Question: When is it bad news for a retailer to report 30% sales growth in the middle of a recession?
Answer: When profit doesn't rise nearly as quickly as those sales are growing. It's worse news when all the sales growth came from new stores being opened, while established operations -- stores open at least a year -- actually saw their sales fall … in the busiest shopping quarter of the year.
And unfortunately for hhgregg (NYSE: HGG) shareholders, that's exactly the news the company reported yesterday:
- Sales were up by 30.6%, to $653.7 million.
- But same-store sales -- the kind most important to retailers -- slipped bu 6.2%.
- Per-share profits grew by only 15.8%, to $0.66 per share.
- Consequently, management walked back guidance for the rest of the year. Old target: $1.15 per share, minimum. New target: $1.15 per share, maximum. And earnings could go as low as $1.10.
Meanwhile, the very thing that's keeping sales growth above water -- new store openings -- has hhgregg's cash profits looking about as cold as a Midwestern winter. Free cash flow so far this year is running negative to the tune of $92.4 million, or nearly three times as much as the $32.7 million hhgregg had burned through by this time last year.
Despite the numbers, hhgregg still insists its growth is good. Far from shying away from its record, the company boasts, in a big, bold font, that it's "on track to open a total of 43 new stores in fiscal year 2011."
Profits? Pfft. Full speed ahead!
To hear management tell it, hhgregg is all about square footage. The chain is "continu[ing] to gain market share as we enter new markets and move closer to becoming a national retail chain," crows CEO Dennis May -- and profit can take a back seat till the company gets there.
But here's the problem, as I see it. Let's assume hhgregg succeeds in its ambition. It builds the stores. It becomes a national chain. What then? The numbers tell us that the stores hhgregg has already built are its weakest performers. Their negative 6.2% comps are worse than the 3.3% decline Best Buy (NYSE: BBY) reported for the third quarter, and even worse than the 4.8% slip that industry fuddy-duddy Sears Holdings (Nasdaq: SHLD) fessed up to in the November quarter. Meanwhile, Lowe's (NYSE: LOW) and Home Depot (NYSE: HD), which compete with hhgregg in appliance sales, reported positive same-store numbers.
I've said it before, and I'll say it again: 16 times earnings makes hhgregg look cheap if it achieves the 19% long-term earnings growth analysts expect. But so far, I'm not seeing it happen.
