hhgregg: Well On Its Way To National Status

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hhgregg's national build-out is off to a solid start.

The company — which seeks to fill the marketplace void left by Circuit City, albeit as a tightly-managed, 400-store chain — is proving it has the prowess to execute across multiple markets, based upon its second-quarter operating results.

Earnings were up 46 percent during the period ending Sept. 30, as the chain continued to open new stores and enter new markets. Upward of 22 additional locations will be added through March, and leases have been secured for 40 more storefronts that will open over the ensuing 12 months as the company breeches the Mid-Atlantic market. Plans call for hhgregg to finish its next fiscal year with nearly 190 stores, paid for in part by a $178 million stock offering, and bolstered by a $92 million war chest.

“We're pleased with our operating results,” executive chairman Jerry Throgmartin told investors during a conference call earlier this month. “These are both challenging and opportunistic times,” he said, and the company is managing the things it can control, like expenses, inventory and marketing, proving that it “can deliver in the best and worst environments.”

“We're encouraged by trends and are more optimistic about the holidays and the rest of the year,” he told investors.

Recently promoted president/CEO Dennis May said he's “pleased with how we managed gross margins” and expenses, as well as with the company's market share growth, attachment rate of accessories and extended warranties, and acceptance in new markets.

Inventory levels, inventory management systems, and merchandising teams and tools are similarly in “great shape” as the chain heads into the holidays, May said, and sequential quarterly improvements in traffic also bodes well for the period.

Also aiding hhgregg's inventory position is closer cooperation with manufacturers on forecasting. “We've moved up the food chain on availability as we've become more important to our vendors,” he said.

Manufacturers also like the company's assisted-sales model, which helps hhgregg sell a better mix of products such as LED TVs, a category where it is “over-indexed to the industry,” May said. “An educated customer buys better products, which have higher gross margins.”

New technology in particular needs to be explained to customers, he continued, and 2010 promises “more new technology than in any other year. Manufacturers need to collect for this, so they can continue to invest.”

The most anticipated new technologies include 3D TV, due to reach the marketplace next summer, and other flat-panel enhancements such as wireless connectivity, hard-drive storage and Internet capability. Giving consumers greater control over content is “very exciting,” May said, and, along with LED technology, will lead to a “two-TV world” in which shoppers choose large, feature-rich models as their primary sets, and add smaller panels to secondary rooms.

The primary panels will help stabilize the long-term outlook for average selling prices, he predicted, and while retails will continue to fall on smaller sets, the expanded installer base will drive up the average number of TVs to three per household. “The runway is very strong for 32 inches and under,” he said, although 40-inch and 42-inch screen sizes will be caught in the middle and experience “the most pressure.”

More immediately, May said the chain continues to gain share in video and remains focused on its relatively new computer business, where sales of notebooks, netbooks, accessories, warranties and services have helped boost category margins.

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