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The Science of Hitting
The Science of Hitting
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hhgregg: Q1 Results

August 04, 2011 | About:

Well, that was quite an interesting day. As the market sunk further into the red and the DJIA dropped more than 500 points, corporate earnings didn’t catch too much press. Despite the combination of mass selling and fear, there is really only one thing to do: get back to analysis in the search for value. As such, I’m back to quarterly conference calls and 10-Qs.

hhgregg (HGG), a specialty retailer of consumer electronics and home appliances, reported their fiscal 2012 first quarter earnings on Tuesday, and held a conference call to discuss the results with the investment community. Along with Best Buy (NYSE:BBY), hhgregg has been subject to increased competition as of late from online retail, most noticeably Amazon (NASDAQ:AMZN); as such, the companies both have single-digit trailing multiples. Here are some of the notes from the quarter and from the call:

Net sales decreased 1% in the quarter (compared to last year) to roughly $431 million; more importantly, comparable sales, which were coming off of a 6.3% number in FY2011, declined 13.2%. The video category, which accounted for 46% of net sales in fiscal 2011, saw comparable sales decline by more than 20% year over year (albeit off a decent prior year comp).

Gross margin dropped 20 basis points to 30.2%, while SG&A increased 80 basis points to 23.9% of sales (due to increased pre-opening expense and the effect of lower comp sales). For the quarter, the company posted a loss of $761,000 ($0.02/share) compared to a profit of $2.7 million ($0.07/share) in the same period last year.

One flag that popped up to me: inventory, despite decreasing 9% on a per store basis, increased from 64% to 83% as a percentage of current assets in the past three months. While this is likely in preparation for the upcoming (hopefully increased) holiday demand in the final months of 2011 and to fill new stores (26 in the Q), it still strikes me as something to keep an eye on; in the case of lower than expected sales, HGG would be left holding a fair amount of inventory on its books, in a category where the merchandise can drop in value fairly rapidly. This may never come to fruition; however, I still think it’s a point that shouldn’t be overlooked by potential investors when studying the balance sheet.

Year over year, book value decreased by more than $20 million to $295 million, as liabilities increased at a faster rate than assets over the past three months. The company repurchased 1,508,240 shares of common stock at an average price of $14.66 per share in the quarter, at aggregate cost of $22.1 million; as a result, shares out decreased by roughly 2% compared to the a year ago.

As of the close, the stock was down more than 11% to a tad above $11/share, and hit 52-week low during the session. As I noted in my article on A.C. Moore, the arts and crafts retailer, this is a tough time to be in a discretionary category that has competitors (as noted by management, “the consumer has a lot of places where they can buy an electronics product”) fighting for sales and share. For hhgregg, the economy (along with online retail) is causing considerable trouble from a growth perspective, which will be a significant hindrance looking forward; the company will likely continue to face a tough environment if the economy doesn’t recover in the coming quarters.

About the author:

The Science of Hitting
I'm a value investor with a long-term focus. As it relates to portfolio construction, my goal is to make a small number of meaningful decisions a year. In the words of Charlie Munger, my preferred approach to investing is "patience followed by pretty aggressive conduct". I run a concentrated portfolio, with a handful of equities accounting for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

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