Pop quiz: What does Gateway
Answer: Its first-quarter earnings report has me humming lyrics from In Through the Out Door.
I'll explain. Previewing Gatway's earnings news earlier this week, I quoted new CEO Ed Coleman as outlining four key areas where he wanted to improve the No. 3 U.S. computer maker's business. The fourth of those areas, as you may recall, was "an increased focus on the consumer market." There's no way to sugarcoat this, so I won't try: If Gateway intended to improve sales in this segment (retail), it failed. If Gateway intended to improve the profitability of this segment (as I surmised), it failed miserably.
And that's great news.
Patience. I'm getting there. Comparing Q1 2007's numbers to those from Q1 2006, Gateway posted essentially flat sales. No improvement there. Profitability-wise, at a 3.1% gross margin, it earned half the profit from each dollar of sales this time as it did in the year-ago quarter.
Butit did post improvement in its second-largest business, professional sales. There, despite sales that fell 23% year over year as the firm cut unprofitable business and "pursue[d] opportunities on a more selective basis," Gateway managed to tack on 310 basis points to last year's 3.8% gross margin, grossing 6.9% last quarter.
This surprising result -- the opposite of what Coleman said he was aiming for -- got me thinking: maybe Gateway is on to something here. A strategy that could actually stand a chance of making this very-third-string player (even after a 60-basis point gain, its market share stands at just 7.2%) into a consistently profitable operation.
Think about it. Beset by well-publicized problems with customer service, and desperately seeking a way to recoup market share lost to Hewlett-Packard
On the other hand, Gateway might do well for itself, and its shareholders, if it makes use of its smaller size to dance nimbly among the giants. To poach the very best, and most profitable, corporate accounts while its larger rivals are occupied elsewhere. Gateway's already proven that such a strategy can boost margins in its professional segment. And so I say: forget retail. Go where the profits are -- in through the out door.
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