As a gadget geek who loves electronics stores, I want to like hhgregg (NYSE: HGG). But the longer I look at the company, the less hope I have for its prospects.
It sounds nice on paper...
hhgregg offers shoppers a wide selection of the newest, and often most expensive, electronics and appliances. The store does offer entry-level products, but a well-trained sales staff stands at the ready to steer customers toward the shinier, more profitable goods. By focusing on selling big-ticket items and ignoring lower-margin products like DVDs, hhgregg can boost its gross margin.
I find this technique as impressive as the company's strategy for expansion. Rather than slowly moving into a market one store at a time, hhgregg opens a cluster of locations, giving the chain an overnight regional presence and rapidly expanding its market share. In 2010, hhgregg opened 46 net new stores, bringing the company's total store count to 173. As expected, the rapid store growth boosted sales, with fourth-quarter sales up 30.6% year over year.
... But in practice, not so much
Alas, that growth in sales conceals an alarming number. hhgregg's same-store sales for the quarter ending December dropped 6.2%. It appears that after the "Hey, a new store!" excitement wears off, hhgregg fails to bring in the customers.
To be fair, hhgregg wasn't the only retailer to see December's same-store sales drop. Best Buy (NYSE: BBY) reported a 3.3% decrease in comps, which looks good only in comparison to hhgregg's performance.
Both stores blamed lower-than-expected demand for premium televisions for the drop in sales, but I think hhgregg was hit harder because it relies so heavily on selling the newest top-of-the-line sets. That approach could pose some problems going forward. In January, Nielsen reported that almost 60% of Americans have no interest in purchasing a 3-D television, and only 3% said they would definitely purchase one in 2011. If almost no one wants the top-of-the-line products, then stocking the largest selection of them won't help hhgregg much.
It would be easy to write off brick-and-mortar retailers as nothing more than future victims of online retailers, but not all neighborhood electronic shops are struggling. By focusing on expanding its postpaid mobile phone sales, RadioShack (NYSE: RSH) increased same-store sales 1.3% during the quarter ending in December. Even Best Buy reported strong sales in mobile phones.
A case of too much, too soon
hhgregg's rapid expansion may also may have hurt the company. Its mostly negative employee reviews on glassdoor.com raise questions about management's effectiveness. Workers' second most common complaint, after the long, unproductive hours, is that hhgregg's commission system favors the company's bottom line more than its sales staff. The rank and file's most common advice to senior management is to start respecting and listening to in-store employees.
The overall impression I get is that as the company has grown, it's begun to view its employees as a drain on revenue, rather than an asset. I'm reminded of Circuit City's ill-fated decision to fire thousands of experienced sales staff and replace them with inexperienced, low-wage workers.
Right now, I think it's hard to make a definitive call on hhgregg because of the natural bump in sales that rapid expansion brings. I would keep my eye on comparable-store sales. If they continue to drop, then I wouldn't hold out much hope for hhgregg's long-term success.
Are hhgregg's problems just the result of growing pains, or has its growth short-circuited its future? Add hhgregg to your watchlist to stay on top of all its future developments.
