Seeking Alpha
Long/short equity, special situations, momentum, event-driven
Profile| Send Message| ()  

Investment Thesis For Shorting hhgregg

In the wake of a disappointing retail season, hhgregg (HGG) is not the only retailer in dangerous waters. However, a number of factors could make hhgregg particularly vulnerable in the future.

Traditionally, the holiday season (roughly November 26-January 2) has been very important for retailers of all shapes and sizes. This season provides retail companies with substantial parts of their annual revenues-as much as 30 percent for some companies. Many companies hire additional staff members for this time. It is also common for firms to spend weeks preparing seasonal signage and decorations.

The 2013 holiday season was highly disappointing for the U.S. retail sector. Though some retailers managed to achieve their goals last year, many more organizations are alarming the public with profit warnings. hhgregg is one company with fairly dim prospects for the future. After recently issuing a revenue warning, hhgregg experienced a 16% stock collapse over the course of two days.

A summary of hhgregg's 2014 Second Quarter is below -- with top bullet points highlighting the company's overall decreases. Image taken from hhgregg website.

(click to enlarge)

The struggling retailer faces the same problems that are dimming prospects at GameStop (GME), Best Buy (BBY) and RadioShack (RSH). It isn't fair to say that hhgregg's crisis resulted solely from consumers staying home and shopping online. In 2013, consumers responded to improving economic conditions as they visited malls and shopping centers in droves. If consumers engaged in fewer real-life shopping trips, this only represented a small change over previous years.

Although consumers continue to visit brick-and-mortar stores, they simply aren't willing to spend as much as they used to. Even though the U.S. economy is back on track, retailers are under enormous pressure to provide greater discounts for their customers. Used to shopping at online discount sites, buyers often approach physical retail stores with a spirit of criticism. In this environment, retail-dependent companies like hhgregg will have to scale back significantly in order to survive. It remains to be seen if hhgregg has the corporate will to make these painful changes.

Most analysts agree that hhgregg's future is highly uncertain. Though it is possible that the company could conduct reforms and maintain viability, this outcome is fairly unlikely.

Set in their ways, old-fashioned companies like hhgregg don't often have the flexibility to perform well during times of industry-wide stress. As the retail industry continues to implode, investors should tread carefully when it comes to hhgregg.

Source: Investors Should Short hhgregg