Hhgregg Cites Stimulus Boost, Better TV ASPs in Q1 Earnings Report

Company executives pointed to increased consumer awareness of energy-saving features in appliances sparked by the government stimulus program last April as one of the driving forces of a 16.1 percent boost in same-store appliance sales. Video sales inched ahead on a comparable-store basis by 2.4 percent, the company said, due to increased interest in new technologies including LED, IP and 3D TV. For the quarter, net income was up 85 percent to $2.7 million on sales of $436 million, up 53 percent from last year, the company said.

Hhgregg continued its “aggressive path to becoming a national retailer of electronics and appliances,” the company said, with 26 store openings in 28 days for the quarter ended June 30. The company is on track to open 12 additional stores by the end of the second quarter, taking advantage of Myer-Emco’s departure from the Washington, D.C., market with a 10-store opening in the area. The company has announced plans to enter the Pittsburgh market in fiscal 2012 and is continuing to revise fiscal 2012 plans “with more details to come.” Company executives declined to identify additional markets for its announced 40-45-store expansion slated for fiscal 2011.

Stores in both the Pittsburgh and Washington markets “leverage existing distribution the company has already made,” said Jerry Throgmartin, executive chairman. Regarding which markets the company might enter, he said, “It’s a function of when we would enter a given market.” The best choice will determine the next market, he said, “so we're going to be methodical, focused and deliberate in our approach. All things are in play and we're looking at all options.” The company’s Q1 expansion included Harrisburg, Pa., in April, Baltimore in early May and Philadelphia at the end of May. Hhgregg is going to continue to take advantage of the real estate economy, Throgmartin said, saying the “macro economy” continues to present opportunities for the company. “It’s still a buyer’s market in the real estate world and there’s till tremendous field talent available to us.”

CEO Dennis May said the company posted year-over-year market share gains in video, while the small electronics and camcorder category experienced “significant pressure” during the quarter from competitive video features built into smartphones and digital cameras. That pressure will continue through the holiday season, May said, but is expected to be offset “by the strength of the computer category as we continue to enhance our assortment of computers and related products.” Although computers represent a relatively small portion of the business, he said, they remain important to overall business because of the attachment value they bring from peripherals and accessories.

Higher margin LED TVs, Internet TVs and 3D TVs are behind “some of the smallest year-over-year declines on ASPs we've seen since ASPs first began their decrease three years ago,” May said. The company’s positive outlook for the current TV cycle extends through the holidays sales season, May said. Over the rest of the calendar year, the company is confident of TV inventories, he said, saying shortages of small-screen TVs that existed earlier in the year have been addressed.

In response to an analyst’s question about how long TV ASPs can hold, May said “a lot of people forget that ASPs actually went up for about three years in a row when flat-panel TVs first came out. It’s not been a constant decline.” But he noted, when the flat-panel market flattened, there was a two-year drought before compelling technologies appeared to drive interest. “A real pipeline of innovation” could keep a healthier video cycle in place for two or three years, he said, because of the growth potential of all the technologies. He said 3D is getting all the attention but still only represents six or seven percent of the market. IPTV, representing 20 percent of sales, will play out over the next two or three years, he said, and LED TV represents 25 percent of the market currently. “We think there’s a real runway in front of those technologies,” he said. And unlike the barren period after the flat-panel cycle, future technologies are on the drawing board in time for a new cycle, May said. “As we get a snapshot of what’s coming behind them, it’s going to be even more compelling,” he said, citing “3D without glasses” and OLED, which he pegged “a game changer."

May said the company has raised its confidence level about revenue opportunities that 3D TV presents over the next couple of years. “We grow more confident as we see the acceptance of the technology, and it’s going to be a broader product category than people originally thought.” Early on, industry watchers estimated only heavy movie watchers and gamers would be interested in 3D, but he said it’s now clear that interest will be much broader. “We become more and more confident that 3D is going to be a mainstream product that will help draw attention to the TV business and continue to help with ASPs of TVs,” he said. In addition to higher unit sales and higher traffic, 3D has a strong attachment rate for add-on products that are required to complete the experience. “When you buy a 3D TV it’s also about furniture, accessories, cables and a Blu-ray player, which are selling very very well,” he said. “When you have six buddies over to your house to watch a football game in 3D, you need six pairs of glasses."

On the promotion side, the company expects a typical advertising push going into the fall and will take advantage of it, May said. It’s “margin-neutral” for hhgregg when a manufacturer wants to drive premium technologies, “which helps preserve ASPs,” May said. “Nothing gets us more excited than manufacturers wanting to drive more LED, IP, and 3D TV sales,” he said. At the same time, the company wants premium technologies to drop to price levels more customers can afford and “improve our product mix.” He said LED TVs are still at a price point that’s challenging for some consumers, and the company would like to see the latest video technologies move down “into more power-alley price points” in the $1,499-$1,799 range. “That’s the kind of price point where we can differentiate and do it at larger volume,” he said.

Hhgregg’s Verizon store-within-a-store rollout, currently in 15 percent of locations, is expected to be fully complete by mid-November. Although results aren’t reflected on the financial sheet, May said, “we're confident that our partnership with the Verizon brand will enhance our superior customer purchase experience and generate incremental traffic in stores.” The agreement represents an exclusive wireless deal with Verizon, he said, saying the company didn’t change its product mix or get out of other wireless business to accommodate Verizon. “We will be a Verizon-only cellphone dealer,” he said.