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The Spokesman-Review Newspaper
Spokane, Washington  Est. May 19, 1883

Egghead Shrinks In Reorganization Half Of Retail Stores Closed; 70 Laid Off Locally

Michael Murphey Staff writer

Egghead Software, the incredible shrinking company since relocating to Spokane from Issaquah, shriveled still more Friday.

In a new effort to resuscitate the ailing software retailer, the company’s chairman announced Egghead will close half its retail stores and trim 70 more workers from its corporate headquarters staff.

Those layoffs include the company’s current top management team; Terry Strom, Egghead’s chief executive officer, and senior vice presidents Kurt Conklin and Ron Smith. Strom, Conklin and Smith masterminded Egghead’s relocation from the Puget Sound area to Spokane.

“The company is carrying the burden of processes and systems that were initiated 10 years ago, and in that regard hasn’t really kept up the way it should have,” Chairman George Orban said in an interview Friday.

Orban will succeed Strom as Egghead’s CEO.

“I think you can’t affect a reorganization of this size without affecting everybody,” Orban said of the dismissal of the company’s three top executives.

He said the company’s managers, including those who will not continue with Egghead, have been “highly professional” in their approach to formulating and implementing this reorganization plan.

Orban said Egghead will keep a downsized corporate headquarters in Spokane. Its current headquarters building at Liberty Lake will be put up for sale.

Company officials said they would like to relocate to downtown Spokane.

Nationwide, Egghead will lay off 800 of 1,800 employees, and close its Lancaster, Pa., distribution center. Its Spokane retail store will remain open.

Egghead was intensely recruited by the Spokane Area Economic Development Council during 1994. The EDC convinced Egghead to reconsider a decision to relocate its operations from Issaquah to Colorado Springs.

EDC President Bob Cooper reacted hopefully to Friday’s announcement.

“A lot of high-tech companies, especially those in the retailing area, have been downsizing,” Cooper said. “If this all goes according to plan, Egghead should retrench for a while, remain in Spokane, and then move forward.”

The Momentum organization was also key in convincing Egghead to come here. Gordon Budke, Momentum’s current chairman, also took an optimistic view.

“Although their labor force is not as high as it was at one time,” Budke said, “they still have a good work force of people in Spokane that makes relatively good wages. I’m hopeful that what they are doing repositions them to be a terribly successful company in the Spokane area.”

Egghead has been a declining company for most of the 1990s.

The company was founded by Victor Alhadeff in 1984. Alhadeff’s formula was to sell software at premium prices from tiny, 2,500-square-foot retail outlets.

That worked fine until big discount stores changed shopping patterns in general, and the software business more specifically.

Alhadeff left the company in 1990 and Egghead found itself saddled with an outdated retail format. But the other side of its business - its direct sales to corporate, government and educational institutions - thrived and helped keep the company alive.

After several rapid turnovers in top management, Strom became CEO in 1993. He lowered retail prices and began closing many of the smaller stores in favor of more expansive outlets. And in an effort to cut costs, he relocated the company’s call center and corporate headquarters to Spokane.

The move cost Egghead more than $4 million. Not long afterward, Strom explained later, disruption caused by the relocation also cost it the corporate, government and educational division because competitors lured away some of Egghead’s key customers.

Rather than facing the costly struggle of rebuilding the division, Egghead sold the operation to Dallas-based Software Spectrum in March 1996. Software Spectrum maintained the operation in Spokane, and has since expanded its local operations.

In the meantime, Egghead’s new format retail stores, like the one it opened early last year in Spokane, were producing mixed results.

In December 1995, Egghead employed 550 in Spokane. The CGE sale reduced that number to about 300, and the total had declined to about 270 corporate headquarters employees at the start of this year. Friday’s announcement reduces that number to about 200. The company also employs a direct sales force of about 70 people here who will not be affected by the reorganization.

Orban, a long-time Egghead board member and shareholder, was named board chairman in May.

The experienced retailer - he founded Ross Stores Inc., a discount clothing chain, and Office Mart Inc., in Florida - quickly stepped in and took a direct hand in trying to resolve Egghead’s retail problems.

In his announcement Friday, Orban said Egghead is closing 77 of its 156 retail stores and reducing the number of markets in which it operates from 54 to 24. The Spokane retail store is among the survivors.

Orban said the company will focus on larger format stores where it has “added upgrade and installation services, changed merchandise presentation formats and created more space for broader assortments.”

“The results of those initiatives have given us some encouragement,” Orban said Friday, “but we don’t have enough of those stores right now to support an overhead and distribution structure that the company is carrying.

“We are trying to reposition our company around our strengths,” Orban added, “but as we do that, we cannot afford to carry the losses and the burdens associated with past (management) practices and under-performing stores.”

The restructuring will cost the company about $30 million, and that hit will be taken in the current quarter.

Coincidentally, Egghead also released its earnings report Friday for the third quarter and nine months ended Dec. 28. For the quarter, the company posted a profit of $1.5 million, or 9 cents per share, on sales of $113.2 million. That compares with a loss of $1.1 million, or 6 cents per share, on sales of $121.7 million during the same quarter a year ago.

For the nine months, Egghead lost $10.7 million, or 61 cents per share, on sales of $271.8 million. That compares with a loss of $7.4 million, or 43 cents per share, on sales of $307 million for the first nine months of the previous year.

Orban hopes Friday’s changes will make those numbers look better by this time in 1998.

“We are going to work very hard over the next year,” Orban said. “It’s not going to happen overnight.”

, DataTimes ILLUSTRATION: Graphic: Egghead’s declining stock