players.

Finance chief Sherwood told The Times that Gateway still planned to be profitable in 2005 but that “internally our objectives are more aggressive.”

Gateway shares fell 5 cents to $4.35 on the New York Stock Exchange.