The plan for explosive growth at hhgregg (NYS: 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.
|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.
Change in Comps (Most Recent Quarter)
|Best Buy (NYS: BBY)||(1.7%)|
Sears Holdings (NAS: SHLD)
(domestic stores only)
|RadioShack (NYS: RSH)||(7.8%)|
|Conn's (NAS: 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 (NYS: 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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At the time this article was published Fool contributor Patrick Martin does not own shares of any of the companies mentioned here. You can follow him on Twitter, where he goes by @TMFpcmart03.The Motley Fool owns shares of Best Buy, RadioShack, and Biglari Holdings. Motley Fool newsletter services have recommended buying shares of hhgregg and Best Buy. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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