Hhgregg Pushing to Become Less Reliant on ‘Volatile’ CE Market

With profitability in the video category hhgregg’s “biggest challenge,” it’s looking to higher margin categories such as 60-inch-and-larger TVs, appliances, furniture, fitness and mattresses -- along with the delivery and installation opportunities that go with them -- to help boost the bottom line, said CEO Dennis May on the company’s Q1 earnings call Thursday.

Hhgregg’s net loss widened to $5.7 million in fiscal Q1 ended June 30 from $761,000 in the year-ago quarter, the company said. Net sales grew 13 percent to $490 million due to the net addition of 30 stores in the last 12 months, it said. Comparable store sales dropped 5 percent, said Chief Financial Officer Jeremy Aguilar, primarily due to a decrease in video business that was partially offset by increases in sales of appliances, computing and mobile phones. The video comp store sales decline included a double-digit falloff in units and a single-digit falloff in average selling prices, both in percentage figures, Aguilar said. It had double-digit unit sales declines for comp stores in cameras, camcorders and small electronics, he said. Increases in tablets and mobile phones were partly offset by a drop in notebook PCs, he said.

Last year’s “meaningful decline in gross margins” that led to universal pricing policy (UPP) and minimum advertised price (MAP) programs instituted this year are “helping to stabilize product margins,” May said. Citing video as important to the company’s “top line and overall profitability,” May said the retailer is refining its merchandising mix to balance traffic with profitability. According to hhgregg’s 10-Q SEC filing Thursday, video and appliances were 82 percent of its sales mix for fiscal Q1, compared with 81 percent a year earlier.

On the “event shopping” nature of the TV business, May said there was “significant volatility” during the quarter and the retailer continues to look for a balance between profit and traffic. Changes on the pricing side are adding more stability to gross margins, but there was still volatility around Memorial Day and Father’s Day promotions, he said. On why pricing programs have only led to stability and not growth in margins, May said, UPP and MAP programs were implemented throughout the quarter, and hhgregg saw a “positive impact” as those models started to sell. In the back half of the calendar year, “we have an opportunity to expand gross margins compared to last year,” he said. The industry began to see “pretty material margin compression,” particularly in video, during fiscal Q2 of last year that extended through the fiscal year, due to overall price compression along with hhgregg’s emphasis on driving promotional non-branded TVs, May said. This fiscal year, pricing policies are expected to have a positive impact on gross margins, he said, and “we will strike a different balance between promotional television and driving profitable traffic,” he said.

While ASPs are starting to stabilize, there’s a drop in demand for smaller screen sizes, May said. Over the second half, growth will occur in 60-inch-and-larger sets, due to the football and holiday seasons, he said. “The mix does change,” he said, due to the seasonality of the TV business. Competitors aren’t doing anything “dramatically different,” he said. Stronger gross margins are “encouraging,” he said, but demand has been weak year-to-date, down from high single digits to low double digits month to month.

On manufacturers that haven’t implemented UPP, May said, “the entire industry is focused on” how to stabilize the 43-million-unit TV business and how to “be more healthy as a whole.” Vendors that haven’t shifted to UPP have, in some cases, shifted to further-reaching MAP programs that encompass both brick-and-mortar and online policies, he said. “Different manufacturers are getting there through different routes,” he said, and “we applaud those."

The company will continue to look for product categories that require home delivery and installation to “exploit those businesses” that it currently has in place, and will look at new product categories so the company is “less reliant on the volatility of electronics,” May told Tuesday’s annual shareholder meeting. Electronics will “continue to be important to us,” he said, while the company looks “to balance out and create a more stable environment.” Hhgregg will begin testing in 31 stores later this month furniture related to the big-screen TV experience including recliners, sofas, end tables and an expanded line of TV stands, along with fitness equipment including treadmills, elliptical machines and recumbent bicycles, he said.

Fitness equipment is “complicated and customers typically need assistance” shopping the category, May said. Hhgregg will leverage current sales associates and delivery and installation teams to manage capital expenditures. Hhgregg has been adjusting its product assortment since the beginning of the year, May said, and testing furniture and fitness “without making additional reductions” in its core business by reallocating floor space and operating more efficiently, he said. The 31-store test of furniture and fitness will be carried out in new and existing markets to see how well they're received in the market as a whole and as an extension of product offerings in existing stores, he said. The two categories combined are expected to take up less than 4,000-square-feet of floor space, he said. Existing sales staff will be tapped to sell the categories, with the “lion’s share” of training expenses picked up by manufacturers, he said.

This quarter hhgregg will start a “buy-online-ship-from-store” strategy, allowing the company to expand its online assortment and improve inventory productivity, May said. On its continued plans to become a national retailer, hhgregg has slowed expansion plans and will grow 10 percent in store locations this year, versus 25 percent in previous years, May said. Next year, store additions will be “refined” to adding stores in existing markets or distribution networks in an effort to leverage costs, he said.