Creative Computers Scraps Stores in Favor of Internet.

LIKE lots of established companies revising their long-term strategies because of the Internet, Creative Computers Inc. is switching gears.

But it has its work cut out for it.

The company, which closed most of its retail showrooms to focus on business online, sells computer products to individual consumers, home offices and small businesses through the Internet, catalogs, telemarketing and a single retail showroom.

To date, Internet sales account for less than 10 percent of overall revenue, despite a jump in the fourth quarter ended Dec. 31 from $12 million to $60 million.

"Creative has played around with a bunch of business models but hasn't been as focused to penetrate the small to medium-sized businesses," said John Lavery, an analyst at William Blair & Co. "They've had more of a consumer focus and haven't been taken as seriously in the business-to-business marketplace."

Frank Khulusi, company founder, chairman and chief executive, said the company is poised to take advantage of that market. In recent months, an aggressive recruiting and training effort has resulted in a 60 percent increase in the number of sales executives -- bringing the total to 200 -- to find and build relationships with customers.

In addition, the company recently beefed up the offerings on eCost.com, which launched last April as a consumer site for computer products. Now visitors will find a Pokemon center and games for Sega Dreamcast and Sony Playstation on the site.

The move came after a decision in mid-1998 to shift gears to the Internet by closing six of its seven retail showrooms, including several acquired through its purchase of Elek-Tek Inc. in 1997.

"We're committed to this marketplace, and we're working hard to get the message across that we're focusing on servicing those small and medium-sized businesses," said President Scott Klein.

But for the fourth quarter ended Dec. 31, Creative reported a net loss of $2.3 million (22 cents per diluted share), compared with a net loss of $5.6 million (55 cents) for the like period a year earlier. Revenue was $222 million vs. $166 million.

For the year, there was a net loss of $10.9 million ($1.05), compared with $17.8 million ($1.75 per share) in 1998.

Heavy start-up costs last year for eCost.com had a big impact on the bottom line. Without that investment, net income would have been $1.4 million (14 cents).

This year, the company's earnings per share are expected to hit 60 cents, according to analysts' consensus estimates by Zacks Investment Research Inc.

Soon to be renamed IdeaMall, the Torrance-based company has issued several announcements in the past month that have piqued mild interest from Wall Street. Its stock was trading at around $13 last week after hitting a 52-week low of $5 in early August.

Most of that increase came in the past month, after Creative debuted a new subsidiary called eLinux.com to capitalize on the growing demand for Linux-based systems and services.

Meanwhile, eCost.com generated $27 million in revenue in the fourth quarter and the number of visitors reached 70,000 a day. (Creative also operates Web sites pcmall.com, macmall.com, and pcm.com.)

Although the Internet accounts for only about 10 percent of sales of most computer product sellers, competition is fierce in the crowded marketplace.

Khulusi founded Creative Computers in 1987 as a mail-order and retail showroom during the heyday of Commodore Amiga computers. The company expanded its retail operation to two more stores in 1993 when it became an authorized Apple dealer.

Creative launched its popular PC Mall catalog in 1995. Two years later, it formed a wholly owned subsidiary known as uBid to sell computer-related products and consumer electronics through an auction format on the Internet.

About 20 percent of uBid was spun off in an initial public offering in 1998. Then to help focus on its core direct-sales business, it spun off the remaining 80 percent of uBid through a distribution payment to shareholders on June 7, 1999. As a result, shares fell from $32.63 to $8.69.

"In the past, Creative has been, well, creative in finding opportunities," Lavery said. "By expanding the size of their sales force and fostering relationships with businesses, they can compete more efficiently in the industry."

                          Creative Computers Inc.
                               Stock Prices
YEAR (Dec. 31)                   1999    1998
Revenue (millions)             $732.0  $642.0
Operating Expenses (millions)   736.1   655.6
Operating Loss (millions)       (4.1)  (13.5)
Net Loss (millions)            (10.9)  (17.8)
Loss Per Share                ($1.05) ($1.75)

Quarterly Net Income (millions)

SUMMARY

Business: Direct marketer of personal computers

Headquarters: Torrance

CEO: Frank F. Khulusi

Market Cap: $132 million

Dividend Yield: N/A [*]

Total Liabilities: $70.9 million

P/E Ratio: N/A

Long-Term Debt: $300,000

(*.) Creative Computers does not pay dividends.