HhGregg Has $1 Million Drop in Quarterly Profit Due to Sales Plunge

Hhgregg’s fiscal Q2 net income dropped $1 million year-over-year to $3.9 million, CEO Dennis May said on its earnings webcast Tuesday. CFO Jeremy Aguilar said the double-digit “peak to trough” change in the business from July through September, led by drops in appliance and video sales, was “as dramatic as I've seen in 35 years.” The company is “seeing stabilization” now, he said. May said he didn’t want to give the impression that “comps fell off the table. … It was just a dramatic swing from things going along pretty robust to not so robust at all.” Comparable store sales dipped 1.5 percent for the quarter, the company said. A decline in vendor support along with increased selling promotions to drive market share reduced margins in video, he said.

Heading into the holiday sales season, May said, manufacturers have promotional plans “date-stamped” for Black Friday and then the first week of December but little activity set before then. “We're not so much waiting on manufacturers as much as we're waiting for consumers, because they believe the best deal is going to be in the holiday season,” he said.

Higher video inventory is favorable for hhgregg, which, May said, has navigated periods of oversupply fairly well. TV manufacturers will be “compelled to be promotional” on new technologies including 3D and IPTV to the point that the gap between the prices of those advanced TVs and more conventional sets “will be closed this holiday season,” he said, saying consumers have been waiting for prices to drop for both of the premium features. Reiterating comments he made on previous calls, he said, “We need to see these two technologies move down into power-alley price points. To date that just hasn’t happened."

May expects moderate pressure on average selling prices in video for the holiday season -- “nothing significant” but moderate decline due to overall price movement and mix shift. He supported price drops because they'll drive consumers to buy more-expensive models. “The consumer wants these products,” he said, citing high scores for 3D and IPTV on wish lists, while consumers put a ceiling on what they'll spend for them. “The industry definitely needs to get the price delta in line with consumer perception,” he said. He said the industry sold 2 million 3D TVs this year and expects to sell 5 million in 2011, and 5 million IPTVs have sold in 2010, with forecasts of 9 million next year. As prices drop to become more in line with consumer expectations, he said, “the mix will shift” to $1,499, $1,299 and $1,199-type retail prices versus $499 purchases. “We very much look forward to the prices being reset in 3D and IPTV,” he said.

Regardless of technology, May said, gross margins tend to move in three bands: zero to $500, $500-$1,000 and $1,000 and higher. “The more TVs move from $2,499 to $1,699 or from $1,999 to $1,299, that’s a good thing for us because it moves compelling product into a power alley price point that we can sell tonnage of but still deliver very good gross margins,” he said.

The TV inventory glut should also be good for the Super Bowl selling season from late December through game day, May said. Last year, the company and the rest of the industry “struggled with availability” of TVs in larger screen sizes, he said. This year there’s going to be “plenty of inventory, and plenty of inventory of better goods,” he said. He described inventory as “a real advantage” and “an upside for us in fiscal Q4."

In computers, a relatively new category for the company, business is growing “faster than the industry rate,” May said. Hhgregg stores are carrying 32 PC SKU’s into the holiday season, up from 22 last year. The company has rolled out a service business chainwide to support the category and has expanded its lines of PC accessories, he said.

Hhgregg also announced it’s expanding into the Miami and western Pennsylvania markets. May provided few details for competitive reasons but said, “We're going to populate with an adequate number of stores to drive great leverage, unit productivity and market share.” The company operates 173 stores and is on track to become a coast-to-coast retailer, he said.

Net sales for the quarter ended Sept. 30 increased 44.8 percent year over year to $480.9 million, the company said. The increase in net sales resulted mainly from the addition of 51 stores the past 12 months, it said.