hhgregg Profit Drops

Posted: Updated:

Indianapolis-based hhgregg Inc. (NYSE: HGG) is reporting a third quarter net income of $5 million, compared to $17.4 million for the same period a year earlier. Chief Executive Officer Dennis May says sales of consumer electronics as well as computing and wireless products did not meet expectations. January 30, 2014

News Release

INDIANAPOLIS, Ind. - hhgregg, Inc. ("hhgregg" or the "Company") today reported net income of $5.0 million, or $0.17 per diluted share, for the three month period ended December 31, 2013, compared with net income of $17.4 million, or $0.51 per diluted share, for the comparable prior year period. For the nine month period ended December 31, 2013, the Company reported net income of $7.5 million, or $0.24 per diluted share, compared with net income of $15.4 million, or $0.44 per diluted share for the comparable prior year period. Third fiscal quarter 2014 results include a $0.3 million ($0.2 million after-tax) charge related to impairment for one store. Net income, as adjusted for this item, for the three month period ended December 31, 2013 was $5.2 million, or $0.17 per diluted share, as adjusted. Net income, as adjusted for this item for the nine month period ended December 31, 2013 was $7.7 million, or $0.25 per diluted share, as adjusted. Third fiscal quarter 2013 results include a $0.5 million ($0.3 million after-tax) charge related to impairment for one store. Net income, as adjusted for this item, for the three month period ended December 31, 2012 was $17.7 million, or $0.52 per diluted share, as adjusted. Net income, as adjusted for this item for the nine month period ended December 31, 2012 was $15.8 million, or $0.45 per diluted share, as adjusted. The decrease in net income for the three months ended December 31, 2013 was largely due to a comparable store sales decrease of 11.2 percent and a decrease in gross margin. The decrease in net income for the nine month period was largely due to a comparable store sales decrease of 6.4 percent and a decrease in gross margin.

Dennis May, President and CEO, commented, "As previously reported, our sales of consumer electronics and computing and wireless products were significantly below our expectations during the quarter. The broad distribution of these categories across a variety of retail formats combined with the intensely promotional environment led to a challenging operating environment for hhgregg. While disappointed with the holiday industry trends, we took a balanced approach, choosing not to fully participate in the heavy promotional environment and proactively managing our inventory levels to match the product demand of our business.”

Mr. May continued, "The broadening distribution and heightened promotional nature of the consumer electronics category during the holiday period reinforces our strategic decision to continue transforming our business toward a broader assortment of home products, including appliances and home furnishings. We remain pleased with the strength of these products, with the third fiscal quarter representing our tenth consecutive quarter of comparable store sales increases in the appliance category. We plan to continue to invest in initiatives to drive profitable sales and customer traffic in these categories and management remains committed to transforming the Company's sales mix and broadening its reach to both new and existing customers."

Net sales for the three months ended December 31, 2013 decreased 11.6% to $707.1 million from $799.6 million in the comparable prior year period. The decrease in net sales for the three month period was primarily the result of a comparable store sales decrease of 11.2%. Net sales for the nine months ended December 31, 2013 decreased 4.1% to $1.8 billion from $1.9 billion in the comparable prior year period. The decrease in net sales for the nine month period was the result of a comparable store sales decrease of 6.4%.

The decrease in comparable store sales for the three months ended December 31, 2013 was driven primarily by a decrease in comparable store sales in the consumer electronics and computing and wireless categories, partially offset by an increase in the appliance and home products categories. The appliance category increase in comparable store sales was driven by an increase in units sold. The home products category increase in comparable store sales was a result of sales of furniture and fitness equipment. The consumer electronics category comparable store sales decline was driven primarily by a double digit comparable store sales decrease in video, largely resulting from our strategy of not fully participating in the increased promotional offerings that occurred across a variety of retail formats during the three months ended December 31, 2013. The computing and wireless category decrease in comparable store sales was driven by a decrease in demand for laptop computers and mobile phones and a lower average selling price for tablets.

Gross profit margin, expressed as gross profit as a percentage of net sales, decreased for the three months ended December 31, 2013 to 26.8% from 27.3% for the comparable prior year period. The decrease is due to a decline in gross profit margin rates across all categories primarily due to the promotional nature of this holiday season.

SG&A expense, as a percentage of net sales, increased 130 basis points for the three months ended December 31, 2013 compared to the prior year period. The increase in SG&A as a percentage of net sales was a result of increases in wage expense, occupancy costs, and product services as a percentage of net sales, primarily due to the deleveraging effect of the net sales decline.

Net advertising expense, as a percentage of net sales, increased 39 basis points during the three months ended December 31, 2013 compared to the prior year period. While the Company reduced its gross advertising spend from the prior year, the increase as a percentage of net sales was primarily due to the deleveraging effect of the net sales decline.

Depreciation expense, as a percentage of net sales, increased 22 basis points for the three months ended December 31, 2013 compared to the prior year period. The increase as a percentage of net sales was primarily due to the deleveraging effect of the net sales decline.

Our effective income tax rate for the three months ended December 31, 2013 decreased to 38.2% from 39.1% in the comparable prior year period. The decrease in our effective income tax rate was primarily the result of an increase in federal and state income tax credits recognized compared to the comparable prior year period.

Share Repurchase

During the third quarter ended December 31, 2013, the Company repurchased 962,893 shares of its common stock at a total cost of $15.6 million. The shares were repurchased under the Company’s $50 million share repurchase program that was authorized by the Company’s Board of Directors on May 16, 2013 and expires on May 22, 2014. As of December 31, 2013, the Company had available approximately $10.1 million authorized to repurchase shares of common stock under the current share repurchase program.

Guidance

The Company expects net income per diluted share to be within a range of $0.30 to $0.40 for fiscal 2014 a reduction from our previous range of $0.75 to $0.90 for fiscal 2014.

Included in the Company’s guidance are the following annual assumptions:

Fiscal 2014 comparable store sales of negative 7.0% to negative 5.5% from our previous assumption of negative 3.5% to negative 2.0%

Fiscal 2014 net sales change of negative 5.5% to negative 4.0% from our previous assumption of negative 1.5% to flat

New store openings of zero in fiscal 2014 from our previous assumption of one new store opening in fiscal 2014

Fiscal 2014 capital expenditures in the range of $26 million to $28 million from our previous range of $28 million to $32 million

The impa