Software -- Egghead's Great Fall -- Can New Leaders Put It Together Again?

Professor Egghead sat on the wall: A year ago Egghead Software was riding high, with record sales and earnings for fiscal year 1992 and a stock price around $25.

Professor Egghead had a great fall: Analysts expect earnings for fiscal year 1993 (which ended March 31) of 40 cents a share, down 56 percent from 1992. The stock has been trading around $8.

To put things back together again, the board in February called in a new CEO, Tim Turnpaugh, and chairman, Richard Cooley, former Seafirst executives with turnaround reputations.

They have a tall order. Analysts say software pricing and competition from "superstore" dealers have made once-lush margins too thin to support a 205-store retail operation. Packages priced at $500 now routinely go for $120 to $150.

Mail-order outlets can sell volume-discounted software without charging tax. Hardware dealers "throw in" software starter kits as value-added incentives. Major manufacturers such as Microsoft, Lotus and Borland sell software directly to huge customer databases.

None of this discourages the 43-year-old Turnpaugh, a roll-up-the-shirtsleeves executive who taught himself to program in FORTRAN at Indiana University in 1970, and in 1977 devised one of the first large-scale international e-mail systems - for Chicago's Continental Bank, a leader in office automation before its collapse in the early 1980s.

Asked to automate Seafirst, Turnpaugh took a huge risk and brought in then-unproven Apple Macintoshes in 1984-85. The staff loved the boxy little machines, and Apple and Seafirst both got plenty of publicity mileage from the move.

In a 16-month overhaul that might have taken slower movers years to accomplish, Turnpaugh also set up a statewide packet-switching network and Seafirst's own PBX system.

"The whole idea was, let's get technology into people's hands everywhere," he said.

Now Turnpaugh wants to get sales juice into his 2,300 employees everywhere. His office in Egghead's Issaquah headquarters contains a big button with the international "no" sign over the word "whining." A whiteboard on the wall contains just three words: Do it now.

Turnpaugh delightedly shows off a life-size astronaut cutout signed by moon walker Buzz Aldrin during a promotion of Knowledge Adventure's Space Adventure in Brea, Calif. The store manager had the bright idea of calling Aldrin in for a software signing and sold 300 copies of the program.

When Microsoft rolled out its new DOS 6 upgrade last month, Egghead's East Coast stores held "Midnight Madness" sales. One gave away the Prodigy on-line service free to the first 20 customers in pajamas; another ordered free pizza for customers waiting in line.

"One of the secrets of retail is local marketing initiative - empowering employees to do neat things for their customers," Turnpaugh said, borrowing a page from the Nordstrom handbook. "They know their clients best."

Turnpaugh also expanded Egghead's traditional 30-day return policy - which in recent times had been de-emphasized.

The big issue facing software buyers today, Turnpaugh says, is, "Where do they go once they've made the hardware purchase?" Finding the right package for the right job requires expertise, hand-holding and backup support, he says.

One policy that Egghead will not reinstitute is meet-or-beat pricing, a casualty of the days when the chain called itself Egghead Discount Software. On the 200 or so big sellers, Egghead's prices are within $10 to $20 of the low end.

But other changes are in the offing: A new look to storefronts and interior designs, which haven't changed since the chain began with a Bellevue store in 1984. The stores will add more hardware peripherals, including scanners, modems, fax boards, CD-ROM drives, and perhaps computers themselves.

Apple's hot-selling portable Macintosh PowerBooks may begin showing up at Egghead stores. The chain may also plunge into the emerging PDA market - hand-held personal digital assistants - for keeping contacts and appointments as well as exchanging files over phone or wireless connections.

To lure customers, Egghead may begin showcasing hot new technologies such as multimedia software, which accounted for 15 percent of its sales during the holiday quarter.

At the same time, Turnpaugh has targeted inefficiencies in Egghead's operation. The first casualty: Its ad department, where 13 full-time and several free-lance employees are being laid off. Egghead plans to hire the EvansGroup instead.

Other staff reductions are rumored.

To analysts' suggestions that Egghead's overhead costs are too high, Turnpaugh admits he doesn't have a magic formula.

"I come from an industry where if you had a 5 percent margin, you were doing good," he said. "Yes, margins are down. You either deal with it, or leave."

Where analysts and Turnpaugh agree is on Egghead's need to work alternate channels, including mail order, corporate and government sales, electronic distribution and support services.

"I'd stay in the retail channel, continue to leverage my expertise and give additional reasons for people to buy there," said Don DePalma, author of "The Software Strategy Report" for Forrester Research in Cambridge, Mass. "But I'd also do my damnedest to get the alternate channels beefed up."

Corporate and government sales, which Egghead pioneered beginning in the mid-1980s, account for about 60 percent of the chain's revenues. DePalma thinks the mix, augmented by telesales and distribution, should be closer to 70-30, and maybe as low as 10 percent retail by 1996 or 1997.

One untapped sector is small business, only now beginning to realize the power of networked computers. Egghead will soon announce a "Business For Business" program targeting offices of 15 to 40 people doing plus-or-minus $20 million a year in sales.

"They want great phone service, and they want a credit-card option," said Turnpaugh. "Nobody's doing this well."

Electronic services may hold a key to Egghead's future as well. A format known as Electronic Data Interchange allows businesses to automate purchase orders, shipping notices, catalog services, billings and other services over computer-to-computer connections by telephone. The federal government plans to convert to EDI with 300,000 suppliers beginning in 1995.

Software distribution, inventory-keeping and upgrading will also begin to be handled electronically in the latter 1990s. Egghead already has implemented a Software Asset Management program providing auditing and inventory procedures to corporate users.

It all adds up to the word Turnpaugh may love best: Opportunity. In recent weeks, he said, sales have started to climb along with, albeit less steeply, margins.

After a Microsoft briefing last Friday, he was feeling so good he helped turn the Egghead cafeteria into a karaoke lounge with Sirius Publishing's new PC Karaoke software program. It wasn't lost on him that the 400 or so employees will have a hot new product to tell their friends about.

"Things are really starting to hum," he said afterward, smiling.