Egghead's Still Scrambling

TIMES STAFF WRITER

Any bricks-and-mortar retailer that believes the Internet can solve all its problems would be sadly mistaken. Ask Egghead.com Inc.

Egghead.com started in the 1980s as a retail chain that sold personal-computer software and related items, and 22 of its outlets were in Southern California. But the growth of "big-box" electronics chains such as Best Buy Co. and CompUSA Inc. forced Egghead.com to shutter its 156 stores in 1997-98 and move to the World Wide Web.

Then late last year, an online retailer called Onsale Inc. bought Egghead.com for about $400 million in stock, kept the Egghead.com name and broadened the company's product line to sell not only PCs and other computer peripherals but a variety of office and consumer goods. One of Onsale's co-founders, Jerry Kaplan, became Egghead.com's chief executive.

But the newly minted Egghead.com, based in Menlo Park, Calif., is still struggling. It's losing money, it doesn't expect to turn a profit again for at least two years, its stock has taken a drubbing and many short sellers are betting the company won't climb out of its nose dive.

Egghead.com's troubles stem in no small part because the competition online is no less fierce than it is on the street corner. In the PC sector alone, some of the biggest players, such as Dell Computer Corp. and Gateway Inc., are masters at selling their gear online, and of course CompUSA, Staples Inc. and other office chains have their own online-sales sites as well.

Then there's the rash of online retailers that sell books, music, videos and a plethora of other consumer goods, including Amazon.com Inc., Barnesandnoble.com and Buy.com Inc. Indeed, Buy.com has seen its stock plummet in recent months as well.

"Computer reselling is one of the most competitive markets on the Internet," which means "you're faced with very slim [profit] margins," said Steve Weinstein, an analyst who follows Egghead.com for Pacific Crest Securities in Portland, Ore.

Wall Street has largely turned its back on Egghead.com. The firm's stock has plunged 79% during the last 12 months, although on Friday it edged up 16 cents a share, to $7.03, on the Nasdaq Stock Market.

Egghead.com recently posted a $155-million loss for 1999--up from a $49-million loss the previous year--in part because of the costs of its merger, even though the merger also helped boost its revenue by 44%, to $515 million.

Another of Egghead.com's concerns is a dwindling cash position. As of Dec. 31, Egghead.com's cash and short-term investments were $86.2 million, down from $166.2 million a year earlier, and that raised questions about whether Egghead.com might burn through its remaining cash in the next year.

Moreover, Egghead.com has become a favorite target for short sellers, or those investors who bet on stocks to fall in price. In a short sale, an investor borrows a stock, sells it at the then-prevailing market price, and then hopes the stock will drop so that it can be repurchased later at the cheaper price. The difference in those prices stays in the short seller's pocket.

As of mid-March, Egghead.com's short interest--that is, the number of shares that had been sold short and not yet repurchased--totaled 7.6 million shares. That's a steep 20% or so of Egghead.com's common shares outstanding and basically indicates that holders of an enormous chunk of Egghead.com's shares expect the stock to keep going down, not up.

"Companies that had a poor business in an industry with no barrier to entry [by new rivals] to begin with would only see those problems exacerbated by being on the Internet," said William Fleckenstein, president of Fleckenstein Capital Inc. The Seattle firm is a noted short seller but doesn't have a position in Egghead.com, he said.

He said Egghead.com's saga is akin to that of other retailers that flocked to the Web, briefly caught fire with investors, and then sank again. They include music provider K-Tel International and Books-a-Million, he said.

"The Internet wasn't the savior of the business," Fleckenstein added.

For its part, Egghead.com says that it still sees plenty of promise in its niche of the Web, which is mainly selling electronics, scanners and other supplies to small-office and home-office customers, while providing a range of discounted and auctioned products to individuals.

"The whole purpose [of the merger] was to create a single, leading retailer of technology products over the Internet, to small-office and home-office buyers," who already account for more than 70% of Egghead.com's revenue, Kaplan said in an interview.

Onsale was one of the Internet's early auction sites, offering vacation packages and sporting goods. So Egghead.com today not only sells Hewlett-Packard PCs, Palm organizers and other office gear, it also auctions off products having nothing to do with the office--such as golf clubs, barbecues, exercise treadmills and trips to the Greek isles.

Jennifer Jordan, an analyst at Black & Co. in Portland, Ore., who has a "buy" rating on Egghead.com, said the firm's strategy makes sense because it is in all three of the main retailing channels on the Web: direct sales of new products, discounted sales of older goods and auctions. "That's a good selling point for them with major distributors" looking to peddle their products via Egghead.com, she said.

"People on Wall Street think this is a has-been sort of business that went from closing failing retailing stores to a last-ditch effort on the Web, and I don't read it that way at all," she said.

Kaplan said Egghead.com went through much more cash than normal in last year's fourth quarter because of the merger. Also, Egghead.com recently signed a deal with a Bahamian investment firm called Acqua Wellington North American Equities Fund Ltd., whereby Egghead.com can sell as much as $100 million of its stock to the firm if it needs more cash.

"Somehow we've gotten tarred with this idea that we're running out of cash, and that does not accurately reflect our position," Kaplan said.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Walking on Shells

Egghead.com is trying to prosper on the Internet by selling a range of goods. But amid fierce competition and its own losses, its stock has steadily declined.

Copyright © 2019, Los Angeles Times
EDITION: California | U.S. & World
63°