Appliance and electronics retailer, hhgregg, Inc. (HGG) again reported weak results in the second 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 7.74% after the earnings release.
hhgregg reported a loss of 37 cents per share in the quarter, which compared unfavorably to a net income of 12 cents in the year-ago quarter as well as the Zacks Consensus Estimate of breakeven result. The loss was primarily due to a double-digit drop in comparable store sales (comps). An increase in net advertising expense ratio and SG&A ratio also contributed to the decline.
Quarter in Detail
hhgregg’s net sales declined 11% year over year to $505.9 million due to a decline in comps. Net sales also lagged the Zacks Consensus Estimate of $533 million by 5.1%. Comparable store sales decreased 11.4% in the quarter due to a fall in comps in all its categories. Comps had improved 6.2% in the year-ago period.
The decline in comps was primarily due to a decrease in comparable store sales in the appliances, consumer electronics and computers and tablets categories. However, the decline was partially offset by gain in the Home category sector during the quarter.
Adjusted gross margin shrank 50 basis points (bps) to 29.1% in the quarter due to lower gross profit margin rates in all the categories, except consumer electronics. Higher promotional expenses on certain appliances also affected margins negatively during the quarter.
On top of that, SG&A expense ratio increased 236 bps to 23.5% due to a 65 bps increase in wage and benefit expense and a 55 bps increase in occupancy costs. Net advertising expense ratio also increased 116 bps to 6.5% due to the deleveraging effect of net sales decline and an increase in advertising spend for the new branding campaign.
The increase in SG&A and advertising expenses led to an increase in operating losses. Operating loss margin was 3.2% in the reported quarter, compared with an income margin of 1.2% in the year-ago quarter.
Category Details
The company reports its business under the following product categories:
Appliances: Comps declined 5.8% in the current quarter due to a decrease in units sold and low demand of the vdeo category. Last year, comps increased 2.6%.
Computers and Tablets Category: Same-store sales in this category declined 33.7% in the quarter, much higher than a decline of 7.2% last year. The decline was due todecrease in demand and average selling prices for computers and tablets and the exit from the contract-based mobile phone business.
Home Products: Same-store sales in this category increased 5% in the quarter compared with 69.1% growth in the prior-year quarter. Although growth slowed down from the year-ago rate, sales improved mainly due to higher promotional investments made in the category as well as several product line-ups introduced during the quarter. Increase in sales of mattresses, sofas and dinette sets also drove higher sales during the quarter.
Consumer Electronics:Same-store sales of this category declined 16% in the quarter, narrower than a decline 20.4% in the year-ago quarter due to a double-digit decline in units sold in the video category. This was slightly offset by an increase in average selling price coming from an increase in sales of larger screen and more premium-featured televisions.
Guidance
hhgregg did not provide fiscal 2015 guidance as it is working on its strategic initiatives and continued volatility within the consumer electronics industry is affecting it. However, the company expects the second half of the fiscal year 2015 to outperform the first.
The company expects annual comparable store sales to be in negative high-single digits to negative mid-single digits as against the previous expectation of negative low single-digits to flat.
The company also expects to open a store in fiscal 2015 instead of two as previously expected. Capital expenditures are expected in the range of $20 to $23 million for fiscal 2015 (maintained). The Zacks Consensus Estimate for fiscal 2015 is pegged at earnings of 12 cents per share.
Our Take
We note that hhgregg carrying a Zacks Rank #5 (Strong Sell) has been disappointing its investors for the past one year, particularly due to its consumer electronic category. Revenues or growth in the category has declined as a result of lower-than-expected margins and declining industry demand for flat screen televisions. Weak promotional activities have also added to its woes. In addition, lack of innovation in televisions has been severely impacting the overall store traffic.
Better-ranked stocks in appliance retailer include Best Buy Inc. (BBY), Gamestop Corporation (GME) and Gome Electrical Appliances (GMELY). While Best Buy sports a Zacks Rank #1 (Strong Buy), Gamestop and Gome Electrical have a Zacks Rank #2 (Buy).
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