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Egghead.com Sales Soft in Q4

Following word last month that a hacker breached its computer systems and may have accessed customer credit card information, Egghead.com Friday disclosed that revenue in the recently completed fourth-quarter were estimated at $91 to $93 million -- lower than previously expected.

The Menlo Park, Calif.-based e-tailer blamed the shortfall on "softening of consumer demand for personal computers and related technology products."

However, the company's downfall may be more than just that. During the holiday season, the company made public that its servers had been hacked by network intruders and that its customers' credit card information could be in jeopardy.

After a 20-day investigation, the company determined that the "poachers" did not access its 3.7 million customer database. However, the publicity was cause for industrywide concern.

Joanne Harzell, Egghead.com's vice president of communication, attributes the loss of sales to a lack of demand in the PC industry overall, which affected the company and its competitors.

"When we announced the hacking, we did not see a drop in sales," she said. "There was a short period in which we saw a slight drop in stock prices, but it has since gone up."

Further, Egghead.com said the estimated loss per share -- which is between 23 and 25 cents -- is better than analyst estimates.

"We are pleased with the the progress in our business accounts program, which offsets some of the downward pressure on margins as a result of seasonal factors and promotion activities," Jeff Sheahan, president and CEO, said. "This, combined with expense reductions, enabled us to reduce our operating losses for the fifth consecutive quarter as we continue our march toward profitability in the fourth quarter of this year."

Paul Ritter, director of online retail strategies with The Yankee Group, speculates that the hacking could have had affected Egghead.com's fourth quarter "to a small extent," but noted that the company has taken several positive steps that other etailers could learn from.

"Egghead has reduced spending on sales and marketing and established strategies for improving gross margins," he noted. "The positive efforts include handling returns on a cost-effective basis by oursourcing its returns handling. This has effectively provided the company with a higher value for the goods that are being returned on the heels of the holiday season. Small gains from improved handling of returns can have a significant impact for firms like Egghead and others who are flirting with profitability.

"In Egghead's case, lower revenues than forecast is not necessarily a sign of major trouble," he concluded. "They project fourth-quarter losses to be about 40 percent better than analysts had expected. Egghead has taken important steps to improve gross margins, substantially I might add, from prior periods. In some cases, this can make all the difference in the world between staying in business and closing the doors for good."

egghead.com will officially reports its Q4 results on February 22, 2001.

At press time, the company's stock was trading at $1.00, down by 0.22.