hhgregg's (HGG) CEO Dennis May on Q1 2015 Results - Earnings Call Transcript

Jul.31.14 | About: hhgregg, Inc. (HGG)

hhgregg (NYSE:HGG)

Q1 2015 Earnings Call

July 31, 2014 9:00 am ET

Executives

Andrew S. Giesler - Interim Chief Financial Officer, Principal Accounting Officer, Senior Vice President of Finance and Secretary

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

Analysts

Dolph Warburton - Jefferies LLC, Research Division

Brian W. Nagel - Oppenheimer & Co. Inc., Research Division

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

Michael Lasser - UBS Investment Bank, Research Division

Gary Balter - Crédit Suisse AG, Research Division

Mark A. Becks - JP Morgan Chase & Co, Research Division

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

Peter J. Keith - Piper Jaffray Companies, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the hhgregg First Quarter 2015 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Andy Giesler, Senior Vice President of Finance and Interim Chief Financial Officer. Please go ahead.

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 fiscal 2015 initiatives, and I will discuss our fiscal first quarter operating results. At the end of our prepared comments, we will have until 10 a.m. Eastern Time to answer your questions. [Operator Instructions]

Let me take a moment to reference the Safe Harbor provision 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 in May, for a additional discussion of these risks and uncertainties.

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

Dennis L. May

Thanks, Andy, and good morning, everyone. Thank you for joining us today. I'd like to begin by recognizing our dedicated employees and extend a special 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.

While we are expecting a challenging quarter based on very difficult compares in the prior year, along with the number of initiatives being launched in the quarter, we were disappointed with our recent results. In that context, management is focused on balancing near-term results with the impact of the execution of long-term investments to transform our business. As we evaluate our initiatives, we are pleased with the progress we have made around customer experience, as evidenced by our winning of 3 J.D. Powers customer satisfaction awards for major appliances, including Overall Satisfaction Award. However, we are adjusting our course of action on parts of our business designed to drive additional traffic to our stores.

The first initiative I want to talk to you about is redefining our sales mix. We are continuing to invest in appliances, large screen premium televisions and an expanded furniture assortment as we evolve our sales mix. As expected, the appliance category was challenged in the quarter based on a very difficult comparison and a more promotional environment. The appliance category lapped a comp of 7.5% in the prior year and a 6.3% comp a year prior to that. The appliance industry continues to be more promotional as more retailers continue to attempt to capture market share.

While our comp for the quarter was negative, we believe our market share in the category remained relatively consistent. The appliance industry is falling short of its expectations as retail shipments calendar year-to-date are relatively flat. And we believe that in our markets, the industry was slightly worse than the national numbers.

The changes in the marketplace are driving us to slightly modify our go-to-market strategies in future periods to gain market share. In addition, we have completed the store segmentation, which offers differentiated product assortments to our customers based on geography and demographics. We are also making progress with our plans of opening additional Fine Lines departments and currently anticipate doubling our current number of 5 Fine Lines locations before the holidays.

Our Fine Lines departments are our ultra premium appliance departments, located inside of our existing stores and showcase premium brand appliances, which not only add greater sales to the existing store but provide a halo effect for existing offerings.

Consumer Electronics category continues to be very challenging, with both declining demand and accelerated movement to online. We are, however, seeing growth in large screen sizes and an above industry mix of Ultra HD. This increase of mix within the premium subcategories led us to gross margin expansion within the category. We believe that this trend should continue and lead us to having a healthier Consumer Electronics category in the future. While we continue to believe the overall industry will be negative, the TV industry will launch more innovation this fall than the previous 3 years combined, which bodes well for our model, which is well positioned to be a leader in the premium large screen category.

We've made several important additions to our furniture lineup during the past quarter with the addition of new brands and price points that will help both sales and margins in future periods. While our core furniture lineup of sofa groups, recliners and dinette tables' comps were up over 35%, the home products category was negative due to declines in TV stands, fitness and bedding. The category was also negatively impacted by the amount of transition as we reset the department. Our new furniture lineup is predominantly set and will be completed in stores by the Labor Day holiday promotion.

Our computers and tablets categories also faced it's most difficult comparison in the quarter, as last year's fiscal Q1 was a double-digit positive, with the remainder of the year double-digit negative. While the category was modestly impacted by the exit of mobile phones, the biggest impact was due to the negative industry pressures from tablets, which we over-indexed in compared to the industry.

We are very pleased with the progress we made around consumer credit. We have taken steps to tailor our credit offerings to best meet the ongoing needs of our customers. Over the past 12 months, we have grown our nonrecourse private label credit card penetration by 342 basis points, 37% of our business, and continue to make progress on our seamless secondary and our lease-to-own credit offerings. We believe that enhancing our credit offerings will generate greater brand loyalty, higher average sales per transaction and increased premium service plan sales.

Next, I want to discuss our initiative around differentiating our customer experience. A few weeks ago, we were awarded the J.D. Power Customer Satisfaction Overall Award for Major Appliances. This is the first time that we have won the overall award. Previously, we have won the award for sales staff. But at this time, we also won the award for delivery and installation. This is an area we have invested heavily and we are pleased that the efforts are paying off. Additionally, we have now rolled out our in-store price comparison tool, along with our 90-day price match promise. Both of these initiatives have contributed to our improved close rates and customer satisfaction scores.

During the quarter, we invested significant advertising dollars around our branding. A large amount of our television advertising spend was directed at this branding message. During the quarter, we launched a branding campaign, which included both increases in overall advertising spend and a shift away from price item promotions to longer-term branding messages. This did not have the desired effect and negatively impacted results during the quarter.

We have made the decision to alter this strategy moving forward. To facilitate this change, we have made the decision to change advertising agencies and return to Zimmerman, who had previously done our advertising. We believe this to be the best course of action and gives us the greatest opportunity for success coming into the important holiday selling season. We are working with Zimmerman at full speed to transition our marketing efforts by Labor Day and are excited with the direction that we are going, which will provide a more balanced approach between branding and promotional advertising.

Next, let me update you on our enhancement of our e-commerce capabilities. We continue to be pleased with our e-commerce performance. Our comps are up 64% fiscal year-to-date, and we continue to add greater functionality to enhance the user experience. We are making significant progress and expect to launch a more extensive expanded aisle assortment through CommerceHub, along with a new mobile app prior to the holiday. We believe we are making tremendous progress online and are very pleased with the results of our investments.

Finally, we are focused on integrating new customer-facing technologies into our overall purchase experience. We have discussed on previous calls our new POS launch, and we are pleased to report that we have completed the rollout. The new POS system will provide operational improvements, customer service improvements and a streamlined checkout process. In addition, the new POS system will allow us greater capabilities in the future, which truly connect our strategies and gives us the ability to integrate our POS and web transactions.

Our second customer-facing technology is our new delivery tracking system, which has now been rolled out chain-wide. The goal of the system was not only to provide a more efficient delivery route, 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 disrupt your schedule. With that in mind, we have deployed a solution that allows constant communication between the delivery team and the customer. This helps ensure hhgregg provides the customer with a seamless, on-schedule, best-in-class home delivery experience.

While still early, we are very pleased with the increases in our customer satisfaction scores around home delivery post-implementation. The progress we have made in this area is also made evident by J.D. Power naming hhgregg #1 in the category of delivery in the major appliance customer satisfaction survey.

Management is executing its plans to transform our business, and we are confident in our ability to establish hhgregg as the home products retailer of choice for consumers. We believe that executing on our initiatives of redefining our sales mix, differentiating our customer experience, enhancing our e-commerce capabilities and launching new IT-based customer capabilities will improve the company's operating profitability. Our balance sheet remains strong with no long-term debt and no borrowings on our revolving credit facility at the end of the first fiscal quarter, which we believe positions us well to successfully execute on our initiatives.

Let me now focus my attention on our outlook for the remainder of the year. As we have discussed on our last call, given our ongoing strategic initiatives to reposition the business around a broader assortment of home products, as well as the continued volatility in the Consumer Electronics industry, we are not providing specific guidance for fiscal 2015. However, to help investors better understand the current trends and outlook for the business for fiscal 2015, we are expecting annual comparable store sales to be negative high-single digits to negative mid-single digits compared to our previous expectations of negative low-single digits to flat.

We still expect the second half of the fiscal year to outperform the first half of the fiscal year. Given the results of our operations in the first quarter and the volatility in consumer demand for our product segments, we no longer believe that our diluted earnings per share in fiscal 2015 will be above the prior year as we've previously stated. However, we do expect to generate positive EBITDA for the fiscal year.

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

Andrew S. Giesler

Thanks, Dennis. This morning, we reported a net loss of $10.3 million or $0.36 per diluted share for the first quarter compared with a net loss of $1.3 million or $0.04 per diluted share for the comparable prior year period. The increase in net loss for the quarter was largely due to the comparable store sale decrease of 10.2%, coupled with nonrecurring investments in branding, medical expenses and noncash charges to income tax expense for stock option expiration.

During the first fiscal quarter, our net sales decreased 10% to $472.3 million from $524.9 million in the comparable prior year period. The decrease in net sales for the quarter was primarily the result of comparable store sales decrease of 10.2%. The decrease in comparable store sales within the appliance category was driven by a decrease in units sold and slight decrease in average selling price. The decrease in comparable store sales for the Consumer Electronics category for the quarter was due primarily to a double-digit decline in units sold within the video category, offset slightly by an increase in average selling price, which was driven by an increase in sales of larger screens and more premium feature television.

The decrease in comparable store sales for the computers and tablets category for the quarter was driven by the exit from the contract-based mobile phone business, a decrease in demand for computers and tablets and a decrease in the average selling price for computers, partially offset by a higher average selling price for tablet.

The decrease in comparable store sales within the home products category was driven by a decrease in the demand for ready-to-assemble television stands and a decrease in sale of mattresses, offset partially by a strong double-digit increase in sales of sofas, recliners and dinette sets.

Gross profit margin, expressed as gross profit as a percentage of net sales, increased for the quarter to 29.7% from 29.5% of the comparable prior period. The increase was due to a favorable product sales mix shift to product categories with higher gross profit margin rate and an increase in gross profit rate within the Consumer Electronics category, partially offset by decreases in gross profit margin rates in all other categories.

SG&A as a percentage of net sales increased 205 basis points for the quarter compared to the prior period. The increase in SG&A as a percentage of net sales was largely a result of the 66 basis point increase in occupancy costs due to the deleveraging effect of the net sales decline, the 65 basis point increase in wage and benefit expense due to increased medical expenses, coupled with the deleveraging effect of the net sales decline and a 23 basis point increase in home delivery expense, primarily due to a higher sales mix of deliverable product.

Net advertising expense as a percentage of net sales increased 83 basis points during the quarter compared to the prior year period. The increase as a percentage of net sales was primarily due to the deleveraging effect of the net sales decline and an increase in advertising spend with the new branding campaign. Our effective income tax rate for the quarter decreased to 29.5% from 39.3% of the comparable prior year period. The decrease in our effective income tax rate is primarily the result of a noncash charge to income tax expense related to stock options that expired during the current quarter.

Due to the pretax loss for the quarter, this charge to income tax expense reduced our overall income tax benefit recorded for the quarter and, as a result, decreased our effective income tax rate. During the quarter, we repurchased approximately 103,000 shares of our common stock at a total cost of $1 million for an average price of $9.50. The shares were repurchased under our $40 million stock repurchase program that was authorized by our Board of Directors effective on May 20, 2014.

Under the program, purchases may be 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. As of June 30, 2014, we had available approximately $39 million authorized to repurchase shares of common stock under the current share repurchase program. Although our operating performance did not meet our expectations, we were able to manage our working capital and continued to have a strong liquidity position, while launching and executing on our key initiatives. We are well positioned to execute on our 2015 strategic initiatives to drive traffic, sales and profit growth and maximizing long-term shareholder returns.

With that, I'd like to turn the call back to the operator for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Dan Binder with Jefferies.

Dolph Warburton - Jefferies LLC, Research Division

This is Dolph Warburton, in for Dan. I guess going forward for the rest of the year -- I know you guys aren't going to give guidance. But where do you guys see margin kind of moving for the rest of the year? And maybe qualitatively, like, where you guys see the shift in mix going?

Dennis L. May

Well, the first quarter, as you saw, we had a 20 basis points increase in gross margin rate that was driven by 2 things. Number one, a mix shift into future categories that have higher-than-chain average margins; the other piece that we did see was an expansion in gross margin rate in Consumer Electronics, and that was specifically driven by our video business. And within the video business, that was driven by an expansion into larger screen sizes and specifically, 4K TVs. So we think about gross margins in our categories being relatively stable for the rest of the year. We -- by category. We do believe that we will continue to see some added benefit in Consumer Electronics and some gross margin rate expansion in Consumer Electronics, specifically driven by an improving mix of TV business in larger screen sizes and 4K television.

Operator

Our next question comes from the line of Brian Nagel with Oppenheimer.

Brian W. Nagel - Oppenheimer & Co. Inc., Research Division

First question I had, with respect to the buyback -- and I've asked a similar type of question in prior calls. It seems like you did slow your buybacks here in the first quarter. So how should we think about that? Was that just more of a timing decision? Or was there some -- you're consciously slowing the buybacks, and going forward, is there some recoup of that?

Dennis L. May

Yes, Brian, what I can say is, to your point, we had very -- a very minimal repurchase in our Q1. And what I would kind of articulate is that, hhgregg has always been very good stewards of its balance sheet. We have a great balance sheet today. And I think during this transformational period, you're going to see us be very focused on ensuring that we have a very strong balance sheet. So that's going to be our focus and making sure that we draw the right balance between shareholder value and our liquidity and our balance sheet. But I think during this transformational period, we're going to have a pretty strong focus on our balance sheet.

Brian W. Nagel - Oppenheimer & Co. Inc., Research Division

Got it. And if I could just follow up with one question. If I look at the inventory growth relative to your sales growth, looks like even though if I'm not measuring it for you, it's a bit elevated here. How do we think about that? I understand your pushing into new categories. There's probably inventory commitment that comes with that. Sale's been weaker though. So I guess the question I'm asking is, how should we think about it? Is there any potential markdown risks as we look at those higher inventories?

Dennis L. May

No. As we sit here today, we are back on forecast with our inventory across the board. The area that we have an increased in inventory at the end of the quarter was our appliance business. Which Brian, as you know, is from a pricing perspective an extremely stable, stable product. If anything, cost go up in that category. But we've quickly gotten that inventory in line. We are pleased with both the quantity and the quality of our inventory across-the-board. Appliances have a little longer lead time. So we saw some softening in sales even beyond our expectations in Q1, and we did finish the quarter slightly higher than we would've liked in appliances. But we have quickly gotten that, that inventory online. So we're back on forecast inventory across all of our categories.

Andrew S. Giesler

Brian, if you look in our 10-Q, you'll see the breakout of the inventory per store, so you can actually see the components of the appliances being -- appliances are up 13.8% on an inventory per square basis. So you can see that, that's where it's really coming from.

Dennis L. May

But we've quickly made those adjustments, Brian, and we're pleased with where we're at around inventory and do not anticipate any markdowns associated with any type of inventory exposure.

Brian W. Nagel - Oppenheimer & Co. Inc., Research Division

Okay, that's great. And if I could just sneak one more in, since we're talking about appliance, which you mentioned in your prepared remarks, you commented on the -- having a more promotional environment. Is there any way to say who's leading those promotions? Is it one of your competitors, 1 competitor in particular, or is hhgregg leading?

Dennis L. May

Well, we certainly were in there -- we're in there competing also. It's what we have seen during -- not only Q1 but a couple of quarters previous to that, you've seen the promotional environment increase around the share of voice, meaning the share of advertising dollars that we are seeing being spent on the appliance category. So it's not so much that we're seeing pricing promotions increase, so it's not so much that we are seeing pricing pressure. We are very competitive. The marketplace is not really doing anything that's out of the ordinary from a pricing perspective. What we have seen is an increase across-the-board from the national retailers in the appliance category, just seeing more advertising dollars being allocated to the appliance category.

Operator

Our next question comes from line of David Strasser with Janney Capital Markets.

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

I'm still trying to understand the traffic opportunity here. I mean, advertising, I guess, is one way to do it or having a better message. But as you go to the bigger ticket stuff, is it just a natural evolution that traffic is going to be down because it's just fewer visits for the bigger ticket stuff? And I'm just trying to understand how you can reverse it? I'm still trying to grasp it.

Dennis L. May

Well, I think, David, first of all, investing in categories and investing a greater mix through advertising and focus in categories were our point of difference. I think, differentiate the brand in the company I think is going to be important moving forward. Meaning that if you look at the appliance category, large screen television or furniture, what we do well really shines there. I think that there are other product categories that we have to participate in from a promotional perspective. Take your shots, be competitive. But I think we just need to recognize that our points of difference in those commodity goods are going to be less. And what we have to do is we have to over-index in these larger ticket categories. So as we think about the investments that we are making right now, it's really around building not just a better, but the best mousetrap whether it be new POS, new delivery systems, Fine Lines, better digital capabilities, all these are going to be targeted at driving this big box -- these big box products. And we're going to focus on products that require credit delivery and installation. Those are product areas where we believe that our share can be more dominant and then our points of difference can also be greater. The biggest shift that we are making is really from our promotional messaging. One of the things that we invested in, in Q1, and it just did not have the desired effect, was we took a more branding strategy and less promotional strategy around our messaging, especially in our television commercials. And so we heightened up and we invested in and spent extra money into a media that just did not generate a return for us. So we had higher expenses and lower traffic because of that. So the change that we will make moving forward, and you'll start to see that happening in August and certainly into Labor Day, is that we will return to what we consider to be a more balanced approach, talking about the retailers our points of difference; but also making sure that we are out there being promotional, letting the consumer know that we've got great promotions, great pricing, great brands, like our competitors. And I think that the investments and the positioning that we try to take around branding just didn't have the desired effect around traffic.

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

Okay, great. One other question on appliances. I mean, it feels like that category kind of -- I'm not going to say run its course, but sort of that outsized outperformance that we saw over the last year or 2 seems to be waning. Do you -- any sense of why that's happening? And whether there's any positive underlying message that it continues -- that it can continue to grow? Are you seeing like a lack of replacement? Is it related to housing, like new appliances for new homes? I'm just trying to get a sense of where you think the shortfall has come and what can happen going forward or what you see going forward?

Dennis L. May

Sure. The first thing, I guess, let's talk about the industry. The appliance retail industry certainly has underperformed expectations year-to-date, it's up around 2%. So I think it's expected to be up 4% to 6%, so certainly coming in short of expectation. So when you look at the industry shipments as a whole, we see a somewhat stronger number. That's because the contract business, which goes into new housing is performing significantly stronger than the retail business. So the contract business is plus-6%, 7%, as where the retail business is only plus a couple of points. I think that's one component of that. Within those numbers for the industry, certainly, the West Coast -- Arizona, Texas, and the West Coast, is performing the strongest. So that's what's driving that number. We are not in any of those markets. So we look at our market share in the 20 states that we're in. We basically held share. One of the things that -- so that's how we judge our performance within the category. We held share in the markets that we were in. I think the biggest component for hhgregg as we look forward, a lot of it, David, is just going to be math. We were up against our most difficult compares by far this particular quarter. So we were up against a plus 7.5% comp increase from the prior year, which was stacked on top of the 6% increase. As you look forward into the rest of this year, you see our compares go up against more than 2%, a 1%, a flat comp. So as we think about the first half opportunity versus the back half opportunity, some of the reasons that we feel like we're going to perform better in the appliance business is just around the math. Our compares are going to be materially easier in the back half of this year. The other component I would say, if you take a look at our initiatives, which we were extremely busy in Q1 and we're wrapping those up in Q2. If you look at every one of our initiatives, whether it be our new POS system, delivery system, Fine Lines, dotcom initiatives, virtually everything that we're going is focused on increasing our ability to compete in the appliance business. Our initiatives are very much targeted at the appliance category. And even though, to your point -- and I'm sorry if it's a long-winded answer, we've had a great run in appliances, 11 quarters in a row of comp increases. We think we've got more runway when we look at our market share. So our market share, in our existing markets is going to be at that 12% to 13% range in our core markets. We've got some markets as high as 20%. But on average, in our markets, were in that low-teens, high double digits share. So we look at that, we think we've got additional runway in front of us.

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

And just a last follow-up and I apologize, but as you go into holiday and you go into sort of the back half on the appliance side, will you be price competitive with everybody? Will you be as promotional as you need to be to maintain that market share?

Dennis L. May

Absolutely. It's interesting, David, to your point, when we talked about -- when we say the word "promotional," that takes on a lot of different terms. Some people immediately think price. We really aren't seeing -- I mean, our appliance margins were virtually flat with prior year on a quarter-on-quarter basis. We had very nominal margin compression. And most of that was just mix within the category. So we aren't seeing significant pricing pressure in the appliance category. We are seeing a significant increase in advertising dollars that's being allocated to the category. So a lot you see a lot of promotional messaging out there. But pricing has been relatively stable.

Operator

Our next question comes from the line of Michael Lasser with UBS.

Michael Lasser - UBS Investment Bank, Research Division

Dennis, I was hoping to get a little bit more clarity on what your longer-term vision is. It seemed like 1 year ago, 1.5 years ago, the thought was you'd diversify in a product category the financing offers you'd try to be appeal to new customer segments, maybe even skew a little bit on the lower end. Now you're opening more Fine Lines, investing in the experience. It seems like that's counter to what your -- the strategy you're following 1.5 years ago. So where -- when all is said and done, where do you think hhgregg will be from a positioning standpoint?

Dennis L. May

I think, first and foremost, Michael, it's about focusing on business categories that our points of difference can really shine through. So when we think about product categories that we want to focus on and reposition the brand longer-term, if you go back in history, hhgregg once upon a time was an electronics company that happened to sell appliances. We've been working very hard -- as I sit here today, the consumer would tell you that we are an appliance company that sells electronics. The hhgregg of the future, we want to be a home products retailer that really excels and differentiates itself in large products that require delivery and installation. They require credit. To your point, credit is very important. But they also require an area that they want to talk to a salesperson. So delivery and installation is very important for those product segments. The credit offering, very important for those product segments. And then the purchase experience is also very important. So those 3 elements are really key as we think about transforming the brand to more of a home products brand, away from just being an electronics retailer. So our investments into the purchase experience are necessary and important because when the customer goes in to buy those big ticket element, their expectations -- they have questions, they have concerns and they are looking for answers, and we can deliver on that. But also these are big ticket elements and they need financing, and we can deliver on that. And then ultimately, one of the reasons that these large -- these products carry the margins that they do is because it requires delivery and installation. So as we paint out those strategies, so much of it is around the fulfillment, the credit and then purchase experience. So when we talk about expanding our credit, not that we just want to take our customer base to a lower end customer base, we wanted to expand our credit offerings because the customers that are going to buy these products, they're really interested in credit. It's an important part of what they want to see out of a retailer when they go to buy big-ticket deliverable products.

Michael Lasser - UBS Investment Bank, Research Division

Okay. And then 2 more questions. First, on the appliance side, I understand that it depends on how you slice and dice the market. But I guess the important point is that the amount of sell-in, whether it's for new home sales, which your home sales have been under significant pressure for the last few months, so there could be a disconnect there. Or now what you're suggesting, the retail side has also been tougher. So is it your expectation that there is a glut of inventory throughout both channels? And how do you think that it will be cleared out over the next few quarters? And maybe as part of that, you can give us some insight into how July trended given that what you're suggesting is it's starting to get better.

Dennis L. May

Well, I think that the industry -- the fortunate thing about the appliance industry is most of the products is built here domestically. So the manufacturing lead times are relatively short in that regard. And I think the other thing, Michael, I mean, we can't step away from the fact that even though the industry has softened, the industry is still up and did have an increase. So by no means are we pleased with how we performed in our fiscal Q1. We expected a challenging quarter. It was more difficult and more volatile than we expected, and we are making investments and adjustments to make sure that we compete more effectively in the back half. Some of the performance that we -- improvement and performance we expect on the back half is also just the math of our compares. So if you think about the appliance category and look at what the compares that we are up against in Q3 and Q4, we're -- our comp are up against the plus 1.5 and plus 0.5 in those 2 quarters. So some of the things that happened last year on the back half, you lost a week during the holiday season. You also had the worst weather in 109 years, we're not expecting that again. So we think that some of those opportunities are just driven by math. The other part of the opportunities are driven by the fact that we were extremely busy during this period with rolling out these initiatives. And those initiatives have an impact to SG&A, those initiatives have an impact to just overall resources. As we go into the back half of this year in our Q3 and Q4, those investments will be behind us, and our expectations are to monetize on those investments, which will also, we believe, will improve our performance. So I don't -- but the short answer to your question though, I don't believe that there is a glut of appliance inventory in the channel.

Michael Lasser - UBS Investment Bank, Research Division

Okay. And no more comment on July?

Dennis L. May

Yes. We've obviously made an adjustment to our outlook for the fiscal year. We don't comment on quarter-to-quarter. But we thought we made the appropriate adjustments based on the volatility that we're seeing to the overall fiscal year.

Michael Lasser - UBS Investment Bank, Research Division

Okay. My last question is on the video category. Units, down double digits. You are seeing some traction in the higher end product. So what's your outlook for the next 6 months into the holiday? Do you think that the overall category can grow as AUPs get pushed up and then offset some of the weakness in the opening price point products more commodities, more in televisions? Or maybe if that side of the business can stabilize, you can actually see some decent growth in the overall video category? Do you think you lost share there as well?

Dennis L. May

I think the overall video category for the year will be down. I think that the lion's share of the unit losses and revenue losses are in the mid and smaller screen sizes. And I think you're going to see significant growth out of 55-inch and larger, which is where we're also getting our tractions. We were comp-positive in large screen television and we are seeing traction that we believe will continue into the back half around the large screen category. There is a significant -- what you're finally seeing is a material shift into this large screen business. And it's a different business because the fulfillment pipe is different. The product doesn't fit in the back seat of a car. I mean, it requires delivery and installation. So we're excited about some of the changes that we are seeing there. We expect -- Michael, we expect 60% of our -- nearly 60% of our TV business in the back half of this year will be 55-inch and larger. So I mean, think about 60% of our TV business will be 55-inch and larger. And we think that's just a product category that we can more effectively compete in. Our points of difference really shine through there. That product carries with it higher ASP. That product carries with it better gross margins. We actually had a gross margin rate expansion in Consumer Electronics last quarter that was driven by this mix shift in video. And we see that trend continuing. We see 4K becoming a real business. We believe in the back half, nearly 20% of our TV business in dollars will be 4K television. So you definitely have seen a mix shift. Now the mid screen size and smaller screen size, I think those are going to be under significant pressure. We will participate there. But it is not our strategy to try to dominate small screen and mid screen commodity opening price point television. We think all the growth is going to come on larger screen size. It's been a long-time coming. And we think that -- we think there is a couple of bright spots within CE. And as you know, you haven't heard me say that for quite some time. And I think 4K probably being the brightest spot and getting some traction. The industry just updated its forecast to 1 million units in that category for this year and up to 4 million units for next year. So we've been pretty muted and pretty pessimistic on the video business for quite some time, but we do see some bright spots for the first time in quite some time.

Operator

Our next question comes from the line of Gary Balter with Credit Suisse.

Gary Balter - Crédit Suisse AG, Research Division

Just in the appliance business, is air conditioning a key -- an important category? Does that have any impact?

Dennis L. May

Yes, it definitely was -- definitely, it is an important category. It's been a cool summer, so air has been a drag. And you not only get a drag in air conditioning, Gary, you also get a drag in refrigeration. Anything with a compressor. And actually in dollars, the impact to the appliance business from heat is actually as greater, if not greater, in refrigeration category as it is in air conditioning. Because when it's hotter, your refrigerator works harder and they break more often. So a cool summer is not a good thing.

Gary Balter - Crédit Suisse AG, Research Division

So is that one of the reasons your part of the country has been weaker than the West?

Dennis L. May

It's part of the reason. The biggest reason, Gary, and it's been going on for more than just this past quarter, the appliance category, the building market has been more robust on the West Coast, Texas, Arizona than it has been in the Midwest. So I think it's more than -- weather is an impact, certainly. But a bigger impact to the overall appliance business from region to region, I think, is how strong the overall building business and remodeling business has been there.

Gary Balter - Crédit Suisse AG, Research Division

So how does the competitive environment change? Because you have Best Buy rolling up Pacific sales, so they've increased their competitive stance in appliances. You have Home Depot, which added Whirlpool last year, that's increased their competitive stance. And you still have another player, I won't mention, which has the largest share, which is still around. How does it break? How does it become less competitive?

Dennis L. May

Well, I think, in the near future, I think the promotional environment and the competitive environment is set. We don't see a lot of changes for the rest of the year. I think that pricing stability is intact and has continued to be intact. There's been a lot of discipline in the marketplace around pricing. So we haven't seen pricing pressure. As I said before, what we do see is we see an increase in advertising dollars being spent on the category. That's the biggest difference that we see. And I don't know that you see that changing for the remainder of the year. Our -- the numbers that we are stacked against change and become less robust. But I think the competitive set for the appliance business is probably what you see right now.

Gary Balter - Crédit Suisse AG, Research Division

Talk about the other categories, like you had double-digit comps in some of the new categories, or I guess they're not new anymore. But some of the categories moving in, the sofas, recliners, dinette sets. Could you talk about what -- how you're expanding that out? Is that now offered in all your stores? And what's working, what's not working with that?

Dennis L. May

So if we look at kind of our home products category, the furniture business continues to be the real bright spot there. We had a 36% comp increase from the category in this quarter, and that was on top of an 85% increase in last year. So we're getting traction there. During this quarter, we added several new brands. So in the past, Gary, as you know, we were a 1 brand-only house -- actually, it was that brand. They were the sole provider. They're still an important part of that business, but we've added 7 new brands to the floor. So we've optimized -- we've gone through that line transition. So even in the middle of a pretty significant transition this past quarter, we still had a 36% comp increase in those categories. We're getting good traction out of these brands. These brands carry with them a higher average ticket and they also carry with them higher gross margin. So our expectations out of furniture is that it's going to continue to grow the balance of our sales. Also, our expectation is that it will also expand its gross margin rate. So it's roughly 6% of our business this year; what we've said is, we believe the category next year will be 10% of the company's business, and we still feel like we are on track for that. So furniture has been a great addition. The exercise category has been not as productive. We've made some changes there, and we're still analyzing whether that business -- how that business fits for us in the future. Furniture is clearly going to win, and we look forward to these new brands and assortments having a real benefit to the back half.

Operator

Our next question comes from line of Christopher Horvers with JPMorgan.

Mark A. Becks - JP Morgan Chase & Co, Research Division

It's actually Mark Becks, on the line for Chris. The first question, on the comp guidance, down mid- to high-single digits. It seems to imply a pretty significant step down in the 2-year run rate for the rest of the year. Can you share how you're thinking about comps? And then, I guess, is that what you're currently seeing now in terms of a deceleration in trends?

Dennis L. May

Well, I think our adjustment to the outlook just captures the volatility that we saw during the fiscal quarter that we're seeing in the marketplace. We been very active about making investments in the first half that we think we're going to be able to put behind us in the back half. So we think our performance will improve. But due to the volatility that we've just seen out of the marketplace, we felt like the adjustment to the outlook was appropriate.

Mark A. Becks - JP Morgan Chase & Co, Research Division

Okay. Historically, you've done a good job of managing expenses in softer comp periods, probably owing to the commissions-based sales force. As you look at 1Q, I guess, it was 20 bps of deleverage for the negative comps. But then, it's been much, much better than that in prior periods. Is there any way on how we should think about the deleverage against these negative comps given some of the onetime items that occurred in the first quarter?

Dennis L. May

Well, I think it's a great question. We look at our Q1, again, we're not pleased with our results. We had a $0.36 loss in the quarter. Roughly half of that loss was made up of the sales impacts. So if you think about that, that $0.36, half of that loss was the sales impact. The other half of that loss, roughly $0.18, was made up of non reoccurring expenses. And I'll give them to you in order of magnitude: the branding investment that we made was the largest impact, that will be a non reoccurring expense because we're going to live within our means from an advertising expenditure moving forward; the income tax expense was #2; and then the increase in medical expense was #3. So branding investment, income tax expense, increase in medical expense. But those non reoccurring expenses made up roughly half of that $0.36 loss. To your point, we have been good stewards of our SG&A in the past. We are very focused on being efficient. And you're going to see us continue to be very focused throughout the course of this year, about being really good stewards of our SG&A. Q1 was not our -- that was not our best example. We've been better in the past, and we're going to be very focused on managing our expenses moving forward.

Mark A. Becks - JP Morgan Chase & Co, Research Division

Great. And then one other. I guess, bigger picture question on strategy. Last year holiday, you chose not to promote. Obviously, there's a discussion about driving traffic to stores. I'm not expecting you to tip your hand for holiday, but maybe just share how you're thinking about the balance between driving traffic in stores and then promotions should the competitive environment heat up again?

Dennis L. May

Yes. I think the word I would use would be balanced. I think that we're going to draw just a really strong balance between being promotional, but also talking about our points of difference. And I think what we did last holiday and certainly through this quarter, was we tilted that balance toward the branding side. I think you're going to find that we're going to find a more even balance between branding messaging but also being promotional. We have to drive traffic into our stores. And to do that, we have to promote, we have to tell the customers we've got great brands and great values. We have the pricing. We have the pricing everyday. Everyday we open our stores, we are very competitive. We need to make sure that our advertising message reflects that and we're letting the customer know that: You know what, we've got great brands and great values at hhgregg.

Operator

Our next question comes from the line of Brad Thomas with KeyBanc Capital Markets.

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

Just a couple more follow-up questions for you here on the advertising. As you think about that call to action spend, could you quantify for us maybe how much of that spend was down in the quarter and how much, if it's possible to quantify, you think it impacted sales in the quarter?

Dennis L. May

Well, Brad, as you know, it's always difficult to get so granular that you're able to determine exactly what that element was. But to your point, we had 2 different elements within this branding investment. One, you have an overall heightened spend, so our gross spend for the quarter was up over prior year. Then within that advertising spend, you also had a shift of mix, so you had a shift of mix away from call to action, more toward a branding strategy. And so you see not only you have the impact of a heightened gross spend, you also have a shift, a significant shift mix. So as I said, roughly half of the quarter's loss was made up of those non reoccurring expenses, the branding -- the adjustment in branding investment being the largest of those.

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

Okay. And so as we think about advertising dollars going forward, we are coming off of 2 quarters where you've spent more. Do you think this is an area that you could actually cut expenses year-over-year?

Dennis L. May

Yes. I would say moving forward, Brad, you're going to see that be a very stable number. So we're going to live within our means. We've made these investments, and we did not get the -- we did, obviously, not get the return out of these investments that we would have liked. And we've made changes. We continue to be very focused as a company to transforming our business, and we've stepped through some doors that we're really pleased with and we've gotten some good results out of. This is an area that we did not get the results that we were looking for out of. So we've made a change not only in our strategy, we've made a change with our agency and look for us to be very good stewards of our advertising expense moving forward, and we're going to live within our means and look for that to be a very stable -- a stable number on a year-over-year basis.

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

Great. And if I could squeeze in one more housekeeping item. Could you just give us an update on who your finance partners are today that are in all stores? And maybe who you're testing or who's in a partial rollout at this point?

Andrew S. Giesler

Yes, Brad, our primary credit offering is through GE. Our secondary is through a company called Tidewater. And we are testing Acceptance Now, which is part of RAC, as well as Progressive in certain stores throughout the country for our tertiary financing offering.

Dennis L. May

And then our lease-to-own, we have chain-wide.

Andrew S. Giesler

We do have that chain-wide. We just have a mix of the 2 different brands, the tertiary, the Progressive, as well as the Acceptance Now.

Dennis L. May

But we continue to make progress here, Brad. And that's important. As we think about this retailer moving forward in the transformation to a home products retailer, credit and expanding our credit offering is very important. We've driven this number up over 40%, so over 40% of our business is being made up of these credit -- these providers. And just as a reminder to everybody on the call, these are nonrecourse to hhgregg. We're not in a risk business. But we're going to continue to expand the offerings, expand the number of partners and continue to drive this as a larger portion of our business.

Operator

Our final question comes from the line of Peter Keith with Piper Jaffray.

Peter J. Keith - Piper Jaffray Companies, Research Division

Just a couple of clarification questions here at the end. When you look at the quarter, I guess, I'm trying to understand, did you think that some of the slowdown was self-inflicted with the branding change? Or, Dennis, do you think there has been a broad slowdown in big-ticket household durables that transpired here in the last few months?

Dennis L. May

I think you've seen -- what I would say here is you certainly have seen some indicators that there is some slowdown, whether it be -- and I'm not a housing expert, I don't -- I'm still trying to sell myself as that, but we've seen some indicators that there is somewhat of a slowdown in the remodeling area of the business, some indicators that housing is certainly being impacted. And if you look at the appliance category, you've seen slowdown. The industry is not tracking to the forecast that's put in place. Whether it be the retail business is plus 2%, that's short of the 4% to 6% forecast that was out there. And the contract business I think is running at plus 6%, which is also materially shorter -- short of the industry forecast. So I think there is a lot of leading indicators that would point to the fact that there is some macro slowdown out there in the marketplace. As it relates to our performance, we anticipated a tough performance, Peter, a tough comp in Q1 because of the compares that we were up against. We were up against 7.5% comp number on appliances and that was certainly a high hurdle. But we were disappointed in how we performed. We held share basically relatively flat in our markets that we're in, appliances, but we didn't gain market share. And I think that -- I think the investments that we are making are going to serve the company well in the future. I think the fact that we were extremely active during this quarter and we're able to absorb so many of these initiatives during this quarter, I think, allows us to be very focused going into the important holiday season, and we're going to be able to monetize these investments to improve our performance.

Peter J. Keith - Piper Jaffray Companies, Research Division

Okay. Just to follow up, when we talked about holiday, I want to be given a point of clarification on the fall selling season. You talked about the TV innovation store rates fall, been that for years. Is there something new that has not come to market yet? Or is that more in reference to the 4K and have [indiscernible] ?

Dennis L. May

I think the traction around -- and you brought up curve -- the traction that we're seeing from the consumer around 4K has been encouraging to us. As you know, this industry has been challenged for the last 3 or 4 years, ever since 3D TV just missed, the industry has struggled for innovation to become a driver of the category again. One of the things that we are somewhat encouraged about -- and again, we've had a very pessimistic view of the TV business now for some time. We are encouraged by some of the traction that we are seeing in 4K. And the reason being is picture quality has always been a #1 driver for customer upgrades. So we are somewhat encouraged by the traction that we are seeing in 4K, and we are also encouraged by the traction we're seeing in the larger screen sizes. The larger screen size influences the type of fulfillment the customer needs, meaning they're going to want to deliver versus taking it with them. We like that change. 4K will influence the consumer to upgrade more frequently because it's a better picture quality. We still believe the TV industry as a whole will be down for the year. We think there's going to continue to be pressure in small screen and mid size screen products and there'll be pressure in opening price point product. We do see some encouraging growth out of the premium segment of the TV business.

Peter J. Keith - Piper Jaffray Companies, Research Division

Okay, great. One last question for you here at the end. On the secondary credit offerings, I think myself and others have viewed that as a real nice growth opportunity. You have a nice waterfall of different credit offerings. It seems like that it's taking a little bit longer to ramp up or it's not quite the sales driver that we had anticipated. I'm curious if there's something on that credit side, whether it's store execution or terms that the credit providers are providing that's maybe restraining the acceptance from your consumers?

Dennis L. May

Yes, great point. We are making progress there, slower than we would like, I agree with you. It's definitely slower than we would like. I think that part of it is just understanding who your customer is, how interested they are in the different elements and understanding that funnel, if you will, from the top to the bottom. I think the other part of it is we need more partners. I think the secondary financing area is an area of significant growth for us. But to Andy's previous comments, we're just bringing on some additional partners and testing some different methods. I think that you're going to see further growth. We've taken that from roughly 29% of our business to 40% of our business over about a 3-year period. But we believe that it can be more, and it needs to be more. And I think that the biggest opportunity for us there is to continue to bring on additional partners in that seamless, secondary component to drive up our approval rate. And we have -- we've made progress but we're not as far as long, as long as we would like to be.

This concludes our call. I want to thank everyone for their participation, and have a great day.

Operator

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

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hhgregg (NYSE:HGG): FQ1 EPS of -$0.36 misses by $0.20. Revenue of $472.3M (-10.0% Y/Y) misses by $18.2M. Shares -7.2% PM.