Gateway's Big Bath

At the end of Gateway's (GTW Quote) third-quarter earnings period last year, CFO David McKittrick drew a big bath and took it. He threw all the company's bad news into one quarter -- the tub -- and Gateway reported a net loss of 68 cents a share, or a loss of 8 cents a share, excluding that rather sizable $113.8 million one-time charge.

On the surface, the move was a masterstroke. Although taking an initial 22% hit, Gateway shares are up 83% since the announcement. Best of all, the maneuver may have helped the company subsequently report its best gross margins in years -- 19.5% and 20.6% in the first two quarters of 1998. The company claims that declining component prices and diversification of its product line were the reasons for the strong margin numbers.

Unfortunately, the news may have been a little bit too good, say three shorts and two analysts TheStreet.com talked with. They argue that the company's third-quarter inventory writedown last year was a questionable accounting maneuver. Even if the move survives accounting scrutiny, bears charge that it was a short-term solution that won't save Gateway from deflationary pricing patterns in the hotly competitive PC industry. Essentially, they believe the company took the writeoff to get rid of obsolete inventory and then proceeded to sell that inventory over the next few quarters to pad its gross margins. Attempts to schedule an interview with Gateway's McKittrick or other executives to discuss the writedown were not successful. ...