Will hhgregg (HGG) Disappoint This Earnings Season? - Analyst Blog

hhgregg Inc HGG is set to report its fourth quarter fiscal 2014 results before the opening bell on May 20. Last quarter, this specialty retailer of consumer and other home products posted a negative surprise of 41.38%. Let's see how things are shaping up prior to the announcement.

Factors to Consider

hhgregg is likely to disappoint its investors yet again this quarter, particularly due to its consumer electronic category which has been declining 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. However, these initiatives will take time to yield results and hence we still expect a sluggish performance in fiscal 2014.

hhgregg, in its preliminary update (reported last month), also announced dismal results for the fourth quarter. hhgregg also lowered its expectations for fiscal 2014.

For the fourth quarter, the company expects net sales to decline approximately 9.9% year over year to $538.3 million, with a decline of approximately 9.9% in comparable store sales. The poor comparable sales performance is largely attributable to the consumer electronic, computing and wireless and home products categories, which are expected to decline about 18.9%, 22.6% and 0.4%, respectively. Appliance category sales are however expected to increase approximately 0.5% in the fourth quarter.

Further, hhgregg expects adjusted net loss to be 17 cents for the fourth quarter of fiscal 2014 as against the prior year's adjusted net income of 31 cents per share. The loss could be attributable to the underperforming contract-based mobile phone business, which the company decided to exit during the fourth quarter. This contract-based mobile phone business was included in the computing and wireless category.

This Indianapolis-based retailer revised its guidance for fiscal 2014 as announced in the preliminary results. hhgregg expects net sales to decline approximately 6.9% from fiscal 2013 levels to $2.3 billion compared with a decline of 4.0–5.5% guided previously. The company expects adjusted earnings in fiscal 2014 to be 9 cents per share, down 87.8% from the prior-year adjusted earnings of 74 cents and much lower than the previous guidance range of 30-40 cents per share.

The primary reason cited for weak preliminary fourth quarter results and lower-than-expected fiscal 2014 results 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.

Earnings Whispers?

Our proven model does not conclusively show that hhgregg is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Zacks ESP: The Expected Surprise Prediction or ESP for hhgregg is 0.00% as both the Zacks Consensus Estimate and the Most Accurate estimate stand at a loss of 17 cents per share.

Zacks Rank: hhgregg has a Zacks Rank #4 (Sell). We caution against stocks with Zacks Rank #4 and #5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Other Stocks to Consider

Other stocks in the retail sector that have both a positive earnings ESP and a favorable Zacks Rank are:

Best Buy Co., Inc. BBY, with an Earnings ESP of +5.00% and a Zacks Rank #2 (Buy).

The Kroger Co. KR, with an Earnings ESP of +0.95% and a Zacks Rank #2

Estee Lauder Companies Inc. EL, with an Earnings ESP of +1.82% and a Zacks Rank #3.