Someone remind me. Marvel
At first glance, the report doesn't look half bad. I mean, just look at the headlines:
• Gateway earned a penny of net profit vs. last year's Q2 loss, despite sales falling 8.5%
• Firmwide gross margins expanded 210 basis points to 7.6%
• Retail segment gross margins expanded 190 basis points to 5.6%
Pretty nice, huh? Plus, CEO Ed Coleman is making good on his promise to turn around the firm's struggling retail operation. By sacrificing unprofitable business and focusing on higher price-point sales, the firm managed to grow its retail sales 4% despite selling 1% fewer units than in last year's Q2. A corollary story played out in the professional sales segment. Unit sales were down 36%, but dollar sales were only down 31% as Gateway eschewed unprofitable sales and practiced "greater selectivity in contract bidding." Successfully, I might add, as gross margins nearly tripled to 12.2% within this segment. The opposite was true in Gateway's direct sales unit, however. Not only did units sold drop 15% year over year, but dollar sales declined 30%, and margins plummeted 780 basis points to land with a thump at 15.1%.
So, on balance...?
On balance, I guess you could say that the results were "mixed," as one pundit put it last week. I wouldn't put it like that, though. To this Fool's eye, the results were abysmal. A trainwreck, really.
You see, I'm looking not so much at Gateway's income statement as its balance sheet and cash flow statement. What we see there is that Gateway's cash burn for the first half of this year was triple that of H1 2006. The company burned so much cash that its balance sheet now shows -- for the first time I can recall -- more long-term debt than cash, equivalents, and short-term securities: $300 million vs. $255 million. Fools, Gateway is a "green gene" no longer.
Granted, what it lacks in cash, Gateway more than makes up for in inventory, but that's a bad thing. Inventories are up 10% year over year, and worst of all is the kind of inventory we see. Raw materials declined 14%, suggesting that Gateway sees weak demand continuing and so is not buying components to satisfy it. Further bolstering this interpretation, finished goods inventory is stacked with 22% more unsold computers this year than last. Hardly the impression you get from the headlines, but it's the truth.
So, to investors wondering whether Gateway, at a buck and change, has hit bottom and can't possibly go lower, I say: Yes, it can.
How does the above compare to Gateway's performance last quarter? Find out in:
Marvel is a Motley Fool Stock Advisor pick.
Fool contributor Rich Smith does not own shares of any company named above.