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hhgregg, Inc. (NYSE:HGG)

Q4 2014 Earnings Conference Call

May 20, 2014 08:00 AM ET

Executives

Dennis L. May - President and CEO

Andrew S. Giesler - Interim CFO, Principal Financial and Accounting Officer

Analysts

Oliver Wintermantel - ISI Group Inc.

Brian Nagel - Oppenheimer & Co.

Michael Goldsmith - UBS Investment Bank

Peter Keith - Piper Jaffray & Co.

Jason Campbell - KeyBanc Capital Markets Inc.

Mark Becks - JPMorgan Securities LLC

Richard Nelson - Stephens Inc.

Operator

Welcome to the hhgregg Fourth Quarter 2014 Earnings Conference Call. At this time, all participants will be put in listen-only mode.

I will turn the conference call over to Andy Giesler, Senior Vice President and Interim Chief Financial Officer for hhgregg. Sir, you may begin.

Andrew S. 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. During today's call, Dennis will discuss the current state of our business and discuss 2015 initiatives. And I’ll discuss our fourth fiscal quarter operating results. At the end of our prepared comments, we will have until 9 a.m. Eastern Time to answer your questions. In the interest of time and to ensure we’re able to answer as many questions from you as possible, we ask you to limit your questions to a single question with one follow-up.

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 the expectations reflected in its forward-looking statements are reasonable and can give no assurance 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 Factors sections of our Form 10-K, which was filed today for additional discussions of these risks and uncertainties.

In addition, we will discuss gross profit as adjusted, net income and earnings per diluted share as adjusted and SG&A as adjusted for the net impact of certain non-recurring charges relating to the exit of the contract space mobile phone business, asset write-offs due to the product mix shift and asset impairment, which are considered non-GAAP measurement. We use these measures to highlight operating performance. Please refer to our reconciliation of gross profit, as adjusted, net income and earnings per diluted share, as adjusted, and SG&A, as adjusted, and the non-GAAP disclosure section on our Investor Relations Web site which can be accessed through www.hhgregg.com.

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 thank you to all of our associates. It’s your hard work and dedication that differentiates hhgregg and ensures our customers receive a superior shopping experience.

As we mentioned in our pre-release, we faced a number of headwinds during the fourth quarter, which led to disappointing financial results. Aside from continued volatility in the consumer electronics business, extreme weather in January, February and the beginning of March negatively impacted traffic and overall operating performance.

Given our stores footprint, we’re more susceptible to regional weather conditions than most of our national competitors. As such, the majority of our stores which are located in the Midwest and mid Atlantic regions were significantly impacted by severe weather conditions during the quarter.

Despite these challenges the Company was able to report its 11th consecutive quarter of comparable store sales increases in the appliance category. We remain confident that our strength in appliances will continue to be the foundation of our Company, as the retailer of choice for home products.

After my comments, Andy will give additional detail on the financial performance of the fourth quarter and fiscal year. I will spend my time addressing our strategic initiatives for fiscal year 2015. We continue to develop our strategy becoming the Retailer of Choice for home products.

We believe that by successfully executing on our initiatives, we will be able to increase our top line results and operating profitability as well as to reinforce our brand relevance with consumers.

During the fiscal year, we will focus on redefining our sales mix, enhancing and differentiating our customer experience, expanding our e-commerce capabilities and launching new customer facing technologies.

The first initiative that I will discuss is redefining our sales mix. Over the past three years, we’ve seen our sales mix shift toward appliances and other home related products. We will continue to invest in appliances, furniture and bedding categories while stabilizing the consumer electronics category with our ultimate goal of lifting our sales volumes.

Sales in the appliance category have increased for 11 consecutive quarters. And this category is proven to be the cornerstone of our business. To continue to drive growth, we’re enhancing our displays of complete kitchen solutions, providing differentiated product assortments to our customers based on geography and demographics, more than doubling our current number of five Fine Lines locations and enhancing our special order capabilities.

In addition, we will continue to place a greater emphasis on the appliance category and our branding and advertising messages. While the appliance industry has had a slow start in the first half of calendar year, we believe that part of this impact was weather related and expect the industry to pick up and perform better in the remainder of the calendar year. We believe that we’re making the right investments in the appliance category to better position hhgregg to gain market share.

Consumer electronics will continue to be an important category for us during this fiscal year and beyond. Our goal for this year will be to stabilize consumer electronic sales. We will do this through further investing in larger screen sizes, OLED technology, and having an expansive selection of ultra HD 4K products.

While we do not believe the video category will be positive this fiscal year, we expect less pressure on the category due to the improving technology cycle and exciting new product launches. We will continue to utilize our computing category to not only drive traffic to our stores, but to showcase new technologies in computers, tablets, and introduce wearable technology.

As mentioned on our prior call, we were in the process of transitioning our furniture assortment by increasing the number of brands that we sell, resulting in a greater assortment of furniture merchandise at a variety of price points, which we believe better match our customers taste.

We will have approximately one-third of our new selection in-store in time for Memorial Day holiday, with the rest of the transition being rolled out through the summer. While we do not expect to dedicate any incremental floor space for this new selection of furniture at this time, we’ll continue to optimize our floor space that’s already devoted to furniture.

We also expect to continue to develop and enhance our credit offerings. Over the past 12 months, our non-recourse private label credit card penetration has increased over 280 basis points, to 36% of our total sales. We continue to encourage the use of the card, the unique benefits such as in-store payment options, reward offers and extended financing options.

Over the past two years, we’ve grown our credit offerings beginning with the rollout of a lease to own option in fiscal 2013 and the rollout of the secondary finance offering in fiscal 2014, both through third-party providers and non-recourse to our business.

We are continuing to modify our credit offerings to best meet the ongoing needs of our customers. We are very pleased with the progress that we’ve made here and expect that in fiscal 2015 over 40% of our business will be done through one of our credit offerings.

Our second initiative for fiscal 2015 is continuing to differentiate our customer experience. hhgregg provides customers with an educated sales force to assist them in making informed decisions about their purchase. We are continuing to refine our selling techniques to embrace technology and utilize omnichannel strategies to better connect with our customer base in-store.

Our goal will be to better serve and engage our customers by providing a truly differentiated shopping and purchasing experience. One example of a differentiated approach is our in-store price comparison tool, which allows our sales associates to engage with the customer and will be available to all of our stores.

We believe we should allow customers to embrace technology during the purchase experience, while eliminating pain points and most often frustrate customers who are buying large products for their homes and key to unlocking our brand potentials through a truly differentiated purchase experience.

Enhancing our e-commerce capabilities is a critical component of our initiatives for this fiscal year. We will continue to rollout new capabilities that provide our customers a truly omnichannel shopping experience, allowing them to move seamlessly across various mediums, including store, Web, mobile, social and call center.

During fiscal 2015, we plan to invest in infrastructure upgrades, additional Web application capabilities, enhancing our mobile application and continue to add a greater selection to our expanded assortment. We expect to improve our nationwide delivery model, add additional payment options for efficient checkout and make personalization updates, such as profile improvements, recommendations and communications.

We will continue to develop applications for mobile commerce and establish third-party application partners to drive greater traffic to our site. In addition to functionality, we expect to offer greater selection for our customers. In fiscal 2014, we tripled our product assortment online by carrying products that are not available in stores.

During fiscal 2015, we plan to grow our current partner base by seeking opportunities with other vendors and adding an in-store kiosk, where our associates can assist our customers in purchasing these products.

Our online presence is an important piece of our success. We are pleased with continued growth in e-commerce as we’ve seen nearly 60% sales growth calendar year-to-date. We know that many consumers start their research online. We want to continue to make hhgreg.com an advantage for our brand.

Finally, we’re focused on integrating new customer facing technologies into our overall purchase experience. We’ve discussed on previous calls our new POS launch, and we’re excited to report that we’re in the rollout phase of that launch having successfully converted 25% of our chain to date.

We expect to complete the chain-wide rollout by the end of the summer. Our new POS system will provide operational improvements, customer service improvements and a streamline checkout process. In addition, the new POS system will allow us greater capabilities in the future with a truly connected strategy as we will have the ability to integrate our POS and Web transactions.

Our second customer facing technology, which is currently in the process of being rolled out as our new delivery tracking system. The goal of this system is to not only provide more efficient delivery routes, but more importantly to provide an integrated tool that allows for communication before, during, and after the delivery process.

We understand that having a delivery come to your house may require you to leave work or juggle your schedule. With that in mind, we will be deploying a solution that allows constant communication between the delivery team and the customer. This will help ensure hhgregg provides the customer with a seamless on schedule best-in-class home delivery.

We expect to have this core functionality of this system in place in all of our distribution centers prior to the end of this month. In addition to our strategic initiatives for the fiscal year, I want to give you an update on our fiscal 2015 store opening plan and discuss with you changes that we’re making to our marketing messaging.

We intend to open two to four new stores in fiscal 2015, which will all be within our existing distribution network. While we have not been aggressive with new store openings in the past two years, we’ve been able to capitalize on opportunities to relocate some of our oversized boxes to our prototype sized box in better retail locations.

We plan to relocate three to five new stores this fiscal year along with the addition of six to eight fine line locations. Aside from our modest store growth plan for this year, we continue to opportunistically review real estate locations, with a long-term goal of being a national retailer.

We recently aired a new and fresh marketing campaign that highlights the joy that families experience when they bring their new purchases home. We began airing these spots in early May and will continue to utilize components of this new branding messaging throughout our advertising mediums.

In addition to refining our message, we’re working to utilize consumer data points to better target our key customer segments to more efficiently spend our advertising dollars. Despite the challenges of last year, we’re excited about our current fiscal year, our opportunity to transform our business through our strategic initiatives.

During the first half of this fiscal year, we will be implementing many of these investments that we’ve spend a significant amount of time planning the last year. We are excited to monetize on so many of our customer facing investments, including a new marketing campaign, new e-commerce capabilities, new product selections, enhance financing offers, a new POS system and a new delivery tracking system. Along with these initiatives, we’ve hired new members of our senior leadership team. We are excited to bring their knowledge and expertise on board as we transform our business.

As we look to fiscal 2015, it’s important that we point out differences we expect to see between the first half and the second half of fiscal year. We believe that the first half of fiscal year will be more of a challenge to the Company as we face tougher compares, as we were comparable store sales positive in the first quarter of last year with high single-digit increases in the appliance category.

We also believe that the second half provides us an opportunity as we look at our performance along with the fact that so many of our initiatives will be operational. We believe our responsibility is to inspire and delight our customers with a truly differentiated purchase experience to help bring our homes to life.

In doing so, we will improve our financial and operating results, and we will solidify our brand relevance within the marketplace. We believe a combination of all of our initiatives will be a true difference maker in the marketplace and elevate our purchase experience above our competition.

With that, I’d like to turn the call over to Andy.

Andrew S. Giesler

Thanks, Dennis, and good morning, everyone. This morning, we reported a net loss of $7.2 million for the fourth fiscal quarter, or a net loss per diluted share of $0.25 compared with net income of $9.9 million or $0.31 per diluted share for the comparable prior-year period.

The quarter results include approximately $4 million or $2.4 million after tax of charges related to the write down of inventory for the planned exit from the contract based mobile business and the write off of store fixtures associated with our changing product mix. Net loss as adjusted for these items for the quarter was $4.8 million, or $0.17 per diluted share.

The decrease in adjusted net income for the quarter was primarily the result of comparable store sales decrease of 9.9%, a decrease in gross profit as a percentage of net sales, and an increase in net advertising expense and SG&A as a percentage of net sales.

During the fourth fiscal quarter our net sales decreased 9.9% to $538.3 million compared to $597.6 million in the comparable prior-year period. The decrease in net sales for the quarter was primarily attributable to the reduced customer traffic as a reaction to extreme weather during the quarter. The decrease in comparable store sales for the quarter was driven by a decrease in comparable store sales and consumer electronics, computing and wireless and home products categories partially offset by an increase in the appliance category.

The appliance category increase in comparable store sales which marks our 11th consecutive quarter of achieving positive comparable store sales in the category was due to an increase in average selling prices, offset partially by a decline in demand due to the weather. The decrease in comparable store sales for the consumer electronics category was due primarily to double-digit declines in units sold in the video category, largely resulting from our strategy of offering pure entry level models and a greater mix of larger screen television.

The decrease in comparable stores within the computing and wireless category was driven by a decreased demand for computers and mobile phones and a decrease in the average selling price for computers, tablet and mobile phones, partially offset by double-digit increased demand for tablets.

The decrease in comparable store sales within the home products category was driven by a decrease in the demand of mattresses, along with the impact of transition within our furniture category. This was also the first full quarter lapping the new furniture and fitness products rolled out in the third fiscal quarter of fiscal year 2013.

Gross profit margin, expressed as gross profit as a percentage of net sales, decreased approximately 154 basis points for the quarter to 28.3% from 29.9% for the comparable prior-year period. The fiscal fourth quarter includes a charge of approximately $1.7 million related to the expected write down of inventory for the planned exit from the contract-based mobile phone business.

Excluding this charge, the gross profit margin, as adjusted, for the quarter was 28.7%. The decrease was a result of decreases in gross profit margin across the majority of our categories, partially offset by a favorable product sales mix shift.

SG&A, as a percentage of net sales, increased 192 basis points for the quarter compared to the prior-year period. Excluding the $1.9 million charge for the write-off of store fixtures associated with our changing product mix, SG&A, as a percentage of net sales, for the quarter was 22.3%.

The increase in SG&A as a percentage of net sales was a result of a 69 basis point increase in occupancy costs due to the deleveraging effect of the net sales decline, a 36 basis point increase due to the write-off of store fixtures associated with our changing product mix, a 22 basis point increase of delivery expense as a percentage of net sales due to a higher sales mix of deliverable product, and various other increases in SG&A expense primarily due to the deleveraging effect of the net sales decline, which included weather related expenses.

Net advertising expense, as a percentage of net sales, increased 114 basis points during the quarter compared to the prior-year period. The increase as a percentage of net sales was driven largely by the deleveraging effect of the net sales decline coupled with the increased spend levels over the prior-year period.

Our effective income tax rate for the quarter increased to 39.3%, from 39% in the comparable prior-year period. The slight increase in the adjusted effective income tax rate is primarily the result of an increase in federal income tax credits recognized compared to the prior-year period, which increased our effective income tax rate for the quarter, since results were a pre-tax loss.

During the quarter, we repurchased approximately 1 million shares of our common stock at a total cost of $9.3 million or an average price of $9.01 per share. The shares were repurchased under our $50 million stock repurchase program that was authorized by our Board of Directors effective on May 22, 2013.

Additionally, effective on May 28, 2014, our Board of Directors authorized a new $40 million stock repurchase plan. Under the program, purchases maybe made from time-to-time in the open market or in privately negotiated transactions in accordance with applicable laws and regulations. The repurchase program will expire on May 20, 2015 unless extended or shortened by our Board of Directors.

With the strength of our balance sheet and our strong liquidity position, we’re well positioned to execute on our 2015 strategic initiatives. In addition to not having any debt at the end of fiscal 2014, we spent the year investing in our infrastructure and repurchased nearly $50 million of additional shares.

Our focus this year will be on maximizing the sales and profitability of existing markets as we transform our business model with only a minimum number of new stores planned for the year. We continue to remain focused on driving sales and profit growth and maximizing long-term shareholder returns.

Given our multiple strategic initiatives, which are currently underway as well as the continued volatility within the consumer electronics industry, we’re now providing guidance for fiscal year 2015. To help investors better understand the current trends and outlook for the business, we’re expecting annual comparable store sales to be between negative low single-digits to flat with the first half of the fiscal year below this expectation and the second half of the fiscal year above this expectations.

In addition, we expect fiscal 2015 net income per diluted share to be higher than fiscal 2014 net income per diluted share as adjusted. Additionally, we expect to open between two and four new stores during fiscal 2015.

Capital expenditures are expected to range of $20 million to $23 million for fiscal 2015. We will continue to update these expectations throughout the fiscal year as our strategic initiatives help to transform our business.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from Oliver Wintermantel of ISI Group. You may begin.

Oliver Wintermantel - ISI Group Inc.

Good morning, guys. Now that we’re almost halfway or a little bit more than halfway for the first quarter, can you comment on what your trends that you’ve seen so far this year?

Dennis L. May

Good morning, Oliver. Great question. As we said in our prepared comments, first of all we kind of see this fiscal year as tale of two halves. The first half of the year being more challenging and then the back half we believe was significant opportunities. Then, even kind of drilling down within that is really our first fiscal Q1 last year was by far almost robust quarter. We are actually were the comp store positive during Q1 last year. And even drilling down inside that quarter, our April-May business was very robust. So as we look at our compares last -- from last year we’ve kind of robust trend in April-May and then we saw last year’s after May, we saw a significant downturn really after that period and then those soft sales continued throughout the remainder of the year. And so as from a comparison perspective, we will be up against that in Q1 and really specifically in April-May. Though we’re half way through the calendar of our quarter, we’re not nearly half way through the volume of the quarter, simply because you have Memorial Day and Father’s Day in front of you. So if you think about that April-May-June timeframe, Memorial Day and Father’s Day make up the lions share of that. So, up against our most difficult comparison to previous quarter with the lion’s share of the quarter really in front of us.

Oliver Wintermantel - ISI Group Inc.

Okay, great. That’s very helpful. And then maybe as a follow-up, can you just give us a little bit more of a breakdown of your gross margin improved -- decline. What were the drivers of that? Thank you.

Dennis L. May

Oliver, fiscal Q4 for us was a quarter in which we certainly saw some margin pressure. It’s interesting; the weather impacts you in a lot different ways. It impacts your sales, it impacts your costs, because shipping and handling product is more expensive. But it also impacts your gross margins because everybody out -- is out there trying to make up lost sales whether it’s your promotions or your competitor’s promotions, you see that pressure that weather brings to you in the given quarter. And we saw that across most all of our businesses in that quarter. What we have seen in fiscal Q1, we have seen that pressure lessen. So as we look at fiscal Q1 we’re not seeing the margin pressures that we necessarily saw in Q4. The other color that I would add about Q4 is we actually transitioned video products earlier in the season. So our fiscal Q4 had a lot of product transitions. We were selling out of last year’s product, and then in fiscal Q1 obviously we will be learning with new products. So, as we look at fiscal Q1, we’re seeing an improving margin trend from fiscal Q4. So we would tell you think about fiscal Q1 margins very similar to last years fiscal Q1. So, on a year-over-year basis we see that being comparable.

Oliver Wintermantel - ISI Group Inc.

Thanks very much.

Operator

Thank you. Our next question comes from Brian Nagel of Oppenheimer. You may begin.

Brian Nagel - Oppenheimer & Co.

Hi, good morning.

Dennis L. May

Good morning.

Andrew S. Giesler

Good morning, Brian.

Brian Nagel - Oppenheimer & Co.

So a question on the buybacks, you’ve been aggressively buying back your stock now for the past few years and then today you introduced another -- a new buyback authorization. So, if I step back and look at where hhgregg is right now, there’s clearly some transition happening and some struggles. Any thought to despite the balance sheet being strong, despite continuity to generate a significant amount of free cash, is there any thought amongst the management team and the Board to maybe pull back on the buybacks, just to give yourself that extra cushion if you needed from a cash perspective to the extent that some of these struggles on your P&L persist for longer?

Andrew S. Giesler

Yes, Brian I think when you look at our balance sheet today, I think we feel very comfortable with where the balance sheet sits. We have an outstanding balance sheet, significant amount of liquidity available. You did see the Board move from a $50 million share repurchase plan to $40 million share repurchase plan. And while we don’t give any guidance over potential future purchases, we’re always looking to balance capital needs and liquidity and feel pretty good about where we are right there.

Brian Nagel - Oppenheimer & Co.

Okay. And then just a follow-up question on gross margins, the degradation we saw in the fiscal Q4, is there a way to break out how much of that was maybe unique to the quarter or unique to the circumstances of the quarter and not necessarily indicative what we’ve seen gross margins as we think about -- over the fiscal 2015.

Dennis L. May

Hi, Brian, I guess I can add some color again around what we’re seeing as we have migrated into this fiscal year, maybe that will help. From a pricing pressure perspective we have seen that lessen. So as we think about this quarter’s margins we see this quarter’s margins being similar to last year on a year-over-year basis. Within that we also see our video business to migrate more toward a premium assortment, and that’s a combination of two things, that certainly is a function of the investments that we’re making in the direction that we want to go, but that’s also a function of the changes that we see in the industry. As you know we have been very muted on the consumer electronics, specifically the video business for the last couple of years. We do see an improving innovation cycle that’s coming at us right now. So, as we think about our video business and we see some improving trends there relative to innovation, larger screen sizes, 4K, curved screen, OLEDs. So these things generate interest but they also help with margin trends. So, as we think about how the year sets up for us around gross margins, we think a combination of some of the innovation cycles that are happening combined with our initiatives that we have in place that are really coming together right now. We have so many investments that are really becoming operational right now. We feel like the margin picture is an improving picture. Now there is a lot in front of us. As you know the promotional environment for the holiday and that type of thing remains to be seen, but there are some things that set up well for us. We won't have a shorter holiday season this year. We don’t believe we will have the worst weather in 109 years. So we think those are positive elements that not only set up for better revenue trends in the back half but also potentially better margin trends.

Brian Nagel - Oppenheimer & Co.

Thank you very much.

Operator

Thank you. Our next question is from Michael Lasser of UBS Investment Bank. You may begin.

Michael Goldsmith - UBS Investment Bank

Good morning. This is Michael Goldsmith filling in for Michael Lasser. Thank you for taking my call. You touched a little bit about this on the upcoming quarter, but what gives you confidence that trends will improve over the course of the upcoming year?

Dennis L. May

Well a combination of two things. First of all some of it’s just math, as you look at our comparables throughout the fiscal year, Q1 for us last year was a positive comp with a very, very strong appliance number that was stacked on top of another strong appliance number from the previous year. And so as we look at the two year stack and look at just the compares from the previous quarters you saw that business in Q2 start to deteriorate and then you had some unique challenges in the holiday period that we think happen once every seven years. Once every seven years you have a week shorter selling season for the holiday, and that won't happen again for seven more years. We also had a unique weather impact in our fiscal Q4. So those are things that we believe are unique. We believe that it's also just a function of your two year stack comparables.

Then, the other element of that is, we’re really bringing a lot of our initiatives live right now. Many of these initiatives we’ve been working on one, two years and these are some longer term investments that the company has made that we’re able to monetize. And we believe those investments are going to have a positive impact for the back half of this year whether it be new systems, new customers facing technologies, it's going to allow us to transact with the customer in a new and relevant way or new merchandising strategies. The furniture assortment that we’ve talked about on the last couple of calls is coming together right now. This product is hitting our floors as we speak; our initiatives around e-commerce and the continued growth that we’re showing there. We have got a litany of executional components that are coming live right now. And that stacks on top of the 60% comps for growth that we posted in e-com year-to-date. So, so many of these initiatives that we’re talking about they’re not futuristic, Michael, they’re coming together in this quarter and we believe that we’re going to be able to monetize these in the back half of some improving trends. That being said, some of this is also just a function of math, I am looking at the two year stack.

Michael Goldsmith - UBS Investment Bank

Thank you, that was very helpful. And as my follow up, we have the furniture coming out, really rolling out this quarter. But when do you expect that the furniture is really going to start to make a big difference?

Dennis L. May

Well the furniture business is still relatively new. It's gone from kind of 0% to 5% of our business relatively quickly. We believe that furniture for us will be a great ancillary addition to our assortment, and we believe it's going to be 10% of our business in the near future. Now 10% of our business obviously it will be more than 10% of our profit because it yields with it much higher gross margins. But the other thing I would say about furniture for us is the nature of the investment. It's a great product category for us because we do big really well. It leverages our home delivery network that we have already put in place, it leverages credit, it leverages ourselves, so it's such a natural fit. And it hasn’t cost the company to reduce it's assortment in electronics or in appliances, of anything that it would want to carry. So, it's a great addition to our products assortment, because it strategically aligns to what we’re good at so well.

Michael Goldsmith - UBS Investment Bank

Great. Thank you.

Operator

Thank you. Our next question is from Peter Keith of Piper Jaffray. You may begin.

Peter Keith - Piper Jaffray & Co.

Hi, good morning. I was hoping we could talk about the mobile business. I guess, it sounds like it was loosing money, but what was the decision to actually exit it, was it becoming too tough to manage or is it, just looked that mobile cycle going forward isn't particularly favorable?

Dennis L. May

So as we look at the mobile category, it's such a different business for us. It's a contract business; it's so different than any of our other businesses that we’re in. It's operationally very complex. But the real decision for us to exit the category centers around the fact that it just wasn’t strategic to our core initiatives and we think about where we’re going as a company in the investments that we want to make. We’re in the wireless business because we want to it to generate incremental traffic that can expand our customer base. And we just didn’t feel that it was expanding our customer base, we didn’t feel like it was generating nearly the traffic that it would need to for the amount of effort that was going into it. That being said, it also was loosing money, and so it was a high maintenance category. It wasn’t strategic to our core initiatives, and it was a drag on our arms.

Peter Keith - Piper Jaffray & Co.

So, as a follow up to that maybe for Andy, could you quantify maybe how much it lost this past fiscal year which then might benefit the coming fiscal year?

Andrew S. Giesler

Yes, I think that if you look at the annual EPS impact it was probably a loss of $0.04 to $0.05 last year.

Peter Keith - Piper Jaffray & Co.

Okay, that’s helpful. And then I wanted to also then ask a question on the credit initiatives, in the past you’ve talked about your prime credit offering having about a one-third rejection rate. I was curious on that one-third, what's the uptake rate right now with the alternative credit offerings, in terms of what percentage of that one-third is sticking with your business?

Dennis L. May

I think that the majority of the people are getting the opportunity to apply for a secondary because that is a seamless secondary. Of that we are seeing a little bit less than what we would have expected to see as it relates to the approval rate. We are pleased with once the customer is approved on the take rate there, but we haven't given any quantification of what that one-third is. We would say we’re continuing to do everything we can to work with our providers to ensure that we have the highest possible approval rate and relationships to those turndowns. But at this point we’re not quantifying anything specific. What I would say is, as you think about that whole portfolio. So if you think about our volume as the total, so think about 40% of our business is a combination of those elements of the three different providers. So, if you think about the fact that in the past roughly 35%, 36% of our business has been on private label card, then the remaining balance would be those two providers.

Peter Keith - Piper Jaffray & Co.

Okay, fair enough. Thanks a lot guys.

Operator

Thank you. Our next question is from Brad Thomas of KeyBanc Capital. You many begin.

Jason Campbell - KeyBanc Capital Markets Inc.

Hi, guys, this is actually Jason Campbell in for Brad.

Dennis L. May

Good morning.

Jason Campbell - KeyBanc Capital Markets Inc.

You talked about -- I mean you have a lot of different initiatives underway. I was wondering if you can kind of walk through what the impact to the P&L kind of, when some of that spending will hit the SG&A line? What you can capitalize and what's going to go through as just regular G&A?

Dennis L. May

Really minimal impact relative to G&A. I mean if you look at our initiatives, our e-commerce investments are continuing investments, so those are similar to prior-year. From a marketing perspective, we’re really excited about our new marketing campaign that we launched at the beginning of this month, but similar to prior-year. So if you think about our advertising spend or marketing investments those are going to be similar to previous years. So, really not a significant impact of SG&A, what we like about these investments is, we have -- that they’re going to make it either more efficient with the customer or allow us to gain market share. Both are good for the top and the bottom line. So we don’t see anything significantly structurally different around SG&A. We have been a very good steward of our SG&A in the past and we’re going to continue to be very focused on that area.

Jason Campbell - KeyBanc Capital Markets Inc.

Okay. And then secondly you guys have been doing well in our appliances. I was wondering, you kind of mentioned that you have to reset the bar for the expectations of this year. What are your new expectations in terms of industry growth, market share gains? And then as that relates to housing, when is it -- is there a lag of, a month or two or a quarter or two between when housing picks up and when you guys kind of see people coming in and buying new appliances?

Dennis L. May

Yes, we’ve been very pleased with our appliance business, 11 consecutive quarters of comp store growth. We have been a very consistent farmer in this area, and we’re excited about the upcoming year and we’ve got great initiatives. If you look at these core initiatives that the company has outlined, the center piece of all of them is the appliance category, whether its new POS, a new delivery system, growth of fine lines, new marketing message, e-com, all these investments really will aid our appliance business. Now if you look at our most recent quarter, we were comp store positive 0.5%. The industry was basically flat and that’s including markets across the United States that’s California, Arizona, which were not impacted by weather and are some of your more rapid growth markets. So, as we look at how we stacked up in the quarter, given the weather impact that we have, we actually were pretty pleased on how we stacked up. We competed very effectively for market share, and we’re going to continue to compete for market share. So, and even though we have been able to stack quarter-after-quarter, we believe that long-term our growth in appliances is going to continue to be there, and the investments that we’re making are going to continue to drive that, whether it be the strategic investments or promotional investments in the market place. So we still -- we feel like those things are going to happen throughout the course of the year and though the appliance industry certainly was impacted by weather, we see the appliance industry this year growing and we see ourselves growing, in growing comps and appliances this year.

Andrew S. Giesler

Jason, the other thing you mentioned was as far as metrics, housing starts definitely are a lagging indicator for us. As we look at, at the most important metric for us is actually housing turnover. You get so much of the new home construction business that is bought directly from the manufacturer to some of the bigger builders. So, for us we look at it from a standpoint of housing turnover and that’s typically the best part or the best correlation as it relates to our appliance business.

Jason Campbell - KeyBanc Capital Markets Inc.

And is there kind of a lag between when somebody buys the house and when they actually come in or do they replace the appliances before they transfer or just to spruce it up or how does that kind of work with your business?

Dennis L. May

Yes, it's a combination of both. The thing I would draw out though is the number one driver of appliances and what makes it such a stable business is duress, meaning that the old one was broke. Approximately 65% of the appliances that are sold in the market place are purchased because of the fact that the old one is broke. So that’s the number one driver. So, if you think about appliances, you have this dead rock that makes this such a stable business. 65% of the category is duress and then you have approximately 10% to 15% of that is remodeling. So you have a customer who’s buying a house, selling the house, and then you have another depending on what's going on in housing, you have another what I would call low double-digit part of the business that’s driven by new construction housing.

Jason Campbell - KeyBanc Capital Markets Inc.

All right. Thank you very much.

Operator

Thank you. Our next question is from Christopher Horvers of JP Morgan. You may begin.

Mark Becks - JPMorgan Securities LLC

Hi, it's actually Mark Becks on for Chris. Just continuing on appliances, it seems like you’re expecting that category to go back to kind of the low to mid single digit comp that you’ve been putting out before the weather impact in the back half. Is that accurate and then given the stacks on appliances in the first quarter are pretty tough, is that something that you would expect to be positive throughout the entire year or is it similar to your comp outlook for the company in that it outperforms in the back half? Thanks.

Dennis L. May

I think it's similar to the company trajectory, appliances is basically 50% of our business. So that category will perform in line with the company. So, to your point, our fiscal Q1 is our most challenging quarter in the category. And then we see some real opportunities in the back half of this year for the appliance business.

Mark Becks - JPMorgan Securities LLC

Okay. And then looking at some of the other categories, can you give us an idea of what sort of drag you would expect to see in the computing and wireless business given the changes there in strategy. And then also the home products category took a pretty notable drop off in 4Q kind of, what's the good run rate or what's your expectation for that business going forward?

Dennis L. May

Well on the IT category, we’re going to continue to invest in that business. I think it's important to note that hhgregg was invested in the IT business long before wireless, and we will continue to be invested in the IT category. It's an important business for us, so as we think about tablets, notebooks, new wearable technologies, we think it's going to be an exciting new business that we’re investing in. So IT for us is a business that we’re going to continue to be invested in, it's important to drive traffic in that regard. What I would say, that business like for the industry has most notably seen a slow down in tablet sales, and I think that is the biggest drag we’ve seen on the IT category outside of wireless. And so much of that is around product launches. As you know the tablet, notebook category business is going to be highly depended on when either Apple or Samsung is launching new products, and that always breathes new life into that product. So you will see some of that volatility go through the year and it will centered mostly around product launches. Your question around the furniture business, we see continued growth in the furniture category. One comment I would make about our fiscal Q4. Furniture was actually above double digits, even with the weather and all the impacts of the weather had on our business, furniture was actually up double digits. It was pulled down by mattress sales, and also what we call ready to assemble furniture or RTA furniture pulled down that number most notably in the quarter, and the reason being is that ready to assemble furniture is directly correlated to our television sales because these are stands that actually the TVs are set on. So, when our demand for TV was down markedly in the quarter it also pulled down our demand for ready to assemble furniture. But our furniture business actually grew double digits in that quarter, and we expect to see -- continue to see double digit growth out of that category moving forward throughout the course of the year.

Andrew S. Giesler

Hi, Mark one just piece of color to give you on computing and wireless category. The mobile category was approximately 1% of our business on an annual basis. So just to kind of give you a little more color on what that impact will be for the rest of the year.

Mark Becks - JPMorgan Securities LLC

Perfect, that’s very helpful. And then just a final question on the expense side, I think you highlighted delivery expenses is a 20 -- 22 basis point headwind. Was that weather or now with e-commerce, I think you guys have said it's 5% in given the brand transformation that number is going to be going, how should we think about the delivery and the freight headwind as you ramp that online business? Thanks.

Dennis L. May

Yes, Mark it's actually related to home delivery business which would be our appliances and home products, the furniture category, because so much of that is delivered to the customers home, and that’s the piece of the product delivery that we’re referring to as far as the de-leveraging impact there.

Mark Becks - JPMorgan Securities LLC

So, I guess that’s expected to persist with growth on appliances going forward?

Dennis L. May

Correct. Both appliances and the home products categories, as those categories grow you will see a little bit of pressure in that category.

Mark Becks - JPMorgan Securities LLC

Great. Thanks.

Operator

Thank you. Our last question is from Rick Nelson of Stephens Inc. You may begin.

Richard Nelson - Stephens Inc.

Thanks, good morning. I was wondering how the 3% comp for the year in appliances, how you think that’s stacked up versus the industry?

Dennis L. May

Yes, Rick what I would say is, it's kind of a -- compared to the industry in fiscal Q1, that number was actually better than the industry. In fiscal Q4 that number was on par with the industry which we would consider a job well done considering the fact we had far more weather impact than the nation would as a whole. Fiscal Q2 and fiscal Q3 were below the industry. So, if you think about that on a quarter-by-quarter basis, when we measure our market share and how we’re competing for share, we look at it on the markets that we’re in and less focused on that national number where it's being as I said before the hottest markets in the appliance categories right now is going to be West Coast, it's going to be Arizona, and it's going to be Texas, none of which we participate in. So, when we measure our market share we really focused on the 20 states that we compete in, and I would say that, that market share was relatively flat last year. I think that we may have picked up slight share within the 20 states that we were in, but it was slight. And it was kind of a goalpost if you will, Q1 and Q4 being our best performance to our regional market share.

Richard Nelson - Stephens Inc.

Thank you for that color. Also I would like to ask you about the new prototype. You mentioned it's smaller, if you can define that and how else that must be different from the legacy stores?

Dennis L. May

We have moved our prototype size box from a 30,000 square foot box to a 25,000 square foot box and that’s through just optimizing our assortment. Obviously we had a lot of changes in the consumer electronics business, so most of that space has come out of CE business. It's also come out of the back room, because we shift our sales mix to more of a deliverable product, you need less warehousing space. So, if you think about that prototype box and how its size is differently than the past, it's less factoring space, less space allocated to consumer electronics. But still at a very dominate assortment of -- for video. We still – we had a assortment of over 100 televisions and what's interesting about the video business for the upcoming year is actually, there’s a lot of new stuff out there, we’ve got larger screen sizes, we’re seeing growth in 60 inch and larger screen size. You have 4K technology, curve screen technology, OLED. So it allows you to really take advantage of that video wall and bring it to life with some new technology. So, if you think about the size though and think about modeling that out 25,000 square foot box and probably the biggest emphasis change is going to be the amount of back room that’s also changed the warehouse and the back of the store.

Richard Nelson - Stephens Inc.

All right, very good. Thanks a lot and good luck.

Dennis L. May

All right. Thank you.

Operator

Thank you. Ladies and gentlemen this concludes today's conference. Thank you for your participation. Have a wonderful day.

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