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Friday, February
6, 1998
Egghead Inc.
<% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EGGS)") else Response.Write("(Nasdaq: EGGS)") end if %>
Phone: 509-922-7031
Website: http://www.egghead.com
Price (2/5/98): $7 5/8
HOW DID IT FIND TROUBLE?
This recipe begins with a cracked Egghead. Another fallen flier. It was only
this past October when we were singing the praises of the stock's timely
double.
Back then the market was enamored with Egghead's growing presence on the
Internet and its acquisition of Surplus Direct. Shareholders figured online
commerce was the future, not the namesake mall-based retail stores.
Be careful for what you wish for -- because you just might get it. Last month
the company announced that it would be closing down all of its Egghead retail
units, restructure, and become a lean, mean cyber-vending machine. The very
Wall Street that was high on the company's foray onto the World Wide Web
suddenly grew cautious that the company was putting all of its Eggheads in
one basket.
The stock got shelled. Once the course was set and the reality hit home that
the company would go at least another two years without turning a profit,
investors got less eggsited and headed for the eggsits.
BUSINESS DESCRIPTION
In August, the California-based computer products retailer completed its
acquisition of Surplus Direct. The privately held upstart, which specializes
in close-outs and surplus merchandise, gave Egghead a strong footing in the
off-price computer market. While Egghead was just beginning to dabble with
online software sales, Surplus Direct, in addition to a well-circulated catalog
business, also had a popular clearance-based website
(www.surplusdirect.com) and an
Internet auction site
(www.surplusauction.com).
After revamping its
website in September,
Egghead now bills itself as the only major computer retailer supporting expanded
online product offerings like electronic software downloads, rebates, and
liquidation items. Even real-time inventory is accessible by the customer.
FINANCIAL FACTS
Income Statement
12-month sales: $307.5 million
12-month income: ($51.1 million)*
12-month EPS: ($2.79)*
Profit Margin: N/A
Market Cap: $175.4 million
(*Includes non-recurring items)
Balance Sheet
Cash: $57 million
Current Assets: $146 million
Current Liabilities: $75.8 million
Long-term Debt: $0.1 million
Ratios
Price-to-earnings: N/A
Price-to-sales: 0.57
HOW COULD YOU HAVE AVOIDED THIS TROUBLE?
The shift should not have taken anyone by surprise. By the time the company
had closed on the sale of Surplus Direct over the summer, it had just closed
down almost half of its stores.
Storefront retail was not the company's future. It was only a matter of time
before the mall landlords and the smiling sales clerks would be a thing of
the past. While the company did open itself to greater uncertainty, the real
culprit was the stock market that applauded the Net-destined roadmap by bidding
up the shares after the Surplus Direct acquisition.
Egghead was only trying to give the public what it wanted while giving itself
completely to the lucrative potential of Internet commerce. The company was
going to lose money anyway if it decided to continue to run its drab retail
network of 80 stores while trying to develop a focused Internet strategy.
By ripping off the Band-Aid in one swift tug, Egghead figured it was looking
beyond the short-term sharp pain and towards long-term relief. Some shareholders
saw it coming, but still let out a yelp.
WHERE TO FROM HERE?
Soon this company will be Egghead.com. While the .com appendage has not slowed
Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> any, the coattails were checked at the door.
Will investors understand that there will be a sharp drop in revenues?
The company-owned websites are ringing up $1 million a week. While that figure
continues to grow, even if it were to double to a $100 million annual run-rate
it is just a fraction of the $307.5 million in trailing revenues.
Then again, shareholders have been willing to pay huge premiums to revenues
for companies like Amazon.com and Yahoo! <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: YHOO)") else Response.Write("(Nasdaq: YHOO)") end if %> who, like
the new Egghead, reside exclusively on the Internet.
For investors who don't have the patience to wait for the company to potentially
turn a profit by the end of the millennium, all hope is not lost. While the
company will take a $42 million charge to account for the store closures,
the annual overhead is projected to fall from $23 million presently to $13.4
million.
Sales will still need to soar before even the lower expense hurdle is cleared,
but the company is off to a nice start. The namesake website that welcomed
just 300,000 visitors in the June quarter greeted 6 million entries in the
December quarter. The company cites a December 1997 Media Metrix survey that
shows the combined websites ranking as high as the third most popular Internet
commerce site for people shopping at work.
Chairman and CEO George Orban feels that the dot-comization of Egghead provides
the "best opportunity to create long-term value for our shareholders." I
agree. But the short-term is going to be a turbulent trip.
-Rick Aristotle Munarriz
([email protected])
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