Question: When is it bad news for a retailer to report 45% sales growth in the middle of a recession?
Answer: It's bad news when despite all the new revenue, the company's profit actually shrank. And unfortunately for hhgregg
- Sales were up 44.8% to $480.9 million.
- But comparable-store sales -- the kind most important to retail stock investors -- slipped 1.5%.
- Per-share profit dropped 23% to $0.10, missing consensus targets by $0.06.
- And free cash flow -- don't make me laugh. Over the past four quarters, the company was more than $35 million in the hole.
What went wrong?
In a word: You. You, the consumer, didn't buy enough big-ticket appliances at hhgregg last quarter. (Although you did spend 1.6% more on video products.) By the way, this contrasts sharply with the news out of Best Buy
I overstate, of course. Sears Holdings
But still, for all the folks who've been declaring hhgregg "the new Circuit City" and a potential duopolist that will divide the home appliances/electronics market with incumbent Best Buy, let's just say that particular investment thesis took a hit today. hhgregg is having serious difficulties selling home appliances, and the contest is only getting tougher -- making the store chain ever more dependent on audio/visual sales.
What else can go wrong?
And it gets worse. While not yet admitting defeat, hhgregg is quietly preparing its investors for further disappointment. Management left the top end of its profit forecast intact at $1.45 per share, but lowered the low end for this year's earnings to $1.30 per share from $1.35.
If that comes to pass, by the way, the retailer is selling for about 18 times this year's earnings -- not a bad price, given five-year projected annual growth of 20%. Not a good price if hhgregg can't grow its profit at all.
Fool contributor Rich Smith does not own shares of any company named above. 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 Fool has a disclosure policy.
Best Buy and Lowe's are Motley Fool Inside Value selections. Best Buy and hhgregg are Motley Fool Stock Advisor recommendations. Motley Fool Options has recommended buying calls on Best Buy. The Fool owns shares of Best Buy and Lowe's.