hhgregg Continues Repositioning, Reports Loss

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Indianapolis-based hhgregg Inc. (NYSE: HGG) is reporting a first quarter loss of nearly $10.3 million, compared to a $1.3 million loss during the same period the previous year. Chief Executive Officer Dennis May says he is not satisfied with the results and will continue efforts to reposition the retailer around a "broader assortment of home products." July 31, 2014

News Release

INDIANAPOLIS, Ind. - hhgregg, Inc. ("hhgregg" or the "Company") today reported net loss of $10.3 million, or $0.36 per diluted share, for the three month period ended June 30, 2014, compared with net loss of $1.3 million, or $0.04 per diluted share, for the comparable prior year period. The increase in net loss for the three months ended June 30, 2014 was largely due to a comparable store sales decrease of 10.2 percent.

Dennis May, President and CEO commented, "While we expected the first quarter to be challenging given the difficult comparison to the prior year, we are not satisfied with our recent results. We recognize the importance of balancing near-term results with long-term investments to transform the business. Therefore we will continue to invest in our strategic initiatives to reposition the business around a broader assortment of home products. While we are making progress in many areas, we have opportunities for improvement in others. We have adjusted our advertising strategy to be more balanced, focusing more on traffic driving promotions versus the branding focused advertising that we did in the first quarter. We are also making adjustments to the video and appliance categories and refocusing our broader efforts on driving traffic to our stores and website."

Mr. May continued, "We continue to make significant progress as it relates to the customer experiences inside our stores and on our website. We are proud that we have recently been recognized with distinction as the J.D. Powers' "Highest in Customer Satisfaction among the Largest Appliance Retailers". Additionally, we continue to drive strong growth from our e-commerce site. We need to make further strides in driving customer visits to our stores, so that more consumers are aware of the hhgregg experience.”

Net sales for the three months ended June 30, 2014 decreased 10.0% to $472.3 million from $524.9 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 10.2%.

The decrease in comparable store sales within the appliance category for the three months ended June 30, 2014 was driven by a decrease in units sold and a slight decrease in average selling price. The decrease in comparable stores sales for the consumer electronics category for the three month period was due primarily to a double digit decline in units sold within the video category offset slightly by an increase in average selling price, which was driven by an increase in sales of larger screen and more premium featured televisions. The decrease in comparable store sales for the computers and tablets category for the three month period was driven by the exit from the contract-based mobile phone business, a decrease in demand for computers and tablets and a decrease in the average selling prices for computers, partially offset by a higher average selling price for tablets. The decrease in comparable store sales within the home products category was driven by a decrease in the demand for ready to assemble television stands and a decrease in sales of mattresses, offset partially by a double digit increase in sales of sofas, recliners and dinette sets.

Gross profit margin, expressed as gross profit as a percentage of net sales, increased for the three months ended June 30, 2014 to 29.7% from 29.5% for the comparable prior year period. The increase was due to a favorable product sales mix shift to product categories with higher gross profit margin rates, partially offset by decreases in gross profit margin rates in all categories except the consumer electronics category.

SG&A expense, as a percentage of net sales, increased 205 basis points for the three months ended June 30, 2014 compared to the prior year period. The increase in SG&A as a percentage of net sales was largely a result of a 66 basis point increase in occupancy costs due to the deleveraging effect of the net sales decline, a 65 basis point increase in wage and benefit expense due to increased medical expense coupled with the deleveraging effect of the net sales decline and a 23 basis point increase in home delivery expense primarily due to a higher sales mix of deliverable product.

Net advertising expense, as a percentage of net sales, increased 83 basis points during the three months ended June 30, 2014 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 and an increase in advertising spend for the new branding campaign.

Depreciation expense, as a percentage of net sales, increased 12 basis points for the three months ended June 30, 2014 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 June 30, 2014 decreased to 29.5% from 39.3% in the comparable prior year period. The decrease in our effective income tax rate is primarily the result of a non-cash charge to income tax expense related to stock options that expired during the current quarter. Due to the pretax loss for the quarter, this charge to income tax expense reduced our overall income tax benefit recorded for the quarter and as a result, decreased our effective income tax rate.

Share Repurchase

During the first quarter ended June 30, 2014, the Company repurchased 102,705 shares of its common stock at a total cost of $1.0 million and at an average price of $9.50 per share. The shares were repurchased under the Company’s $40 million share repurchase program that was authorized by the Company’s Board of Directors on May 20, 2014 and expires on May 20, 2015. As of June 30, 2014, the Company had available approximately $39.0 million authorized to repurchase shares of common stock under the current share repurchase program.

2015 Outlook

Given our ongoing strategic initiatives to reposition the business around a broader assortment of home products as well as the continued volatility in the consumer electronics industry, we are not providing specific guidance for fiscal 2015. However, to help investors better understand the current trends and outlook for the business for fiscal 2015, we are expecting annual comparable store sales to be negative high single digits to negative mid single digits compared to our previous expectation of negative low single digits to flat. We still expect the second half of the fiscal year to outperform the first half of the fiscal year. Given the results of our operations in the first quarter and the volatility in consumer demand for our product segments we no longer believe that our diluted earnings per share in fiscal 2015 will be above the prior year as we previously stated. However, we do expect to generate positive EBITDA for the fiscal year.

Additionally, we expect to open 2 new stores during fiscal 2015 compared to our previous expectation of opening between 2 and 4 new stores during fiscal 2015. Capital expenditures are still expected to be in the range of $20 million to $23 million for fiscal 2015.

Dennis May, President and CEO commented, "Management is executing its plans to transform our business and we are confident in our ability to establish hhgregg as the home products retailer of choice for consumers. We believe that executing on our initiatives of redefining our sales mix, differentiating our customer experience, enhancing our e-commerce capabilities and launching new IT based custome