Appliance and electronics retailer, hhgregg, Inc. HGG had a solid start to fiscal 2016 as it reported a narrower-than-expected loss in the first quarter. Sales, however, lagged the Zacks Consensus Estimate. Comp sales decline moderated from the preceding quarter, signaling positive impact from the company’s transformation initiatives, which focus on stabilizing the business by reversing the negative sales trends, optimizing marketing spending and improving the cost structure.
hhgregg reported a loss of 32 cents per share in the first quarter of fiscal 2016, which compared favorably with the prior year loss of 36 cents per share and the Zacks Consensus Estimate of a loss of 37 cents. The loss narrowed after comparable store (comp) sales showed significant improvement.
Quarter in Detail
hhgregg reported net sales of $441.1 million. Sales lagged the Zacks Consensus Estimate of $449 million by 1.8% and decreased 6.6% year over year due to a decline of 6.3% in comparable store sales. While comps were still negative in the first quarter, we note that comparable store sales decline of 6.3% was significantly narrower than a decline of 10% in the preceding quarter. The narrower decline was attributable to positive sequential improvement in sales and traffic trend. Comp sales decline was 10.2% in the year-ago quarter.
Comp sales declined in all categories in the quarter, except Home Products. The company’s e-commerce business is an exception as its comparable sales witnessed an increase of 25.5% in the first quarter.
Adjusted gross margin expanded 80 basis points to 30.5% in the quarter as a result of favorable product sales mix of categories with higher gross margin rates and increase in gross profit margin rates for the consumer electronics, computers and tablets and home products categories.
However, selling, general and administrative (SG&A) expense ratio increased 50 basis points to 25.2% due to an increase in bank transaction fees, higher occupancy costs and consulting expense, partially offset by decreases in wage expense and employee benefits. Net advertising expense ratio decreased 60 basis points to 5.2% due to a reduction of gross advertising spend. Depreciation and amortization (D&A) expense ratio also declined 30 basis points to 1.9%.
Operating loss margin was 1.9%, narrower than a loss margin of 3.0% in the last year quarter, aided by lower advertising and D&A expense ratio, partially offset by SG&A expenses.
EBITDA was $0.2 million compared to a loss of $3.5 million in the prior year quarter helped by the company’s initiatives.
Category Details
The company reports its business under the following product categories:
Appliances:Comparable store sales in this category were down 2.2% in the quarter with a decline in average selling price and sales volume. Last year, comp sales decreased 2%.
Computers and Tablets Category:Same store sales in this category declined significantly by 42% in the quarter, much wider than a decline of 29.5% in the last year quarter. The decline was due to a decrease in unit demand as well as lower average selling prices for computers and tablets and exit from contract-based mobile phone business in the first quarter of fiscal 2015. Excluding the mobile phone business, the decrease in comparable sales for the three months ended Jun 30, 2015 was 38.6%.
Home Products: Same store sales in this category increased 12.1% in the quarter as against a decline of 0.5% in the prior year quarter. The increase was driven by higher unit demand and increased average selling prices in the category. Excluding fitness equipment, comparable store sales growth in the category was 17.4%.
Consumer Electronics:Same store sales of this category declined 8.3% in the quarter. The decline was due to a 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 18.7% decline recorded in the year-ago quarter.
Share Repurchase Update
During the quarter, hhgregg did not repurchase any shares under the company’s share repurchase program of $40 million, which expired on May 20, 2015. Under this program, the company repurchased only 0.8 million shares for $5.3 million in fiscal 2015.
Outlook
We are encouraged that hhgregg’s strategic initiatives have moderated the losses and rate of comp sales decline in the quarter. The impact can be seen in positive EBITDA results and improved gross margin.
For FY16, the company expects to remain focused on expanding its Fine Lines departments within the appliance category, increasing the sale of larger screen 4K TV’s and home theaters, and refining its offerings in other categories. Further, it remains optimistic on its savings and revenue initiatives that might lead to positive adjusted EBITDA in fiscal 2016. The company also expects to have positive comps for Appliances in fiscal 2016.
However, we believe that any sort of improvement will take time as the company is under a lot of pressure and facing volatility. Moreover, hhgregg has reiterated its expectations of negative mid-single digit comps for this year. Sales from its consumer electronics business will likely remain in the red in the coming quarters.
hhgregg holds a Zacks Rank #3 (Hold), while its industry peers Aaron’s Inc. AAN and Conn’s Inc CONN sport a Zacks Rank #1 (Strong Buy) and Zacks Rank #2 (Buy), respectively. Another better-ranked retailer in the broader market includes Ingles Market, Inc. IMKTA, which carries a Zacks Rank #2.
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