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hhgregg (HGG) Stock Down on Wider-than-Expected Q3 Loss

Appliance and electronics retailer, hhgregg, Inc. HGG reported a wider-than-expected loss in the third quarter of fiscal 2017. Sales lagged the Zacks Consensus Estimate, due to competitive pressures in the market, specifically in consumer electronics category. Shares of hhgregg were down 16.8% after market close on Jan 26.

hhgregg reported adjusted loss of $1.70 per share in the third quarter of fiscal 2017, wider than both the Zacks Consensus Estimate of a loss of 29 cents and the prior-year quarter loss of 15 cents. 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 quarterdue 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.

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hhgregg has been reporting losses and declining revenues for the past many quarters, primarily due to weak comps. In fact, hhgregg has been exhibiting a bearish run on the index since past one year. Specifically, in the noted period, the stock has declined significantly by 65.3% in comparison to the Zacks categorized Retail-Consumer Electronics industry, which showcased growth of 44.5%. Notably, the industry is part of the top 9% of the Zacks Classified industries (24 out of the 265). The broader Retail and Wholesale sector is placed at the bottom 6% of the Zacks Classified sectors (15 out of 16).

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.

HHGregg, Inc. Price, Consensus and EPS Surprise

 

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

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 plunged 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.

Zacks Rank & Key Picks

hhgregg has a Zacks Rank #3 (Hold). A better ranked stock in the same industry include Best Buy Co., Inc. BBY, holding a Zacks Rank #1 (Strong Buy). Other better-ranked stocks from the broader retail sector include Francesca's Holdings Corp. FRAN and Tilly’s, Inc. TLYS. All the three stocks hold a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Best Buy has delivered an average positive surprise of 25.6% and has a long-term earnings growth of 11.87%. While Francesca's Holdings has an expected long-term earnings growth of 13.75%, Tilly’s have an expected earnings growth of 13.0% for the next three to five years.

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