Higher SG&A Drags Hhgregg's Profit

Hhgregg Inc.’s(HGG - Analyst Report) third-quarter ended December 31, 2011, income from continuing operations came in at $22.5 million or 60 cents per share, in line with the Zacks Consensus Estimate.

Net income and earnings dipped 16.4% and 9.1%, respectively, from the year-ago quarter. However, net addition of 35 stores during the past 12 months, a comparable store sales increase of 3.9% and a decrease in SG&A as a percentage of net sales, which was partially offset by a disproportionate fall in gross profit margin as a percentage of net sales and an increase in net advertising expense as a percentage of net sales.

Quarter in Detail

Hhgregg’s net sales rose 26.9% to $829.5 million in the reported quarter. Same-store sales climbed on the back of growth in the appliance and the home office categories, partially offset by declines in the video and other categories. The appliance category was supported by the company’s initiatives to capture increased market share and outpace the marketplace in comparable store sales growth. Home office category boomed on the back of increased demand in notebook computers and the offering of tablets and mobile phones.

Gross margin, as a percentage of net sales, sunk 237 basis points to 27.2% in the quarter. The decline was caused by poor performance in the video category and increased promotional activity in the segment.

SG&A, as a percentage of net sales, plunged approximately 112 basis points in the quarter due to result of sales leverage on occupancy cost and wage expense due to the comparable store sales increase and strong performance from the new stores that opened last year.

Net advertising expense based on net sales climbed 125 basis points in the reported quarter.

Cash Flow, Balance Sheet

The company ended the year with cash and cash equivalents of $5,351 million, while net cash used by operating activities declined to $18.9 million compared with $43.4 million in the prior-year quarter. The decline was primarily attributable to higher working capital requirements. The company has no long-term debt.

Guidance
 
Concurrent to the earnings release, management provided an outlook for fiscal 2012. For fiscal 2012, the company expects net income per diluted share will be within a range of $1.05 to $1.15 for fiscal 2012. The Zacks Consensus Estimate for fiscal 2012 is $1.10, for fiscal 2013 it is $1.26. For the next quarter it is 37 cents.

Net sales for fiscal 2012 are expected to increase in the 22%-24% range, while comparable store sales are expected to be flat to positive 2%.

Hhgregg, Inc. operates as a specialty retailer of consumer electronics, home appliances, and related services and primarily competes with Best Buy Co. Inc. (BBY - Analyst Report). Hhgregg currently has a Zacks #5 Rank, which implies a short-term ‘Strong Sell’ rating on the stock.

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