An appliance and electronic retailer hhgregg Inc. (HGG - Analyst Report) posted second quarter 2012 earnings of 11 cents per share, exceeding the Zacks Consensus Estimate of 9 cents by 22%. However, the quarter’s earnings lagged the prior-year quarter earnings of 16 cents by 31%.
Revenue and comparable store sales decline and higher selling, general and administrative (SG&A) expense ratio partially offset benefit from improved gross margins which led to the year over year decline in earnings.
Quarter in Detail
hhgregg’s net sales dropped 5% year over year to $587.6 million in the reported quarter due to a decline in comparable store sales. Sales also fell shy of the Zacks Consensus Estimate of $640 million. However, the company opened 19 new stores in the last 12 months.
Comparable store sales witnessed an 8.8% decline in the quarter compared to the previous- year period due to the poor performance of video and other categories. The appliance and computing and mobile phones categories delivered improved results.
Gross margin expanded 107 basis points (bps) to 29.6% in the quarter, resulting from improved margin rates in the video and appliance category offset by a decline in computing and mobile phone and other categories.
Selling, general and administrative expenses (SG&A), as a percentage of net sales, increased 80 bps in the quarter to 21.4%, due to higher employee wage expenses. Net advertising expense as a percentage of net sales also climbed 50 bps to 5.4% in the reported quarter, due to the deleveraging effect of the net sales decline.
The company reports its business under three product categories:
In the Video category, the company offers premium video products, branded appliances, audio products and accessories in its stores. Net sales in the Video category climbed 36% year over year while comparable store sales in the segment went down 20.5% due to decline in unit demand partially offset by increase in average selling prices during the quarter.
The Appliances category offers a broad selection of major appliances, including latest range of refrigerators, cooking ranges, dishwashers, freezers, washers and dryers, sold under a variety of leading brand names. The Appliance category witnessed sales growth of 46% and same store sales growth of 1.1%, driven by improved average selling prices.
In the Computing and mobile phones category, the company offers a broad selection of computer and mobile phone products, including notebook computers, tablets and mobile phones. Computing and mobile phones reported sales growth of 9% with same store sales growth of 11.8%. The quarter witnessed increased demand for tablet computers and mobile phones, with less demand for notebook and netbook computers.
Apart from the mentioned products, the company also sells Other products like audio systems, furniture, mattresses and other select popular consumer electronics and accessories. These products reported sales growth of 9%, while same store sales declined 17.0% due to low comparable sales of cameras, camcorders and small electronics, partially offset by growth in the mattress category.
Other Financial Details
hhgregg repurchased 1.2 million shares during the reported quarter for a total cost of $8.3 million. The share buyback was part of the $50 million share repurchase program that commenced in May, 2012. As of September 30, 2012, the company had $30.5 million worth of shares outstanding under the current share repurchase program.
Management reiterated its fiscal 2013 outlook, with earnings in the range of 90 cents to $1.05 per share. Net sales for fiscal 2013 are expected to increase in the 3%–6% range, while comparable store sales are expected to be in the range of negative 6% to negative 4%. hhgregg now expects to open 20 new stores in fiscal 2013 compared with the previous forecast of 20 to 22 new stores.
hhgregg, which competes with Best Buy Co. Inc. (BBY - Analyst Report), currently has a Zacks #5 Rank (short-term Strong Sell rating). We have a Neutral recommendation on the stock over the long term.