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hhgregg: Sales Up, Profits Down

11/09/2010 08:42:44 AM Eastern

Indianapolis - hhgregg
said higher expenses, lower margins and a drop-off in major appliance demand
sent profits sharply lower during the company's second fiscal quarter.

But despite what
the company described as "significant volatility" in the marketplace, the CE
and appliance chain plans to open upward of 45 new stores next year in Miami, western
Pennsylvania and other markets, on top of the 51 new locations added over the
past 12 months.

Net income
declined 20.4 percent to $3.9 million for the three months, ended Sept. 30, while
net sales surged nearly 45 percent to $480.9 million, due largely to the
new-store build out.

 Comp-store sales declined 1.5 percent during
the period, which the chain attributed to a 3.9 percent decrease in appliance
comps as the federally funded majap rebate program pulled demand into the prior
quarter.

President/CEO
Dennis May said the company is pleased with continued market share gains in new
and existing regions, as well as with new store productivity, which is running
above 100 percent. But he warned that the "challenging macro-economic environment
is negatively impacting our industry and continues to add volatility to our
business."

May noted, "We
entered the quarter on a strong note, with consumers responding very favorably
to promotions and improving trends in the video category. As the quarter
progressed, we saw a deceleration in both appliances and video sales."

Looking ahead,
chief financial officer

Jeremy Aguilar
said the company has lowered the bottom end of its projected full-year net
income due to industry headwinds and a precarious marketplace. "While our
visibility into the important holiday and Super Bowl selling seasons remains
limited due to the significant volatility in our product categories and
challenging macro-economic environment, we remain cautiously optimistic that
the top end of our guidance range is achievable."

During the second
quarter, profits were impacted by a decrease in gross margin rate, increased
advertising as a percentage of net sales, the 1.5 percent comp decline, and an
increase in expenses associated with the launch of the company's 13 Washington
D.C. area stores.

Besides the lower
appliance comps, hhgregg reported a 3 percent decline in the catchall "other"
category due primarily to double-digit comp-store sales decreases in small
electronics and camcorders, partially offset by increases in sales of notebook
computers.

Video comps rose
1.6 percent due primarily to continued strong unit demand, but partially offset
by a decrease in average selling prices, the company said.

Gross profit
margin decreased about 79 basis points to 30 percent, primarily due to a lower
mix of major appliances in new markets. Majaps carry higher margins than the
company average, the chain said, and traditionally take "longer to mature" in
new markets than all its other product categories.

 In addition, a decline in vendor support and
increased selling promotions, used to drive market share gains in video, led to
decreased margins in that category.

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