hhgregg Swings to Loss

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Indianapolis-based hhgregg Inc. (NYSE:HGG) is reporting a fiscal third quarter net loss of $86.9 million, compared to net income of $5 million in the same period a year earlier. The company recently hired several new executives and consultants who Chief Executive Officer Dennis May says will focus on marketing, retail and logistics efforts aimed at "transforming our business model." January 29, 2015

News Release

INDIANAPOLIS, Ind. - hhgregg, Inc. ("hhgregg" or the "Company") today reported net loss of $86.9 million, or $3.10 per diluted share, for the three month period ended December 31, 2014, compared with net income of $5.0 million, or $0.17 per diluted share, for the comparable prior year period. For the nine month period ended December 31, 2014, the Company reported net loss of $107.5 million, or $3.80 per diluted share, compared with net income of $7.5 million, or $0.24 per diluted share for the comparable prior year period. Third fiscal quarter 2015 results include a $43.0 million pre-tax, non-cash charge related to impairment of property, plant and equipment and a $56.9 million non-cash charge related to establishing a valuation allowance for deferred tax assets, which was comprised of $40.9 million of tax expense for previously recognized deferred tax assets and $16.0 million of tax benefits not recognized related to losses incurred during the current quarter. Net loss, as adjusted to exclude these items, for the three month period ended December 31, 2014 was $3.8 million, or $0.14 per diluted share. Net loss, as adjusted to exclude these items for the nine month period ended December 31, 2014 was $24.5 million, or $0.86 per diluted share.

Third fiscal quarter 2014 results include a $0.3 million ($0.2 million after-tax) charge related to impairment of property, plant and equipment for one store. Net income, as adjusted to exclude this item, for the three month period ended December 31, 2013 was $5.2 million or $0.17 per diluted share. Net income, as adjusted to exclude this item for the nine month period ended December 31, 2013 was $7.7 million, or $0.25 per diluted share. The decrease in net income, as adjusted for the three months ended December 31, 2014 was largely due to a comparable store sales decrease of 6.3% slightly offset by an increase in gross margin. The decrease in net income, as adjusted for the nine months ended December 31, 2014 was largely due to a comparable store sales decrease of 9.1%.

Dennis May, President and CEO commented, "The Company continues to execute on its strategic initiatives focused on transforming our business model. The Company has made progress improving on our previous quarters' sales trends, in particular in the consumer electronics and appliance businesses. Despite these improvements in our core categories, we are committed to increasing the rate of progress in improving the overall sales and profit trends in the business. To assist in our efforts, the company has recently hired several new, experienced, senior management team members to drive our strategic initiatives. Additionally, management has engaged experienced retail consultants to assist in rationalizing our marketing spend, optimizing our logistics network and accelerating our overall transformation efforts. We remain confident in our ability to make meaningful improvements in the coming fiscal year."

Net sales for the three months ended December 31, 2014 decreased 5.9% to $665.6 million from $707.1 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 6.3%. Net sales for the nine months ended December 31, 2014 decreased 8.7% to $1.6 billion from $1.8 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 9.1%. The Company experienced a 60% increase in comparable sales on its e-commerce site for the three and nine months ended December 31, 2014.

The decrease in comparable store sales for the three months ended December 31, 2014 was driven primarily by decreases in consumer electronics, computers and tablets and home products. The decrease in comparable store sales for the three months ended December 31, 2014 was 6.3%. Excluding mobile phones and fitness equipment, due to the exit from these product lines, the decrease in comparable store sales for the three months ended December 31, 2014 was 5.1%. The comparable store sales of the appliance category remained relatively flat with no significant change in average selling price or unit demand. The consumer electronics category comparable store sales decline was primarily due 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 of 35% in comparable store sales for the computers and tablets category for the three month period was driven by a decrease in unit demand for computers and tablets as well as a decrease in the average selling prices for computers and tablets and the exit from the contract-based mobile phone business. Excluding mobile phones, the decrease in comparable sales for the three months ended December 31, 2014 for the computers and tablets category was 29.6%. The decrease of 9.2% in comparable store sales for the home products category was largely a result of the exit from fitness equipment and a double digit unit demand decline within the TV stands, recliner and sofa product lines, offset slightly by increased average selling prices among nearly all product lines within this category and increased unit demand within mattresses. Excluding fitness equipment, the decrease in comparable store sales for the three months ended December 31, 2014 for the home products category was 2.7%.

Gross profit margin, expressed as gross profit as a percentage of net sales, increased for the three months ended December 31, 2014 to 27.0% from 26.8% for the comparable prior year period. The increase was due to a favorable sales mix shift to product categories with higher gross profit margin rates and an increase in gross profit margin for the video category due to an increase in sales of larger screen and more premium featured televisions.

SG&A expense, as a percentage of net sales, increased 120 basis points for the three months ended December 31, 2014 compared to the prior year period. The increase in SG&A as a percentage of net sales was a result of a 26 basis points increase in product services from a higher percentage of home delivery, a 23 basis points increase in occupancy costs due to the deleveraging effect of the net sales decline, a 13 basis points increase in consulting expenses to assist in rationalizing our marketing spend, optimizing our logistics network and accelerating our transformation efforts, and increases in other SG&A expenses primarily due to the deleveraging effect of the net sales decline. During the quarter, the Company incurred $1.2 million in fees associated with consulting expenses to assist in the transformation efforts. The impact of these expenses was $0.04 of net loss per diluted share.

Net advertising expense, as a percentage of net sales, increased 62 basis points during the three months ended December 31, 2014 compared to the prior year period. The increase from the prior year was due to increased gross advertising spend coupled with the deleveraging effect of the net sales decline.

Depreciation expense, as a percentage of net sales, remained relatively flat for the three months ended December 31, 2014 compared to the prior year period.

As of December 31, 2014, the Company has recognized income tax expense on a pretax loss resulting from the full valuation allowance that was recorded to reduce the net deferred tax assets of the company to zero