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Will Onsale merger save Egghead?

Closing all its stores and moving online hasn't done much so far to help the troubled computer and software retailer.

Egghead may have a fractured business strategy that hasn't been repaired by going online.

It remains to be seen whether the $400 million merger deal between the computer product retailer and Onsale is going to provide the fuel to get the company flying as high as it once did--especially given that Onsale has had problems of its own.

Analysts say Egghead's financial problems and strategic troubles underscore a looming reality: Shutting offline stores and putting all your retail eggs in the online basket is not always a quick fix.

The Liberty Lake, Washington, company launched its Web site in January 1998 after the firm laid off employees and shut down 83 bricks-and-mortar stores. At the time, Egghead stock soared to a high of nearly 40 as investors expressed confidence in the online plan.

That confidence didn't last. The company, which ran its offline business for 14 years, lost $8.87 million in the third quarter of last year and another $13.7 million in the fourth quarter. Overall in fiscal 1999, the company reported a loss of $1.40 per share on revenues of $148.7 million.

The stock was trading this afternoon at 12, down from a 52-week high of 40.25.

"Losing money has, frankly, been expected," said Paul Merenbloom, analyst at Prudential Securities, who reiterated a "strong buy" rating on Egghead today.

Meanwhile, Banc Boston Robertson Stephens analyst Lauren Cooks Levitan, who changed her rating on Egghead from "buy" to "long-term attractive" today, noted that Egghead has "quickly established itself as a leading e-tailer." Egghead relaunched its online shopping center last November, which includes the Egghead Superstore, the Egghead SurplusDirect liquidation center, and Egghead Auctions.

Roger Lanctot, a director at market research firm PC Data, said Egghead is at the forefront of the auction movement, yet has had mixed success with promotional and advertising campaigns. Egghead has struck marketing agreements with Microsoft, Yahoo, GeoCities, @Home Network, America Online, and others.

"It's not unlike the companies they're competing with that have had a 50-50 success rate with different strategies," Lanctot said. Lanctot said the Onsale merger could give Egghead an "opportunity to make some money."

Indeed, there was a time when Egghead did.

Before its customers ditched its specialized stores and headed to superstores, Egghead was approaching $1 billion in sales, Lanctot said, though that number dropped to well below $500 million as offline customers dried up and their stores closed.

Forrester Research analyst Seema Williams said the site is cluttered and difficult to navigate because the company tries to sell too many types of products, from jewelry to cameras to Star Trek cards to minicomputers.

Williams said the company has also missed chances to expand its business strategy into higher-margin sales. For example, she said, Egghead has never tapped into the small business/home office category, where it could be selling telecommunications services and office supplies, she said.

And the competition in the online computer software/hardware industry is fierce, notes Jupiter Communications analyst Fiona Swerdlow. Egghead competes against not only Buy.com, Beyond.com, and Cyberion Outpost and other online firms, but also PC giants including Dell Computer and Gateway.

"There's a significant amount of competition, particularly in the software market, and it's dispersed," said Miran Chun, retail analyst with ZD Market Intelligence. "Both Onsale and Egghead have had troubles with their online strategies."

Egghead could not be reached for comment today. However, in a statement issued with today's Onsale deal, Egghead.com chief executive George Orban did not appear deterred by his company's troubled history.

"This business combination represents a further step in the dramatic evolution of Egghead.com as a leading Internet commerce company," Orban said. "We intend to further leverage our brand equity, capital and management resources to develop the market leading retailer in our category."