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hhgregg (NYSE:HGG)

Q3 2013 Earnings Call

January 31, 2013 9:00 am ET

Executives

Andy Giesler - Vice President of Finance

Dennis L. May - Chief Executive Officer, President and Director

Jeremy J. Aguilar - Chief Financial Officer, Principal Accounting Officer and Corporate Secretary

Analysts

David S. Strasser - Janney Montgomery Scott LLC, Research Division

Peter J. Keith - Piper Jaffray Companies, Research Division

Christopher Horvers - JP Morgan Chase & Co, Research Division

David A. Schick - Stifel, Nicolaus & Co., Inc., Research Division

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

N. Richard Nelson - Stephens Inc., Research Division

Michael Lasser - UBS Investment Bank, Research Division

Anthony C. Chukumba - BB&T Capital Markets, Research Division

R. Scott Tilghman - B. Riley & Co., LLC, Research Division

Daniel T. Binder - Jefferies & Company, Inc., Research Division

Operator

Good day, and welcome to the hhgregg Third Quarter 2013 earnings Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Andy Giesler, Vice President of Finance. Please go ahead, sir.

Andy Giesler

Good morning, everyone, and thank you for joining us. Joining me on the call this morning with prepared comments is Dennis May, our President and Chief Executive Officer; and Jeremy Aguilar, our Chief Financial Officer.

During today's call, Dennis will discuss the current state of our business and update you on our initiatives, and Jeremy will discuss our third fiscal quarter operating results and discuss our guidance. At the end of our prepared remarks, we will have until 10:00 a.m. Eastern Time to answer your questions. [Operator Instructions]

Let me take a moment to reference the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. During this call, we will make forward-looking statements, which are subject to significant risks and uncertainties, which include the future operating and financial performance of the company.

The company believe that the expectations reflected in its forward-looking statements are reasonable and can give no assurance that such expectations or any of its forward-looking statements will prove to be correct.

We refer you to today's earnings release and the MD&A and risk factor section of our Form 10-K, which was filed on May 23, 2012, and our Form 10-Q filed on November 2, 2012 for additional discussions of these risks and uncertainties.

With that, I'd like to turn the call over to Dennis.

Dennis L. May

Thanks, Andy, and good morning, everyone. Thank you for joining us today. I'd like to begin by recognizing our dedicated employees and extend a special thanks to all of our associates who worked so hard through the holiday season. It's your hard work and dedication that differentiates hhgregg and ensures our customers receive a superior shopping experience.

During the quarter, the video industry saw significant top line pressure as overall demand in the category remain challenged.

In addition to the video industry headwinds, we also made strategic decisions to focus on higher-margin, larger screen sizes while offering fewer entry-level price point screen sizes. As planned, the strategy drove higher gross margins in our video category but did negatively impact our video comps and market share in the promotional portion of the category.

In addition to our strategy shift, the industry saw an expanded distribution of larger screen television to the mass channel and warehouse clubs. We will continue to refine our strategy to both maximize our margins in the category while continuing to drive an appropriate level of traffic with more promotional offerings.

With the continued growth of our appliance business and the introduction of new categories, such as furniture and fitness equipment, we continue to reposition our overall brand and go-to-market strategy to place less reliance on the video category as a whole.

In the past, hhgregg has been seen as a consumer electronics company that sells appliances. Today, appliance is our largest product category, representing 42% of our business during the first 9 months of fiscal 2013.

As we continue to grow our market share in appliances and introduce new product categories, we see the hhgregg of the future as a home product store that also sells consumer electronics.

We do not expect trends in the video industry to materially improve in the near future. And we expect CE will gradually represent a smaller and smaller part of our overall sales mix. We expect to give more color around the evolution of our brand repositioning in our next earnings call when we discuss our fiscal 2014 initiatives.

During fiscal 2013, growing market share in the appliance category was our top initiative, and we continue to believe there is significant room for long-term growth in this category.

This quarter marks the sixth consecutive quarter of comparable store sales growth in the appliance category. We have consistently outpaced the industry in appliance comparable store sales growth, gaining market share in each of these quarters.

While we have been pleased with our investments in the category, we still believe there is significant opportunity for us to continue to gain share in this growing category moving forward. We believe we have opportunities to give appliances even more share of voice in our ads, improve our cooking displays and grow our sales of appliances to the builder channel. We also believe that this year's investments in branding and store management, along with an industry that should benefit from a more robust housing market, gives us continued runway for additional market share gains and category growth.

We will continue to highlight to the customer why hhgregg is the must-shop appliance retailer.

In addition to driving market share gains in appliances, we also plan to continue to invest in new categories that leverage our sales force, utilize home delivery and have a need for customer financing. This fall, we tested home entertainment furniture and home fitness products in selected stores and made the decision to rollout these products to all of our stores prior to the holiday selling season. We were pleased with the performance of these new categories during our third fiscal quarter and expect to continue to grow these businesses significantly as more consumers get introduced to our furniture and fitness offerings and as we further refine our assortments based on our learnings during the holiday selling season. In fact, we are already testing expanded assortments of furniture in certain stores. While today, our offerings have targeted the living room, we will continue to test other rooms of the house that meet our core competencies.

Our success in the furniture category is not only based on leveraging our core strengths of our consolidated sales force, credit offerings and distribution hubs, but also the fact that our customers are already shopping in our stores for other large home products. In addition, we are able to provide in stock and next day delivery of our furniture offerings, which we believe is a significant competitive advantage. In many cases, these products would take weeks before consumers would be able to receive delivery from other furniture outlets.

We were also pleased with the initial roll out of our home fitness department. Similar to the furniture category, this new product category leverages our existing capabilities around large-box, home good products. That being said, we learned a lot over the holiday season about fitness assortments and price points and continue to refine the category as we enter the peak fitness selling season.

In addition to products that leverage our core competencies, we also continue to look for additional products that drive traffic.

During the quarter, we saw significant growth in our computing and mobile phone department. With comparable store sales up 16% on top of a 91% increase in the prior year.

Consumers continue to find value in utilizing our sales associates in navigating the complex and ever-changing IT category. Since mid-November, we have offered Apple products at 146 stores. We are pleased with the impact of these products that had on our traffic in those stores compared to our stores that did not carry Apple.

We look forward to further growing this new relationship with Apple.

Throughout the upcoming fiscal year, we will continue to test new products and categories with the largest focus being on product categories that are adjacent to our existing category set of home products.

In addition to driving traffic to our stores throughout new product categories and additional product offerings, we also believe we can drive incremental store traffic through additional credit offerings. Today, we have increased our private label credit card to account for over 1/3 of our business and believe we can do even more incremental business through additional consumer credit offerings.

There are many advantages to having a consumer utilize our credit card. With loyalty being #1, followed closely by higher margin products and better attachments rates.

Today, we are testing lease-to-own options through a third-party provider in approximately 1/4 of our chain and plan to fully roll this out to the majority of our stores by the end of the fiscal quarter of -- or end of third fiscal quarter of 2014. We are also working on a secondary program for those customers who were turned down by our primary credit offering and hope to begin testing this program in stores during fiscal 2014.

As a reminder, our existing and planned credit programs are done through third-party provider and are nonrecourse to us.

We continue to grow our online business while making further enhancements to hhgregg.com. We have improved on our consumer experience and have recently launched buy online, ship from store. Buy online, ship from store will expand our assortment of available web product, as well as improve our overall inventory productivity.

We continue to be committed to enhancing the consumer experience and ease of use for hhgregg.com to both for -- drive our online sales, as well as our in-store traffic. While we have made significant headway since relaunching our site in August of 2011, we have additional opportunities to make the experience even better. Look for us to continue to enhance the site throughout fiscal 2014.

As we have stated on prior calls, we expect to slow our new store growth in fiscal 2014, with store growth focused in existing markets where we can leverage distribution, advertising and regional management infrastructure. One of our top priorities is to drive more customer traffic to our stores. We believe we can do this by offering additional products, more robust credit offerings, continuing to evolve our website and enhancing our in-store execution. We expect to pilot a new point-of-sale system, which should significantly enhance the purchase experience by making the checkout process even more efficient and by integrating new logistics tools to the point of sale to make our home delivery process even better than it is today. We will focus on making the customer experience even stronger throughout our chain.

And with that, I would like to turn the call over to Jeremy.

Jeremy J. Aguilar

Thanks, Dennis, and good morning, everyone. This morning, we reported net income of $17.4 million for the quarter or $0.51 per diluted share, compared to net income of $22.5 million or $0.60 per diluted share for the comparable prior year period. The decrease in net income for the 3-month period was a result of a 9.7% decrease in comparable store sales, and an increase in SG&A expense as a percentage of net sales.

Our results were positively impacted by a 5-basis-point increase in gross profit as a percentage of net sales and the accretive impact of the net addition of 20 stores during the past 12 months.

Excluding a non-cash impairment charge of $0.01, net income was $0.52 per diluted share during the fiscal quarter. During the third fiscal quarter, our net sales decreased 3.6% to $799.6 million, compared to $829.5 million in the comparable prior year. The decrease in net sales from the 3 month period was the result of a comparable store sales decline of 9.7%, partially offset by the net addition of 20 stores during the past 12 months.

The decrease in comparable store sales for the 3-month period ended December 31, 2012 was driven primarily by a decrease in the video and other categories, partially offset by increases in the appliance and computing and mobile phone categories.

The video category comparable store sales decline was driven by a double-digit decrease in unit demand, partially offset by single-digit increase in average selling prices, largely resulting from our strategy of offering fewer entry level models. The decrease in comparable store sales for the other category was primarily the result of double-digit comparable store sales declines in cameras, camcorders, small electronics and mattresses, partially offset by sales from the furniture and fitness equipment categories.

This quarter marks the sixth consecutive quarter of achieving positive comparable store sales for the appliance category.

The appliance category increase in comparable store sales was driven by increases in both average selling price and units. The growth in the computing and mobile phones category was led by increased demand for tablets, partially offset by a decline in mobile phones.

Gross profit margin, expressed as a gross profit as a percentage of net sales, increased 5 basis points for the quarter to 27.3% from 27.2% for the comparable prior year period.

The increase was largely due to an increase in gross profit margin rates in the appliance and video categories, partially offset by decreases in gross profit margin rates in the computing and mobile phone category, as well as the other category. The appliance category was favorably impacted by a continued mix shift to higher efficiency products which generate higher gross margin rates. The increase in the video category gross margin rate was largely due to a favorable mix of larger LED model screen sizes which generate higher gross margin rates than the smaller screen LCD models.

The computing and mobile phone category gross margin rate decrease was due to a decline in the gross margin rate of mobile phones, while the other category gross margin rate was pressured by declines in the gross margin rate of accessories.

SG&A expense as a percentage of net sales increased 47 basis points for the quarter compared to the prior year period. The increase was primarily due to an increase in occupancy costs as a percentage of net sales due to the deleveraging effect of the net sales decline in addition to an increase in home delivery expenses as a percentage of net sales due to a higher sales mix of deliverable product. This increase was partially offset by decreases in other SG&A accounts as a result of cost control measures.

Net advertising expense as a percentage of net sales increased 8 basis points during the quarter compared to the prior year period. While we decreased gross advertising spend from the prior year, the slight increase of the percentage of net sales was driven largely by the deleveraging effect from that sales decline.

Depreciation expense as a percentage of net sales increased 25 basis points for the prior year -- compared to the prior year. The increase as a percentage of net sales was primarily due to capital spend associated with the 20 net new stores opened during the past 12 months and from the deleveraging effect of the net sales decline.

Our effective income tax rate for the quarter increased to 39.1% from 37.8% in the comparable prior year period. The increase is primarily the result of federal income tax credits recognized in fiscal 2012 under the Hiring Incentives to Restore Employment Act of 2010. These credits are no longer available in fiscal 2013.

This increase in our effective tax rate results in an approximately $0.01 negative impact on our diluted EPS compared to the prior year.

During our third fiscal quarter, we repurchased 1.3 million shares of our common stock at a total cost of $10.6 million. The shares were repurchased under our $50 million share repurchase program that was authorized by the company's Board of Directors on May 24, 2012 and expires on May 23, 2013, unless extended or shortened by the company's Board of Directors. As of the end of our third fiscal quarter, we had approximately $20 million of remaining authorization to repurchase shares of common stock under the current share repurchase program.

Our balance sheet liquidity remain very strong, with no long-term debt and no borrowings under our revolving credit facility at quarter end. Our strong liquidity positions us well to execute on our strategic initiatives: To drive additional traffic, increase sales productivity in our comparable store base and expand in the new product categories. While the overall operating environment will likely remain volatile for the foreseeable future, we remain committed to improving shareholder value over the long term.

Turning to our guidance. As previously announced on January 14, we expect net income per diluted share to be within a range of $0.70 to $0.80 for fiscal 2013. Included in our guidance are the following assumptions: Net sales increase of flat to 1%, comparable store sales of negative 8.5% to negative 7.5%, net capital expenditures of approximately $45 million, and the impact of the fiscal year-to-date share repurchase activity of $3.6 million at a cost of $30 million.

And with that, I would like to turn the call back to the operator for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from David Strasser of Janney Capital Markets.

David S. Strasser - Janney Montgomery Scott LLC, Research Division

I want to follow-up, and we may have talked about this I think not that long ago, but I wanted to think it through a little bit more. As you kind of look at your business, the TV category, I mean, as you're planning out a 5-year plan, do you think there's a bounce back there? Do you think it continues to deteriorate? Do you think you're kind of at the level? And where does mix go? And how -- where does ultimately mix go in the category versus the overall business? And I guess, you're obviously doing stuff with exercise equipment, with the furniture and so on, when you look out -- once again, a couple of years, how big can those businesses be within your mix? A lot of questions, sorry, but I just kind of thinking about the broader mix.

Dennis L. May

Yes. David. That's a great question. As we think about, first of all, the video business, we believe the video business will continue to be somewhat cyclical. There probably are brighter days ahead of the industry. You certainly have some new innovations, some new technology coming down the pike. One of things that we did like about the Consumer Electronics Show this year is we were seeing real product, 4k, 2k or what's called ultra HD, OLED is finally -- these are real products.

So as we think about the cyclical nature of the category, there's some innovation coming. Innovation is going to be good for the industry. It helps ASPs. And ultimately, what we would hope is that it would stimulate the customer to begin to replace or upgrade these flat-panel TVs that they've been buying over the last 8 years.

So I think from an innovation perspective, yes, I think there's some better innovation coming down the pike for the industry. I don't believe that innovation is going to be very impactful this year. I think it's kind of a minimal impact for this year. So as we think about the longer-term view of the video industry, I think there's more innovation. But we do believe the video business is going to be challenged in the near term. And I think also the video business, there are certain pieces of it that is forever changed. Taking a step back now and thinking about our over arching strategy is all about investing into product categories that we can leverage our core competencies. We don't want to get out of the video business, it's an important category for us. We want to continue to compete effectively in the business. But we do want to grow other categories. So as we think about growing other businesses, the appliance initiative is our #1 initiative. We're really excited about our progress there. It's 42% of our business year-to-date and we think it's got continued runway in front of it, so we're excited about that. We do see over time, we see consumer electronics continuing to be a smaller and smaller portion of our business though, David. And we do believe that appliances is and will continue to be our largest business. The furniture business represents a lot of opportunity for us. It's an $80 billion industry. We're just getting started in it. The initial blush for us has been pretty favorable. But yes, as we said in our prepared comments, it's -- we're in one room. So look for us to continue to shift our sales mix toward large, home products that carry with it higher gross margins that require delivery, installation, credit and a sales force. So that was a long question and I gave you a long answer but I think it does speak to our over arching strategy of continuing to diversify the sales mix away from being as reliant on the video category.

Operator

The next question is from Peter Keith of Piper Jaffray.

Peter J. Keith - Piper Jaffray Companies, Research Division

I wanted to ask a little bit more on gross margin. And what we noticed is that there was a rather notable step down in gross margins sequentially from Q2, much more so than what you've seen historically. I know there has been kind of an ongoing strategy this year to get the margins up in the video category, but it seems like something structurally or something at least just for the quarter, changed relative to earlier in the year. I was hoping you can provide some color on that.

Dennis L. May

Absolutely, the biggest shift from Q3 to Q2 is just the significant mix shift that you have during the holiday season. So as you look at, most noticeably, our IT business, IT mobile business, we had significant -- not only significant comp store growth, but also it represents its largest portion of the business during that particular quarter. So we had a mix shift away from video, you had a nice growth in appliances, but you also have significant growth in that IT wireless mobility business. And it does carry with it a significant lower gross margins than the chain average. So it's really about mix. We experienced a gross margin rate increase in appliances. And we also experienced a gross margin rate increase in our video business. So as you think about that rate, it was positive in those 2 businesses. The biggest impact was just a mix shift during the holiday season.

Peter J. Keith - Piper Jaffray Companies, Research Division

Okay. I guess as a follow-on to that, and these are 2 minor categories but we know they're gross margin accretive for you is that you saw a decline in your mobile phone business and your mattress business. And I can't remember a period when either of those have been down. I guess could you talk to what happened in the quarter on those 2 categories? Because I would imagine there -- those are areas of opportunity for you and you just get a bit concerned that they've turned negative here in the most recent quarter.

Dennis L. May

Yes, they are areas of opportunities. The bedding business, the mattresses has been somewhat volatile. And I think one of the things you'll see hhgregg do -- we expect to grow that business and are confident that we're going to be able to do that. Look for us to change a little bit of our strategy around how much UPP products that we offer. So we've been -- we currently carry Serta, we carry Tempur-Pedic, there's obviously some dynamic changes going on in the industry, and look for us to be a little bit more promotional -- I don't believe it's going to have an impact to gross margins. But look for us to be a little more promotional in driving the bedding business. I think you'll see that category. Also I think that category will benefit from us being in the furniture business. I think the synergies between those 2 businesses are there. And we're confident that we'll be able to see growth in that business. In mobility, for us, the wireless business, we had great growth in IT and so that business continues to expand. The mobility business for us is really still new. What I would say is we are -- we're really in the first or second inning of that category of understanding what our opportunity is, the best way to go to market. So I think this holiday season was really an opportunity for the first time to learn about that business and what's the best way to go to market in that category. And we believe we have -- and you already said it, we believe we have opportunities to improve in that area also.

Operator

Our next question is from Chris Horvers of JPMorgan.

Christopher Horvers - JP Morgan Chase & Co, Research Division

Big picture, does the encroachment for mass in the big screen LED and the experience this holiday season from a sales and margins perspective make you revisit the strategy to stay away from the entry-level category?

Dennis L. May

I think that as we look to the holiday season, we were very pleased with a lot of the things that we did. We were very pleased with our appliance business, very pleased with our IT growth. The video strategy, for us continues to be a challenging one. And it's challenging for 2 reasons. It's -- first of all, it's a declining business, second of all, it's a changing business. If it was just 1 of the 2, I think it would be easier for us to get our arms around really cementing the exact right strategy to address that. So as we wrestle with these 2 levers, these 2 changing elements in the category, look for us to continue to change and look to opening price points for branded product. I mean, I think if you asked me, "Dennis, what is the one thing that you would do differently in the video business?" And there are some things that we would do -- would have done differently in the video business this holiday season. I think that we would have looked at how much of our share of voice that we should have given to more opening price points of branded products not as much non-branded products. So as you look for hhgregg to continue to change and tweak our strategy in video, look for us to expand the amount of share of voice advertising that we give more opening price point-branded televisions, specifically in the larger screen sizes.

Christopher Horvers - JP Morgan Chase & Co, Research Division

Understood. And as you think about your comp -- sorry, were you saying something?

Dennis L. May

No.

Christopher Horvers - JP Morgan Chase & Co, Research Division

So on the -- as you think about your view on a declining category, do you think, fundamentally, that tablets end up being 3- or 4-year drag on TVs, maybe TVs per household start to go back down towards 2 per household for maybe 3 today?

Dennis L. May

We've seen that trend already. It's to your point, we have seen the flat-panel television which used to be less than 2 televisions per household. We saw that number as flat panel came on the scene go from 2 to 2.3 to 2.7. We've seen that number flatten out and actually start to decline a little bit. So yes, I agree with you. I think that the number of televisions per household will be somewhat impacted. But on the flip side, the tablet industry has just tremendous growth in front of it. The consumer electronics business is sometimes painted with one brush. And there's different segments of the industry that are doing very well. Look for us to continue to evolve our sales mix not only to rationalize and right size our video business, but also to invest and emphasize some of the growth areas. We see mobility, we see Wireless, we see the tablet, IT section continuing to be an opportunity for the overall industry and for hhgregg.

Christopher Horvers - JP Morgan Chase & Co, Research Division

And then one final one, sort of bringing it all together. Have it -- has it crossed your mind to maybe further abdicate pieces in the TV market, push the TV comps lower but at the same time, pull forward in an upward inflection in same-store sales as you expand into these emerging categories?

Dennis L. May

We don't think so. We're always mindful of the best way to navigate through in these tricky waters in this industry. But we also believe that we are a significant player in the video category. We will continue to be a significant player. I think that we have to be very mindful of our traffic. So as we consider the different price spans and considering our go-to-market strategy, we have to make sure that as we reposition the brand, one of the things that we bring into the table of being in the furniture business is the fact that we bring traffic to the table. And we got to be somewhat mindful of that to make sure that we keep a strong traffic count and strong relationship with our consumers, which is why that we've got to play it at different price points in video, but also why we need to invest in the IT mobility category so that we stay relevant with consumers. We see that customer frequently. So that we have a relationship, so when they're ready to buy their major appliance, when they're ready to buy their furniture, we're able to offer the net room solution, we've got a great relationship with the customer. So I think traffic is going to also be in the equation as we consider how we navigate through the kind of these shifting product mixes.

Operator

The next question is from David Schick of Stifel, Nicolaus.

David A. Schick - Stifel, Nicolaus & Co., Inc., Research Division

On the appliance side, you talked about strength and that you believe you can continue to show it. Do you think -- sorry, 2 questions, do you think that's more housing cycle demand across the board or product innovation within the appliance segment? And then my second question is, as you try the new categories, furniture, et cetera, are you seeing, on balance, more new customers coming to Gregg or is it customers that have been there trying new categories?

Dennis L. May

Two great questions. Around the appliance business, we see 3 levers for continued comp store growth. One lever is just market share gains that even though we've been very pleased with the business and very pleased with how we perform within the business, when we look at our overall market share, we still believe we have opportunity to expand our share of the business.

So that's one component. The second component is, we've been showing comp store increases into some headwinds of the industry actually being down. And industry was down, it was down again last year. As we look into this coming year, the industry has a forecast to be up for the first time in a couple of years. So I think there is some tailwinds of the industry. I think housing, not only new housing, but also the turnover in housing, will be beneficial for the appliance business. So we think about share increases, we think about some improving macro trends within the industry. We also look for energy efficiency to continue to be a driver of the business. High efficiency, energy savings as energy becomes more expensive, as the government gives more emphasis around energy regulations, there's going to continue to be more innovation around energy savings and more pressure on the consumer to make those investments into their product. But one interesting stat around the appliance business is still over 60% of the business is to rest [ph]. So that gives us such a stable format for the category. So we feel good about increased growth. And as we think about -- your second question was new categories and how we think about that business. The furniture, for us, we were somewhat surprised of how much the furniture business was new traffic. We felt like initially going into it, especially just testing a limited assortment that it would be -- it would be a larger portion of the customers would the existing loyal hhgregg customers, consumers that were buying a television from us and they were just going to complete that TV purchase. And that's a portion of it but actually over 50% of the consumers that bought furniture for us was -- that was their main -- that was what they came in to buy. So we are pleased that it did generate some new traffic for us.

Operator

The next question comes from Brad Thomas of KeyBanc Capital Markets.

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

Just, I want to ask a little bit more about the store opening outlook for next year. I know you've given some commentary about them in the past, so it should be a little bit lower rate of growth. But what's your initial plan at this stage?

Dennis L. May

Brad, we haven't given specific guidance around new store openings. I would say that it's going to be significantly lower than last year. At this point, we anticipate opening just a handful of stores. And those stores that we do open will be -- as I said before, it will be focused existing -- within existing distribution rings, within existing advertising rings, meaning that if we open a store, it will have a very clear leverage point around all of our infrastructure tellers that we have today. So look for pretty minimal expansion this year. We -- our aspiration is still to be a national retailer and we're excited to take this year and make improvements in our business model, develop these new categories, expand credit. And then when we address these things, then we'll be a growth company again. But right now, we're really focused internally and we like the list of initiatives we have in front of us.

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

Got you. And then, so as we -- I recognize it's still early and you don't have a full plan together yet. But as we think of CapEx for next year, is there an opportunity to bring that down from the $45 million that you're on track for this year? Or there are going to be other areas that you'll need to make investments like pictures or systems or anything like that?

Jeremy J. Aguilar

Yes. Brad, this is Jeremy. It's a great question. I think as you look specifically to new store growth CapEx, clearly will be down significantly with what it has been. I think you will look to the company to make continued investments, appropriate investments into additional items whether it be systems or investing back in the chain as we grow up these new categories. But there should be clearly an expectation that CapEx will be declining.

Operator

Our next question is from Rick Nelson of Stephens.

N. Richard Nelson - Stephens Inc., Research Division

Dennis, If you think Amazon is a longer-term threat to the appliance business or do you think the logistics there are too cumbersome?

Dennis L. May

Well, never say never to anything, Rick. But as we look at the appliance business of -- there's a certain attributes of not only appliances, but product categories like that. The appliance category has about a 92% as an industry, delivery and installation, meaning 92% of the time there was some type of water hookup, gas hook up, waterline, electrical work that needed to be done. So there's such an intensive installation component to that. What we're excited to grow our online business of appliances. So we feel like we're pretty good at it, we're making great investments around our website in that area. But still, as we look at trying to do the appliance business outside of our distribution hub, it's very difficult. It's very -- if you're not, if you don't have leverage and if you don't have distribution leverage and a network that's really honed in around efficiency, it's very challenging. So we have a broader perspective on the appliance business. We think that -- we think it's going to be a great category for your website to drive research on. We think that the consumer wants to interact online before they make that purchase.

But ultimately, it still is -- it's a touch and feel and high installation business. One interesting point about the online appliance business, at least for us, it's the flip of the electronics world. In the electronics world, frequently, the consumer will buy online and pick up in store. In the appliance world, when they do buy online from us, most of the time, they've already been to the store and they just couldn't complete their transaction, meaning that, they've been in the store but they had to go home and measure and make sure that the product would fit. So as we think about our online experience in appliances, we think it's a multichannel strategy and we think the showroom is a critical part, delivery and installation is a critical part and the dotcom component of it also plays a great role around research.

N. Richard Nelson - Stephens Inc., Research Division

Okay. Also, I'm interested in the furniture test. Were you looking at an expanded assortment. How many stores is that? How much square footage? And if the tests prove successful, how quick can you roll it in to the rest of the base?

Dennis L. May

Well, we've expanded the assortment about 7 stores, Rick. In those 7 stores, we've just expanded the living room. So we're still just in the living room at this point. We think that -- and I would just remind everybody, we've been in this business for a really short period of time, so we've expanded the assortment in these 7 stores in the living room. As we look at the business longer-term, we believe there's an opportunity to be in other rooms for the consumer. We obviously -- we sell millions of appliances already, so there's probably an opportunity for us to help them with a room solution after when they're making those appliance purchases to complete out the rest of the kitchen. We're already in the bedding business, so we think there's an opportunity for us to be in the bedroom with furnitures. So look for us to continue to test those things. It's about a 30% to 40% increase in square footage for the category, Rick, so it's not dramatic. But it is an expansion in the assortment. It's -- we've got very short period of time and we'll study those results and study them closely and look to how do we optimize this business further.

Operator

The next question is from Michael Lasser of UBS.

Michael Lasser - UBS Investment Bank, Research Division

First, when you look at the decline rates or not being able to get credit as a reason for why someone doesn't purchase, does that more frequently happen in the appliance category? Or is it more in the television category? Because I'm trying to wonder if -- I'm wondering if you expand that, is that going to be -- where will that be more beneficial and then what are the P&L implications of that?

Dennis L. May

It is -- it's similar across both businesses, Michael. It's not dramatically different between the 2. The P&L impact of us being able to move a consumer, whether it's primary financing or secondary financing, it's kind of -- there's 3 pillars there. The first is just better consumer loyalty. We show that our retention rate is higher with that customer or close rates are higher. We also experience a higher gross margin rate. So when that consumer is able to get qualified financing, whether it's primary or secondary, the gross margin rates are higher, they buy a better product. The third element of that is our attachment of either accessories or extended warranty is also higher. So as we think about that credit business, it's a combination of things. We think it helps us capture market share, we also think that it helps us improve our overall profitability because the ticket, the invoice and the consumer just gets more profitable.

Michael Lasser - UBS Investment Bank, Research Division

And do you have some order of magnitude that you're expecting to have for your increase in credit availability?

Dennis L. May

Not at this time. It's -- we are testing. We have a couple of things that we're doing. We're testing one option that we have in about 20%, roughly 1/4 of the chain at this point. But it's been in place a very short period of time, and we're pleased with the initial results. Our expectation is to continue to expand that program. There is an additional program that's around a secondary financing option for those consumers to be more seamless -- that are turned down to be more seamlessly approved. And that option, we hope to pilot this before the holiday season. So it's just -- we don't have any results there. We have been able to increase our penetration of our current private label, hhgregg credit card, which is the GE credit card. We've been able to drive that penetration up over 1/3 of our business. And we see all the benefits that I just discussed whether it be close rates, margins, attachment of accessories. As we expand our credit business, everything else gets better with it.

Michael Lasser - UBS Investment Bank, Research Division

My second question is on the computing and television products that have unilateral pricing policies attached to them. Have you seen any evidence that broader reinforcement of those minimum -- of that minimum pricing standard has stifled demand?

Dennis L. May

I think that UPP has held up well. I think it's had some of the positive impacts on the industry that everybody was hopeful for. I think it stabilized ASPs. I think it's helped the gross margins just in the category as a whole. I do believe, for a retailer like hhgregg, I do believe that it does have an impact in our traffic because we're not in other commodity businesses that we can generate traffic with. So when we want to generate TV traffic, we try to promote TVs. And so I think that UPP does have an impact on demand from that regard as I think it does have some influence on overall traffic.

Operator

The next question is from Anthony Chukumba of BB&T Capital Markets.

Anthony C. Chukumba - BB&T Capital Markets, Research Division

I had a question in terms of maybe expanding into some of these new product categories, entertainment furniture and fitness and maybe potential other product categories. Are you planning to staff those product categories with dedicated sales people? Or are you just going to try to cross train your existing appliance and consumer electronics sales people?

Dennis L. May

I think that -- 2 elements: Number one, we will continue to look at different staffing models and we will test different staffing and compensation models to maximize these businesses as we learn them better, Anthony. The second piece is an area that we are probably the most active with around our training program right now across our entire sales force is training on these new businesses. There was -- we moved quickly during the holiday season to add these categories, and we are very glad that we did. We learned a lot, we had positive contribution to sales and the category. We'll take those learnings that we experienced during the holiday season and we'll apply that to assortments, advertising strategies, training strategies and also different staffing models. So look for us to continue to be very curious and make -- the great thing about having 228 stores, we can try different things in different markets and find what is the best solution to provide the customer the best experience. So I think you're going find that we're going to be very flexible and very curious to maximize that.

Anthony C. Chukumba - BB&T Capital Markets, Research Division

Got it. That's helpful. And then just one somewhat related follow-up question. Just looking at your inventory, it's up about 5% year-over-year when your sales are down a little bit. I mean is that some of the new product categories? Or are there other pockets of inventory in your older product categories that -- which you maybe need to or are a little heavy in?

Dennis L. May

We feel really good about the quantity and the quality of our inventory. We do have, obviously, some inventory investments in new businesses and that's, I think -- we feel like we navigated through the holiday season relatively well. We -- our average per store inventory is actually down, around 4%. Obviously, our comps are down more than that. So we're focused on getting this inventory to make sure it's commensurate with that. Also look for us to continue to rationalize our assortment, Anthony. As you think about different businesses, I mean, our appliance business obviously continues to increase comp store sales, so we're making investments in that business. Our video business which has had comp decline, we will be very focused on rationalizing that assortment. So look for us to make some adjustments and probably some SKU reductions in the video category in the upcoming year. But we feel very good. Obviously, we're going through a transition of consumer electronics products through the course of the spring and we're in great shape.

Operator

The next question comes from Scott Tilghman of B. Riley Caris.

R. Scott Tilghman - B. Riley & Co., LLC, Research Division

I wanted to touch on 2 things. I'll start with the credit slide. As you roll through with the secondary offerings and get those into the stores, both from the rental model and on the secondary credit. I'm wondering what we could expect from a training cost standpoint. But on the flip side, wondering whether or not any of those programs would perhaps require credit insurance or required purchase of warranties that you might actually get some benefit from?

Dennis L. May

As we think about training, there should be no incremental cost to our overall training program for 2 fundamental reasons. Number one, we train about 150 hours annually already. So we will allocate some of those training hours to training on credit and talk about how to better utilize that in that regard. So it will not impact any of our expense items around training. Around -- nothing we're doing would require us to purchase credit insurance.

R. Scott Tilghman - B. Riley & Co., LLC, Research Division

Not you, but the consumer.

Dennis L. May

No. Nothing that would require them to purchase credit insurance also. I do think, if you ask -- if your question -- I think your third element was kind of how the impact to our profitability would be. Obviously, our expectation, as we increase our balance of sale around credit, we would hope that, that would have a positive impact on margin rate, a positive impact on our attachment rate and also, just loyalty from the consumer. I mean, overall retention. But very early stages, too. I mean, and some of these elements are just some things we're just getting started with now and testing out right now.

R. Scott Tilghman - B. Riley & Co., LLC, Research Division

The second topic I wanted to ask about is the National Retail Federation is out with -- and estimates saying they expect Super Bowl-related TV sales to be up 46% year-on-year. Presumably, that's the biggest part of the calendar first quarter of TV sell-through. It seems to contrast a little bit with the comments about the near-term video challenges. Just was wondering if you could comment on that?

Dennis L. May

I have not read the NRF report. So I would say the video industry was -- just came out of the holiday season and contracted low double-digits, high single-digits. Our expectation is those general macro trends will carry into this year. I think most people that are forecasting the video industry for the upcoming year, you're seeing numbers out there, that are mid single-digit to high single-digit declines. So whether the NPD display search, on a more macro basis, those are the numbers that we're initially seeing out of the industry. But time will tell. But I personally have not seen a forecast for the video industry that would contemplate a -- that the industry is going to grow in revenue this upcoming year.

N. Richard Nelson - Stephens Inc., Research Division

And then if I could squeeze in one housekeeping item. Just noticed that the CapEx guidance is up about $5 million from it was just 2 weeks ago. I'm wondering if that's just a timing issue or if there's something else in there?

Jeremy J. Aguilar

Yes, Scott, it's really as a function -- as we continue to close out the quarter, we had some revisions to our previous estimates largely around the actual spend year-to-date and the forecast remains for the year. Overall, there is no change in our strategy when you look back to the beginning of the year and throughout most of the year, ours expectations were around $50 million to $55 million as we continued to slow our growth and take down CapEx, the most recent estimate is $45 million. So going down from $50 million to $55 million down to $45 million.

Operator

Our final question will be from Dan Binder of Jefferies and Company.

Daniel T. Binder - Jefferies & Company, Inc., Research Division

Can you talk a little bit about learnings in the fitness business? And you're talking about expanding furniture beyond the living room. I'm just curious, from a merchant perspective, do you think you need to attract some more talent there? It sounds like maybe for fitness you had some learnings that were a function of maybe somebody that was not typically buying that category starting to dive into it. So just from a human resource standpoint, do you think you have the right management merchants in place to pull off this transition?

Dennis L. May

It's a great point, now. We've been making investments in our merchandising staff. Actually, we've brought in I think 5 new buyers into the buying team to call it throughout the last, probably 6 months, in that regard. So we are making investments into our merchandising team. First of all, expanding the overall team to -- because we're going to be in more businesses, but also adding different areas of expertise in that regard. So look for us to continue to make investments in that merchandising team because we've got a great squad there. But as we get into more businesses and more categories, then we need to make investments where we bring more folks on board to help us drive that. So -- and we've built out our Inventory Analyst Department to, again, make sure that we've got the right inventory at the right place and the right time. What we do find about this business is interesting, especially in the furniture category, is the similarities to the behavior of that product is so similar to appliances, in seasonality, geography and just how the product is sold and how the consumer behaves. So some of it is learning about a new industry, and part of it is also learning about how this industry interacts with hhgregg's consumer. So I think we have to mesh the 2 together and see how they fit. But we're pretty excited about the initial taste is pretty good. So we're excited about growing it.

Daniel T. Binder - Jefferies & Company, Inc., Research Division

And do you anticipate having a sort of an opening price point to a premium product spectrum? Or are you going to be focused more in the middle in those newer categories?

Dennis L. May

I think we'll be more focused on the middle. Probably the area of opportunity for us is more opening price point in fitness. In that regards, more promotional nature in fitness. I think in the furniture area, I think we have found the right position, and that's in the middle of that business. We'll continue to learn. But again, Dan, its -- we're going to be very curious. We're going to test a lot of different things. And we'll find our way quickly but we'll also make sure that we're thoughtful about what the assortment needs to look like and what does the hhgregg consumer want to see out of us both from new categories, new products and also different price points.

Daniel T. Binder - Jefferies & Company, Inc., Research Division

And my last question was around credit. I know when we spoke at ICR, you're still working through that to figure out what the best partners are and so forth. I was curious, it sounds like you're well underway in testing that the lower FICO score offering and you've got the upper FICO score as a offering through your own credit card. In that middle, when do you -- when would you expect to find the right partners in starting -- start to test that? Is that later this year? By holiday? Or do you think you'll have a good program in by holiday?

Dennis L. May

Yes. I think with -- I think what I would say is, based on the amount of IT work and the amount of regulation that you have to navigate through amongst that IT work, our expectation is that we would pilot a test program prior to holiday.

Andy Giesler

This concludes our call. We'd like to thank you for your participation.

Operator

Ladies and gentlemen, thank you for participating in today's program. This does conclude the conference, and you may all disconnect. Everyone, have a great day.

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