HHGregg, Inc. (HGG)

HGG 
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hhgregg, Inc. (HGG)

F1Q09 (Qtr End 06/30/08) Earnings Call Transcript

August 6, 2008 8:00 am ET

Executives

Andy Giesler – Director, IR

Jerry Throgmartin – Chairman and CEO

Dennis May – President and COO

Don Van der Wiel – CFO

Analysts

Mitch Kaiser – Piper Jaffray

Rick Nelson – Stephens, Inc.

Gary Balter – Credit Suisse

Brad Thomas – KeyBanc

Christina Applegate [ph] – SunTrust Robertson Humphrey

Anthony Lebiedzinski – Sidoti & Co.

Scott Tillman – Hudson Square Research

Presentation

Operator

Welcome to hhgregg’s first quarter earnings conference call for fiscal 2009. This call is being recorded. At this time, all participants will be in a listen only mode and I will now turn the conference over to Mr. Andy Giesler, Director of Investor Relations for hhgregg. Please go ahead, sir.

Andy Giesler

Good morning, everyone. My name is Andy Giesler and I’m the Director of Investor Relations for hhgregg. With me today are Jerry Throgmartin, our Chairman and CEO; Dennis May, our President and COO; and Don Van der Wiel, our Chief Financial Officer.

During today’s call, Jerry will share some highlights from our first quarter. Dennis will provide a review of our operating performance and Don will conclude the discussion of our liquidity and capital resources and our earnings guidance. At the end of our prepared comments, we will have until 9:00 AM Eastern Time to discuss any questions that you might have.

Let me take a moment to reference the Safe Harbor Provision under the Private Securities Litigation Reform Act of 1995. During this call, we will make forward-looking statements which are subject to risks and uncertainties, which include the future operating and financial performance of the company. We refer you to today’s earnings release, the MD&A section of our form 10-Q and the risk factor section of our Form 10-K for additional discussion of these risks and uncertainties.

With that I would like to turn the call over to Jerry.

Jerry Throgmartin

Thanks, Andy. Good morning, everyone.

We are pleased with our first quarter performance and the progress that we’ve made executing our growth plan. We’ve successfully continued our expansion into Florida, opening a central distribution center to support our growth in this market. Our team is successfully executing our strategy well in a challenging environment heavily influenced by headwinds we are experiencing in the appliance category.

The year is unfolding as we had planned with our top and bottom line results in line with our expectations. Our consultative sales force continues to represent a significant competitive advantage in this tough retail climate and we continue to focus on ensuring that our stores deliver a truly unique customer purchase experience.

We recorded top line sales growth of 16.2% on the strength of our new store sales performance. Our comparable store sales declined 2.6% in line with our expectations due to the significant challenges in the appliance category coupled with the fact that we are lapping a prior year comparable store sales increase of 8.8%.

Our gross profit margin declined 60 basis points versus last year largely due to the drop in appliance sales as a percentage of consolidated sales. Appliance sales represented approximately 44% of consolidated net sales during the first quarter compared to approximately 47% during the comparable prior year period. The appliance category has historically generated higher gross profit margins than the company averaged, particularly during the first half of this fiscal year.

Net advertising expenses as a percentage of net sales increased 59 basis points with the majority of the increase tied to launching new markets in Florida. SG&A expense as a percentage of net sales increased 37 basis points due to significant investments in our growth plans comprised of store pre-opening expenses for six new store openings and one relocation this year versus 2 new store openings last year, as well as the opening of a new central distribution center hub and the creation of a divisional management team designed to eventually support approximately 30 stores in central and northern Florida.

These growth investments negatively impacted SG&A expense as a percentage of net sales by approximately 75 basis points during the first quarter, but were partially offset by effective cost control administrative expense. During these challenging economic times as always, we remain focused on our execution. I am proud of the efforts of all of our associates who continue to make compelling alternatives to low-serve big box competitors.

I will now turn the call over to Dennis to discuss our operating results in more depth.

Dennis May

Thanks, Jerry, and good morning, everyone.

I would like to spend some time discussing our operational performance clarifying how the shift in our sales mix coupled with our long-term growth investments affected the profitability for the first quarter. During the first quarter, our comparable store sales decreased by 2.6%. This was comprised of a 9.7% decline in appliances, a 5.5% increase in the video category and a 0.5% decrease in our other category, which primarily consists of audio, personal electronics, notebook computers, mattresses and furniture and accessories.

The 9.7% comparable stores sales decrease in the appliance category primarily reflected double digit comparable store sales decline at the entry level and lower mid price point major appliance products. High efficiency front load laundry and refrigeration ran modest comparable store unit increases and contributed to higher average selling prices for the entire appliance category.

The weaker comparable store sales performance for the appliance category relative to the video category and the other category contributed to an approximate 3% decline in the appliance category share of our consolidated sales mix. We expect as in past downturns that appliance unit shipments rebound with the economy, returning to its long-term historical pattern of low single digit unit growth. When this rebound occurs, we expect the appliance share of our consolidated sales mix will return in line with its historical norms.

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