Appliance and electronics retailer, hhgregg, Inc. (HGG) again reported weak results in the first quarter of fiscal 2015. The company missed the Zacks Consensus Estimate for sales and reported wider-than-expected losses in the quarter. Shares declined more than 16% after the earnings release.
hhgregg reported a loss of 36 cents per share in the first quarter of fiscal 2015, wider than the prior year loss of 4 cents per share and the Zacks Consensus Estimate of a loss of 16 cents. The loss was primarily due to double-digit drop in comparable store (comp) sales. An increase in net advertising expense ratio and SG&A ratio also resulted in the decline.
Quarter in Detail
hhgregg’s net sales declined 10% year over year to $472.3 million due to a decline in comparable store sales. Net sales also lagged the Zacks Consensus Estimate of $492 million by 4%. Comparable-store sales decreased 10.2% in the quarter due to a fall in comp sales at all its categories. Comp sales had improved 0.8% in the year-ago period.
Adjusted gross margin improved 20 basis points to 29.7% in the quarter owing to a favorable product sales mix shift to product categories carrying higher gross profit margin rates.
However, SG&A expense ratio increased 205 basis points to 24.7% due to an increase in occupancy costs, wage expense and increase in home delivery expenses. Net advertising expense ratio also increased 83 basis points to 5.8% due to the deleveraging effect of the net sales decline and an increase in advertising spend for the new branding campaign.
The increase in SG&A expenses and advertising expenses led to an increase in operating losses. Operating loss margin was 3%, compared with a loss margin of 0.3% in the last year quarter.
Share Repurchase Update
During the quarter, hhgregg repurchased 102,705 shares for $1 million under the company’s share repurchase program of $40 million, which will expire on May 20, 2015. At the end of Jun 30, the company had approximately $39.0 million worth of shares available for repurchase under the current share repurchase program.
Category Details
The company reports its business under the following product categories:
Appliances: Comparable store sales in this category declined for the first time, after posting increase in comp sales in the past 11 quarters. Comp sales declined 2% in the current quarter due to a decrease in units sold and a slight decrease in average selling price. Last year, comp sales increased 7.5%.
Computers and Tablets Category: Same store sales in this category declined significantly by 29.5% in the quarter compared with growth of 13.2% in the last year quarter. The decline was due to decreased demand for computers and mobile phones and lower average selling prices for computers, partially offset by higher average selling price for tablets.
Home Products: Same-store sales in this category declined 0.5% in the quarter compared with 84.5% growth in the prior-year quarter. The decline was due to lower demand for ready to assemble television stands and a decrease in sales of mattresses, offset partially by a double-digit increase in sales of sofas, recliners and dinette sets.
Consumer Electronics: Same-store sales of this category declined 18.7% in the quarter, which was worse than a decline 15.0% in the year-ago quarter due to double-digit declines in units sold within the video category. This was slightly offset by an increase in average selling price, which was driven by an increase in sales of larger screen and more premium featured televisions.
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 still expects the second half of the fiscal year 2015 to outperform the first half.
The company expects annual comparable store sales to be negative high single digits to negative mid single digits compared to the previous expectation of negative low-single-digits to flat. Also, the company expects earnings per share in fiscal 2015 to be below the prior-year earnings.
The company also expects to open 2 new stores in fiscal 2015 compared with the prior expectation of opening 2 to 4 new stores during fiscal 2015. Capital expenditures are expected to be in the range of $20 million to $23 million for fiscal 2015. The Zacks Consensus Estimate for fiscal 2015 is pegged at earnings of 12 cents per share.
Our Take
We note that hhgregg has been disappointing its investors over the past one year with sluggish results, particularly due to its consumer electronic category. Revenues or growth in the category has declined due to lower-than-expected margins and declining industry demand for flat screen televisions. Weak promotional activities are also adding to its woes. In addition, lack of innovation in televisions has been severely impacting overall store traffic.
The company also witnessed sluggishness in same-store sales in the computing and wireless category in the last five quarters. The company’s home products category is also showing signs of weakness.
However, the company is employing different initiatives to revive its business such as product innovation, shifting focus from one furniture brand to five brands and even exiting underperforming businesses. hhgregg holds a Zacks Rank #2 (Buy).
Another appliance retailer Conn’s Inc. (CONN) also holds the same rank as hhgregg. Other stocks worth considering in the retail sector include Dillards Inc. (DDS) and J.C. Penney Co Inc (JCP), both holding a Zacks Rank #2.
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