Hhgregg Continues March Toward Becoming National CE Retailer

Hhgregg continues on a faster-than-expected track to become a national CE retailer, as it pounces on opportunities created by attractive real estate terms and other advantageous competitive conditions, CEO Dennis May said Thursday on its Q4 earnings call. The company opened 26 stores this quarter, including in the previously uncharted Baltimore and Philadelphia markets this month alone, and remains on course to open 40-45 stores this fiscal year, May said.

Whether hhgregg scales back to more-conservative store openings remains to be seen as it balances “disciplined and focused execution” against the advantages of a buyer’s real estate market, May said. “We are certainly going to continue to grow, and there’s going to be life after the Mid-Atlantic, and then another market and then another market,” May said. “This company has tremendous runway in front of it.” The company is working hard on its expansion plans and will share them with “the Street in the very near future,” he told analysts.

Citing positive industry trends in major appliances and TVs, May said those will allow the company to maintain a stable gross margin long term in each product category. For example, the quarter-to-quarter sales improvement in appliances that the chain achieved Q4 carried over into Q1, May said. The appliance industry’s “cash for clunkers” program for Energy Star-rated appliances provided a spark in some markets, he said. “While it’s too early to know if the stimulus program pulled demand forward, we do know that even in states where there were no or weak stimulus programs, the fundamentals of the appliance market have improved,” he said. The government stimulus program gave additional exposure to the category and helped demonstrate the benefits of Energy Star appliances, which drove sales of high-margin products such as three-door refrigerators and high-efficiency washing machines, he said.

May predicted that new technologies such as 3D TV, LED-backlit LCD TVs and Internet TVs will ease the downward pressure on average selling prices that has hurt the video industry the last three years. The company thinks there’s a significant base of flat-panel TV owners who want to upgrade their five-year-old sets, he said. “All of the new technologies not only create demand but give us a story to tell on the floor about new innovation,” he said. “That helps us sell up, which will help ASPs. Even in the rocky economy, unit demand hasn’t been a problem. The problem has been ASPs."

Although analysts are forecasting further ASP declines in calendar 2010, May said, he agrees with those predicting smaller declines than in years past: “ASPs are certainly moderating.” But “whether it gets to flat remains to be seen,” he said. “The last two or three years, we haven’t had anything compelling to talk about around innovation in the TV industry. That’s one of the reasons we've had 20-30 percent ASP declines in the TV category in general. We are talking about a complete gamut of innovation that’s going to drive consumer interest in the category and improve ASPs."

The video shortages hhgregg experienced in Q4 have abated, and the CE industry is now “robust in technology,” though some suppliers still haven’t brought out their full lines for the year, May said. Earlier in 2010, inventory shortages were a drag on the chain’s video business as the industry went through “a major transition of every brand and model through the Super Bowl,” he said. But inventories began improving this quarter and overall supplies are now good, he said.

May thinks the industry will sell 1.5 million to 4 million 3D TV sets this year and hhgregg will “over-index” for that range in its buying and merchandising practices, he told an analyst who had asked about the wide variance in 3D TV unit-sales forecasts. But the chain expects higher revenue from LED-backlit LCD TVs because industry sales are expected to reach 9 million units for the year, he said. He said ASP declines in 3D TVs will be limited by their inherent higher-end, higher-margin features.

While video and appliances will remain the core of hhgregg’s mix, May said, the company is studying moves into new categories, such as wireless. “We certainly see that as a growth opportunity for the company,” he said. “As we've gotten bigger we have new opportunities to play in that area at a new level.” In the future, May said, “we see that as something we can really leverage.”