Egghead Stock Skids Nearly 15% Projected Loss, Downgrading Trigger Stock’s Sharp Plunge

Problems in Egghead Software’s corporate and government sales division are “covering the real strength the company’s got going in its retail division right now,” according to an analyst who has downgraded his evaluation of the company.

Thomas Carley, an analyst with Portland-based Jensen Securities Co., earlier this week changed his rating of the Spokane-based company to “underperform” from “buy.”

In the aftermath of Carley’s rating, and an announcement by Egghead Tuesday that it expects a loss of 21 cents per share for the second quarter ending Sept. 30, Egghead’s stock took a beating Wednesday.

Shares fell as much as 28 percent. The stock price was down $1.375 at $7.875 in trading of 3.17 million shares. That is more than 15 times the stock’s average daily trading volume during the last three months, making it the eighth most active U.S. stock Wednesday.

Earlier, the stock fell to as low as $6.63. The stock price approached $14 per share in July.

Carley had expected the company to post a profit of 9 cents a share for the quarter.

In Egghead’s Tuesday announcement, the company said the 21-cent loss comes because its corporate direct sales business is experiencing softer than planned sales and margins. During the first two months of the quarter, sales declined 20 percent in comparison with the previous year. The September month-to-date trend is 12 percent below last year.

“Some of the problem is industrywide,” Carley said Wednesday. “Everyone has anticipated that corporations will be slower adopters of Windows 95 than individuals, so you’ll have to wait until the first quarter of 1996 to get that pickup.”

But Egghead’s corporate sales problems go deeper than that. The company is in the process of relocating its corporate headquarters from Issaquah to Spokane. And that will require so much of the company’s attention that Carley is not convinced it can focus enough on the corporate sales decline to turn it around over the next 12 months.

Carley explained that analysts work on a 12-month window. The underperform rating reflects the analyst’s belief that the stock will be anywhere from flat to up 10 percent over that time period.

Egghead reports that in its retail division, Windows 95 sales have actually been stronger than expected, although total sales “have not met expectations.”

Carley likes Egghead’s retail strength, but feels the company is suffering from its own overestimation of retail performance.

“They expected overall retail sales to be up 50 percent for the quarter, and they are up only 20 percent,” Carley said. “I think they had very aggressive goals for the quarter. To run up sales 20 percent year-over-year, having closed 10 percent of your stores during that time, is a very good performance.

“It’s just not as strong as they anticipated.”

Also weighing on the second-quarter numbers is the cost of the move to Spokane, which the company has estimated at $8 million, to be spread over the second and third quarters.

Carley expects Egghead to bounce back, but the question is how far and how soon.

“There is no question Egghead’s ship is going to rise on the rising tide, along with everyone else in the industry,” Carley said. “And that’s going to start with the first quarter of 1996.

“But there remains the question of whether this company can get the corporate sales segment of its operation turned around.”

Carley is one of only two financial analysts who have followed Egghead continuously over the past two years.

, DataTimes