Appliance and electronics retailer hhgregg, Inc. (HGG) again reported sluggish quarterly results. The company missed the Zacks Consensus Estimate for sales and reported wider-than-expected losses in the third quarter of fiscal 2015.
hhgregg reported a loss of 14 cents per share in the third quarter, as against prior year earnings of 17 cents per share, and wider than the Zacks Consensus Estimate of a loss of 4 cents. The loss was primarily due to a drop in comparable store (comp) sales, slightly offset by an increase in gross margin.
Quarter in Detail
As announced in its preliminary results on Jan 7, hhgregg reported net sales of $665.6 million. Sales lagged the Zacks Consensus Estimate of $671 million and decreased 5.9% year over year due to a decline of 6.3% in comps. Comp sales declined in all categories in the quarter, except the appliance category where it remained flat. The company’s e-commerce business is an exception as its comparable sales witnessed a solid increase of 60% in the third quarter.
We note that the comparable store sales decline of 6.3% in the quarter is narrower than a decline of 11.2% in the year-ago quarter, which signals that hhgregg is making efforts to improve sales, particularly in the consumer electronics and appliance businesses. However, the company needs to increase the rate of progress.
Adjusted gross margin improved 20 basis points to 27.0% in the quarter owing to a favorable product sales mix shift to categories carrying higher gross profit margin rates and higher gross profit margins in the video category. Video category margins increased due to an increase in sales of larger screen and more premium featured televisions.
However, selling, general and administrative (SG&A) expense ratio increased 120 basis points to 19.9% due to an increase in occupancy costs, consulting expense and increase in home delivery expenses. Net advertising expense ratio also increased 60 basis points to 5.8% due to the deleveraging effect of the net sales decline and an increase in advertising spend.
The increase in SG&A expenses and advertising expenses led to an increase in operating losses. Operating loss margin was 0.3%, compared with a profit margin of 1.3% in the last year quarter.
Share Repurchase Update
During the quarter, hhgregg repurchased 732,805 shares for $4.3 million under the company’s share repurchase program of $40 million, which will expire on May 20, 2015. At the end of Dec 31, the company had approximately $34.7 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 were almost flat with no changes in average selling price or unit demand. Last year, comp sales increased 1.5%.
Computers and Tablets Category: Same store sales in this category declined significantly by 35% in the quarter as against growth of 24.5% in the last year quarter. The decline was due to a decrease in unit demand for computers and tablets as well as a decrease in average selling prices for computers and tablets and the exit from contract-based mobile phone business. Excluding mobile phones, the decrease in comparable sales for the three months ended Dec 31, 2014 for the computers and tablets category was 29.6%.
Home Products: Same store sales in this category declined 9.2% in the quarter compared with 36.1% growth in the prior year quarter. The decline was largely due to the exit from fitness equipment. A double digit decrease in demand for TV stands, recliner and sofa products also led to the decline, offset slightly by increased average selling prices for nearly all product lines within this category and increased unit demand within mattresses. Excluding fitness equipment, the decrease in comparable store sales in the category was 2.7%.
Consumer Electronics: Same store sales of this category declined 3.9% in the quarter. The decline was due to a double digit decrease in units sold within the video category, offset slightly by an increase in average selling price.
The hike in average selling price was driven by an increase in sales of larger screen and more premium featured televisions. However, the decline was narrower than a 19.7% decline recorded in the year-ago quarter.
Outlook
In the preliminary results, the company stated that it does not expect to close any store location in fiscal 2015. Also, considering some non-cash charges and uncertain market conditions, the company has withdrawn its fiscal year 2015 EBITDA outlook.
Our Take
It is encouraging that hhgregg has been focusing on its strategic initiatives and changing its sales mix, which can be seen in slight improvement in its consumer electronics and appliance business. Though the continued efforts have moderated the rate of comp sales decline, category sales are expected to remain in the red. Moreover, the company expects continued volatility within the consumer electronics industry in the upcoming quarters.
hhgregg holds a Zacks Rank #3 (Hold).
Some better-ranked retailers include Bebe Stores, Inc. (BEBE), Pacific Sunwear of California Inc. (PSUN) and Shoe Carnival, Inc. (SCVL), all of them holding a Zacks Rank #1 (Strong Buy).
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