hhgregg Downgraded to Strong Sell

Zacks Investment Research downgraded hhgregg Inc. ( HGG - Analyst Report ) to a Zacks Rank #5 (Strong Sell) on Jan 16. Expectations of a disappointing third quarter fiscal 2013 and a consequent cut in the fiscal 2013 outlook, particularly due to continued decline in video category, are the reasons for the downgrade.

Why the Downgrade?

Appliance and electronics retailer, hhgregg has witnessed sharp downward estimate revisions after it announced preliminary results for the third quarter fiscal 2013 (ended December 31, 2012), which is scheduled to release on Jan 31. hhgregg has also revised its guidance for fiscal 2013 ending March 31, 2013.

For the third quarter, the company expects net sales to decline approximately 3.6% year over year to $799.6 million, with a decline of approximately 9.7% in comparable store sales. The poor comparable sales performance is expected to come from both the video and other categories, which are expected to decline 24.6% and 23.7%, respectively.

This decline is expected to overshadow the positive comparable sales in the appliance category as well as the computing and mobile phones category, which are expected to increase approximately 6.1% and 16.2%, respectively.

Further, lower-than-expected sales performance in the video category is expected to impact third quarter earnings. Excluding one-time store impairment charge, hhgregg projects a decline of approximately 21.3% in third quarter fiscal 2013 adjusted earnings to 52 cents.

Guidance

Following the weak preliminary third quarter results, the Indianapolis-based retailer revised its guidance for fiscal 2013. hhgregg has reduced its earnings forecast for fiscal 2013 to a range of 70 to 80 cents per share compared with the previous guidance of 90 cents to $1.05 per share.

The company has also lowered its comparable store sales guidance and expects it in the range of negative 8.5% to negative 7.5%, compared with the prior guidance range of negative 6.0% to negative 4.0%. Net sales are now expected to increase in the range of flat to 1.0%, much lower than the previous growth range of 3.0% to 6.0%. In addition, the company expects capital spending in the range of $35.0 million to $40.0 million, also lower than the previous guidance of $50.0 million to $55.0 million.

hhgregg has been experiencing disappointing results in the video category since last few quarters due to fundamental shifts in the video category and lower-than-expected margins across all screen sizes. In addition, declining industry demand for flat screen televisions severely impacted overall store traffic and video category sales.

Moreover, promotional activities or product innovation within the video category has further declined the gross profit margin rate for the video category and the total company gross margin rates.

Though hhgregg has also been testing new merchandise categories to improve overall mix in the video category, we continue to expect sluggish performance in the video category.

All the estimates declined for the third quarter over the past 7 days and the Zacks Consensus Estimate decreased 11.9% to 52 cents per share. For 2013, all the estimates were revised downward over the same timeframe, sinking the Zacks Consensus Estimate by 19.4% to 75 cents per share. For 2014, most of the estimates declined, which dropped the Zacks Consensus Estimate 9.3% to 88 cents per share over the last 7 days.

Other Stocks to Consider

Not all stocks are performing as poorly as hhgregg. Other computer & electronics retail industry stocks with favorable Zacks Rank include Conn’s, Inc. ( CONN - Snapshot Report ) with a Zacks Rank #1 (Strong Buy) and Aaron’s Inc ( AAN - Snapshot Report ) and Radioshack Corp (RSH) with a Zacks Rank #2 (Buy).