hhgregg: Sales Up, Profits Down

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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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