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On Feb 28, we downgraded hhgregg Inc. (HGG - Analyst Report) to Underperform due to a disappointing third quarter fiscal 2013 (ended December 31, 2012) and a consequent cut in fiscal 2013 outlook, particularly due to continued decline in the video category.

Why the Downgrade?

Appliance and electronics retailer, hhgregg has witnessed sharp downward estimate revisions after it announced weak preliminary results for the third quarter fiscal 2013 on Jan 14. hhgregg later delivered weak third quarter results on Jan 31 and also slashed its earnings, sales and comparable sales guidance for fiscal 2013 due to sluggish video category sales.

hhgregg’s third quarter earnings declined 13.3% from the prior-year quarter due to revenue and comparable-store sales decline, especially in the video category. Sales dropped 3.6% year over year due to a decline in comparable store sales. Sales also fell shy of the Zacks Consensus Estimate. The company also reported higher selling, general and administrative (SG&A) expense ratio, which resulted in the decline.

Following the release of third quarter results, the Zacks Consensus Estimate for fiscal 2013 has gone down 1.4% to 75 cents per share. The Zacks Consensus Estimate for fiscal 2014 has also declined 1.2% to 84 cents per share. With the Zacks Consensus Estimates going down, the company now has a Zacks Rank #5 (Strong Sell).

Cause for Concern

hhgregg’s video category is suffering from significant top-line pressure due to fundamental shifts and lower-than-expected margins across all screen sizes. In addition, declining industry demand for flat screen LCD televisions is severely impacting 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 total company gross margin rates.

Though hhgregg has slightly improved its margins in the third quarter fiscal 2013 and also been testing new merchandise categories to improve overall mix in the video category, we believe that the industry-wide headwind in video category has overshadowed the company’s efforts to improve the overall mix of business. Moreover, we continue to expect sluggish performance in the video category over the near term.

Other Stocks to Consider

Not all stocks are performing as poorly as hhgregg. Other retail and wholesale stocks that are presently doing favorable business include Green Mountain Coffee Roasters, Inc. (GMCR - Analyst Report), Safeway Inc. (SWY - Analyst Report), and Natural Grocers by Vitamin Cotta (NGVC - Snapshot Report). Green Mountain holds a Zacks Rank #1 (Strong Buy), while Safeway and Natural Grocers carry a Zacks Rank #2 (Buy).

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