Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Hhgregg Inc. (NYSE:HGG)

F3Q09 Earnings Call

February 5, 2009 9:00 am ET

Executives

Jerry Throgmartin – Chairman, Chief Executive Officer

Dennis May – President, Chief Operating Officer

Don Van der Wiel – Chief Financial Officer

Andy Giesler – Director of Investor Relations

Analysts

Rick Nelson – Stephens Inc.

Mitchell Kaiser – Piper Jaffrey

Brad Thomas – KeyBanc

Brian Nagel – UBS

Gary Balter – Credit Suisse

David Magee – SunTrust Robinson Humphrey

Michael Lasser – Barclays

Operator

Welcome to Hhgregg's third quarter earnings conference call for fiscal 2009. (Operator instructions) I will now turn the conference over to Andy Giesler, Director of Investor Relations for Hhgregg. Please go ahead.

Andy Giesler

With me today are Jerry Throgmartin, our Chairman and Chief Executive Officer, Dennis May, our President and Chief Operating Officer and Don Van der Wiel, our Chief Financial Officer.

During today's call, Jerry will make some opening comments, Dennis will provide highlights from our third quarter and Don will conclude with a discussion of our liquidity and capital resources and an update of our earnings guidance. At the end of our prepared comments, we will have until 10:00 am ET to discuss any questions that you might have.

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 believes that the expectations reflected in these forward-looking statements are reasonable and can give no assurance that such expectations for any of its forward-looking statements will prove to be correct.

We refer you to today's earnings release, the MD&A section of our Form 10-Q and the risk factor section of our Form 10-K for additional discussion of these risks and uncertainties. In addition, we will discuss net income and earnings per diluted share as adjusted to primarily exclude the impact of the loss from the early extinguishment of debt from the debt refinancing completed in connection with our initial public offering in July 2007, all of which are considered non-GAAP measurements.

We use these measurements to highlight operating performance. Please refer to our reconciliation of net income and diluted earnings per share as adjusted in the non-GAAP disclosure section on our investor relations website, which can be accessed through www.hhgregg.com.

With that, I would like to turn the call over to Jerry.

Jerry Throgmartin

We were pleased with our solid performance during the third quarter in light of the tough macroeconomic environment and ongoing challenges in retail in general. Though macroeconomic trends continue to present stiff headwinds and affected our sales during our third quarter, we were very pleased with our ability to manage margin, expenses and working capital.

There has been substantial market volatility stemming from recent turmoil in the financial and credit markets and growing unemployment, which has created economic uncertainty. We believe that this economic uncertainty has contributed to a significant drop in customer traffic since the last two weeks in September.

In the face of this economic uncertainty, we developed a plan to maximize our bottom line results and believe that we executed it very well as reflected by a 15.6% increase in our third quarter earnings per share over last year. This was achieved by focusing our attention on the aspects of the business that we can control namely our plan to sell, expense management, inventory control, and working capital management.

Even though we saw gradual modest improvement in customer traffic trends throughout the third quarter and into the start of the fourth quarter, we do not expect any demonstrable improvement in the macroeconomic environment for the foreseeable future. As a result, we will continue to focus on the aforementioned controllables.

In the longer term we are confident that we are well suited to take advantage of the upturn in the economy through an improvement in real estate terms, and most importantly, increased market share gain. We move forward with a strong liquidity position, a powerful operating platform and a team that is energized and focused on maximizing the many opportunities that lie ahead.

Before I turn the call over to over Dennis to discuss some important third quarter trends, I want to acknowledge the dedication and effort of all of our associates who continue to make us a compelling alternative to low-serve big box competitors. This market is like nothing I've ever seen before, and I couldn't be more pleased with the level of execution that our associates are delivering during these times.

I will now turn the call over to Dennis.

Dennis May

Let me reiterate Jerry's sentiment as it relates to our performance during the quarter. Despite an extremely tough macroeconomic environment compounded by our heavy balance of sales in appliances, we were able to achieve a 15.6% increase in our diluted earnings per share during the third quarter due to our ability to manage our plan to sell, expenses, inventory and working capital. These results are a testament to the caliber and dedication of all of our associates across the organization.

During the third quarter, our comparable store sales decreased by 13.2% on top of a 3% increase during the third quarter last year. This was comprised of a 21.9% decline in appliances, which comprised 28% of our business, a 6.9% decrease in the video category, which comprised 54% of our business, and a 14.6% decrease in our other category, which comprised the remaining 18% of our business.

The 21.9% comparable store sales decrease in the appliance category during the third quarter came on top of a 27% decrease last year. The decrease primarily reflected double-digit comparable store sales decline at entry level and lower mid-price point major appliance products.

Once again, high efficiency and front-load laundry and three-door refrigeration performed better than the company average and contributed to higher average selling prices for the entire appliance category. The weaker comparable store sales performance of the appliance category, relative to the video category and the other category, contributed to an approximate 3 percentage point decline in the appliance category share of our consolidated sales mix.

We continue to expect that appliance unit shipments will rebound with the eventual rebound of the economy returning to its long-term historical pattern of low single-digit unit growth. When this occurs we expect the appliance share of our consolidated sales mix would return to historical norm.

The 6.9% comparable stores decrease in video during the third quarter lapped a 2.2% increase from the prior year. The decrease in video sales performance was primarily driven by the compression in average selling prices of flat panel televisions outpacing double-digit comparable store sales unit increase.

The 14.6% decrease in comparable store sales in the other category followed a 13.3% increase in the comparable prior year period. The comparable store sales decrease in the other product category was driven largely by decreased sales of mattresses and personal electronics.

Gross profit margin expressed as gross profit as a percentage of net sales increased by 90 basis points. The appliance gross profit margins exceeded the consolidated gross profit margins. The appliance category accounted for approximately 3 percentage points less of the consolidated net sales relative to the comparable prior year period, thereby negatively impacting the consolidated gross profit margin.

Buying opportunities in the video category was attributable in large part to excess industry supplies had a distinct positive impact on the consolidated gross margin rate compared with the prior year period. Small changes within the other product category net sales composition had a modest positive impact on the consolidated gross profit margin when compared with last year.

SG&A expense, as a percentage of net sales, increased 62 basis points when compared to the prior year. The increase was primarily due to gross investment totaling 30 basis points largely comprised of store pre-opening expenses associated with six new stores, as well as distribution and management infrastructure investments in Florida. These gross investments and the de-leveraging effect of our comparable stores sales decline was partially offset by effective cost controls over general and administrative expense, including a reduction in bonus expense.

Net advertising expense decreased three basis points compared to the comparable prior year period. This was achieved by a combination of efficient spend plan and attractive spot rate buying opportunities following the presidential election.

We intend to continue to manage our inventory levels and assortments closely during the next year. As of December 31st, we reduced our average inventory per store by 16.4% compared to last year to 1.7 million. We remain confident in our ability to nimbly manage our plan to sell and our directed sales force in such a way to offer tremendous values to the consumer while maximizing our gross profit margins.

I would now like to take a moment to expand on significant long-term opportunities that Jerry alluded to earlier. First, we are aggressively pursuing the electronics market share once garnered by Circuit City. To this end, we have extended our offer to accept Circuit City gift cards in our stores through April 1st. These gift cards will be good toward up to 20% of the total hhgregg product purchase price.

Additionally, we have developed a program with our vendors to honor manufacturer’s warranties on items purchased in Circuit City stores. While there is no financial benefit on either of these warranties, we believe that there’s a tremendous opportunity to demonstrate our commitment to superior customer service and provide the consumer with valued support during these trying times.

We have been closely monitoring the impact of the initial round of Circuit City closings on our business. The most apparent impact of these closings during our fiscal third quarter manifested itself in terms of favorable buying opportunities. With our short inventory purchase cycle and directed sales force, we were able to partner with certain of our vendors in the excess supplies to our customers at a very compelling value.

During the month of January, some of those markets impacted by the initial Circuit City closings announced in November have experienced an improvement in historical run rates relative to the chain average. Having said that, we believe that there will be an unfavorable short-term impact on our business during our fiscal fourth quarter from the liquidation of the remainder of the Circuit City store base.

The impact, which has been incorporated into our updated earnings guidance, is expected to have a modest negative effect on our sales, gross margin and advertising spends. As mentioned before, we are aggressively pursuing Circuit’s old market share and are optimistic that the expected market share gains will benefit our business over the long-term, however at this point we cannot accurately estimate this impact.

The second significant long-term opportunity that Jerry alluded to relates to real estate. Due to the mounting number of retail chain bankruptcies, we are beginning to see an increase in store supply of quality locations at more reasonable rental rates in certain markets. This presents a significant opportunity for our long-term growth plan, tempered in the short-term by our desire to conservatively manage liquidity and debt levels.

With that, I would like to turn the call over to Don to discuss our liquidity and capital resources and an update on our fiscal 2009 earnings guidance.

Don Van der Wiel

We ended the third quarter of fiscal 2009 with $1.7 million in cash compared to $3.3 million for the prior year. As of December 31, 2008, we had $14.8 million of borrowings under our line of credit and $4.1 million in outstanding letters of credit drawn on our revolving credit facility, leaving us a net borrowing availability of approximately $81.1 million in our revolving credit facility.

As of yesterday, we had $4.4 million of cash and cash equivalents and no outstanding borrowings on our revolver. In addition, we had net borrowing availability of $95.9 million under a revolving credit facility after accounting for a draw of $4.1 million in outstanding letters of credit.

We are very comfortable with the adequacy of our cash flow from operations and our existing revolving credit facility to support all of our funding needs. Our revolving credit facility is a traditional asset-backed lending facility, which does not expire until July 2012. There are no financial covenants until we reach a trigger point within $8.5 million of our borrowing capacity.

Our term [inaudible] facility consisting of $89.3 million of term loans as of December 31, 2008, has one financial covenant related to maximum leverage under which total indebtedness cannot exceed three times a trailing 12-month EBITDA as so defined. As of December 31, 2008, our leverage ratio was 1.57.

Continued economic uncertainty resulting from the turmoil in the financial markets and growing unemployment has significantly impacted customer traffic patterns since the middle of September. Customer traffic patterns are much more volatile and less predictable than we have historically experienced. Consequently, despite efforts to personally manage our gross profit margins, SG&A expense and working capital position, we maintained a broad range of projected results for fiscal 2009.

Based on a comparable store sales decline of between 7% and 11% in the fourth quarter of the fiscal year, net income for diluted share for fiscal 2009 would range between $0.85 and $0.95 as compared with the previous net income per diluted share guidance of $0.75 and $0.90. This would result in a comparable stores sales decline of 8% to 10% for fiscal 2009 as compared with an 8% to 12% comparable store sales decline under prior guidance.

Net sales would grow between 9% and 12% for the fourth quarter of the fiscal year, which would result in net sales growth between 9% and 12% for fiscal year as compared to 9% and 13% in previous guidance. We plan to open 20 new stores during fiscal 2009, of which 18 have been opened.

Capital expenditures net of sale [inaudible] proceeds are expected to range from $24 million and $26 million for fiscal 2009 as compared with prior guidance at $29 million to $31 million. We expect to finance these capital expenditures with cash from operations and do not expect to be drawn on a revolving credit facility as of March 31, 2009.

At this time, I’d like to turn the call back to the operator so we may entertain any questions that you might have.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from Rick Nelson – Stephens Inc.

Rick Nelson – Stephens Inc.

Can you talk about comps and how they are tracked during the quarter? Did the declines moderate as the quarter progressed?

Dennis May

Rick, we don’t give specific color around month-to-month. I think what we would say is, as we said on our call, is we saw traffic improve throughout the quarter into the fourth quarter. So as we look at that we think about business throughout the quarter improving through Q3 and improving into our fourth quarter.

Rick Nelson – Stephens Inc.

And the Circuit City liquidation sales, do they steal traffic from the Gregg stores or do they in fact boost traffic from the stores?

Dennis May

Well I think that they probably generate interest from consumers, but our expectations are that the Circuit City liquidation in our fiscal fourth quarter would have an impact on both, a marginal impact on both our traffic and our margins.

Rick Nelson – Stephens Inc.

And that’s what you’re seeing to date?

Dennis May

As we look out into the quarter, their liquidation will go all the way through, my understanding, will go all the way through our fiscal fourth quarter. So that liquidation will go through the quarter. Historically the discount from the liquidators will increase as they get closer to the end of that quarter.

Rick Nelson – Stephens Inc.

The leverage in advertising expense in the third quarter, what drove that? Are you getting better media buys or are you in fact pulling back on advertising or is it just more leverage of bigger sales?

Dennis May

Yes. The primary driver there, Rick, was better leverage around being able to buy effective media and buy it at reduced rates. So we were pretty pleased with our agency’s ability to go out into the market place and negotiate attractive cost performance rates around media.

Rick Nelson – Stephens Inc.

One final question on the opportunistic buyers that you talked about during the quarter, are those in fact becoming more abundant with the Circuit City demise?

Dennis May

Well, what you saw was a combination of two drivers in the fiscal third quarter for us, you had the Circuit City issue and you also had just had an oversupply in the channel, Rick. That oversupply of TVs was driven primarily through the downturn of the economy.

What we have seen is that oversupply correct itself, as we kind of look into the TV channel right now, we believe that weeks supply of supply of inventory in the entire TV channel has been right-sized and is pretty much on point.

Operator

Your next call comes from Mitch Keiser – Piper Jaffrey

Mitchell Keiser – Piper Jaffrey

On the inventory side, I think coming into the third quarter you were down pretty substantially on the video, I’d calculate almost 40% per store on inventory. It looks like coming out of the third quarter you’re in a similar situation. So I guess the question is do you continue to feel pretty lean on inventory and feel that there’s an opportunity to take advantage of any buys if they should come?

Dennis May

Yes. Mitch our focus all through fiscal third quarter, fourth quarter and beyond in this environment, we feel like it's really prudent that keep your purchasing cycles very short. We feel like we're really well positioned to take advantage of buying opportunities for two reasons.

One, we are efficient in how we flow our inventory, but also a real strength of our model is our directed sales force. So merchandising team works hand-in-hand with store operations to maximize profitability through focusing on our plan to sell, and that plan to sell is a very strategic one. We're working very closely with our manufacturers during this tough economy to maximize, not only our margins, but also to do the best we can to help drive their mix.

One of the reasons we've been as important to our suppliers as we are, is during this tough economic times we're able to deliver a best in class product mix. So that's exactly right.

Mitchell Kaiser – Piper Jaffrey

In terms of this store growth, I know you haven't guided for next year, but could you just help us think qualitatively about how you are going to approach that market, particularly with all the Circuit City stores closing?

Jerry Throgmartin

Mitch, this is Jerry, and I think that, I'd like to try to kind of do a level set on growth. While we haven't given guidance on next year, obviously there's an opportunity that creates with this situation, a huge runway for us and we felt like before this that our model created a great runway for growth as an alternative for consumers. We think that's even enhanced now in this particular situation.

I think as we look at growth we're still a growth company. We're very pleased with and have demonstrated our ability to grow without a drop off in execution. We've been able to transfer our culture, our values, and more importantly, our customer satisfaction levels as we've gone into new markets.

So, that's very positive in that we're not growing out of our ability to execute. As we look forward with this great runway and great opportunity, we have to balance that with profitable growth and the management of working capital, and those three things, growth, profit, and working capital will be the kind of the guideposts that we use to grow.

This is not an economic environment where you get any hero badges from banks, suppliers, or anybody else for getting too close to the edge on your working capital, even though some opportunities might be exciting. We obviously continue to focus on making a profit every step that we go, and we will continue to do that.

So we're going to take those three things, look at the opportunities, and I can tell you that we are diligently looking at all the opportunities and many opportunities, but we will balance that with profit and working capital management in an economic time that is as uncertain as any of us have seen, and make sure that we not only grow, but that we're left standing to reap the benefits of this great opportunity.

Mitchell Kaiser – Piper Jaffrey

Then is it fair to assume that new store growth would be funded from cash from acquisitions, or how do you think about financing those?

Dennis May

Historically our company, Mitch this is Dennis, we've been very proud of the fact that we have funded growth from free cash flow, and you know as we look into our future, I've felt that we want to continue that track record, and our expectations that we would continue to fund our expansion from free cash flow.

Mitchell Kaiser – Piper Jaffrey

Lastly, I know it's probably splitting hairs a little bit, but just wanted to understand the dynamic on Circuit city. We’ve seen [inaudible] put out good numbers on the comp side today. Yesterday Costco talked about strength in the TV category. Is your expectation that the promotions are more impactful in February and March than they were in January, as it relates to Circuit City or how should we think about that, because my perspective is from what I've just hearing in the channel and others reported, is that the January month was actually pretty good.

Dennis May

Well, Circuit hasn't shared with me their liquidation plans in great detail, Mitch, but what we would expect and what historically has followed with in the past, is the first month out of the gate for the liquidating retailer has pretty low discounts, and they really just kind of ride on the handle of a, an advertising handle of going out of business.

Our expectation of those discounts will steepen in February and get even steeper in March. Again, not necessarily knowing the details of what they have planned. That's just historically how we have seen liquidations go in the past.

Mitchell Kaiser – Piper Jaffrey

Is it fair to assume that the inventory that they had is the better inventory that would be kind of comparable to what's in your store might be blown out at this point?

Dennis May

Well, we monitor that pretty closely. As we sit here today, we feel like they still have a relatively good base of inventory, so as we do store checks and as we monitor that, at this point we still see pretty grade A inventory in there available for sale. I think you'll see that change pretty rapidly as you see discounts you know go up, but again difficult for us to estimate exactly when that will be.

Operator

Next question comes from Brad Thomas – KeyBanc Capital Markets

Brad Thomas – KeyBanc

Wanted to follow up a little bit on your thoughts on your comp outlook, your guidance for the fourth quarter does imply acceleration. You know it sounds like Circuit City could have a little bit of a negative impact here though March. What is it that gives you confidence that comps could pick up?

Dennis May

Well, I think what we’ve said is that we've seen traffic overall throughout the quarter, fiscal third quarter, Brad, improve and we've seen that carry into our fiscal fourth quarter, and we feel like we've tried to take all the estimates of both the economy, the impact of Circuit, and that's really the logic behind our guidance for both the fourth quarter and for the annual guidance.

It's kind of taking where we're at in our current run rate and traffic, what expectations do we estimate that the winding down of Circuit City could have, both on traffic and margins. That was kind of the logic that we used as we looked at our fiscal fourth guidance and our annual guidance. That's really the drivers that put us where we're at today.

Brad Thomas – KeyBanc

So would it be fair to assume that you'd see a lift in the video category since that's where you really have the over lap?

Dennis May

Certainly the biggest opportunity long-term for us with this change at Circuit City, because Circuit does not carry appliances, the biggest opportunity for us in the long-term share gain is going to be in this video business. So we're pretty excited about this, as Jerry alluded to.

As we look at the runway of this organization, we've always been very bullish on our model, we think this is just another data point to really point to the company having a great run way and tremendous long-term growth potentials.

Brad Thomas – KeyBanc

Then as you think out of it a little bit longer, now you got into computers a little bit more a couple years ago and tested video games during the holiday season, how are you thinking of some of these categories that Circuit City used to have a pretty big presence in?

Dennis May

Well, yes, as I said earlier, videos are probably the biggest opportunity Brad. What I would also ducktail on that computers, we got into computer, notebook computer business a couple of years ago. That business has continued to grow for us. Our expectations are it will continue to grow and grow faster than the industry.

So our expectation long-term is that we would pick up market share in computers. We were pleased with our video game tests that we had this Christmas season. Our expectations are videogames will be a permanent category for our company, not just a seasonal category, but a permanent business.

We're still assessing exactly how broad that business could be for us. I would expect those to continue to be conservative and how we grow that business, but we do believe some of these other categories that Circuit City had share in, are going to continue to benefit our company.

Operator

Your next question comes from Brian Nagel – UBS

Brian Nagel – UBS

A couple of questions, and then I guess a somewhat of a follow-up to some prior questions. But, Dennis, on the gross margins we saw the big pop up in gross margin and you explained in your prepared remarks with they reflect we did the better buying. As we're modeling out, how should we think about the sustainability of that, because as I understand it, there was a piece that was, more or less at one time, that also reflects what I think is maybe you’re improving clout with your vendors, but I guess how should we think about the sustainability of that gross margin problem?

Dennis May

Well, Brian as we said here today we look forward to coming back to you next quarter with fiscal 2010 guidance and hopefully be able to talk more at that time about how we see our long-term prospects around our major economic drivers.

What I would say is whenever there’s a storm in this industry our track record and our business model shows the best, whether it be what we saw this Christmas season or what we saw in the 2006 Christmas season. We have the ability through a very seasoned merchandising staff combined with a directed sales force, and to your point, we have the ability to navigate through stormy waters. We also have the ability to take advantage of opportunities on the buying side as well as anybody in this channel.

So I think it really speaks to the strength for our model that we are able to leverage margins the way that we did this Christmas season. However that being said, the significant over supply of inventory that was in the channel was not good for our suppliers. As you continue to see them come out with their announcements around the Christmas selling season they – obviously it was very challenging on their earnings.

So again, my expectations are that our suppliers are going to be very focused in this tough economic time about keeping their inventories in line and I think you’re going to see a tremendous amount of focus from the TV suppliers specifically to manage that inventory.

That being said, our relationships with our manufacturers are better than ever. We’ve always had strong relationships. They’re more strategic than ever. As they look into their future they see Hhgregg as a significant part of the solution to address product mix.

These manufacturers need a retailer to be able to stand in front of the product, explain the features and benefits of new technologies and sell innovation because the preservation of ASPs and the preservation of gross margins, not only for the retailer but also for the manufacturer, is going to be accomplished through selling technology, selling innovation. And that’s just not being done in low serve or self serve retail today. So to your point we really feel like our relationships are solid. We feel like they’re only going to get better.

Brian Nagel – UBS

And the second question, on the circuit opportunity, since you look at the dynamic in the marketplace right now as I understand it you have stores that competed with Circuit City at one time and those Circuit City stores are already closed. Can you maybe give us a little help on what you saw in the sales trends at those stores before and after the nearby Circuit City was actually shuttered?

Dennis May

Brian, for competitive reasons I really can’t quantify the impact of that and hopefully you understand that, but what we have said and what I would say is that the run rate of those stores compared to the chain average. We saw material movement. We saw material improvement in the performance of those stores.

Brian Nagel – USB

And then a final question, you’ve talked before about it and again today about the program to accept the Circuit City gift cards, maybe you can help us understand the success that if there’s any measurable impact upon your results either way right now?

Dennis May

Again, we are aggressively pursuing Circuit City’s market share. We’re sharing as much as we’re comfortable for competitive reasons. We’re not the only one out there that’s trying to gain that market share so hopefully you understand that we’re really not eager to give away too many secrets around that.

However, we would say that we’ve had tremendous response from customers and most importantly tremendous PR within the communities and the marketplace, and I think it just exhibits our style of service and the way that we go to market. That being said, we really don’t break out any of the specifics around how effective that program has been for us.

Brian Nagel – USB

Thanks a lot. Again, great quarter and good luck with the next one.

Operator

Next we’ll go to Gary Balter– Credit Suisse.

Gary Balter – Credit Suisse

Thank you, guys. A couple of follow-up questions to Brian’s; there’s another company, this other elephant in the room called Sears, which some people put on death watch, others think it's doing fine. Could you talk, they seem to be more aggressive in the Christmas season in appliances. What have you seen from them promotionally in both consumer electronics and appliances?

Dennis May

We try not to comment a lot about specific competitors. We have seen that retailer, that you said I didn’t, we’ve seen them be pretty competitive and pretty aggressive in the marketplace. More so in fiscal Q3 around the Christmas season both in really appliances and electronics we saw their share voice increase and we saw them be a little more competitive around promotions and discounts.

That being said though, I tell you as we look at our competitive posture in the marketplace we feel great. We’re an industry that’s all about comp shopping and making sure that we are competitive in the marketplace.

We’ve done a really good job throughout the quarter of adjusting to the environment we feel. And promotionally that’s important to be able to read the consumer cues and be able to tie in where they perceive value to be and our pricing and our promotions have been very compelling. But we’re definitely seeing, as we look at the marketplace, we feel like we’re positioned properly.

Gary Balter – Credit Suisse

You mentioned that rents going down or getting better. Could you put some context around that in terms of how much do you see as you model that, how much do you think you could save in terms of rent costs?

Dennis May

We’ve seen significant movement, again for competitive reasons we’d like not to say exactly what we’ve seen there in rental rates; it’s very material. And it’s material, Gary, not only around what we’re paying for rates but also our terms, the quality of the locations that we’re able to access, the flexibility of the landlords and how they’re willing to contribute whether it be TI dollars or the terms within the lease. So it’s location, it’s rental rate and it’s also just flexibility from the landlord.

As we look at these opportunities in front of us, the ability to quickly penetrate a market is so important for us compared to going into the market and taking maybe 12 to 18 months to penetrate that market. If we can go into a market and reduce that cycle time from beginning to end it’s going to be materially important for us.

Gary Balter – Credit Suisse

Does it also give you a chance to renegotiate old rents that you have with some of the same developers?

Dennis May

Well, I think the opportunity as leases come to the end of their term, not in the end but even the back quarter or whatever, I think you have an opportunity there definitely. One of the things that’s important to remember about our company though is our fleet is very, very new. If you look at the organization, we really are, and that’s a good thing by the way, it’s a good problem to have when you say oh, your real estate’s very young.

So we have a relatively new fleet of stores. We will definitely leverage those opportunities where ever possible. We see the impact of rental rates being felt more gradually as we expand simply because the fleet of locations that we have are pretty new.

Gary Balter – Credit Suisse

Has there been talk? You haven’t given us, obviously, the guidance for next year in new store growth, but given the environment we’ve seen other retailers just basically say hey, we’re going to pull back. It’s going to get worse from a real estate point of view. It’s going to create even better deals down the road. Is there some of that thought going on in the company?

Jerry Throgmartin

I think, as I was saying before about growth, we still think there’s an ability to grow. Now, we’re in an environment where you’re monitoring what’s going on in the world on a daily basis. When we talk about growing opportunistically, I think that might have been to your question, that is the deal that you do today in this environment could likely be better three months from now.

Now again, you have to temper that with well I could take that to the extreme and say that the next store that we’re going to add is in 2012 because that’s when the rates are going to be the absolute lowest. And what you’re really trying to find is where is there good value and what’s the right time to go in and start making money and growing share.

And I think we have to balance those things together. I think that there will be those opportunities. I think you continue to look at them. And the other thing – one of your earlier questions – I'd like to get folks to think about, as we look at rents and talk about that, in some cases what's happening is rental rates are making markets and/or stores viable opportunities when in my opinion a few months ago, a year ago the rents were just really out of sight.

And it did not make sense and you got to looking and saying how can retailers really go in and pay those kind of rents and make money long-term? And I think we're finding that in some cases they couldn't. And now it makes markets and stores viable that would not have been viable for us a year ago.

Dennis May

The one thing I would add onto Jerry's comment is we also see a mix change. If you look at the company's expansion for the last couple of years it's been primarily been driven by new construction and that new construction has much longer lead times around the time that you commit to the time you are actually able to open stores.

We see that mix reversing. Before it was 90, 10, maybe 85, 15, 85% new construction. We expect that to reverse the other direction. So the locations that are out there, and the quality locations that are out there are existing buildings so refurbishing or converting a Linens 'N Things box or whatever kind of box to an Hhgregg box is a much shorter cycle than building something out of the ground.

So you'll see the mix change, you'll see the lead time shorten, which in this environment anything we can do to shorten our lead time whether it be in purchasing products or committing to real estate locations is a good thing. So we see that also.

Gary Balter – Credit Suisse

Just understanding the liquidation process, is there any map involved in liquidation? Like do they take a Sony product and sell it for whatever they want during the liquidation or does Sony still control pricing even in that scenario?

Jerry Throgmartin

It's pretty difficult to have much of leverage. I think during liquidation you'll see pricing go where pricing goes. And whether they put the actual item in price or just 50% off but at the end of the day when you're going out of business relationships with vendors become a lot less important.

Gary Balter – Credit Suisse

So as it goes in the next 60 days or so we'll see a bit more impact. Just following up on Brian's question because that's a question as we model that's most complicated and you kind of deferred the question to later, so I'll try it again. But just trying to understand, we heard Costco yesterday tell us they passed back all of their savings and drove significant TV sales. We saw your numbers and basically you didn't say we kept it all but you had that one-time boost in gross margin.

We're trying – when reconciled those two statements because you both had good sales but part two is understand how much impact was that gross margin opportunity so we could model it up for future quarters?

Dennis May

Yes, Gary, we're going to have to continue to defer that for upcoming guidance. I appreciate your asking again. Our company – I'll tell you philosophically the way that we approach the business. Profit is a state of mind in our company and we're all about making money. So we want to be aggressive in the marketplace.

We try to balance though. As we see opportunities from our suppliers we're going to always try to make a profit, drive the business where it makes sense and sometimes you take pricing to street and sometimes you put it in your pocket. So we're always trying to balance market share versus profitability. And it's not a one size fits all for us. We're always managing that. Some of it is a reflection of the environment and some of it's a reflection of just where we need to be.

We're going to be balancing share versus profit versus mix in that regard. So you probably won't hear us say that we got good buys and just took it all to the street. You probably will never hear us say that we got good buys and we put it all in our pockets. So we're going to balance that. We definitely, as we look at the industry, we definitely picked up market share in the TV category during the holiday season.

Operator

Your next question comes from David Magee – SunTrust Robinson Humphrey.

David Magee – SunTrust Robinson Humphrey

A couple of questions, one is n the TV side can you tell us what the ASP was at least been qualitatively in the third quarter versus the second quarter?

Dennis May

I'm sorry, David, I . . .

David Magee – SunTrust Robinson Humphrey

Just the average selling price for the TVs, did you see much change in the second quarter to the third quarter?

Dennis May

We saw ASPs – what we said for the quarter, ASPs were obviously down this year versus last year in our third quarter. And ASPs also would be down in our fiscal third quarter versus our fiscal second quarter. For competitive reasons we don't disclose how much but when you look at the industry you saw the same thing. You see the industry ASPs and our fiscal second quarter dropping materially from second to third.

And what we would say is our ASPs significantly out-performed the industry this holiday season. So we were very pleased our plan to sell, how we went to market and our ability to execute around that. So if we look at our ASPS compared to the industry, whether it be DisplaySearch or NPD, we out-performed the industry this holiday season.

David Magee – SunTrust Robinson Humphrey

Secondly on the Florida stores what are you seeing there? I know they had maybe a little bit of softness in the second quarter relative to what you'd like it to be and some of that is obviously the environment. What's happening there recently?

Dennis May

It's pretty well documented in Florida the economy in Florida continues to be challenging. It continues to be soft in the state of Florida. However I would say we're very bullish in our long-term future in the Florida market.

We’ve had good entries into that market. We've got good real estate. We're very pleased with our customer satisfaction. We're very pleased with operationally how we are performing in the marketplace whether it be our metrics that we use or third party companies and third party metrics that we use, we've been very pleased by our execution.

And we believe long-term the Florida market will turn and our expectations in Florida will be one of our best if not our best comp store performing markets in the future.

David Magee – SunTrust Robinson Humphrey

And lastly on the appliance side we've had a couple of down years for this sector itself and we must be having an aging fleet out there with regard to refrigerators and the like. What are your early thoughts about the coming 12 months? Do you think that could be much flatter in terms of the decline or what are you thinking right now in regard to appliance standpoint?

Dennis May

David, as we sat with the industry pundit for the appliance category and all the analysts and the forecast for that sector one of the things that we would say is we have more volatility, more separation, a wider gap of expectations for the appliance industry for next year. There's just still a lot of volatility in it. As we look into our next fiscal year we're going to try to get a better handle on that. When we come back with any additional guidance for the upcoming year it will certainly encompass that.

But at the end of the day there's so much, the economy, housing industry, it's all of the different sectors that are driving that. So as we think about appliances we're very confident that when the housing market turns the appliance business is going to turn with it. And it's going to go back to being a very predictable, very stable business. If you look at the appliance business for the last 50 years it's been such a stable business. It's this economy and downturn in housing that compressed it and as we see those factors improving we're very confident the appliance business with improve with it.

Operator

Your next question comes from Michael Lasser – Barclays.

Michael Lasser – Barclays

We're in kind of a unique period where we're not going to hear from you on a formal basis for another four months just given that you're going to be having a little more time after your fourth quarter.

And since the outlook for your fiscal 2010 is so important and recognizing the fact that there is a lot of moving parts next year, was hoping you could offer a little more detailed commentary on the store opening plan for next year.

Is it safe for us to expect you're going to open at least 20 new stores because if we extrapolate a little bit of your commentary where a lot of the stores are go to be retro-fits and presumably some are going to be leased in the existing markets where there'll be more cost synergies so the operating losses will be less than they were this year, I mean you could have a pretty big ramp in new store growth over the next quarters?

Jerry Throgmartin

It will have an initial impact and it certainly has a negative impact on that, so I think you're going to see them monitor inventory in this environment very, very closely.

Michael Lasser – Barclays

Are there any concerns that supply swings too far in the wrong direction? In other words gets too tight?

Jerry Throgmartin

Yes, I think that would only be a concern if you saw a major uptick in demand that would outstretch capacity significantly. So I think from a manufacturing perspective we're sufficient capacity for the demand in the product channel. Obviously we don't have that risk because when we buy products on very short – we forecast long-term but purchase short term so we're in the driver's seat there.

But for the manufacturer we feel like there's sufficient capacity even if the units were to swing up more than expected.

Operator

And that does conclude the question and answer session at this time. At this time I'll turn the conference back over to management for any concluding or closing remarks.

Jerry Throgmartin

Well we would like to thank everybody for their interest and we look forward to talking to you in the future and have a great day, thank you.

Operator

And that does conclude today's conference. Again, thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Hhgregg Inc. F3Q09 (Qtr End 12/31/08) Earnings Call Transcript
This Transcript
All Transcripts