hhgregg Reports Higher Fiscal Q3 Sales, Profits

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Indianapolis — hhgregg reported higher net sales and net earnings for its fiscal third quarter, ended Dec. 31, 2008.

Net sales were up 6.6 percent to $416.1 million, while net income was up 15.6 percent to $17.1 million.

But the company could not elude the weak majap marketplace, which impacted appliance volume and sent comp-store sales skidding 13.2 percent for the quarter.

In a conference call, chairman/CEO Jerry Throgmartin said the economic uncertainty and market volatility “is like nothing I’ve ever seen before,” and contributed to a significant drop in customer traffic during the period.

While Throgmartin does not foresee any “demonstrable improvement” in the current quarter, traffic patterns improved somewhat in January and early February, president/chief operating officer Dennis May said.

May noted that the company is “aggressively pursuing Circuit City’s market share” in TV and other overlapping categories like notebook computers, which it entered two years ago, and video games, which it tested last year and will permanently add to the assortment.

Circuit City’s liquidation is expected to have a modest, short-term impact on hhgregg’s traffic and margins in the current quarter, May said, particularly with discounts deepening as the fire sales progress.

The store closings in November and December, combined with the falloff in consumer demand, resulted in a significant oversupply of TVs that led to “compelling buying opportunities” — as well as the weak operating results that manufacturers are now reporting, May said. However, inventory levels have since been corrected, he noted, and TV manufacturers “will be very focused on keeping inventories in line.”

May said hhgregg’s relationships with its TV suppliers are better and more strategic than ever, as vendors increasingly rely on the commissioned-sales chain to explain and sell new and higher-margin technologies to consumers. “We’re a significant part of the solution to their product mix,” he said. “Preserving their gross margins and average selling prices will be accomplished by selling technology and innovation” — including forthcoming LED and OLED TVs — “and that’s not happening in the low-serve and self-serve environments.”

The company said it will also benefit from the glut of real estate stemming from the liquidations of Circuit City and other national chains. According to Throgmartin, landlords are showing more flexibility on lease terms and rental rates have dropped significantly from last year’s untenable levels, which may have contributed to the rash of retail bankruptcies. This will provide new expansion opportunities for hhgregg, which could enter markets more quickly and cheaply by retrofitting existent boxes vacated by Linens ’n Things and other stores.

On the product front, the company sustained double-digit comp-store unit sales declines of major appliance products, particularly at entry-level and lower mid-price points.

Pricier high-efficiency front-load laundry and three-door refrigeration also experienced comp-store unit sales decreases during the third quarter, although they were significantly less than the appliance category average and contributed to slightly higher average selling prices for the appliances category in total, the company said.

The comp-store sales decrease for the three-month period in the video category was primarily driven by the compression in average selling prices of flat-panel TVs slightly outpacing double-digit comp-store sales unit increases, the chain said.

The comp-store sales decrease in the other product category was primarily due to decreased sales of mattresses and personal electronics.

The increase in third-quarter earnings was primarily attributable to a 90-basis-point improvement in gross profit margins, coupled with start-up investments in distribution and management infrastructure to support the new-store growth in Florida, the chain said.

In a prepared statement,  May said “Our solid third-quarter results were primarily driven by better-than-expected gross margins due to improved buying opportunities in a couple of key merchandise categories. Importantly, we closely managed our inventories and working capital during the quarter, which should allow us to fund our fiscal 2009 store expansion plans entirely through free cash flow."

Gross profit margin, expressed as gross profit as a percentage of net sales, increased 90 basis points for the three months, ended Dec. 31, 2008, and increased 20 basis points for the nine months, ended Dec. 31, 2008, compared with the respective prior-year periods.

The appliance gross profit margins exceeded the company average as a percentage of sales during the third quarter and the year-to-date period, but the appliance category accounted for approximately 3 percentage points less of the consolidated net sales for each period relative to the comparable prior-year periods, thereby negatively impacting the consolidated gross profit margin.

Buying opportunities in the video category, attributable in large part to supply imbalances, had a distinct positive impact on the consolidated gross profit margin rate during the third quarter and a modest positive impact for the first nine months of the year compared with the respective prior-year periods.

In its statement the retailer acknowledged "continued economic uncertainty resulting from the turmoil in the financial markets and growing unemployment has significantly impacted customer traffic patterns since the middle of September this year. Customer traffic patterns are much more volatile and less predictable than we have historically experienced.”

Throgmartin said in the statement, “While we do not anticipate any near-term improvement in the macro environment, we will continue to focus on what we can best control, namely, reducing expenses, carefully managing inventory and cash flow, keeping our sales force highly motivated and providing our customers with an unmatched shopping experience. Longer term, we are confident that we are ideally suited to take advantage of the industry dynamics in terms of enhanced vendor relationships, improved real estate, and most importantly, increased market share gains. We move forward with a strong liquidity position, a powerful operating platform and a team that is energized and focused on maximizing the many opportunities that lie ahead."


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