Appliance and electronics retailer, hhgregg, Inc. reported a wider-than-expected loss in the second quarter of fiscal 2017. Sales also lagged the Zacks Consensus Estimate. Shares of hhgregg were down 21.26% after market close on Nov 8.
hhgregg reported adjusted loss of 51 cents per share in the second quarter of fiscal 2017, wider than both the Zacks Consensus Estimate of a loss of 39 cents and the prior-year quarter loss of 35 cents.
This was due to a drop in sales, lower comparable store sales (comps) and decline in consumer electronics gross margin.
Quarter in Detail
hhgregg reported net sales of $455.0 million, which lagged the Zacks Consensus Estimate of $461.7 million. Also, the figure was down 6.6% year over year due to a decline of 6.4% in comparable store sales. We note that the comparable store sales decline was wider than a 3.4% drop in the preceding quarter and a 3.5% fall in the prior-year quarter owing to sustained growth in appliances and furniture, offset by continued decreases in consumer electronics.
Nevertheless, online sales increased 35.5% from the prior-year quarter. The company remains on track to exceed $150 million in online sales this fiscal year.
Despite a competitive environment, gross margin expanded 20 basis points (bps) to 28.7% in the reported quarter owing to favorable sales mix shift to product categories with higher gross profit margin rates, in addition to higher gross margin rates in consumer electronics offset by lower gross margin rates in appliances and home products.
However, the selling, general and administrative (SG&A) expense ratio expanded 260 bps to 25.9% due to increases in wages as a result of one-time labor costs, higher costs associated with the logistics optimization project, increases in delivery services and higher occupancy cost.
Adjusted EBITDA loss was $6.15 million in the second quarter, wider than $0.7 million in the prior-year quarter. This was due to the declines in average selling price and market share in non-4K TVs.
During the quarter, the company closed six stores, including five stores in Wisconsin. It does not have immediate plans to close any additional stores this fiscal year.
As of Sep 30, the company continued to have no outstanding debt. As of that date, it had total net availability of $143.2 million.
The company reports its business under the following product categories:
Appliances: Comparable store sales in this category rose 5.7% in the quarter due to an increase in sales volume, offset by a decrease in average selling price. In the year-ago quarter, comps had increased 0.8%.
During the quarter, the company gained 20 bps of market share across the entire appliance category. It also remains on track to grow the Fine Lines format in existing stores, as these had helped boost sales in the past.
During the quarter, hhgregg opened three additional Fine Lines, which means it has opened a total of six Fine Line stores per the plan of opening 10−15 for fiscal 2017. In fiscal 2018, the company expects to open an additional 15−20 Fine Lines locations.
Home Products: Same store sales in this category decreased 0.7% in the quarter due to a decline in unit sales in the category, offset by higher average selling prices. While furniture realized positive comps of 9.5%, bedding declined in the quarter. In the year-ago quarter, comps had increased 4.4%.
The company also believes the store reset initiative has infused positive growth in the category. It is now tracking the resetting of 140 stores by the holiday period this year, and expects to complete the remaining 220 stores by Apr 1, 2017.
Consumer Electronics: Same store sales at this category plunged 25.1% in the quarter. The decline was due to a decrease in units sold within the video category, which makes up 75% of this category, offset by an increase in average selling price. The decline was wider than a 10.2% drop in the prior-year quarter.
The company continues to focus on large screen 4K TV growth, in line with the industry trends. However, it lost share in non-4K units during the quarter.
Management is working on several initiatives for the consumer electronics category to revive this difficult segment. However, the segment will continue to witness a downtrend as a percentage of total sales.
hhgregg has a Zacks Rank #3 (Hold).
Some better-ranked stocks in the retail sector are Francesca's Holdings Corporation (FRAN - Free Report) , Steven Madden, Ltd. (SHOO - Free Report) and Boot Barn Holdings, Inc. (BOOT - Free Report) . All these stocks hold a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
While Francesca's Holdings carries an expected long-term earnings growth of 13.75%, Steven Madden and Boot Barn have an expected earnings growth of 13.5% and 14.5%, respectively, for the next three to five years.
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