Hhgregg (HGG) Q4 Loss Narrower Than Expected; Sales Lag

Appliance and electronics retailer, hhgregg, Inc. (NYSE:HGG) reported narrower-than-expected loss in the fourth quarter of fiscal 2016. Sales however lagged the Zacks Consensus Estimate. Shares of hhgregg were up 4.27% after the close on May 19.

hhgregg reported a loss of 28 cents per share in the fourth quarter of fiscal 2016, narrower than the Zacks Consensus Estimate of a loss of 34 cents and the prior year quarter loss of 63 cents. While comparable store (comp) sales declined in the quarter, it was narrower than the preceding quarter decline. Cost savings initiatives also moderated losses in the quarter.

Quarter in Detail

hhgregg reported net sales of $439.0 million. Sales missed the Zacks Consensus Estimate of $464 million by 5.4% and decreased 9.6% year over year due to a decline of 9.3% in comparable store sales. We note that the comparable store sales decline was however narrower than a decline of 10.8% in the preceding quarter and a decline of 10% in the prior year quarter. This was due to improved momentum, especially in the appliance category, as the company witnessed improvement in overall February and March comps.

Except the Home Products category, comp sales declined year-over-year in all categories namely Consumer Electronics, Computers and Tablets and Appliances. However, except Consumer Electronics, all the other categories showed a sequential improvement in the quarter.

Adjusted gross margin expanded 10 basis points (bps) to 28.7% in the quarter owing to a favorable product sales mix with higher gross margin rates offsetting the decrease in gross profit margin rates in all categories except home products. The decrease in gross margin rates was primarily due to free delivery in appliances and a continued promotional environment.

hhgregg generated $8.1 million in net advertising savings in the fourth quarter, which resulted in total year net advertising savings of $23.8 million compared to the prior year figure.

However, selling, general and administrative (SG&A) expense ratio decreased 50 bps to 24.2% due to decreases in wages and employee benefits as a result of efficiencies in the company's labor structure; and decrease in bank transaction fees. Loss of consulting fees also resulted in the decline. This was partially offset by fees associated with increases in delivery services and higher occupancy cost.

Adjusted EBITDA increased to $0.16 million in the fourth quarter as against a loss of $7.8 million in the prior year fourth quarter. We note that the improved EBITDA was due to the company’s expense reduction initiatives.

In the fourth quarter, the company realized $21.1 million of cost savings. With this, the company realized $66.9 million of cost savings in fiscal 2016, thus exceeding the goal of saving $50 million in fiscal 2016.

Category Details

The company reports its business under the following product categories:

Appliances: Comparable store sales in this category decreased 0.4% in the quarter due to a decline in sales volume, offset by an increase in average selling price. In the year-ago quarter, comp sales had decreased 5.0%.

Computers and Tablets Category: Same store sales in this category declined 32.2% in the quarter, narrower than a decline of 37.6% in the last year quarter. The decline was due to a decrease in unit demand as well as lower average selling prices for computers and tablets.

Home Products: Same store sales in this category increased 2.8% in the quarter as against a decline of 12.5% in the prior year quarter. The improved performance was driven by higher average selling prices offset by a decline in unit demand in the category.

Consumer Electronics: Same store sales of this category declined significantly by 19.6% in the quarter. The decline was due to a decrease in units sold within the video category as well as a decline in average selling price.

Fiscal 2016 Results

hhgregg reported a loss of 96 cents per share in fiscal 2016, narrower than the Zacks Consensus Estimate of a loss of $1.19 per share and the prior year quarter loss of $1.38 per share.

Net sales declined 8% to $1.959 billion. Sales lagged the Zacks Consensus Estimate of $1.982 billion by 1.1%. Comps declined 7.7% year over year.

Outlook

We are encouraged about hhgregg’s strategic initiatives, which focus on stabilizing the business by reversing the negative sales trends, optimizing marketing spending and improving the cost structure. These initiatives have led to positive EBITDA results in the quarter and exceed the cost saving goal. These cost savings helped to maintain strong liquidity. The company expects to achieve further cost reductions in fiscal 2017.

The company also expects to drive growth in the appliance and home products categories and boost omni-channel sales in fiscal 2017. The company expects to continue to generate positive comps store sales performance in appliances throughout fiscal 2017. The company is also on track to add up to 15 Fine Lines appliance departments in its stores by the end of fiscal 2017, more than doubling the number as of the end of Mar 2016.

hhgregg has a Zacks Rank #3 (Hold). Better-ranked retailers in the broader market include The Kroger Co. (NYSE:KR) , Best Buy Co., Inc. (NYSE:BBY) and Abercrombie & Fitch Co. (NYSE:ANF) . All of them carry a Zacks Rank #2 (Buy).