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Appliance and electronics retailer hhgregg, Inc. (HGG - Analyst Report) reported lower-than-expected earnings and sales in third quarter fiscal 2014, as discussed by the company in its preliminary sales results released on Jan 6, 2014.

hhgregg reported adjusted earnings of 17 cents in the third quarter of fiscal 2014, which missed the Zacks Consensus Estimate of 29 cents per share by 41.4% due to weaker-than-expected sales. It also declined 67.3% from the prior-year quarter due to a decline in comparable store sales, lower gross margins and a 130 basis points increase in selling, general & administrative expense (SG&A) ratio.

Quarter in Detail

As reported in its preliminary results, hhgregg’s net sales declined 11.6% year over year to $707.1 million in the quarter due to a decline in comparable store sales. Comparable store sales were adversely affected by a weak retail sales environment owing to low consumer confidence. Sales lagged the Zacks Consensus Estimate of $716.0 million.

The sluggish revenues in the third quarter were mainly due to relatively weak sales in the holiday season. In order to compete with big-box retailers like Wal-Mart Stores Inc. (WMT - Analyst Report) and Best Buy Co. (BBY - Analyst Report), the company offered aggressive promotional offers on items like televisions and tablets, which dragged down holiday sales margins. hhgregg has now decided to curb its promotional spending and instead shift its focus toward a broader mix of home products, including appliances and home furnishings.

Comparable store sales decreased 11.2% in the quarter as a decline in the consumer electronics and computing and wireless categories was partially offset by growth in the appliances and home products categories. Comp sales declined 9.7% in the year-ago period and 6.2% in the second quarter of fiscal 2014.

Gross margin declined 50 basis points to 26.8% in the quarter due to a decline in gross profit margin rates across all categories, primarily attributable to increased promotional activity during the holiday season.

During the quarter, hhgregg repurchased 962,893 shares for $15.6 million under the company’s share repurchase program of $50 million. As of Dec 31, 2013, the company had approximately $10.1 million available for repurchase under the current share repurchase program.

Category Details

The company reports its business under the following product categories:

Appliances:Comparable store sales in this category grew 1.5% in the current quarter driven by an increase in units sold compared with 6.1% growth in the year-ago period.

Computing and Wireless Category:Same store sales in this category declined significantly by 24.5% in the quarter compared with a 7.2% decline in the sequentially preceding quarter. The decline was due to a decrease in demand for laptop computers and mobile phones and lower average selling price for tablets. Comp sales increased 15.1% in the year-ago quarter.

Home Products: The category showed improvement and reported same store sales growth of 36.1% in the quarter. However, growth was sluggish compared to the sequentially preceding quarter, which reported comp growth of 69.1%. However, comp sales growth improved from 23.4% in the year-ago period. The improvement was primarily the result of increased sales of furniture and fitness equipment products.

Consumer Electronics:Same store sales for this category declined 19.7% in the quarter, due to double digit comparable store sales decline in video products. However, it was better than a decline of 20.4% in the prior quarter and 24.1% in the year-ago quarter, owing to the company’s initiatives.

We note that hhgregg has been delivering disappointing results in the consumer electronic category since the past year due to lower-than-expected margins across all screen sizes. In addition, declining industry demand for flat screen televisions severely impacted overall store traffic and consumer electronic category sales.

The company is trying to improve its consumer electronics category through various initiatives. hhgregg has been growing its appliance business and focusing on initiatives to drive additional traffic and increase sales. The company is taking initiatives to restructure its sales mix, expand customer base and enhance its service offerings. However, the improvement in the consumer electronic category is expected to take time and thus we continue to expect a sluggish performance in fiscal 2014.

Reduced Fiscal 2014 Guidance

Following weak third quarter fiscal 2014 results, hhgregg expects fiscal 2014 earnings to be in the range of 30 cents to 40 cents, lower than the prior estimate of 75 cents to 90 cents. The guidance cut can be attributed to lower-than-expected comparable store sales. The Zacks Consensus Estimate for fiscal 2014 is higher than the company’s guidance at 59 cents per share. The Zacks Consensus Estimate was 22 cents for the fourth quarter.

For fiscal 2014, the company expects net sales to be negative 5.5% to negative 4.0%, lower than the prior guidance of negative 1.5% to flat. Comparable store sales is expected in the range of negative 7.0% to negative 5.5%, a decline from the previous expectation of negative 3.5% to negative 2.0%.

The company does not intend to open any new store in fiscal 2014, in contrast to its earlier expectation of opening one store in fiscal 2014. hhgregg holds a Zacks Rank #5 (Strong Sell).

Appliance retailer Conn’s Inc. (CONN - Snapshot Report) is a better-ranked stock in the same sector, sporting a Zacks Rank #1 (Strong Buy).

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