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hhgregg (HGG) Q3 Loss Narrower than Expected; Sales Lag

Zacks Equity Research
Updated

Appliance and electronics retailer, hhgregg, Inc. HGG reported narrower-than-expected loss in the third quarter of fiscal 2016. Sales however lagged the Zacks Consensus Estimate. Shares of hhgregg declined 7.41% after the close on Jan 28.

hhgregg reported a loss of 17 cents per share in the third quarter of fiscal 2016, narrower than the Zacks Consensus Estimate of a loss of 21 cents and the prior year quarter loss of 18 cents. While sales and comparable store (comp) sales declined more than expected in the quarter, cost savings initiatives moderated losses in the quarter.

 

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Quarter in Detail

hhgregg reported net sales of $593.0 million. Sales lagged the Zacks Consensus Estimate of $602 million by 1.5% and decreased 10.9% year over year due to a decline of 10.8% in comparable store sales. We note that comparable store sales decline of 10.8% was significantly wider than a decline of 3.5% in the preceding quarter and a decline of 6.3% in the prior year quarter. The wider decline was due to competitive pressure in the market.

Except the Home Products category, comp sales declined in all categories namely Consumer Electronics, Computers and Tablets and Appliances.

Adjusted gross margin contracted 83 basis points to 26.1% in the quarter due to lower gross profit margin rates in all categories except home products, partially offset by a favorable product sales mix to categories with higher gross margin rates. Gross margin also declined due to greater competition and a highly promotional environment during the holiday period to drive sales.

However, selling, general and administrative (SG&A) expense ratio decreased 30 basis points to 19.6% due to decreases in wages as a result of efficiencies in the company's labor structure; decrease in delivery services due to efficiencies in routing and lower fuel prices. Loss of consulting fees also resulted in the decline. This was partially offset by fees associated with higher cost customer financing options and higher private label credit card penetration and occupancy cost.

Adjusted EBITDA was $4.3 million, lower than $8.0 million in the prior year quarter. Though adjusted EBITDA was lower than the prior-year quarter, it was positive due to the company’s expense reduction initiatives.

In the third quarter, the company realized $21.7 million of cost savings and remains on track to meet or exceed its plan to save $50 million in fiscal 2016.

Category Details

The company reports its business under the following product categories:

Appliances: Comparable store sales in this category decreased 10.4% in the quarter due to a decline in average selling price and a decline in sales volume. Last year, comp sales decreased 0.1%.

Computers and Tablets Category: Same store sales in this category declined significantly by 35.2% in the quarter, wider than a decline of 35.0% 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.

Home Products: Same store sales in this category increased 3.3% in the quarter as against a decline of 9.2% in the prior year quarter. The increase was driven by higher average selling prices offset by a decline in unit demand in the category.

Consumer Electronics: Same store sales of this category declined 7.9% 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. The decline was wider than a 3.9% decline recorded in the year-ago quarter.

Outlook

We are encouraged about hhgregg’s strategic initiatives, which focus on stabilizing the business by reversing the negative sales trends, optimizing marketing spending and improving the cost structure. These initiatives have led to positive EBITDA results in the quarter. The company remains confident that it will generate positive adjusted EBITDA in the fourth quarter as well.

The company also expects to remain focused on expanding its Fine Lines departments within the appliance category. Currently, the company has 11 locations with Fine Lines, which the company anticipates to double by the end of fiscal 2017. This will further help in lifting appliance comps and overall store comps. The company also plans to increase the sale of larger screen 4K TV’s and home theaters, furniture and online sales in fiscal 2016.

hhgregg has a Zacks Rank #3 (Hold). Better-ranked retailers in the broader market include The Kroger Co. KR, Ross Stores, Inc. ROST and Fred’s, Inc. FRED. While Fred’s sports a Zacks Rank #1 (Strong Buy), Kroger and Ross Stores carry a Zacks Rank #2 (Buy).

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HHGREGG INC (HGG): Free Stock Analysis Report
 
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KROGER CO (KR): Free Stock Analysis Report
 
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