Is hhgregg, Inc. the Next Best Buy?

This article is part of our Rising Star Portfolios Series.

Specialty retail is a fickle beast. Knowing what is hot and what's not can make or break a company's position. And if the customer's not getting both a superior experience and the best deals in town, they'll bolt faster than you can say Circuit City -- just ask Circuit City.

Best Buy (NYSE: BBY  ) has certainly reaped some of the rewards of Circuit City's demise. However hhgregg, Inc.   (NYSE: HGG  ) has been around for 55 years, and is starting to make an impact in the market. But which one is the better investment? By taking a look at a few different ratios, we can get an idea as to which company may have better days ahead.

It's cyclical
The cash conversion cycle is one of the best measures of how a company is managing its working capital. It represents the number of days it takes a company to convert raw materials into goods or services, finished goods into sales, and sales into cash -- or more simply put, how long it takes to get cash spent on raw materials back via sales. With this in mind, the lower the number the better; here's how hhgregg and Best Buy convert:

Company

TTM

2010

2009

2008

2007

5 Yr. Avg.

hhgregg

38.0

25.9

27.9

23.9

24.4

28.0

Best Buy

22.5

16.2

11.5

9.1

7.7

13.4

Source: Capital IQ, a division of Standard & Poor's.

Not terribly surprising here given Best Buy's scale over competitors. But it will be interesting to see how hhgregg's conversion cycle trends over the coming years as it continues to grow.

Inside the margins
Operating margin, also known as the EBIT margin (earnings before interest and taxes), is an excellent indicator of operational efficiency. These are the earnings that take into account the company's operating expenses and this can tell us how much the company is spending to operate the business -- earning $1 million doesn't mean much if it costs $950,000 to do it. So how do these two compare? Here are the figures:

Company

TTM

2010

2009

2008

2007

5 Yr. Avg.

hhgregg

3.8%

4.5%

5.0%

5.4%

5.3%

4.8%

Best Buy

4.7%

4.6%

4.5%

5.4%

5.6%

5.0%

Source: Capital IQ, a division of Standard & Poor's.

Not much disparity here over the last five years. Where scale helps Best Buy stay efficient, hhgregg also focuses on efficiency and selling higher margin items in the process.

I love turnovers!
Inventory turnover is another valuable metric, particularly in retail. It can tell us how often a company's inventory is sold and replaced over a given period of time. Comparing inventory turnover ratios in the same industry can offer some insight as to which company may be performing better: the higher the number, the better the performance. Here's how they turn over inventory:

Company

TTM

2010

2009

2008

2007

5 Yr. Avg.

hhgregg

5.8

6.2

7

7

6.9

6.6

Best Buy

4

7.3

7.2

7

7.4

6.6

Source: Capital IQ, a division of Standard & Poor's.

Wow, dead-even over the last five years. Both companies are doing an effective job of keeping inventory moving. That compares to Wal-Mart's (NYSE: WMT  ) average of 8.4, which is about as efficient an operator as you're likely to find. So the performance of these guys is pretty good.

So what does all of this mean?
All things being equal, when we consider these three metrics in assessing both businesses, Best Buy has a slight edge over hhgregg in the cash conversion cycle. But these aren't the only metrics to consider when assessing a business. hhgregg is in a much different position than Best Buy: its $865 million market cap is minute compared to Best Buy at almost $14 billion, but I'm pretty sure we can expect some significant growth from hhgregg in the coming years.

Both hhgregg and Best Buy are quality businesses, and I'll continue to seek out other winning investments for my Motley portfolio keeping these very same ideas in mind. Wanna talk shop? Swing on by my discussion board, and you can also follow me on Twitter.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios) here.

Stock Advisor analyst Jason Moser owns no shares of any companies mentioned in this article. Best Buy and Wal-Mart are Motley Fool Inside Value recommendations. Best Buy and hhgregg are Motley Fool Stock Advisor picks. Wal-Mart is a Motley Fool Global Gains selection. Motley Fool Options has recommended buying calls on Best Buy. The Fool owns shares of Best Buy, and Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 05, 2011, at 5:38 PM, garytancredi wrote:

    I just recently came back to Gregg after leaving

    the company due to my wife's health issues.

    Anyway, I have worked for them since they came

    south to Atlanta back in '03. Since then, they have

    gone from just over 50 stores to about 175. As

    an electronics and appliance salesman, I do like

    the company for the most part, but the turnover

    amongst sales staff and management is very, very high. Do you see this as a potential drawback, even when they get to thier ultimate

    goal of 500-600 stores? There are alot of negative comments on line.

  • Report this Comment On January 27, 2011, at 10:09 PM, jason092201 wrote:

    In this article it states that HHGregg is a 55 year old company and asks "Is HHGregg the next Best Buy?"

    In my opinion HHGregg is not even the next Circuit City. Circuit City was a company that had been around since 1949 and what has happened to them? Part of CC's problems were their cheap real estate choices, what locations has HHGregg been going after at an alarming rate? Old CC stores. HH has been opening a lot of stores, but, same store sales are down almost double what BBY's are. HHGregg can't keep opening new stores forever. Turnover as well as many other things will hurt HHGregg in the long run as well as poor real estate choices. Biggest point I agree with in the article is HHGregg has approx. $1.7 billion a year in revenue to BBY's $53 billion. HHGregg has to grow just a bit to become one of the big dogs! HHGregg will fight it out with Sears, Lowes and Best Buy on one side and Wal Mart, Target and Best Buy on the other (Appliances / Home Theater) and I don't like those odds for HHGregg in the big scheme of things.

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