H.h. Gregg Exits Contract Mobile Phones, Shifts to Higher-Margin TVs

H.h. gregg lost $7.2 million in fiscal Q4, vs. a profit of $9.9 million in the year-ago quarter due to “the worst weather in 109 years” from January through early March and “continued volatility in the consumer electronics business,” said CEO Dennis May on an earnings call Tuesday. May said h.h. gregg’s regional footprint in the Midwest and Mid-Atlantic makes it more susceptible to regional weather conditions than most of its national competitors.

H.h. gregg lost 4-5 cents per share for the full fiscal year in the mobile phone segment and logged a $1.7 million inventory write-down for its planned exit from the contract-based mobile phone business, said Andy Giesler, senior vice president-finance. Giesler called the contract-based mobile phone segment a “different” business for h.h. gregg that was “complex” to manage. Mobile phones weren’t “strategic to our core initiatives,” he said, saying the retailer entered the mobile phone business with the hope of generating incremental store traffic that didn’t materialize. The business didn’t expand the customer base or generate “nearly the traffic it would need to for the amount of effort that was going into it."

Sales for fiscal Q4 fell 9.9 percent to $538.3 million from the year-ago quarter due to lower store traffic and lower comps in CE, computing and wireless and home products, Giesler said. The retailer had double-digit declines in units sold in video, due to its strategy to offer fewer entry-level products and focus on higher margin sets, Giesler said. In computing, comp store sales decreases resulted from lower demand for computers and mobile phones and lower average selling prices in computers, tablets and mobile phones, he said. Tablet demand grew by double digits, he said.

Gross profit as a percentage of sales fell at h.h. gregg to 28.3 percent for fiscal Q4 from 29.9 percent for the year-ago quarter, which May attributed to weather and to an earlier transition of TVs to 2014 models. The impact of the weather, which led to a 0.1 percent drop in comp store sales, also affected shipping and handling costs and gross margins due to pricing competition, Margin said. When bad weather affects retail, “Everybody is out there trying to make up lost sales,” May said. All segments of the h.h. gregg business took a hit, he said.

May said h.h. gregg has been very “muted” on CE products for the past several years, but is hoping for improving trends in TV based on larger screens and new technologies that should help generate consumer interest and reverse margin trends. While May gave a favorable outlook for the second half of 2014 due to company initiatives in e-commerce, furniture and appliance sales and credit offerings, he said the promotional environment of the holiday sales season “remains to be seen.”

May expects another unprofitable year for video in fiscal 2015, although he expects less price pressure due to an “improving technology cycle” and new product launches. H.h. gregg will continue to focus on premium, higher margin, models including larger screen sizes, OLED, curved TV and an “expansive selection of Ultra HD 4K products,” May said.

Despite a slowdown in PC demand, h.h. gregg will continue to show new technology in PCs and tablets and will introduce wearable technology to its mix, May said.

H.h. gregg plans to open two to four new stores in the current fiscal year but will remain within its existing distribution base, May said. The company is still eyeing a nationwide footprint and continues to review real estate opportunities with the long-term goal of being a national retailer, May said. The company plans to relocate three to five existing stores and six to eight of its Fine Lines stores to “better locations,” he said.

As h.h. gregg has downsized its prototype size from 30,000 square feet to 25,000 square feet, most of the product space reduction has come from the CE segment, May said. The TV assortment still counts more than 100 models, although screen sizes have grown with a focus on 60 inches and above, he said. Shares closed 0.8 percent higher Tuesday at $8.98.