hhgregg Losses Widen, Store Closures Considered

Net and comp sales down 10%
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Higher expenses and lower sales led to a $25.2 million loss for hhgregg in its fiscal fourth quarter, prompting the company to reduce its distribution footprint and reassess its store count.

Updated! Indianapolis — Higher expenses and lower sales led to a $25.2 million loss for hhgregg in its fiscal fourth quarter, prompting the company to reduce its distribution footprint and reassess its store count.

The loss, covering the three months ending March 31, steepened from a year-ago loss of $7.2 million, but narrowed from the $87 million loss recorded last quarter.

The results were driven by persistent sales declines for which the multiregional CE, appliance and furniture chain has been unable to apply the brakes. Net sales slid 9.8 percent for the period, to $485.6 million, and comp-store sales decreased 10 percent.

To help turn the tide, president/CEO Dennis May said the company is focused on improving its cost structure and reversing the sales slide.

To rein in costs, the chain will “be working to selectively rationalize our footprint,” he said, including two end-of-lease stores that were closed last quarter. hhgregg’s footprint spans 226 stores in 20 states, along with supporting spoke-and-hub distribution centers, the result of a multi-year build-out as the chain pursued national ambitions.

“We don’t anticipate significant store closings,” May told investors on an earnings call this morning.

Instead, the company will continue to evaluate its real estate and make adjustments accordingly.

“Any good retailer is looking at their portfolio of real estate and trying to understand dot-com growth and the number of locations that make the most sense to have in a market,” he said.

While the store fleet is relatively new and cash-flow positive, “We will always look at the most efficient footprint and make those decisions to improve productivity,” he noted.

The company will also better manage its inventory to free up working capital, and will spend its ad dollars more efficiently by switching from newspaper circulars to “more effective” digital mediums and appliance-specific TV spots, he noted.

Taken together, the company stands to save more than $50 million in inventory reductions, and has identified $30 million in annualized savings.

On the sales front, plans call for an expansion of it Fine Lines super-premium appliance departments, which have been producing “strong results”; further fine-tunings of its regional merchandise mix; and a continued focus on larger-screen 4K TVs, which comprise 30 percent of its video mix and are projected to represent nearly half of all TV sales by the holidays.

“We remain confident that through the combination of our savings and revenue initiatives, we will return to positive adjusted EBITDA [earnings before interest, taxes, depreciation and amortization] in fiscal year 2016,” May said.

Broken out by product category, majaps, the company’s largest with more than half the sales mix, experienced a 5 percent dip in comp sales during the quarter, amid what May described as an 800-basis-point drop in demand.

CE, comprising 38 percent of the mix, saw comps fall 9.8 percent despite higher average selling prices (ASPs), while computers and tablets, at 6 percent of the mix, suffered the steepest comp decline, falling 37.6 percent, or 33.4 percent excluding mobile, a category that hhgregg had exited.

Comps for furniture and mattresses, the chain’s most promising growth sector at only 5 percent of the mix, slipped 12.5 percent during the quarter, reflecting the company’s exit from the fitness category. Excluding exercise equipment, comps declined 2.6 percent.

The one bright spot was e-commerce, where comparable sales rose 47 percent, May told analysts. He said online sales currently represent 4 percent of the business and will eventually grow to 7 percent of total sales.

Besides lower sales, other hits to the bottom line included $3.6 million in write downs of mobile phone inventory and store fixtures, and higher marketing, occupancy costs due to the deleveraging effect of the sales declines.

Higher costs were also incurred from steeper bank transaction fees, increased home deliveries, and payment for a retail consultancy that is helping the company rethink its marketing plans, improve its logistics network and revamp the business.

The higher expenses negated a 27-basis-point increase in gross profit margin, to 28.6 percent, stemming from higher CE, furniture and mattress ASPs.

For the full year, net sales fell 8.9 percent to $2.1 billion, comp sales decreased 9.2 percent, and the net loss totaled $132.7 million compared with a profit of $228 million for the prior year.

In a research note, Janney Capital retail analyst David Strasser said there was little good in hhgregg’s earnings report.

“We know it’s not a great sales environment, but it’s not this bad,” he wrote. “Sales were weak as they lost competitive ground across all categories,” with traffic remaining the core concern.

“There are no easy cures for hhgregg right now,” he observed.

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