We are maintaining our Neutral recommendation on
), a specialty retailer of premium video products, following an
appraisal of its second quarter fiscal 2013 results.
hhgregg's second quarter earnings of 11 cents per share
exceeded the Zacks Consensus Estimate by 22%. However, the
quarter's earnings lagged the prior-year quarter earnings by 31%.
Lower revenues and higher selling, general and administrative
expense ratio led to the earnings decline.
hhgregg's net sales dropped 5% year over year to $587.6
million in the reported quarter due to 8.8% decline in comparable
store sales. Sales also fell shy of the Zacks Consensus Estimate
of $640 million. The poor performance of video and other
categories resulted in the comparable sales decline. However,
improved margin rates in the video category drove gross margins
higher by 107 basis points to 29.6% in the quarter.
Overall, we are encouraged by the company's initiatives to
drive additional traffic and increase sales. Strategic
initiatives like restructuring of in-store management team and
introduction of new categories have grown its appliance market
The company has expanded its computing and mobile phones
category by introducing notebooks and desktops along with Verizon
smartphones, which previously only included computers and
tablets. Management has plans to fully roll out furniture and
exercise equipment at all its stores in fiscal third quarter
2013. Management claims that these new categories will cover less
store space and will not affect existing products and yet boost
hhgregg has been expanding its stores into new markets for the
last few years. The company has opened or acquired stores in 14
new metropolitan markets in the past five years, most recently in
the Chicago, Illinois and Miami, Florida markets. hhgregg further
plans to open 20 new stores in fiscal 2013, predominately in St.
Louis, Missouri and Milwaukee, Wisconsin.
It also redesigned its website during the second quarter of
fiscal 2013, which offers options to buy products online and ship
them directly to consumers. The new website thus provides an
enhanced purchase experience and boosts the company's
multi-channel retail strategy.
However, the company has been experiencing disappointing
results in the video category due to lower-than-expected margins
across all screen sizes. In addition, promotional activity within
the video category has resulted in a reduction in the gross
profit margin rate for the category.
Though management's decision to focus more on the large screen
video category improved the gross margin rate, the loss of
overall market share of televisions resulted in poor performance
of the video category in the second quarter of fiscal 2013. We do
not expect the company to find the right mix of gross margin rate
and market share in the next few quarters and thus remain on the
hhgregg currently has a Zacks #3 Rank (short-term Hold
rating), in sharp contrast to its peer
Best Buy Co. Inc.
), which holds a Zacks #5 Rank (short-term Strong Sell
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HHGREGG INC (HGG): Free Stock Analysis Report
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