TV Makers in ‘Conservative Approach’ to Holiday Inventory, h.h. gregg Says

"Continued headwinds” are expected in the TV category through the holiday season, which has led manufacturers to take a “pretty conservative approach” to supply, said h.h. gregg CEO Dennis May on an earnings call Thursday. With TV makers shipping TVs to meet projected lower demand, if the season turned out to be “unexpectedly positive,” then inventory would be constrained because the industry isn’t “building to anything like that,” May said.

H.h. gregg is continuing efforts to focus on higher margin categories including appliances, furniture and home products, May said, saying the most recent quarter was the ninth consecutive reporting period with appliance growth. The company “reset” its sales floor to allocate more space to the fledgling home products category and to highlight premium high-end TV models for holiday “and beyond,” he said.

A 20 percent sales decline in the CE category for fiscal Q2 was primarily the result of lower TV sales due to the narrowing of entry-level models, the company said. May said h.h. gregg hopes to “close the gap” during the holiday season between its CE numbers and the mid- to high single-digit growth the industry is seeing at large. The company has an overall goal to boost sales of large ticket big-box items, with large-screen TV being a key part of the plan, he said.

In addition to a slow September hurt by the government shutdown and its impact on consumer confidence, the “largest obstacle” for h.h. gregg for the month was the CE category, May said. Results that were expected to be negative fell “below expectations,” he said. The retailer lost video market share while it adjusted the mix of promotional and premium products including 4K, 240 Hz, and 60-inch and larger “brand” models, May said. The mid-year revamping of h.h. gregg’s TV strategy involved changes to advertising, sales training and credit offerings, and the company will continue to balance the use of promotional screen sizes and entry-level price points to drive traffic with the emphasis on higher-margin product, he said.

On when 4K TV will become significant to h.h. gregg’s sales trends, May said there will be “pricing movement even this holiday season” that will move into what he called the “power-alley price point.” When TVs fall below $2,999, there’s a jump in sales and the next big step in “velocity” is at $1,999, he said. H.h. gregg is “cautiously optimistic” about Ultra HD because the industry has been “so challenging,” he said. On the positive side, he cited the amount of investment manufacturers are making in 4K and said a couple of h.h. gregg manufacturers will have “north of 20 SKUs next year.” In 2014, 4K will be “material to the business” and bring additional attention to premium TV. H.h. gregg will be “assorted” in product offerings and “focused on maximizing” Ultra HD, he said.

On the retailer’s new financial offering that’s designed to create credit opportunities for customers denied financing in the past, May said business will be incremental. The additional financing option will help convert to a buyer a customer who’s “already in the store” but might have been declined for financing in the past, he said. Additional financing options will also improve average selling prices and deliver higher gross margins, he said.

H.h. gregg continues to “right-size” SKU counts in other declining CE categories including GPS devices, cameras and camcorders, May said. Double-digit comparable store declines in laptop sales were the result of double-digit increases in tablet sales, May said. As a result, the retailer has trimmed its laptop menu and boosted the assortment of tablet offerings, he said. While year-over-year tablet growth was strong, sequential sales slowed in the quarter as consumers waited for new product announcements from “key manufacturers,” he said, saying the company believes the slowdown was temporary, and it’s prepping for a “robust” season for tablets.

In smartphones, h.h. gregg has shaved the number of models it offers to focus on products with the most consumer demand such as the iPhone and Samsung Galaxy, May said. While the strategy negatively impacted comp store sales, it helped overall profitability in the category, he said.

Net sales in fiscal Q2 fell 3.3 percent over the year-ago quarter to $568.3 million, h.h. gregg said. Net income slipped from $3.8 million to $3.7 million, it said, while comparable store sales dropped 6.2 percent. Shares closed 13 percent lower Thursday at $15.51.