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Is It Time for hhgregg to Change Its Strategy?

By Patrick Martin - Updated Apr 6, 2017 at 7:53PM

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The rapid growth plan doesn't appear to be working.

The plan for explosive growth at hhgregg (NYSE: HGG) sounded great in theory, but the company's latest earnings release indicates that the plan isn't working out.

The best-laid plans
Rather than move into a new region slowly by opening one or two stores to test the waters, hhgregg opens a cluster. It essentially becomes a major regional presence overnight. The rapid addition of locations naturally increases sales. Unfortunately for hhgregg, once the initial grand-opening excitement wears off, customers apparently don't come back.

I've written before about my concerns regarding hhgregg's declining comparable-store sales. This metric, also known as comps, factors out the effects of newly opened stores by measuring sales at locations that have been open for a year or more. Since my last article, the company has reported two more quarters of declining year-over-year comps. Consequently, net income has also declined.

Metric

Q3 2010

Q4 2010

Q1 2011

Change in Sales (YOY) 30.6% 21.5% (1.0%)
Change in Comps (YOY) (6.2%) (10.8%) (13.2%)
Net Income (in Millions) $26.9 $14.6 ($0.8)

Like any good publicly traded company, hhgregg had seemingly reasonable excuses for its slipping sales:

  • It misjudged consumer demand for 3D televisions during the holidays.
  • Bad weather around the Super Bowl kept shoppers from buying as many televisions as they had the year before.
  • During the latest quarter, consumers bought fewer appliances than during the same time last year because the federal stimulus program ended.

I'd almost buy these excuses, but the company's comps are so much worse than its competitors' are.

Company

Change in Comps (Most Recent Quarter)

Best Buy (NYSE: BBY) (1.7%)
Sears Holdings (Nasdaq: SHLD)
(domestic stores only)
(3.6%)
RadioShack (NYSE: RSH) (7.8%)
Conn's (Nasdaq: CONN) (3.9%)

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

Clearly, something else is at play here. Right now it feels like the company has spread itself too thin. Over the past two years, hhgregg has opened 63 new locations, which translates into a 57% increase in its total store count. Frankly, I don't think the company was prepared for it.

Time to hit the brakes
At this point, I think hhgregg should take a page from Biglari Holdings (NYSE: BH). Back when the company was known as Steak 'n Shake, it added stores to boost stagnating profits but saw same-store sales decline. In 2009, Sardar Biglari stepped in as CEO, stopped the expansion, began closing stores, and returned the company to profitability. He then named the parent company after himself, but that's another story.

It's time for hhgregg to admit that its expansion plan has failed and reassess its strategy. I'd like to see it open fewer new stores and consider closing underperforming locations. Then it can take the resources it planned to spend on expansion and use them to drive customers to existing stores. After the company has gotten control of its plummeting same-store sales, it can start to think about growth again.

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Stocks Mentioned

Sears Holdings Corporation Stock Quote
Sears Holdings Corporation
SHLDQ
Best Buy Co., Inc. Stock Quote
Best Buy Co., Inc.
BBY
$83.99 (2.36%) $1.94
RS Legacy Corporation Stock Quote
RS Legacy Corporation
RSHCQ
hhgregg, Inc. Stock Quote
hhgregg, Inc.
HGGGQ
Biglari Holdings Inc. Stock Quote
Biglari Holdings Inc.
BH
$132.12 (1.79%) $2.32
Conn's, Inc. Stock Quote
Conn's, Inc.
CONN
$13.53 (-1.53%) $0.21

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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