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Egghead to Close Stores, Expand Sales on Web

Technology: Battered by its bigger rivals, ailing computer hardware and software retailer launches Internet-only strategy.


Recognizing that it could not compete against consumer electronics superstores, boutique retailer Egghead Computer said Wednesday that it will shutter its 80 outlets nationwide and move to the ultimate superstore--the World Wide Web.

Like independent hardware stores, pharmacies and hobby shops, smaller computer stores have suffered under the onslaught of "big box" retailers such as CompUSA, Circuit City, Fry's Electronics and Best Buy. One year ago, Egghead was forced to close half its 156 stores--including 20 of its 22 Southland locations--but it was still unable to turn a profit selling computers and software.

Analysts praised Egghead for finally realizing there is no room for it in the new retail environment. The outlook on the Internet, on the other hand, is promising: Computer hardware and software is the biggest segment of the fast-growing online commerce market. Yankee Group, a Boston-based market research firm, projects online sales of computer gear will reach $11 billion by 2000, up from $2 billion now.

"It's much smarter going about your time trying to build a new business by leveraging the Egghead brand--which is really solid--on the Web site rather than worry about whether the old stores are going to survive," said John Taylor, an analyst with Arcadia Investment Group in Portland, Ore.

Egghead has already seen visits to its Web site grow from 300,000 in the spring quarter to more than 6 million in the quarter just ended, with online revenue exploding. The company said it is taking in about $1 million a week in online sales at its main site and that of a subsidiary, Surplus Direct.

In contrast, sales at Egghead's stores fell 12.5% to $99.1 million in the quarter ended Dec. 27. The company recorded a quarterly loss of $6.6 million--or 29 cents a share--contrasted with a profit of $1.5 million a year earlier.

"We believe that focusing the management of Egghead on the Internet represents the best opportunity to create long-term value for our shareholders," said George Orban, Egghead's chief executive.

Egghead's exit from storefronts nationwide will result in 800 layoffs, the company said. In California, 18 stores will close, along with a distribution center in Sacramento. Its only remaining stores in Southern California are in West Los Angeles and Pasadena.

Egghead's decision may bode well for investors since online commerce firms such as and music retailer N2K are trading at much higher multiples than Egghead shares. Still, the stock fell about 18% on Wednesday, losing $1.38 to close at $6.38 on the Nasdaq market.

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