Egghead Software touts new Windows


April 13, 1992|By Paul Andrews | Paul Andrews,Seattle Times

SEATTLE FHC VJB — SEATTLE -- For once-scrambled Egghead Discount Software, which boasted the most puns per advertising inch of any company in personal computing, the recent rollout of Microsoft's Windows 3.1 is strictly a case of sunny side up.

Each of Egghead's 183 outlets nationwide has been stocked with 400 to 600 copies of the Windows upgrade. They are expected to go fast. At $47 a pop, Windows alone should account for $3.4 million to $5.2 million in sales for the Seattle-based chain over a matter of days.

Egghead is hoping for a repeat of its Microsoft DOS 5 rollout last June, which carried the software retailer to record quarterly sales of $185.9 million. A similar promotional push is planned for the Windows upgrade, including in-store displays, mailings to its 2 million customer data base and newspaper ads.

But the chain isn't stopping with Windows.

Egghead plans to add from 20 to 40 stores in the next 12 months. And last week it launched a promotion to give 5 percent discounts to regular customers. Those who sign up will receive a new quarterly newsletter that, based on a questionnaire they fill out, will target their specific PC platforms (Macintosh, IBM or other) and interests (home computing, office productivity, etc.).

"We call it our frequent-buyer program," said Rod Brooks, Egghead's senior vice president of marketing and merchandising. CUE will take Egghead into the arena of "not just fulfilling demand but creating it as well," he said.

Egghead has been on a roll lately, its stock shooting up after a ringing endorsement from a leading money manager, Corey Horowitz, and television commentator Dan Dorfman last month. Mr. Horowitz made Egghead his "No. 1 stock" for the next 12 months, aiming at a $42-a-share figure by next March. When Mr. Dorfman relayed the news to his viewers, the stock jumped $1.25 to $27. Over the just-completed quarter, the stock gained $10.25 a share, or 61 percent.

"They had lots of problems," said Robert Kleiber, an analyst who follows Egghead for Piper, Jaffray & Hopwood. "But they did what you have to do -- stop the bleeding, figure out why you're bleeding and fix it."

Indeed, Egghead, which was founded in 1983, has had a Humpty Dumpty past. Spurred by ad campaigns featuring everyone from Microsoft Chairman Bill Gates to the cartoony Prof. Egghead, the chain quickly expanded nationwide to a peak of 205 stores in more than 20 states.

Along the way it added a corporate and government sales group for Fortune 500 companies and leading government agencies, and Egghead University, a computer-training facility.

By 1989, however, the roof had caved in. After Egghead's initial public offering in June 1988, the stock plummeted from $17 to $10.75 a share. A class-action lawsuit was filed, in July 1989, by shareholders charging that the company misrepresented its finances in the initial public offering. The company had lost more than $13 million the previous quarter.

In the marketplace, the company's reputation also was tarnished. Employee turnover was so high that customers often knew more about merchandise than salespeople. Egghead's policy of letting users take software home for a 30-day trial -- as well as loose accounting methods -- had resulted in a high inventory "shrinkage" rate.

Analysts such as Mr. Kleiber even wondered aloud whether software, increasingly being sold through discount mail-order houses, was the kind of commodity that could support a retail chain. Margins were becoming too thin to make the standard 40 percent to 60 percent markup on wholesale.

In retrospect, Mr. Brooks thinks the company was spread too thin.

The turnaround began with new management, starting with founder Victor Alhadeff's 1989 resignation and replacement by investors Stuart Sloan, Matt Griffin and Ron Weinstein at the helm. The troika took over with a $1-a-year salary; however, they received stock options at an average price of $14.13 a share. Mr. Griffin, as president and chief executive, remains in charge of day-to-day operations at Egghead.

Among the first steps the new management took was to set up each store as a profit-and-loss center. Stores that weren't pulling their weight were quickly closed. Inventory loss dropped, as well.

Egghead University was sold to Mr. Alhadeff and continues to operate under the name Catapult Inc. The corporate-government sales force was reconstituted. And the lawsuit was settled, in October 1990, for $2.9 million, to get it off Egghead's ledger.

Training sales staff in the ever-changing software market

became a high priority. Last year Egghead spent $3.5 million for training and has budgeted $4.2 million for the coming fiscal year.

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