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Research analyst, valuentum
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Monday morning, additional holiday results have rolled in, and not surprisingly, the results diverged materially. hhgregg (HGG), the electronics and appliances retailer that has attempted to fill the void left by Circuit City's closing, reported terrible third-quarter results. Total sales dropped 3.6% year-over-year to $799.6 million, with same-store sales tumbling 9.7% compared to the year ago period. The decline was driven by weak video (TV) sales, which fell 24.6% on a comparable-basis, and a 6.1% increase in appliances that was well behind Best Buy's (BBY) performance.

As we've previously addressed, the big box electronics retailers are having a tough time not only finding new items to fill the void of declining media sales, but firms have also struggled to drive TV revenues. TVs have been clearly commoditized, in our view, and thus driving profitability will continue to be a challenge. Third-quarter earnings for hhgregg were $0.52 per share, well below consensus estimates, and 21% lower than the previous year.

In addition to third quarter results, hhgregg updated its full-year guidance, which includes full-year same-store sales declining 7.5%-8.5% compared to its previous guidance of a 4%- 6% decline. Earnings-per-share guidance was revised downward over 20% to $0.70-$0.80 per share compared to its previous call for $0.90-$1.05 per share. With this substantial earnings decline (suggesting declining margins), we wonder if Best Buy's margins will be even worse as its sales have held up significantly better. However, since hhgregg has focused on expanding its footprint during this challenging time, we think it could be in significantly more trouble than Best Buy, especially since it has little brand power in many markets.

Francesca's (FRAN), on the other hand, said it ended the holiday season with a bang. The firm said fourth quarter same-store sales will grow 7%-8% (on top of a 14.7% increase during the same period last year), driving total sales growth of 37%-38%. Earnings are expected to jump 45%-50% year-over-year to $0.29-$0.30 per share. Both were roughly in line with consensus estimates, but the guidance still suggests that the company did a solid job holding the line on discounts in what was labeled a highly promotional holiday season. Although the retailer is still a relatively small company (just $84 million sales expected in the fourth quarter), we think its guidance shows how companies can grow in a no-growth macro environment by providing a differentiated experience and products.

Though there remains a compelling short case with respect to Francesca's aggressive accounting practices, related party transactions, and a recently-departed CEO, we believe the company is doing a solid job attracting consumers and is one of the more popular young brands. Nevertheless, retail is notoriously fickle, so we aren't too confident that Francesca's can sustain the positive momentum before something else attracts attention.

Investing in retail remains a challenge in a no-growth environment, but we think avoiding stores with decelerating momentum, commodity products, and weakening gross margins is a good place to start.

Source: More Holiday Results Pour In, Fortunes Diverge