Sales Up, Profits Down in Hhgregg’s Q3 on Declining ASPs

Hhgregg reported higher sales for fiscal Q3 2012 ended Dec. 31 but profit fell to $22.5 million from $26.9 million in Q3 2012 on margin pressure in the video category, CEO Dennis May said in an earnings call Wednesday. Sales were up in the quarter 26.9 percent to $829.5 million. “The holiday saw persistent challenges within the video industry,” May said, citing declining ASPs and stagnant unit sales that were down 6.7 percent for the quarter, according to NPD. Hhgregg saw a comparable store sales decline in video of 4.8 percent, May said.

The company was “encouraged by share gains” over the holidays but “we were not able to maintain margins” throughout the holiday season, May said. Significant traffic gains and growth for Black Friday were offset by “heavier than anticipated industry-wide promotional pressures in both large and small screen sizes, and our margin performance was more negatively impacted than anticipated,” he said. As competition became “more aggressive” over the holidays, “we elected to remain competitively priced,” he said.

Manufacturers are attempting to take more control on pricing in the volatile video market, May said. Responding to an analyst’s question about price protection, he said, “There’s a lot of activity around that -- more than I've ever seen in my 20-plus years of being in this business.” Manufacturers are making some “pretty sweeping changes” to MAP pricing both online and in print affecting both online and brick-and-mortar retailers, May said. Some manufacturers are introducing UMRP (unilateral minimum resale price), he said, “meaning that the price of a product is set and is to be sold at that price” both with advertised, on-floor and online prices, he said. Profitability pressure has forced manufacturers to make the changes with the new product lines coming out this spring, May said. The goal is to introduce “pricing discipline” in the market with a focus on “preserving ASPs and profitability in the video business. We're watching that very closely,” he said.

Following “disappointing” holiday season results, hhgregg plans to modify plans for calendar Q4 2012 “to strike the appropriate balance between driving traffic and profitability,” May said. The company is looking to larger screen sizes and OLED to prop up margins for TVs this year amid forecasts of flat to lower mid-single digit sales declines for the overall category, May said. On the potential for OLED in 2012, May called it an “amazing” product that’s “super-thin, 200 percent the brightness of LCD” and one that stands in stark advantage when sitting next to an LED LCD TV. May predicted OLED will be an “innovation statement” this holiday season with “huge impact” on 2013. He cited LG’s 55-inch OLED TV introduced at CES, and said, “It has a lot of flexibility about how you can install it, where you can install it and the picture quality is unbelievable.”

In response to an analyst’s question about the rumored Apple TV and its potential to put TV buyers in a “state of paralysis” as they wait for its arrival, May said it won’t make a “huge difference” to the “pent-up demand” of the TV industry. More people are replacing “flat-panel TVs that are burning out,” he said. He cited “exciting technologies” including voice recognition and gesture control from existing manufacturers coming to market in the next 12-24 months, and said, “anything that puts new, meaningful, compelling innovation into the industry is exactly what the doctor ordered.” While there’s no Apple TV product “at this time,” May said such a product could be a catalyst for other manufacturers to bring new technology to market sooner. Referring to the spate of “strong rumors” about an Apple TV, May said, “We think that would be a natural fit, and we think we'd be a great place to buy such a product. It can only be good for the industry."

Hhgregg went into the holiday season with a “more aggressive posture” toward video than the prior year, May said, and the company saw a “very competitive landscape” that played out during Black Friday weekend and beyond that cut into margins. Manufacturer attempts to drive sales of “certain screen sizes” also affected margins, May said. “There was a greater impact to gross margin from the supplier side also as they made price changes through the holiday season that influenced mix and the ability to step up within certain product lines,” he said. The retailer will make “appropriate tweaks” to its merchandising strategy coming out of the holiday season, he said. Consumers have an “affinity” for larger screen sizes including 80-, 84- and 90-inch, he said, and hhgregg will make a stronger push at those sizes, and with smart TV offerings as well. He didn’t mention 3D TV in his comments.

TV inventory is currently “a little light,” May said, and “we would have liked to have a little more inventory around the Super Bowl,” he said. The new video lines will begin to ship at the end of the month, and the company is positioned for a “clean transition,” he said. In the channel overall, inventory is also light, he said. “We follow this all the way back to the glass and the panels,” he said. “There were some disappointments in the video business during the holiday season but manufacturers managed inventory well,” he said.

Home office comp sales at hhgregg were up 91.4 percent in Q3, driven by tablets, cellphones and double-digit gains in notebook PCs, May said. With assistance from manufacturers, the company will begin retrofitting existing stores this year with a new home office display to roll out in 2013. Consumers will be able to test devices at the displays and have a more “interactive experience” in stores, he said.

In tablets, the Android tablet business “caught everyone by surprise by how successful it was,” May said, and the category exceeded expectations in unit growth. Stores need to improve at “managing attachments and filling the basket in the computer business,” he said. “If the IT business is going to be a meaningful part of this company’s business, it’s got to pull the wagon,” May said. Managing margin in the PC business is challenging, where margins are lower than other categories, he said.

Q3 was the first full quarter of mobile phone sales at hhgregg. The company is “gaining traction” and will continue to make investments in the business, which May expects to add “meaningful profit” in coming years. The retailer has added a third dedicated sales force in addition to CE and appliances and the additional crews are expected to add “enhanced specialization” that should result in improved close rates and attach rates across phones, tablets and laptops, May said.

In appliances, average selling prices are going up, May said, contributing to an already high-margin business. The industry took “pricing actions” last year to absorb commodity cost increases that manufacturers had been facing, and the company’s market share grew in both traffic and sales, he said.

On hhgregg’s multi-channel strategy, the company saw triple-digit increases in e-commerce in Q3, May said. During Q3, 7 percent of e-commerce sales were picked up in store, he said, enabling additional sales opportunities and “industry-leading close rates,” he said.

Hhgregg operated 208 stores at the end of Q3 and plans to open 20-25 new stores this year, with the “lion’s share” of the stores within range of the Chicago distribution center, May said. Hhgregg closed up $.75 to $11.34.