hhgregg, Inc. (NYSE:HGG)
Q1 2016 Earnings Conference Call
May 19, 2016 09:00 AM ET
Robert Riesbeck - Chief Financial Officer
Lance Peterson - Director, Finance and Investor Relations
Oliver Wintermantel - Evercore ISI
Michael Goldsmith - UBS
Anthony Chukumba - BB&T Capital Markets
David Magee - SunTrust Robinson Humphrey
Good day ladies and gentlemen, and welcome to the hhgregg Fourth Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. If anyone should require assistance during the conference, you may press star then zero on your touchtone telephone. As a reminder, this conference call is being recorded.
I would now like to turn the conference over to Lance Peterson, Director of Finance and Investor Relations. Please begin.
Good morning and thank you for joining us today. Joining me on our call this morning is our Chief Financial Officer, and Interim President and Chief Executive Officer, Bob Riesbeck.
Bob will discuss the current state of our business, a review of our fiscal 2016 results, and a summary of our fiscal 2017 initiatives. After his prepared comments, Bob will take your questions until 10 AM Eastern Time.
During our call, we will make forward-looking statements which are subject to significant risks and uncertainties, and include our future operating and financial performance. We believe the expectations reflected in our forward-looking statements are reasonable but can give no assurance such expectations or any of our forward-looking statements will prove to be correct. We refer you to today’s earnings release and our current Form 10-K for additional information of these risks and uncertainties.
In addition, we will discuss several non-GAAP measurements we use to assess our financial performance, including EBITDA, adjusted EBITDA, adjusted net loss, and adjusted net loss per diluted share. Please refer to our reconciliation in the non-GAAP disclosure section on our investor relations website, which can be access at hhgregg.com.
With that, I’d like to turn the call over to Bob.
Thank you, Lance and good morning everyone. Fiscal 2016 was a pivotal year for hhgregg. We returned to positive adjusted EBITDA and took steps that will continue for the balance of this year to improve the financial performance of the company.
Through a focus on cost efficiency and SG&A and logistics, we exceeded our fiscal 2016 $50 million cost savings goalby nearly $17 million. This in turn drove a nearly $15 million dollar improvement in fiscal 2016 adjusted EBITDA. These cost savings also allowed us to maintain strong liquidity and enter fiscal 2017 in a solid financial condition with an expectation to achieve further cost reductions.
Despite these improvements, we recognized that we fell short of our revenue expectations in fiscal 2016. We have a strategy for fiscal 2017 to drive growth in our appliance and home products categories and boost omnichannel sales. We will be as focused and relentless on revenue growth in fiscal 2017 as we were on the cost initiatives in fiscal 2016. We are confident of further improved financial performance this fiscal year.
Before moving to our fiscal 2017 goals, I will recap the fourth quarter and fiscal year 2016 results. Our three top financial objectives in fiscal 2016 were to generate positive EBITDA, realize $20 million in savings initiatives and achieve mid-single digit negative comps. Our most important financial goal was to generate positive EBITDA for the year. We delivered on this objective.
On an adjusted basis we generated $8.2 million of EBITDA and it bears repeating, this was nearly a $15 million improvement over the prior year. For the fourth quarter we improved EBITDA by $7.9 million when compared to the fourth quarter of last year. Our second financial objective was to realize $50 million of cost savings for the year. We exceeded this objective as we generated $67 million of cost savings. This is a testament to the entire organization as we maintain strong customer satisfaction scores and higher conversion rates every quarter. In the fourth quarter, we realized $21 million of savings related to this objective. Going forward the annualized impact to these savings will be approximately $75 million.
Our third financial objective was to achieve mid-single-digit negative comps for the fiscal year. Although we improved our comps in three of the four quarters, a difficult holiday season and January results weighed down the fiscal year comp and we finished the year with a negative 7.7% comp.
We did however end the year on a positive note as we saw improvement in our overall February and March comps. Most encouraging was a positive 4.9% appliance comp during the last two months of the quarter.
Let me provide some additional detail on the fourth quarter before turning to fiscal 2017 initiatives. During the quarter we generated net sales of $438.8 million, which was down 9.6% from the fourth quarter of last year. During the quarter, our gross profit margin improved 10 basis points to 28.7% from 28.6% in the prior fourth fiscal quarter. The increase in gross margin rate was primarily the result of favorable product sales mix to categories with higher gross margin rates offsetting the decreased gross profit margin rates in all categories except home products.
We generated $8.1 million in net advertising savings in the fourth quarter, which resulted in a total year net advertising savings of $23.8 million compared to the prior year. We very pleased with our level of spend and the efficiency of our [ad buy] during the quarter. As we continue to refine our media strategy, we expect even greater effectiveness from our advertising spend, and we will continue to allocate our dollars better by market and by medium to ensure optimal impact at all of our locations.
The $13 million decrease in SG&A during the fourth quarter was primarily driven by cost savings in operations and corporate overhead. We recognized a $6.1 million decrease in wages due to our continuing effort to drive efficiencies in our cost structure. A $1.8 million decrease in financing fees due to fewer enhanced financing options and a $1.8 million decrease in employee benefits due to reductions in medical expenses and benefits driven by the efficiencies in our labor model.
Even though we had less financing fees, we did see our total private-label credit card penetration remain relatively flat in the fourth quarter compared to prior year. And for the fiscal year, the penetration rate increased by 390 basis points to 44.9% compared to 41% in fiscal 2015.
For the quarter, on an adjusted basis net loss was $7.7 million or $0.28 per diluted share, as compared to a net loss of $17.4 million or $0.63 per diluted share in the prior year. We continue to manage our balance sheet and maintain a strong liquidity position. At the end of fiscal 2016 we improved availability under our credit facility by $5.2 million compared to the end of fiscal 2015.
As of March 31, 2016 we had net availability of $143.6 million with no outstanding borrowings. One other balance sheet item highlighted is that during fiscal 2016 we decreased our inventory balances by an average of $35 million compared to fiscal 2015. Please note that as of March 31, 2016 we lapped this inventory initiative that we put in place in the prior year so that was not a significant change compared to March 31 of 2015.
We are in the process of finalizing agreement with our lenders that will extend our credit facility for five years and will add approximately $20 million of availability to the company. We expect to close on this agreement in mid-June.
In short, our company’s financial performance improved in fiscal 2016 giving us a strong foundation as we enter fiscal 2017. Our number one company objective this year will be to drive revenue. There is no doubt that we must reverse our recent trends on sales performance. We invested in several initiatives during fiscal 2016 that we now believe will produce results throughout fiscal 2017 and we will continue to make additional investments during this fiscal year.
Our appliance business, which has been the most resilient category for us over the past few years, will be the primary driver of our revenue objective. Appliances have grown to 56% of our overall sales and the category gives us our best brand awareness with consumers.
Actions we have taken in appliances recently include the free delivery program that we rolled out in mid-February. This has been effective and has generated the buying behavior we had desired, and this has been realized in the nearly 5% appliance comp in February and March. Again we have seen a similar momentum in the current quarter. We expect to continue positive comp store sales performance in appliances throughout fiscal 2017.
We are on track to add up to 15 Fine Lines appliance departments in our stores by the end of fiscal 2017, more than doubling the number of Fine Lines we have at the end of March 2016. We will continue to utilize extended financing as a marketing and conversion tool. We have extended our appliance kitchen packages offerings further this year than we had in any prior year. The leadership changes we made in the appliance merchandising team last year have started to have a significant impact on this category. We are very excited about our talent level and are now beginning to see the return on this investment.
Our vendor relationships and supports continued to grow in this category and we will continue to mutually benefit from these relationships. Although our three other revenue categories are smaller in size when compared to our appliance category, they are also important as part of our overall effort to drive our revenue.
Our consumer electronics business has recently been the category that experienced the most competitive in macro pressure. We assume competition in this space will continue to be fierce for the foreseeable future, especially as prices decrease on 4K TVs. To help combat this, we continue to work with our vendor partners to broaden our assortment of products.
We also plan to invest more heavily in online TV sales through incremental digital investments and additional SKUs. Our focus will continue to be on large-screen premium TVs and to differentiate ourselves from the competition on service levels.
In addition, we started offering free delivery on TVs in April. As screen sizes become larger and larger we believe delivery and installation with become a more significant competitive advantage for us. Finally, we will continue to utilize our financing options to drive sales in consumer electronics.
Home products and furniture will continue to be the largest percentage growth category for hhgregg. As we mentioned last quarter, store layout has been critical to our recent success in home products. Having furniture near the front of the store has made it easier for our customers to see our assortment immediately upon entering our locations.
The store resets with furniture near the front of the store have produced an incremental lift in overalls store sales. As of the end of the fiscal 2016 we had 40 reset stores and we plan to reset a 100 additional stores by the end of the current fiscal year. In addition to this merchandising strategy, we will increase advertising spend in home products and be more competitive in financing by offering 48-month and 60-month programs.
As with appliances and TVs, we are now offering free delivery for furniture and bedding. Although it has declined in the past several years and is now our smallest category, we will continue to offer computers and tablets. We need to do this to maintain relevance as a consumer electronics leader and most of this investment will be online and through expanded offerings.
We must also continue to invest in our e-commerce platform. Our e-commerce sales will be a core component of our growth as customers not only want to shop online and mobile, but do more and more of their research away from the store. During the fourth quarter, we generated 20% growth in e-commerce and for the year our growth was 12.9%. We will capitalize on the investments we made in our mobile capabilities and with our expanded offerings specifically around online TV.
We believe this will help us grow total e-commerce sales by 20% to 25% in the current fiscal year. Over the past couple of years, the majority of our capital investments have been in the IT platform to enhance our e-commerce capabilities. In fiscal 2017, our capital investments will be focused on our stores in driving revenue, primarily through our Fine Lines and our store resets. We expect to spend roughly $20 million in capital expenditures this year.
As it relates to driving traffic, we must continue to be more effective with our marketing spend. As a management team, we are unanimous in our assessment that our marketing dollars can be more impactful and we will continue to get smarter in fiscal 2017 with our execution. We expect overall marketing spend to remain relatively flat to the prior year.
In addition to a strong emphasis on revenue growth we have two other key objectives for fiscal 2017 that we expect to drive revenue and value for the company. Objective number two is sales excellence. We will enhance our connection to the customers through better customer service. We know that service excellence as measured in our customer satisfaction scores is directly correlated to sales performance through higher ticket and higher customer retention.
In order to do this with an incentivized sales force we need to embrace both the competitive pricingof the industry and additional products not sold in our stores. To make this happen, our associates are embracing the ultimate price center in our stores and making consumers more aware of its presence. The ultimate price center is a kiosk in our stores with a mobile option, which gives our sales associates the ability to quickly validate the lowest price for any product in the market jointly with our customers. It also functions as a tool to allow our customers to shop our expanded aisle from the store.
We believe this is another way for us to build trust with our customers and will drive a more relational experience between our customers and sales associates. We will be measuring sales excellence initiatives through our conversion rates and customer satisfaction scores. We plan to continue to provide our sales associates with every tool possible, including customer traffic to enhance their ability to be successfully.
Our number three objective this year is logistics optimization through our supply chain and delivery network. During fiscal 2017, our savings initiatives focused on advertising, store operations and corporate overhead.
In fiscal 2017, we will begin realizing the savings generated from making our logistics and supply-chain more efficient. This involves reshaping our distribution footprint, realigning transportation costs, improving productivity and changing our home delivery model. Over the next two years we will realize $20 million to $25 million of annualized savings with this initiative. This will start to be realized in the second half of the current fiscal year.
In 2017, our primary focus will be on maximizing revenue with the goal of achieving a mid single-digit negative overall comp and a consistently positive appliance and home products comp, offset by an expected decline in consumer electronics. We will be as passionate and focused on revenue growth this year as we were on cost reductions last year.
We are confident the investments we made last year and those we will make this year will help us achieve improved revenue trends and profitability growth, with the expectation of a solidly positive EBITDA for the current fiscal year.
And with that we will be happy to take any questions.
Thank you. [Operator Instructions] The first question is from Oliver Wintermantel of Evercore ISI. Your line is open.
Yes, good morning. I had a question regarding the TV cycle, maybe you can give us a little bit more information about what you've seen so far in 4Ks in units and ASPs and how you think that will play out for the rest of the year especially the holiday season?
Yes, I think that -- we had some challenges in this past quarter with TV. Some of the models with our vendors did not transition until the current quarter that we are in. So when you look at our overall comp for the last quarter with consumer electronics being down 20%, I think it is interesting to note that of that about 17% of that decline was related to pure units, and 3% of that was roughly related to average selling prices.
So, with that transition it had about a $25 million impact on our quarter and if we did not – if we would have had that product similar to prior years, our overall comp in consumer electronics would have been a negative 5.5% instead of the minus 20 that we realized. So, from an ASP perspective, we do continue to see that decline. NPD data for the quarter showed video ASPs down about 6.3%. we were only down 3% because we do index on the high-end, and that is where our focus is. So it clearly had an impact on our quarter and it also had an impact on our liquidity because had we had those sales in the quarter we would have had $25 million plus of more cash.
Got it, thank you, and just you mentioned e-commerce grew about 20% year-over-year, can you remind us what your percent of total sales is in e-commerce?
Our total e-commerce business right now is only about $100 million. So we do expect it to grow by roughly 25% this year.
Thanks very much. Good luck.
Thank you. The next question is from Michael Lasser of UBS. Your line is open.
Good morning. It is Michael Goldsmith on for Michael Lasser today. Thanks a lot for taking my question. My first question is on the cadence of the quarter, it sounds like January started off pretty tough and that it came back over February and March, but maybe not so much to overcome a tough January, can you just kind of provide a little bit more detail about that and how that's transitioned into the month of April and into May?
Yes, I mean clearly January was very tough, and I think that our appliance business recovered very nicely in February and March, and we have continued to see a similar trend through the first half of the current quarter or up to today. So we feel very comfortable and confident in our appliance business. When it comes to consumer electronics again that transition on TV being later this year than last year, we are just starting to see the TV business come back.
So clearly a drag on the quarter and had we been at minus  instead of a minus 20 in consumer electronics just based on that shift we would have had a much better, but still negative comp.
Got it. And then did you see any differences within the geographies of your stores, I know some other retailers have experienced weaker trends in the north in discretionary products, did you experience something similar?
We really haven’t – I mean keep in mind we don't go north of really the Philadelphia market and don’t go really any further west in kind of Chicago and St. Louis. So we have not seen that impact.
And then as a follow-up, what is working within consumer electronics right now, it seems that TVs were set to improve based on some adjustments but what is working, what is shining within the category?
I still think 4K is the shining star, but I believe that it is becoming more and more of a percentage of everybody’s assortment, where we did over-index with it for a while and so, we feel like we will make up the unit deficiency that we had, but with ASPs, fortunately for us only being down 3%, whereas the rest of the industry is down 6.3%, that is where the business is for us, I mean, it is nearly $600 million or $700 million of business in consumer electronics.
Great, thanks very much and good luck in the upcoming year.
Thank you very much.
Thank you. The next question is from Anthony Chukumba of BB&T Capital Markets. Your line is open.
Good morning, thanks for taking my question. I wanted to see if we can get an update on the CEO search?
Well, when I was asked by the board to take this role at the beginning of February, we agreed that it would be a six-month process. So right now, we will not reevaluate that until roughly the August time frame, but I fully hope and expect to keep this role?
When you say keep the role you're saying you'd go from being the interim CEO to the permanent CEO, I just want to make sure I understand that.
That is what I would hope.
Okay, that is helpful. Thank you.
Thank you. The next question is from David Magee of SunTrust. Your line is open.
Hi, good morning.
With regard to the TV business, what is your feeling about the customers receptivity to the TVs as the prices have come down, and why would be ASPs be different in terms of your differential than what NPD is showing?
Again, we do index on higher sizes and higher tickets. We do not carry the number two brand out there, Vizio. So we are predominantly a Samsung, LG and Sony house, and so that is why we index a bit higher than the industry. And it will drive traffic with our TV business.
Are you surprised or disappointed in terms of the customers' reception to these lower price points that we're seeing over time?
No. I think it has – I mean, if you look at the industry over its history, as this technology becomes more and more embedded and becomes a bigger portion of the assortment that seems to be the trend.
On the – you mentioned the financing options being expanded and as a source of top-line growth, but can you give a little more color about what is really popular right now in the financing side of things and what might be expanding faster?
Well, I think that our ability now to be able to offer different financing options by category has helped with us with every category we have. I mean we traditionally would have just one financing option against all categories. We are now able to offer different categories between furniture, bedding, video and appliances. And I think that that helps us be more competitive with the competitors in each category.
What type of financing has the most traction right now?
It really depends on category. I mean, we are at 24 months right now on appliances and video. We are 36 to 48 and sometimes 60 months in bedding and furniture.
Thank you. And lastly, how constrained do you feel about the size of the stores and what you would like to do with regard to moving into the higher-margin furniture business?
I don't believe we have any concerns about the size of our – I mean, our average footprint is about 32,000 square feet. We carry virtually every television and every model in every location that we have along with the appliances. And so we will get more localized with our assortment in appliances, and in video, and that will give us plenty of room to do what we need to do with furniture.
The last question actually is you mentioned earlier the pricing pressure in the CE category, is that coming from sort of across the board or do you see that coming from discounters or online, any segment in particular that's behind that?
It is relatively across-the-board. I mean it is – if you look at the NPD data, it is virtually every retailer that is playing has got the same type of pressure.
Thank you and good luck.
[Operator Instructions] The next question is from Anthony Chukumba of BB&T Capital Markets. Your line is open.
Good morning. So I just had one additional question, I was just wondering how you feel about your store base being at 227 stores. I'm assuming you are probably not planning to open any new locations this year, but I was just wondering what your thought is in terms of potential store closings? Thank you.
Great question. I mean we are in a process of evaluating that. I mean there are a couple of markets where we have had a tough road, and there are other markets where we probably could add another store. So we are going to go through that entire evaluation and I think in our next call probably have some.
Okay, that is helpful. Thanks.
Thank you. And at this time I would like to turn the call back over for closing remarks.
Thanks everyone again for your interest in hhgregg, and we look forward to providing you an update on our next call in August. Have a great day.
Thank you. Ladies and gentlemen, this concludes today’s conference. You may now disconnect. Good day.
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