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hhgregg Hits 52-Week Low on Weak Q3 Results

Zacks Equity Research

Shares of hhgregg, Inc. (HGG) hit a 52-week low of $7.43 on Feb 4, and eventually closed at $7.54. The drop in share price could be attributed to weak third quarter fiscal 2014 results and a reduced fiscal 2014 guidance, reported last week. In fact, shares of this appliance and electronics retailer have dipped roughly 45% year-to-date.

Factors Hurting hhgregg

On Jan 30, hhgregg reported lower-than-expected earnings and sales in the third quarter fiscal 2014 and cut its outlook for fiscal 2014.

hhgregg’s earnings of 17 cents per share missed the Zacks Consensus Estimate by 41.4% due to weaker-than-expected sales. It also declined 67.3% from the prior-year quarter due to a decline in comparable store sales, lower gross margins and higher selling, general & administrative expense (SG&A) ratio.

hhgregg’s net sales declined 11.6% year over year to $707.1 million in the quarter due to a decline in comparable store sales. Sales also lagged the Zacks Consensus Estimate of $716.0 million.

The sluggish revenue in the third quarter was mainly due to relatively weak sales in the holiday season. During the holiday season, the company offered aggressive promotional offers on items like televisions and tablets in order to compete with big-box retailers like Wal-Mart Stores Inc (WMT) and Best Buy Co. (BBY), which dragged down holiday sales margins. hhgregg has now decided to curb its promotional spending and instead shift its focus toward a broader mix of home products, including appliances and home furnishings.

Comparable store sales decreased 11.2% in the quarter as a decline in consumer electronics and computing and wireless categories was partially offset by growth in appliances and home products categories. Comp sales were wider than the decline of 9.7% in the year-ago period and 6.2% in the second quarter of fiscal 2014.

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 across all screen sizes. In addition, declining industry demand for flat screen televisions severely impacted overall store traffic and consumer electronic category sales.

The company is trying to improve its consumer electronics category through various initiatives. hhgregg has been expanding its appliance business and focusing on initiatives to drive additional traffic and increase sales. The company is taking initiatives to restructure its sales mix, expand customer base and enhance its service offerings. However, the improvement in the consumer electronic category is expected to take time and thus we continue to expect a sluggish performance in fiscal 2014.

Reduced Fiscal 2014 Guidance

Following weak third quarter fiscal 2014 results and lower-than-expected comps, hhgregg lowered its top and bottom line guidance for fiscal 2014. Adjusted earnings are expected to be in the range of 30 cents to 40 cents, lower than the prior estimate of 75 cents to 90 cents.

For fiscal 2014, the company expects net sales to decline in the range of 4%-5.5% worse than the prior guidance of negative 1.5% to flat. Comparable store sales is expected in the range of negative 7.0% to negative 5.5%, worse than previous expectation of negative 3.5% to negative 2.0%.

The company does not intend to open any new store in fiscal 2014, in contrast to its earlier expectation of opening one store in the year. hhgregg holds a Zacks Rank #4 (Sell).

Appliance retailer Conn’s Inc. (CONN) is a better-ranked stock in the same sector, sporting a Zacks Rank #1 (Strong Buy).

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Read the Full Research Report on WMT
Read the Full Research Report on BBY
Read the Full Research Report on CONN

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