Wayne Inouye saved Irvine-based Gateway Inc. from chronic losses. But in the end it didn’t matter.
Directors at the computer maker saw Inouye riding retail sales alone as other lines of business suffered. Doubts grew about whether Inouye could fix the problems, according to analysts.
And so, Inouye, who brought Gateway to Orange County from San Diego in 2004, stepped down last week to “pursue other interests,” according to the company.
Chairman Richard Snyder, a former Gateway president who took the chairman’s spot after the 2005 retirement of founder Ted Waitt, now is interim chief executive.
Inouye is set to advise Snyder during the transition.
The change caught many by surprise.
“Typically, I pride myself in seeing these kinds of things ahead of time,” said analyst Rob Enderle with the Enderle Group in San Jose. “I didn’t see this one coming.”
It’s no secret Gateway is struggling against bigger rivals Hewlett-Packard Co. and Dell Inc. Taking them on in sales to businesses and directly to consumers proved Inouye’s undoing.
The executive wasn’t able to extend his turnaround plan beyond cost cutting and selling through big retailers.
Meanwhile, sales directly to buyers via the Web or phone and to small and midsize businesses suffered.
Inouye knows retail. Earlier in his career he worked for Best Buy Co. At Irvine’s eMachines Inc., Inouye turned around the discount PC seller via sales through big stores.
One of his first moves at Gateway was to shut down the company’s own struggling stores and drum up sales through Best Buy, CompUSA and others.
Retail sales were a bright spot in Gateway’s otherwise disappointing fourth quarter. They rose 31% from a year earlier to $792 million.
But retail only counts for so much. Sales through big chains deliver the slimmest of profits,and less of a chance to sell buyers on upgrades or gain return customers, said Stephen Baker, director of industry analysis for the NPD Group Inc. in Port Washington, N.Y.
“What probably happened is they didn’t feel like Wayne could get them to the right places with the other businesses,” Baker said.
Poor Q4
Inouye’s departure came a week after Gateway disappointed Wall Street with its fourth-quarter results.
Overall sales were $1.12 billion, up 9% from a year earlier but below the $1.22 billion analysts were looking for.
The culprit: direct sales to consumers and businesses, which fell 39% from a year earlier.
Gateway reported a $22.4 million profit, up about 50% from a year earlier. Excluding special items, the company posted fourth-quarter earnings of $12.6 million. Analysts were looking for $18.7 million.
“In hindsight you can say, ‘Look, it’s not that they’re not making money,'” Baker said. “It’s that they just see a lot of pressure in the professional and direct businesses. To be a long-term player in the marketplace they need to be successful in all three of those areas.”
The fourth quarter wasn’t a fluke.
In the third quarter, Gateway saw direct sales fall 27% from a year earlier. Professional sales dropped 12%. Retail sales again were the star, growing nearly 50%.
Gateway may have been prompted to change leaders now because of software upgrades expected at businesses in the next couple of years, according to Enderle. Chief among them is Microsoft Corp.’s Vista operating system, due out late this year or next.
Who will replace Inouye?
One candidate could be Stephen Ward, the IBM Corp. executive who became chief executive of China’s Lenovo Group Ltd. in 2004. He stepped down in December and was replaced by William Amelio, one of Dell’s senior executives for Asia.
Whoever comes to Gateway will find that Inouye left the company a much leaner operation than when he arrived.
Inouye was tapped to lead Gateway in 2004 after the company bought eMachines for $266 million.
Gateway was struggling from years of losses under founder Waitt. In 2003, Gateway’s sales fell nearly 20% from 2002 to $3 billion. The company’s operating loss was $510 million.
Rise at Gateway
In a coup, Inouye took over Gateway with his own executive team. Inouye brought his focus on retail and cost cutting from eMachines.
Within weeks of becoming chief executive, Inouye started shuttering all of Gateway’s stores. The layoffs reduced the company’s headcount from 7,600 people to fewer than 2,000.
By the end of 2004, Gateway had moved to Irvine, bringing the county another Fortune 500 company.
The formula seemed to work. Gateway gained market share and posted its first profitable quarter in years during the second quarter of 2005.
But the focus soon shifted to growth beyond retail and profits beyond cost cutting.
