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hhgregg Down on Prelim Numbers, Cuts FY14 View

Zacks Equity Research

Shares of hhgregg, Inc. (HGG) crashed 9.64% yesterday after the company announced its preliminary results for the fourth quarter of fiscal 2014. hhgregg lowered its expectations for fiscal 2014. This appliance and electronics retailer is scheduled to release its fourth quarter fiscal 2014 results on May 20.

Fourth Quarter Fiscal 2014

For the fourth quarter, the company expects net sales to decline approximately 9.9% year over year to $538.3 million, with a decline of approximately 9.9% in comparable store sales. The poor comparable sales performance is largely attributable to the consumer electronic, computing and wireless and home products categories, which are expected to decline about 18.9%, 22.6% and 0.4%, respectively. Appliance category sales are however expected to increase approximately 0.5% in the fourth quarter.

Further, hhgregg expects adjusted net loss to be 17 cents for the fourth quarter of fiscal 2014 as against prior year’s adjusted net income of 31 cents per share. The loss could be attributable to the underperforming contract-based mobile phone business, which the company decided to exit during the fourth quarter. This contract-based mobile phone business was included in the computing and wireless category.

The company’s sales and earnings expectations are far behind the Zacks Consensus Estimate of $547 million and 11 cents for the fourth quarter.

Fiscal 2014

This Indianapolis-based retailer revised its guidance for fiscal 2014. hhgregg expects net sales to decline approximately 6.9% from fiscal 2013 levels to $2.3 billion. The new guidance indicates a worse sales figure than a decline of 4.0–5.5% guided previously. The company expects adjusted earnings in fiscal 2014 to be 9 cents per share, down 87.8% from the prior-year adjusted earnings of 74 cents and much lower than the previous guidance range of 30-40 cents per share.

The company’s sales and earnings expectations for the fiscal 2014 are behind the Zacks Consensus Estimate of $2.348 billion and 35 cents per share.

During the third quarter conference call, hhgregg also anticipated comparable store sales in the range of negative 7.0% to negative 5.5%. The company also announced that it did not intend to open any new stores in fiscal 2014, in contrast to its earlier expectation of opening one store in fiscal 2014.

The primary reason cited for weak preliminary fourth quarter results and lower-than-expected fiscal 2014 results was extreme cold weather. hhgregg witnessed lower traffic in most of its stores , especially in the Midwest and Mid-Atlantic regions due to harsh weather conditions in January, February and the beginning of March.

We note that hhgregg has been delivering disappointing results in the consumer electronic category since the past one year due to lower-than-expected margins and declining industry demand for flat screen televisions. The company is trying to improve its consumer electronics category through new product innovations such as Ultra HD TVs and larger screen sizes, which are expected to boost sales.

In order to revive the home category, the company is geared to make the transition from one furniture brand to five brands, which will not only strengthen the home products category but will also enhance the whole shopping experience for its customers. The company expects to launch these new products in hhgregg stores by early summer.

To further boost the appliance category, hhgregg has been focusing on initiatives to drive additional traffic and increase sales. The initiatives include restructuring its sales mix, expanding its customer base and enhancing its service offerings.

We expect these initiatives to revive the underperforming categories. However, these initiatives will take time to bear fruits and thus we continue to expect a sluggish performance in fiscal 2014. hhgregg holds a Zacks Rank #4 (Sell).

However, better-ranked stocks in the retail sector include Companhia Brasileira de Distribuicao (CBD), Foot Locker, Inc. (FL) and The Kroger Co. (KR). While Companhia Brasileira de Distribuicao sports a Zacks Rank #1 (Strong Buy), Foot Locker and Kroger carry a Zacks Rank #2 (Buy).

Read the Full Research Report on KR
Read the Full Research Report on FL
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Read the Full Research Report on CBD

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