HHGregg (HGG) Down 58.6% Since Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for HHGregg, Inc. HGG. Shares have lost about 58.6% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

hhgregg Posts Wider-than-Expected Third Quarter Loss

hhgregg reported a wider-than-expected loss in the third-quarter fiscal 2017. Sales lagged the Zacks Consensus Estimate, due to competitive pressures in the market, specifically in consumer electronics category.

hhgregg reported adjusted loss of $1.70 per share in the third-quarter fiscal 2017, wider than both the Zacks Consensus Estimate of a loss of $0.29 and the prior-year quarter loss of $0.15 per share. This was due to a drop in sales, lower comparable store sales (comps) and decline in gross margin.

Quarter in Detail

hhgregg reported net sales of $453.0 million, which lagged the Zacks Consensus Estimate of $568 million. Also, the figure was down 23.7% year over year due to a decline of 22.2% in comparable store sales. We note that the comparable store sales decline was wider than the 6.4% drop in the preceding quarter and a 10.8% fall in the prior-year quarter due to continued decrease in consumer electronics, appliances and home products segments. Additionally, the consolidation of two existing distribution centers into one had a temporary negative impact on company’s sales in the quarter in the range of $20 to $25 million.

Gross margin declined 410 basis points (bps) to 22.0% in the reported quarter due to lower gross margin rates in all categories, primarily in consumer electronics, partially offset by a favorable sales mix shift to product categories with higher gross profit margin rates.

However, the selling, general and administrative (SG&A) expense ratio expanded 600 bps to 25.6% due to increases in wages and increases in delivery services.

Adjusted EBITDA loss was $39.3 million in the third quarter, compared with EBITDA gain of $4.8 million in the prior-year quarter. This was due to the lower gross margins and higher SG&A expenses.

Category Details

The company reports its business under the following product categories:

Appliances: Comparable store sales in this category declined 4.2% in the quarter due to decrease in sales volume and average selling price. In the year-ago quarter, comps had declined 10.4%.

The company remains on track to grow the Fine Lines format in existing stores, as these had helped boost sales in the past. The company plans to open four additional stores in fourth-quarter fiscal 2017, bringing the total to 21. In fiscal 2018, the company expects to open 10 to 15 additional locations.

Home Products: Same store sales in this category decreased 9.0% in the quarter due to a decline in unit sales in the category and lower average selling prices. In the year-ago quarter, comps increased 3.3%.

The company believes the store reset initiative has infused positive growth in the category. At the end of the third quarter, the store reset count was up to 170 of the 220 stores.

Consumer Electronics: Same store sales at this category dropped 38.6% in the quarter. The decline was due to a decrease in units sold within the video category, which makes up 75% of this category and decrease in average selling price. The decline was narrower than a 12.2% drop in the prior-year quarter. The company continues to focus on large screen 4K TV growth, in line with the industry trends.

Management is working on several initiatives for the consumer electronics category to revive this difficult segment. However, the segment will continue to witness a downtrend as a percentage of total sales.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month. There has been one revision lower for the current quarter. In the past month, the consensus estimate has shifted 16.67% downward due to these changes.

HHGregg, Inc. Price and Consensus

 

HHGregg, Inc. Price and Consensus | HHGregg, Inc. Quote

VGM Scores

At this time, HHGregg's stock has a subpar Growth Score of 'D', however its Momentum is doing a lot better with a 'A'. However, the stock was allocated a grade of 'F' on the value side, putting it in the fifth quintile for this investment strategy.

Overall, the stock has an aggregte VGM Score of 'F'. If you aren't focused on one strategy, this score is the one you should be interested in.

The company's stock is suitable solely for momentum based on our styles scores.

Outlook

Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift. It's no surprise that the stock has a Zacks Rank #5 (Strong Sell). We are looking for a below average return from the stock in the next few months.

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