Egghead Takes Crack At Web Company Suffers Losses, Retreats To Cyberspace Market, Will Close All Retail Stores

After trying almost every conceivable retail format over the past four years, Egghead Inc. is giving up and retreating to cyberspace.

Faced with mounting losses and ever increasing competition from national chains, Egghead officials announced Wednesday that the company will shut down its retail operations and focus solely on Internet commerce.

“In assessing the resources of this company, we had to make choices about where to focus the attention of management and where we could get the best return for our investment,” George Orban, Egghead’s chairman and chief executive officer, said Wednesday. “We decided on the Internet, which is growing much more rapidly than the retail channels.”

Egghead will close all 80 of its retail stores and its distribution center in Sacramento, Calif. The move will involve 800 layoffs, including cutting Egghead’s Spokane staff from 175 to about 50.

When the reorganization is complete, Egghead will employ about 200 people, mostly in Oregon.

Officials would not elaborate Wednesday on Egghead’s long-range future in Spokane. Orban has talked in the past about selling the company’s Liberty Lake facility and moving the corporate headquarters operation downtown.

“For us at this point, that’s something we really haven’t thought through,” Orban said.

One industry expert says Egghead had little choice but to give up on retailing.

“For two years,” said Roger Lanctot, “no one wanted to fess up and acknowledge that Egghead had lousy locations that were too small, they were under-assorted, and nobody was shopping there.”

Lanctot, who is editorial research director for Computer Retail Week, said the industry was speculating that Egghead would move to a “virtual retailing strategy” a year ago.

“But it wasn’t the right time,” he said. “Now, though, they can look at a year’s worth of data and shopping behavior on their web sites.”

That data shows that at its current run rate, Egghead would do $50 million in Internet sales this year, about half of the retail sales volume.

“So it really becomes a no-brainer,” Lanctot said.

Egghead made its announcement on the same day it released its disappointing financial results for the third quarter of fiscal 1998.

During the quarter that ended Dec. 28, the company lost $6.6 million, or 29 cents per share, on sales of $99.1 million. That compares to net income of $1.5 million, or 9 cents per share, on sales of $113.2 million during the same period a year ago.

Pre-tax net loss for continuing operations for the first nine months of fiscal 1998 was $15.2 million compared to a loss of $17.6 million for the first nine months of fiscal 1997.

“The retail environment is one that is highly competitive,” Orban said. “There are many companies out there in the retail space with different strategies or larger resources who are doing far greater amounts of business in that channel than we are.”

Orban said Egghead’s critical mass had fallen to the point that it simply could not compete in a market with constantly falling prices and shrinking profit margins.

“So,” he said, “this company is going to focus on the Internet, where we believe the projected growth is very substantial. Our progress (in this area) has been substantial, even though we’ve been preoccupied with the challenges of the retail business.”

Orban pointed out that the company’s Internet sales for the third quarter were $11.8 million, an increase of $9.3 million from the same quarter a year ago.

Visits to www.egghead.com increased from 300,000 in the first quarter of the current fiscal year to more than six million during the third quarter. And the web sites of Egghead and its Surplus Direct subsidiary “are currently posting revenues of approximately $1 million per week.”

Orban said industry experts predict that Internet commerce in computer hardware and software products will grow from $2 billion to $11 billion by the year 2000.

But Orban also warned shareholders that the transition will be expensive. The company expects to recognize a one-time charge against earnings of about $42 million in the fourth quarter for costs and writeoffs related to inventory liquidation, severance payments, and other closure-related expenses.

He added that Egghead anticipates “substantial operating losses for at least the next two years as it builds its Internet customer base and seeks to achieve significant economies of scale.”

Lanctot said Egghead projects $100 million to $120 million in Internet sales for the current fiscal year, $250 million to $300 million next year, and $500 million the year after.

One threat Lanctot sees to those projections is the likely aggressive entry into the virtual marketplace of all of the same huge national companies that chased Egghead from the retail marketplace.

Being first will help, but maintaining a hold on its customer base will likely cost Egghead a lot of money in marketing under those circumstances, Lanctot said.

Orban could not offer a time frame for the closure of its retail outlets, including its store at 7808 N. Division.

“That’s a function of inventory liquidation,” he said, “so we can’t be specific right now, but it will be over the next several months.”

The company’s stock dropped 17.7 percent with Wednesday’s news, falling $1.37-1/2 to close at $6.371/2 on the Nasdaq stock market.

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