hhgregg Posts Loss in Q4 - Analyst Blog

Appliance and electronics retailer, hhgregg, Inc. HGG reported weak results for the fourth quarter and fiscal 2014. The results were in-line with the Zacks Consensus Estimate on both counts. However, we would like to tell investors that the Zacks Consensus Estimate takes into account the weakness stated by the company in its preliminary sales results released on Apr 16, 2014. The company held harsh winter weather and continued decline in consumer electronic category as the main reason for weak preliminary results.

As reported in its preliminary results, hhgregg reported adjusted loss of 17 cents per share in the fourth quarter of fiscal 2014, as expected by management, compared to the prior year adjusted net income of 31 cents per share. The loss was due to a decline in comparable store sales, lower gross margin and an increase in net advertising expense ratio and SG&A ratio.

The loss does not include the exit of the contract-based mobile phone business during the quarter, which has been underperforming and was included in the computing and wireless category.

Quarter in Detail

hhgregg's net sales declined approximately 9.9% year over year to $538.3 million due to a decline in comparable store sales. The primary reason cited for weak sales was extreme cold weather. hhgregg witnessed lower traffic in most of its stores , especially in the Midwest and Mid-Atlantic regions due to harsh weather conditions in January, February and the beginning of March.

Comparable store sales decreased approximately 9.9% in the quarter. The poor comparable sales performance is largely attributable to the consumer electronic, computing and wireless and home products categories, which declined during the quarter. Appliance category sales, however, increased in the fourth quarter. Comp sales had declined 9.8% in the year-ago period and 11.2% in the third quarter of fiscal 2014.

Adjusted gross margin declined 120 basis points to 28.7% in the quarter due to a decline in gross profit margin rates across the majority of categories, partially offset by a favorable product sales mix shift.

During the quarter, hhgregg repurchased 1.0 million shares for $9.3 million under the company's share repurchase program. Over the past three fiscal years, the company has repurchased 12.7 million shares. In addition, the company's board authorized a new $40.0 million stock repurchase program, which will expire on May 20, 2015.

Category Details

The company reports its business under the following product categories:

Appliances: Comparable store sales in this category grew 0.5% in the current quarter driven by an increase in average selling prices, offset partially by a decline in demand due to the weather. Last year, comp sales growth was 5.2%.

Computing and Wireless Category: Same store sales in this category declined significantly by 22.6% in the quarter compared with a 7.5% decline in the last year quarter. The decline was due to decreased demand for computers and mobile phones and a decrease in the average selling prices for computers, tablets and mobile phones, partially offset by a double digit increase in demand for tablets. Comp sales declined by 24.5% in the third quarter of fiscal 2014.

Home Products: Same store sales in this category declined 0.4% in the quarter compared with 36.1% growth in the prior quarter and 73.6% growth in the year-ago quarter. The decline was due to a decrease in the demand for mattresses along with the transition within the furniture category. This was also the first full quarter lapping the introduction of new furniture and fitness products in the third quarter of fiscal 2013.

Consumer Electronics: Same store sales for this category declined 18.9% in the quarter due to double-digit declines in units sold within the video category, largely resulting from the company's offering of fewer entry level models and a greater mix of larger screen televisions. However, it was better than a decline of 19.7% in the prior quarter and 25.7% in the year-ago quarter, owing to the company's initiatives.

We note that hhgregg has been delivering disappointing results in the consumer electronic category since the past one year due to lower-than-expected margins and declining industry demand for flat screen televisions. The company is trying to improve its consumer electronics category through new product innovations such as Ultra HD TVs and larger screen sizes, which are expected to boost sales.

In order to revive the home category, the company is geared to make the transition from one furniture brand to five brands, which will not only strengthen the home products category but will also enhance the whole shopping experience for its customers. The company expects to launch these new products in hhgregg stores by early summer.

To further boost the appliance category, hhgregg has been focusing on initiatives to drive additional traffic and increase sales. The initiatives include restructuring its sales mix, expanding its customer base and enhancing its service offerings.

Fiscal 2014 Results

This Indianapolis-based retailer posted net sales decline of approximately 5.5% to $2.34 billion, better than a 6.9% decline expected in the preliminary results. The company posted adjusted earnings of 9 cents per share in fiscal 2014, down 87.8% from the prior-year adjusted earnings of 74 cents. The result was in-line with the preliminary results.

Guidance

hhgregg did not provide a guidance for fiscal 2015 as the company is working on its strategic initiatives and is pressurized by continued volatility within the consumer electronics industry. However, the company expects to open 2 to 4 new stores during fiscal 2015. The Zacks Consensus Estimate for fiscal 2015 is pegged at 12 cents per share.

hhgregg holds a Zacks Rank #5 (Strong Sell).

Appliance retailer Aaron's Inc. AAN is a better-ranked stock in the same sector, sporting a Zacks Rank #1 (Strong Buy). Other stocks worth considering in the retail sector include Foot Locker, Inc FL and Genesco, Inc GCO, both holding a Zacks Rank #2 (Buy).

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