Price Drops on Entry-Level TVs Lured Hhgregg Holiday Customers from 3D, IPTV

Comparable store sales at Hhgregg were down 6 percent for fiscal Q3 ended Dec. 31, because of weakness in core categories including video, appliances and small electronics, CEO Dennis May said in an earnings call Tuesday. Expecting growth, the company “overindexed” in premium video technologies including 3D and IPTV, he said, and sales in the categories “fell short of expectations.” The weak economy, combined with lack of content and the price gap between low-end TVs and 3D TV, “continued to mute growth and limit near-term expectations,” May said.

Although management had expected vendor-promoted price declines in highly featured TVs to close the price gap and stimulate demand in premium video products during the quarter, “price drops in entry-level flat-panel TV widened gaps, causing the overall mix to differ from original expectations,” May said, and that “pressured comps and margins across the video category.” Double-digit drops in video ASPs were partly offset by “continued strong unit demand,” he said. In other categories, double-digit fall-offs in comp-store sales of small electronics and camcorders were offset by an increase in notebook computer sales, May said. Appliance sales were down 5.7 percent, the company said.

Hhgregg lowered its forecast range for fiscal 2011 earnings per share, to $1.10-$1.15 from $1.15-$1.23 in recognition of “challenging industry headwinds and the negative effects of inclement weather conditions across the chain during the important Super Bowl selling season,” May said. Before Super Bowl week, the company “believed it was tracking in line with projections,” he said, but now comp-store sales ratcheted back to negative 4-5 percent from negative 1-3 percent. “When you miss that business,” May said of the hyped-up Super Bowl, “you don’t get it back.” Still, he said, the company is “pleased with the quality of its inventory” and doesn’t expect “significant markdowns compared to historic levels."

Saying the industry grossly overestimated the sales potential of 3D TV in 2010, Chief Financial Officer Jerry Aguilar said 3D TV will be repositioned in 2011 and the price gap between lower-end TVs and 3D-enabled TVs will “close quite a bit.” He said “manufacturers have learned something” and “listened to the consumer” and will sell 3D as a feature, not a product category. With a narrower price delta of $200-$400 and “much more content,” 3D TV is expected to sell 4-5 million units this year, Aguilar said, in line with expectations for 2010, which came up far short at 1.6 million units. He sees a flattening of ASP declines in video overall over the coming year.

May said the company is “pleased with growth” in its overall computer business as it continues to expand hardware, service offerings and accessories chainwide. But weakness in digital cameras, camcorders and navigation units are pressuring comp-store sales, he said. In coming months, Verizon store-within-a-store outlets located in some Hhgregg stores “will be eligible” to carry iPhones, he said. Sales results won’t show up in the retailer’s top-line results, he said, but “demand should help stimulate overall traffic.” Hhgregg stores carry Apple TV, Aguilar said, and they have the option to sell the iPad.

Hhgregg expects to benefit from the tablet surge this spring, when Android software “will take the world by storm,” Aguilar said. The category presents “new business opportunities for new participants,” he said, thanks to a “significant assortment of products” coming in early spring. Tablets give a company like Hhgregg a chance to grab a bigger share of the IT market, Aguilar said, by educating customers on Wi-Fi and differences among products. At the same time, he said, because Hhgregg’s computer business is still a minor part of the balance sheet, the company doesn’t expect tablets to cannibalize PC sales.

According to Hhgregg’s 10-Q quarterly report, the company has opened 46 stores the past 12 months, in new markets including Baltimore, Washington, Philadelphia and Richmond, Va., along with its fourth distribution center, in Brandywine, Md. It’s on track to open 43 stores in fiscal 2011, May said, as part of its “measured” approach to national expansion, with openings slated for Pittsburgh in late spring, Miami in early summer and Chicago in early fall. The company will open a distribution center to support the Chicago market. In response to an analyst’s question about expanding to markets where Ultimate Electronics had been, May said, “Distribution is a key component of what we do” and he pointed to the company’s methodical strategy for expansion, taking advantage of current resources.

Net income for the third quarter ended Dec. 31 was $26.9 million on sales of $654 million, compared with net income of $22.7 million and revenue of $500 million the prior year, the company said. Company shares closed 6.75 percent lower Tuesday at $17.41.