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hhgregg (NYSE:HGG)

Q1 2013 Earnings Call

August 02, 2012 9:00 am ET

Executives

Andy Giesler - Vice President of Finance

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

Jeremy J. Aguilar - Chief Financial Officer, Principal Accounting Officer and Corporate Secretary

Analysts

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

Christopher Horvers - JP Morgan Chase & Co, Research Division

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

David G. Magee - SunTrust Robinson Humphrey, Inc., Research Division

Michael Lasser - UBS Investment Bank, Research Division

N. Richard Nelson - Stephens Inc., Research Division

Daniel T. Binder - Jefferies & Company, Inc., Research Division

David A. Schick - Stifel, Nicolaus & Co., Inc., Research Division

Gregory S. Melich - ISI Group Inc., Research Division

Anthony C. Chukumba - BB&T Capital Markets, Research Division

Alan M. Rifkin - Barclays Capital, Research Division

Anthony C. Lebiedzinski - Sidoti & Company, LLC

Operator

Good day, and welcome to hhgregg's First Quarter 2013 Earnings Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Andy Giesler, Vice President of Finance. Please go ahead, sir.

Andy 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; and Jeremy Aguilar, our Chief Financial Officer.

During today's call, Dennis will discuss the current state of our business and update you on our initiatives, and Jeremy will discuss our first fiscal quarter operating results and discuss the revised guidance.

At the end of our prepared remarks, we will have until 10:00 a.m. Eastern time to answer your questions. [Operator Instructions]

Let me take a moment to reference the Safe Harbor provisions under Private Securities Litigation Reform Act of 1995. During this call, we'll make forward-looking statements, which are subject to significant risks and uncertainties, which include the future operating and financial performance of the company.

The company believes that the expectations reflected in its forward-looking statements are reasonable and can give no assurance that 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 Factor sections of our Form 10-K, which was filed on May 23, 2012; and our Form 10-Q, which was filed this morning, for 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 extending a special thanks to all of our associates. It's your hard work and dedication that differentiates hhgregg and assures our customers receive a superior shopping experience.

As we mentioned in our press release, our sales results from the quarter were below our expectations. Heading into the quarter, we have projected comparable store sales to be in line with our March quarter results, which was a comparable store decline of negative 0.7.

However, we experienced weaker demand and greater volatility in our business than anticipated. We reacted to the sales shortfall by making adjustments to our cost structure and expects subsequent quarters to benefit from our cost-reduction measures.

Looking forward, these adjustments to our cost structure will allow us to partially offset the impact on earnings from our previously announced sales revised sales assumptions.

While we are disappointed in our results, we are as committed as ever to returning the business to positive comparable store sales.

The video industry remains challenged, with industry ASPs continuing to fall. As we continue to balance traffic growth and profitability in our Video business, we made progress in slowing the decline in gross margins, but at the expense of top line and market share.

While we believe that manufacturers attempts to slow the ASP declines and add profitability back to the category through universal pricing policies and better enforcement among advertised pricing will help profitability in future periods, the broader effect of weak industry demands is expected to continue the way on the category for some time.

In the appliance category, we remain very pleased with the results of our initiatives. We are continuing to gain market share and are becoming the appliance retailer of choice in our markets.

Our growth in the category remains robust, and is likely that appliance will grow to be our largest product category this fiscal year.

We are also pleased with the stability of gross margins in this category, and believe the appliance business is an attractive business that will continue to drive our business over time.

While the computing and mobile phone industry have negatively impacted as consumers defer purchases until the upcoming product launches by Microsoft and Apple, we were still able to generate positive comparable store sales in this product category.

We have fully rolled out our new IT product display and believe that they will help us build momentum in the back half of this year as new products are rolled out.

We remain committed to our core value of competing on price and differentiating ourselves through service.

While we define big-box consumer products today as appliances and large-screen television, we continue to test new products that set this definition.

We believe there is an opportunity for hhgregg to broaden its product assortment into home products that require delivery or installation.

We believe hhgregg puts big-box products in the home better than anyone. These types of products could leverage our consultive sales force, home delivery service and private label consumer credit card.

We know today that there's a clear segmentation for us between our market share and big-box products versus small-box products. This does not mean that we're going to abandon these products because they do a great job of helping us drive traffic into our stores. It does mean that we are going to continue to invest in our capabilities and have a best-in-class home delivery model.

Despite the consumer electronics industry challenges, we are committed to executing on our key initiatives as we have outlined in the past. Our key initiatives are continuing to gain market share in appliances; stabilizing the profitability of our Video business; continuing to develop the computing and mobile phone category; adding significant functionality to our Web business; and improving our store productivity.

On growing our appliance market share, while pleased with our success in the category, we believe we have further opportunities to become a more meaningful leader in the appliance industry and ensure that we are the must-shop appliance retailer in our markets.

We are encouraged by the results of our investments to date, and will continue to invest in the promotions and customer-facing technologies to gain additional momentum in the space.

Stabilizing the profitability of the video category is clearly our biggest challenge. The video category is important to our top line and overall profitability.

Last year, during the second fiscal quarter, we saw a meaningful decline in gross margins for the category, which led manufacturers to enhance their discipline around their pricing strategies.

Many manufacturers have incorporated broader-reaching minimum advertised price policies, and in some cases, implementing unilateral pricing policies. These policies, which vendors fully rolled out by the end of our first quarter, are helping stabilize product margins.

As previously mentioned, we are continuing to refine our merchandise mix to balance traffic and profitability. While demand for TVs greater than 60 inches remains robust, TVs between 37 and 50 inches continue to be challenging, offsetting the growth in larger screen sizes.

As it relates to our July Video business, we continue to be pleased with the gross profit rate, the top line results remain challenged.

The next major initiative for fiscal 2013 is continuing to develop our computing and mobile phone category. In fiscal 2012, we added a greater assortment of notebooks, desktops and tablets, along with Verizon smartphones.

In fiscal 2013, we have continued to enhance our IT offerings in this category. We have fully rolled out our new product displays and believe that this has better prepared us to compete effectively for the back-to-school selling season, along with the upcoming launch of Windows 8.

Looking at our initiative to enhance our multichannel capabilities, last year, we completely changed the look and feel of our website, hhgregg.com.

In addition to enhancing the "buy online, pick up in store" capabilities, we have several functionality rollouts scheduled this fiscal year. One of our major rollouts planned for the current quarter will include the launch of our "buy online, ship from store."

This will expand our online assortment and further enhance our inventory productivity.

We have additional customer facing launches scheduled prior to the important holiday selling season.

The next initiative is increasing our store productivity. In the coming months, we have added 2 new product offerings in approximately 31 stores: home entertainment furniture and home fitness equipment.

Home entertainment furniture will include recliners, sofas and sectionals; and tables; and an expanded assortment of TV stands. We believe these are a great complement to our current business model as they are a natural fit for the home entertainment room that centers around the large-screen TV.

In addition, to the home entertainment furniture category, we will be testing fitness equipment. Today's fitness equipment is complicated and customers typically need assistance when shopping this category. Our selection will include treadmills, elliptical machines and recumbent bicycles.

These new categories, like large-screen televisions and appliances, will leverage our best-in-class delivery network, our sales associates, and in many cases, customers may want to take advantage of our financing offers.

Customers trust hhgregg to assist them in selecting and delivering big-box products to their homes, and we believe these complements our current offerings very well.

Finally, we're in the middle of testing additional Apple products in 26 of our stores. This test includes the addition of iPad and iPod products and accessories. Currently, we sell iPhone and Apple TV in all of our stores.

To date, we are very pleased with the results of our tests and the consumer response to the additional Apple products in our stores.

As I mentioned earlier, we are committed to aggressively managing our costs. We are reviewing every aspect of SG&A and advertising programs and are actively rationalizing our ad spend, reviewing our infrastructure, optimizing our profitability on our service offerings, all while maintaining a best-in-class customer purchase experience. We will not waver from providing our customers the very best in service and support.

In conclusion, we remain committed to becoming a national retailer of appliances and consumer electronics over time. Near term, we will focus on maximizing the operating results of our existing stores and our current markets, while adding new stores at a measured pace in existing distribution network, which leverages our infrastructure investments in those markets, while driving our market share.

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

Jeremy J. Aguilar

Thanks, Dennis, and good morning, everyone. This morning, we reported a net loss of $5.7 million for the quarter or a loss of $0.16 per diluted share, compared to a net loss of $800,000 or $0.02 per diluted share for the comparable prior-year period. The increase in net loss for the 3-month period was the result of a comparable store sales decrease of 5.1%, an increase in advertising expense to percentage of net sales, an increase in SG&A expenses as a percentage of net sales and a slight decrease in gross profit as a percentage of net sales, partially offset by the sales from the additional 30 net stores opened in the past 12 months.

During the first fiscal quarter, our net sales increased 13.5% to $489.9 million, compared to $431.5 million in the comparable prior-year period.

The increase in net sales for the 3 months ended June 30, 2012, was attributable to the net addition of 30 stores during the past 12 months, partially offset by a comparable store sales decrease of 5.1%.

The decrease in comparable store sales for the 3-month period ended June 30, 2012, was driven primarily by a decrease in the video and other categories, partially offset by increases in the appliance, and computing and mobile phone categories.

The video category comparable store sales decline was driven by double-digit decrease in unit demand to a low single-digit decrease in average selling prices.

The decrease in comparable store sales for the other category was primarily result of double-digit comparable store sales decreases in cameras, camcorders and small electronics, partially offset by growth in the mattress category.

The appliance category saw an increase in average selling prices, with unit demand relatively flat compared to the prior 3-month period.

The computing and mobile phones category was led by increased demand in the offering of tablet computers and mobile phones, partially offset by declines in notebook computers.

Gross profit margin, expressed as gross profit as a percentage of net sales, decreased 26 basis points for the quarter to 29.9% from 30.2% for the comparable prior-year period. The decrease was largely due to a decrease in gross profit margin in the video and appliance categories, partially offset by a favorable sales mix.

During the fiscal second quarter of the prior year, we, along with the overall industry, experienced a reset of gross profit margin rates within the video category.

Given the company has not yet lapsed these resets, gross profit margin rates were pressured during the first fiscal quarter of the current year.

Appliances also experienced a slight decline in gross profit rates as the result of our initiatives to grow market share in the category and increase promotional activity, partially offset by a shift in the product mix within the category to products with higher gross profit margins.

The computing and mobile phones category experienced an increase in gross profit margin due to the offering of mobile phones, which we did not offer in the comparable prior-year period. The declines were also offset by an increase in gross profit margin rate in the other category, which was primarily due to increases in furniture and mattresses.

SG&A expense as a percentage of net sales increased 32 basis points for the quarter compared to the prior-year period. The increase was largely a result of increases in employee benefit expenses due to increased health insurance costs, in addition to the de-leveraging effect of the comparable store sales decline.

This increase was partially offset by slight decreases in other SG&A accounts as a result of cost control measures implemented during the quarter.

Net advertising expense as a percentage of net sales increased 96 basis points during the quarter, compared to the prior-year period. The increase was a percentage of net sales was driven largely by increased promotional activity to drive market share increases and the de-leveraging effect of the comparable store sales decline.

Our effective income tax rate for the quarter increased to 40.8% from 17.2% in the comparable prior-year period. The increase is primarily the result of the charge to reduce deferred tax assets in the comparable prior-year period, which reduced the income tax benefit recognized.

The reduction in the deferred state income tax rate with the comparable prior-year period was the result of a scheduled reduction in Indiana's corporate income tax rate beginning July 1, 2012.

During our first fiscal quarter, we repurchased 1.1 million shares of our common stock at a total cost of $11.2 million. The shares were repurchased under a $50 million share repurchase program that was authorized by the company's Board of Directors on May 24, 2012, and expires on May 23, 2013, unless extended or shortened by the company's Board of Directors.

Turning to our guidance. Attuned to what the company's pre-release on July 10, 2012, we expect net income per diluted share to be within the range of $0.90 to $1.05 for fiscal 2013. Included in the company's guidance are the following annual assumptions: net sales increase of 3% to 6%; comparable store sales of negative 6% to negative 4%; the opening of 20 to 22 new stores, of which 2 opened in the first fiscal quarter; the impact of fiscal first quarter share repurchase activity of 1.1 million shares at a cost of $11.2 million.

Though our industry has been challenged over the past several years, we have consistently maintained a solid liquidity position with no long-term debt. In spite of a volatile sales environment, we have been able to manage our inventory very well, and we are pleased with our current inventory levels.

We continue to remain focused on driving long-term shareholder value, while maintaining a strong liquidity position.

And 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 on the queue is Brad Thomas with KeyBanc Capital Markets.

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

I want to just follow up on some of the new products that you all are going to be testing. Dennis, could you just give us a sense for what the store might look like? How much square footage would you reallocate to the furniture and the fitness equipment? And then is it reasonable to presume that, that would come from the video category?

Dennis L. May

Great question. We're excited about testing these new product categories. As we have gone through the course of this year, we've been reallocating and re-rationalizing our assortment, really, at the beginning of this year. So we're actually able to test these 2 new product categories, both home furniture and the fitness category without making any additional reductions in our assortment of our core businesses. What it does for us, and we really look forward to testing these new products and having everyone see these new products in our stores, it allows us to reallocate some of our floor space and optimize in a more efficient manner. But actually, our assortment of traditional consumer electronics products or appliances do not change in these categories. So we'll be able to offer the best of both worlds. Our existing assortment in these categories, plus these accretive businesses, which, again, will be able to not only leverage what we do in our stores, but our home delivery and installation network.

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

Okay. And if I could just follow up on advertising and its efforts to drive market share gains. Advertising dollars up pretty significantly in the last year. What's the outlook in terms of dollars and your expectations for the ability, at last, de-leverage in the future quarters? How should we think about advertising?

Dennis L. May

Yes. Brad, I think we've done some really good work toward the end of the quarter and that'll really serve us well in future quarters around being efficient, not only around advertising, but our SG&A as a whole. As I said in my prepared remarks, we came out of our fourth fiscal quarter with some pretty encouraging consumer trends around demand. We had minus 0.7% comp. We saw some encouraging trends. Then we saw, obviously, demand weaken in the quarter, which made it -- that we made some good work and good efforts around reallocating cost structure reallocating advertising expense, made it difficult to make those adjustments within our first quarter. But as we look into the future, we look to do some really good work around rationalizing and looking at our advertising spend and really going after what we consider to be some of the lesser productive -- lesser ROI parts of that spend. So we continue to learn more about digital advertising, which is pretty cost effective. So we're really going to be good stewards of our ad spends for the remainder of this fiscal year.

Operator

Our next question on the queue is Christopher Horvers with JPMorgan.

Christopher Horvers - JP Morgan Chase & Co, Research Division

Can you talk about the volatility of the TV category throughout the quarter, particularly around the Memorial Day and July 4 holidays? It sounds like that's -- it's becoming an event shopping kind of business in TVs. Was any of the shortfall around those holidays self-inflicted by pulling back on some of the more promotional SKUs?

Dennis L. May

Great question. As you pointed out, significant volatility within the quarter -- and a lot of that volatility around some of those key selling seasons. hhgregg has made some decisions. We continue to look to find the appropriate balance between profitability and traffic. And as we navigate through some of these changes and there's a lot of changes going on within the video business, you have the changes on the pricing side, you have more UPP products being rolled out, you have different M.A.P. policies and that type of thing. And we believe that these changes are positive changes by the manufacturers. It's adding greater stability to gross margins, which we did see in the quarter in that regard. However, it is a balance, and we've got to continue to navigate through that and strike the appropriate balance between profitability and traffic. And we did see a lot of that volatility around those -- around Father's Day and around Memorial Day.

Christopher Horvers - JP Morgan Chase & Co, Research Division

And so did -- do you think any of that, the down double-digit comps on video, do you think any of that was -- I mean, what portion of that could you say was you just try to rain in and then on some of the more promotional SKUs? And then on your comment on July and going forward, is this strategy something that you'll continue to execute into the back half?

Dennis L. May

Well, for competitive reasons, we don't break out any of the subsets within the Video business. What I would say, if you look at our results, you clearly see ASPs starting to stabilize, but you see unit declines. So that would probably -- that would imply, obviously, the greatest loss around smaller screen sizes. So as we think about the Video business for the back half, we see growth for the industry and for hhgregg around 60-inch and the larger televisions. We feel like that's going to be a good growth area. Obviously, in Q1, large-screen television represents its smallest share of the business. You see some seasonality in large-screen television and around the holiday season and certainly around football season. It becomes a much larger portion of the business. So the mix does changed. So look for us to continue to tweak that strategy and finding the right balance. But what I would say is look for us to have an eye on profitability.

Christopher Horvers - JP Morgan Chase & Co, Research Division

And then just the final question is, as you pull back in the markets some of the promotional SKUs, are you seeing some of your competitors react and do something similar? Or they kind of stay in the course?

Dennis L. May

We're really not seeing anything dramatically different from the competitive landscape at this time. But unfortunately -- I wish I knew what their future strategy was. Unfortunately, I do not. But no, we really -- we feel like, as we think about the stability of ASPs moving forward, we feel good about that. We see continued growth in larger screen sizes. And we do see -- we see stronger gross margins in the Video business. So that's encouraging to us. The question mark will be, what does demand look like? The industry has been very weak year-to-date, anywhere from low double-digit to high single-digit decline month after month for the industry.

Operator

Next question on our queue is David Strasser with Janney Capital Market.

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

I want to ask you a question. As you look at some of the changes, some of the differences in your business, and I guess it could be considered geography or old versus new. I'm just trying to get a sense if there's any big disparity between newer markets, older markets or geographically in some of the categories, particularly relative to plan. And as you kind of look back on what was a fairly dramatic -- a fairly aggressive growth over the last few years or any market step today you might work with or areas you may -- could have done more investments.

Dennis L. May

I guess, I would answer the question about overall performance by market. We have seen our performance of existing markets be very consistent and stable from market-to-market. So we've not seen any great disparity between geographies around performance of the business. What I would say is we've been very pleased with our growth. I mean, growth has been good for this company, whether it be markets we've opened 5 years ago or on most recent expansion into Chicago or Miami. We've been pleased with those investments and feel like those investments will serve the company well for a long time. The slowing of our growth, I think, is a reflection of the company -- continue to strike the right balance between the real estate opportunities that are available to us and the business opportunities that are available to us. As we look at the real estate environment out there, it's good, it's not great. But we feel like we have some exciting business opportunities that we can provide greater focus around ultimately, around testing new businesses, leveraging and growing our appliance business, continue to build out our web functionality. And we feel like that -- those focuses have a better return for the company right now.

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

Okay. I mean, and just a little bit of a different topic. You may have talked about it, but there's one point where I went in and out. I was looking at UPP and it's just -- trying to get a sense and I guess it's a little bit towards Chris's question, too. As you kind of look at the holidays, July 4th and Memorial Day, have you -- how does that plan to -- particularly around those holidays, sort of, I guess, is a follow-up to that question.

Dennis L. May

Well what I would say, just to give you a sense of timing within our first quarter, we saw the UPP assortments get set pretty much by the end of the quarter. So, Dave, as you think about the timing, think about, call it, the June time frame. The manufacturers were pretty much complete getting that assortment on the floor. We are -- as we sit here today, though, for competitive reasons, we don't break it out. We are encouraged and pleased with the balance of sale that UPP products represent of our total mix. We think as the seasonality changes and shifts toward larger screen sizes, which is where at the predominance of the UPP models and the hard M.A.P. models are, we think that mix continues to change. Because as you think about NFL and college football kickoff, and you think about Christmas, you see larger screen sizes just represent a larger portion of the Video business in that regard. So I think that -- I think we're encouraged by what we're seeing. We're encouraged by what we're seeing around the impact of gross margins -- gross margin rate and in that regard. And we're encouraged to see how UPP is selling for not only for hhgregg, but for the industry as a whole. So as we look into the holiday selling season, we think that's going to be positive.

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

Just a last follow-up on that and then I'll turn it over. But has there been any noticeable difference in conversion rates or close rates as a result of UPP?

Dennis L. May

We have not seen anything, David. We've been -- we were very pleased with our conversion rate within the quarter. So we've not seen anything remarkably different.

Operator

Next question on the queue is David Magee with SunTrust Robinson.

David G. Magee - SunTrust Robinson Humphrey, Inc., Research Division

Just a couple of questions. One on the appliance business. You'd -- the comps were good at 6%, plus 6%, but there were some promotional activity. Can you talk about, maybe, what gross profit dollars did in that category during the quarter, and then how that relationship changed during the next couple of quarters?

Dennis L. May

Yes, David. We experienced some very marginal -- gross margin rate decline in the appliance category Q1 and it was very marginal. So we had stronger margins in the category, and we were pleased. We're pleased with how margins really track to the quarter and how they're tracking -- as we look into the future, we see continued strong gross margin out of appliance. So it was a very marginal rate decline. We were pleased to see gross margins where they were within the quarter and for the company and feel like that we're seeing some good stabilizing effects. I guess -- but we don't -- I guess I'll revise that we don't see anything different out of the appliance business as it relates to gross margins in the future.

David G. Magee - SunTrust Robinson Humphrey, Inc., Research Division

The second question is regarding categories that you could maybe have more focus on going forward. Would mattresses be something that you consider expanding at a faster rate?

Dennis L. May

We do. We're excited about the bedding business. We saw it grow last quarter and we see continued growth. It's a business that were underdeveloped and, David, we think there's an opportunity for us to grow that business. And fundamentally, what we see from a focus perspective for hhgregg is a focus to grow big-box products. We believe that we have this core opportunity to refine our sales mix around product categories like major appliances, 60-inch and larger television, bedding, furniture, fitness equipment. But these product categories are big ticket product categories. They have very strong gross margins and they require home delivery and installation. The consumer wants a salesperson. They have questions and they need answers. And it's also a product category where financing on our hhgregg credit card can play a bigger role. We are seeing -- we're very focused on increasing the penetration of our credit card and our financing offering. We saw, with that last quarter within Q1, that grow -- we think we saw that grow, and we expect continued growth around hhgregg credit cards. So...

Operator

Our next question on the queue is Michael Lasser with UBS.

Michael Lasser - UBS Investment Bank, Research Division

First on the gross margin and the impact from some of the pricing actions that vendors have been taking. Your comment was that it's been stable. Why hasn't that led to more improvement? And does this suggest that there has been other factors that has been weighing on the gross margin within the video category for the last couple of years?

Dennis L. May

Yes, Michael. What I would say about the quarter as a whole, first of all, UPP and those new models became seated as we went through the quarter. And we saw a positive impact in gross margins as we went through the quarter, as those models came in, got seated on the floor, started to sell. So as we think about gross -- as we think about gross margins in the back half of this year in the Video business, we believe that we have an opportunity to expand gross margins in the video category compared to last year. If you remember last year, we started to see pretty material margin compressions, specifically around the video category in our fiscal Q2. And we saw those margin pressures really go throughout the course of the fiscal year. Those margin pressures were created by a combination of things. One, which is compression in the industry as a whole. And we feel like UPP and some of the steps that manufacturers are taking to add back profitability to the business are going to assist in that area. And the second component was part of our emphasis around driving promotional, nonbranded television. As we look into this year in the back half, we see 2 things happening: we do believe that the pricing policies by the manufacturers is going to have a positive impact to gross margins; and we do believe that we will strike a different balance between promotional television and driving profitable traffic. So I think that -- I think that we will continue to tweak our strategy, Michael, going to the back half. And our expectations to your point, I think, is that we will -- our expectations are that we will see an expansion of gross margins for the video category in the back half.

Michael Lasser - UBS Investment Bank, Research Division

Could you quantify the potential impact from some of the pricing actions that vendors have been taking?

Dennis L. May

Michael, I cannot. Obviously, implied in our guidance is -- we take all that in consideration.

Michael Lasser - UBS Investment Bank, Research Division

Could it be to such a magnitude that it would enable to revisit some of the promotional activities on the opening price point televisions in smaller screen sizes? So if you're making more on the higher-end models, perhaps, you would be a little more aggressive on the lower-end models and still have some stability in your gross margin?

Dennis L. May

I think that's a balance that we're always looking at and struggling with. But, yes, we would always look at that. I think we're going to make sure that we see customers. And I think we're going to do a couple of things that'll be important. I think we're going to take the learnings of last holiday season and apply those to this holiday. Meaning that we played the promotional game in a bigger way, in a different way last holiday than we have in the past and we now have that data. We have that information. We understand how sticky the consumer is, meaning that, when they came in and they bought that traffic item, did they come back? When did they come back? How do I speak to that consumer? How do I do a better job of data -- of mining the database to generate future traffic? So we're certainly going to take the learnings of last holiday and will apply into this year. Michael, to your point, we try to make the smartest decisions we can about balancing profit and traffic.

Michael Lasser - UBS Investment Bank, Research Division

Let me just ask one last question on capital allocation. You're investing in new stores, you're investing in your categories. Do you expect the industry, at least the video portion of the industry, to remain difficult for an extended period? And you also run a pretty tight cash balance over the -- for the last 5 quarters, how should we think about your philosophy of allocating capital back to shareholders and trying to balance that with what's probably going to be some heavy investment needs and just maybe maintaining sufficient liquidity position?

Jeremy J. Aguilar

Yes, Michael, it's Jeremy. It is a great question. We've tried to remain balanced from our approach at looking at deployment of capital for long-term shareholder value, along with managing liquidity needs and some of the capital resources that we needed to deploy into the market, largely new stores. One of the things we talked about is we would expect that new stores would slow to some extent and would be largely just some minimal efforts into back-selling of markets. So from that perspective, we would expect, moving forward after this year, that capital deployment for new stores, would flow to a degree. Clearly, we've been active in our share repurchase program and believe that, that has been accretive and will continue to be accretive of those measures that we took last year as well as this first quarter. But we really look towards balancing, stay flexible in our liquidity position. The company has no long-term debt. And really, we remain fairly conservative around our approach of capital structure and cash generation, but believe very strongly about the cash proceeds from the business.

Michael Lasser - UBS Investment Bank, Research Division

And Michael, the other thing I would just add to it is -- you know me, I'm a talker -- is that the new businesses that we are getting in are very low CapEx businesses. I mean one thing that we really like about this and look forward to having that this group out to new stores to show that these new product categories is low CapEx. They fit within our stores so well and just really helps with our store layout. So we're excited about how the store looks and feels. We've done quite a bit of consumer testing around this. And we believe that these new categories are going to be good businesses for us in the future. We've got things that we want to learn, which is one of the reasons that we're testing them in 31 stores. But they're going to be very low CapEx businesses for us to enter.

Operator

Our next question on the queue is Rick Nelson with Stephens.

N. Richard Nelson - Stephens Inc., Research Division

I'd like to follow-up on the new categories, furniture and fitness equipment, what the timeline might be and how many stores are we talking about with those expanded assortment?

Dennis L. May

Yes. Rick, we're going to test both these businesses starting here in about 2 or 3 weeks. So we'll have them on the floor in late August, mid-August, and we'll test them in 31 stores. It will be a combination of some new markets that we're launching and some existing markets. The reason that we did that, we wanted to get a sense of how they would perform when we grand opened our new market with these new businesses. But also how an existing market would receive these categories. So it's a blend of both of those, but think about the time frame here in late August.

N. Richard Nelson - Stephens Inc., Research Division

And how much square footage would you be devoting to these categories or the SKU talents that we might be looking at?

Dennis L. May

Rick, a way to think about it is that the 2 businesses combined will be just under 4,000 square feet.

Operator

Our next question on the queue is Dan Bin with Jefferies.

Daniel T. Binder - Jefferies & Company, Inc., Research Division

My question was around the appliance businesses. You have gotten more competitive, given up, investing some price you have a little bit of margin in that business to drive market share. Have you seen any kind of competitive response? And where do you think the market share's coming from?

Dennis L. May

The market share, it comes from a lot of different places. So it's not one fixed of area. What I would say is our gross margin rate in appliances in the quarter dropped very nominally. And it was just a -- so we saw a very strong gross margins in the appliance business compared to prior quarter, and we see very strong gross margins in appliance. So we don't see anything materially different there, Dan. We do think that, that category's going to continue to perform well for us around comps kind of continue to gain share in that business. So we're pleased in that regard. We have not seen anything different in the appliance business. It's always competitive. I mean, nobody's out there just giving us market share. You got to go take it, and you go to go earn it. So we feel good about the investments that we've made into that business and the initiatives that we continue to focus on around driving the appliance business.

Daniel T. Binder - Jefferies & Company, Inc., Research Division

And then, I missed part of your credit discussion. But did you comment, at all, and if you haven't, can you comment a little bit on some of the things you're exploring on the lower end of the FICO spectrum?

Jeremy J. Aguilar

We are working on expanding credit as a balance of sales rose. We think that's an exciting opportunity for the company, though, we are working on a lot of different things. It was nothing that we're prepared to announce.

Operator

Our next question on the queue is David Schick with Stifel Nicolaus.

David A. Schick - Stifel, Nicolaus & Co., Inc., Research Division

Could you talk about the -- I think it's a 26-store expanded Apple test. Is there any halo effect to other categories in the store or traffic?

Dennis L. May

Well, to your point, David, we turn -- we turned on 26 stores. We're testing Apple products, iPad and iPod. And then we already have iPhone and Apple TV across the chain. And we're just really getting started with that test. We've been very pleased to how the consumer's responding. It certainly -- it's accretive to traffic because it's a product -- a dominant product category that we did not have. And the other thing it also does is as you think about where the consumer electronics industry is going -- and this whole notion of the consumer wants to manage content and manage content how they want to manage it. So Apple, for us, helps us complete that product cycle, if you will, helps us -- in that regard, just having all the right brands for the customers. So we're pleased with the test, and we would certainly love to continue to expand that product offering. But that's more to come, we hope.

David A. Schick - Stifel, Nicolaus & Co., Inc., Research Division

Okay, great. On the -- when you had talked a month ago or so, you talked about some field structure or cost savings on field structure stuff. Could you give that -- anymore detailed thoughts or thoughts down the store payroll and how much flex there is there?

Dennis L. May

Well I think that -- what I would say is we've been very focused. As we've seen the volatility in Q1, we've been very focused on making sure that we're efficient and driving the right cost structure, matching the right cost structure to consumer demand. Probably what made Q1 the most challenging for us is we saw positive consumer trends in Q4, and then we saw a lot of volatility in Q1. And then, yes, then obviously, Q1, that was disappointing in that regard. But what we do moving forward, obviously, is we think that we have a more appropriate view on consumer demand and so we're able to impact staffing, make sure we match accordingly. The thing I would just make sure that I'm very, very focused on, I want to emphasize is we are a very customer-focused retailer, and we're going to make sure that our purchase experience is best-in-class. So we're not doing anything that we feel like that would impact our customer service in any way. And keep in mind, David, I mean, obviously, our sales force is 100% on commission. So we're able to -- that part of our organization floats up and down with demand.

David A. Schick - Stifel, Nicolaus & Co., Inc., Research Division

Right. Okay. Last question related to -- for what everybody else has been asking about, the new categories like fitness. How do you think about the inventory turns or the inventory need characteristics of that versus your existing business? And if you could talk about that.

Dennis L. May

I think, blended. It will be in line with company average turns. The fitness business actually has higher turns than our company average turns. And furniture will be slightly less, but pretty much in line with company average turns. So we see this as pretty much being a nonimpact, overall, inventory productivity. So think about the same fashion. The biggest leverage points to these categories, though, is around our home delivery network. We've already done the hard part. We've already invested and created this best-in-class delivery and installation network. So we're going to be able to leverage that network over these new businesses, and that's what really gets us excited about.

Operator

Our next question on the queue is Greg Melich with ISI Group.

Gregory S. Melich - ISI Group Inc., Research Division

First, on appliance, guys, what were units versus ASP in the quarter? Traffic as well?

Dennis L. May

Yes. High level, we certainly saw ASPs -- ASP's were -- it's a combination of the 2. We saw ASPs less, Greg. We also see units left. What I would say there is certainly, you see continued ASP growth, that's the lion share purchasing around revenue growth we have for that category. The industry was actually, as you know, was actually down. So our share gains came in both. But as we look into the future, not seeing any additional price increases from manufacturers. I do think you will see probably some changes in mix around laundry and some changes in mix around 3-door. So I do believe that ASPs will continue to be strong, if not up, for the back half.

Gregory S. Melich - ISI Group Inc., Research Division

Laundry mix driven by the recent pairs?[ph]

Dennis L. May

No, it's really a shift from front load. What you're seeing is in high-efficiency laundry, you are seeing a shift from front load laundry back into high efficiency top load laundry, which is kind of changing that mix shift in the laundry business. It's interesting to see perhaps the customer went from top load to front load. Now that high-efficiency load has come out, you're seeing them shift back into high-efficiency top load, which carries with it, obviously, very strong gross margins.

Gregory S. Melich - ISI Group Inc., Research Division

Second, could you describe, you talked about the inventory, but look at the bigger picture of the last couple years, working capital's been negative sort of 30 to 35 [ph] in the year? Even though the footage growth is less now, would you expect that sort of working capital outflow as you build these new businesses, just given the AP, the inventory turns in those businesses?

Dennis L. May

Overall, Greg, we -- the model has been able to historically generate cash flow. Now we've, obviously, reinvested that capital, had cash flow back in the new store growth. I think when we look at working capital moving forward, rightsizing some of our realignment on the cost structures that we've laid out here a little bit, I think we look for fairly consistent measurement within the performance of those particular measures as we move forward.

Gregory S. Melich - ISI Group Inc., Research Division

All right. And then lastly, on the video side with the UPP being employed by some of the brands. How are you thinking about the manufacturers that haven't gone to UPP? Are you actively working with them to encourage it? Or are you basically just saying, "Yes, we're just going to put more SKUs, the guidance that we want to go that route." How are you thinking about that?

Dennis L. May

Greg, what we've seen is the entire industry is, I think, is focused on how do we stabilize this Video business. I mean, how do we make this? This is a $43 million unit business. How do we make it a better business and a more healthy industry as a whole? So yes, some manufacturers that have gone about it from a standpoint of adding UPP to the product mix, many other manufacturers that have not gone to UPP route have also restructured their M.A.P. policies and have gone through further reaching M.A.P. policies that not only encompass brick-and-mortar, but encompasses online and that type of thing. So we see the industry as a whole, making an attempt to introduce stability. Some have chosen UPP as a route, some have chosen a broader-reaching, stronger M.A.P. policy. And from our perspective, we applaud both. M.A.P, obviously, is minimum advertised price. So it's -- different manufacturers are getting there through different routes, but it's interesting to see that the industry as a whole really try to address their individual businesses and add some stability to it.

Operator

Our next question on the queue is Anthony Chukumba with BB&T Capital Markets.

Anthony C. Chukumba - BB&T Capital Markets, Research Division

You talked about reducing cost to help offset some of these returns we're seeing, particularly, in the video category. You talked a little bit about reducing some of your advertising cost and shifting towards to digital. So just wondering if you could give additional color in terms of some other potential areas for cost reductions? Would they be at the store level or kind of at the corporate level?

Dennis L. May

Well, ultimately, we're always looking to drive efficiencies. I mean, that's our primary function. I think advertising is an area that we continue to look strongly at and how do we drive the most productive average spend. I think that as we sit here today, management has a better read than we did before Q1 around consumer demand. Therefore, we can make smarter decisions around our ad spend. We continue to also look at our advertising within what is the right way to reach the customer. I mean digital advertising is certainly becoming a bigger part of what we do and that could be more efficient. I think the other thing that I would draw out is one of those we talked about today is we're looking to materially change, at least in the near term, our growth trajectory. So this particular unit that we're in, we're going to looking at the 10% unit growth, which, in the past, we've been north of 25%. We -- as we look into next year, we see unit growth really just being refined to where it makes sense towards, maybe add some new stores to maybe in the existing market or an existing distribution network to drive leverage. So there's an efficiency that we can draw out of that also. So we're going to look into every aspect of our business and make sure that we're efficient, and that we're driving the most efficient SG&A that we can.

Operator

Our next question on the queue is Alan Rifkin with Barclays.

Alan M. Rifkin - Barclays Capital, Research Division

First is the point of clarification where appliance units flat or up? I thought Jeremy said that units were flat, but then it seems you said that they were are up.

Dennis L. May

No, I'm sorry. Units were flat in appliances.

Alan M. Rifkin - Barclays Capital, Research Division

So obviously, you de-levered on advertising and that didn't yield the sales results that you hoped for. So what incremental change, if any, are you amking to your advertising budget for the holiday season in particular?

Dennis L. May

For competitive reasons, Al, we don't break that. What I would say is we've -- we feel like that we have a good read on consumer demand, and we've made -- we certainly have made adjustments to our advertising plans. Not only advertising, but our cost structure as a whole, whether it be around staffing or around inventory levels. And we feel like we have the appropriate SG&A spend to match with our consumer demands. So we're going to continue to look at that time and time again as we navigate through this year. We're going to be -- we're going to be better stewards of our advertising spend.

Alan M. Rifkin - Barclays Capital, Research Division

Okay. Will there be any incremental training expenses with associates in conjunction with the 2 new product categories that you're adding?

Dennis L. May

There would not be. Very efficient, if you think about the fact that we're doing training on an ongoing basis and our -- these manufacturers are going to be very good stewards of helping us launch this businesses. So they cover the lion share of those expenses.

Alan M. Rifkin - Barclays Capital, Research Division

Okay. And one last question, if I may, Dennis. I mean, do you feel -- do you still feel that you're very committed to the commission sales structure? Or do you believe that in the wake of EBIT margins declining and then what is notoriously a raised at then EBIT margin business, you can still afford to pay your folks on a commission basis?

Dennis L. May

We're a huge believer in commission. We believe it's absolutely the right model. From our perspective, when we look at our customer satisfaction, when we look at the manner, which we go to market and how we compete, we believe the commission sales force is the right model. And if you look at our share gains in appliances over the last 5 quarters, I think that having the best-in-class sales force has been the #1 reason that we've been able to drive that focus and drive share in appliances.

Operator

And we do have time for one final question. Our final question comes from Anthony Lebiedzinski with Sidoti & Company.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

I was wondering if you could comment on vendor support during the quarter and your outlook for the balance of the year?

Dennis L. May

Yes. As we look at our manufacturers, our relationships with them, we've been very pleased with their support. Strategically, our manufacturers are aligned with what we do and how we do it. It's not only a functional effect that we buy a lot of product, it's the way we go to market. It's the mix that we drive. So as we look to the future, we've been very pleased with our vendor support, and we expect our manufacturers to continue to be very aligned with how we go to market, so we're looking forward to it.

Anthony C. Lebiedzinski - Sidoti & Company, LLC

And as far as your private label credit card, currently, you offer a 5% discount on major appliances above $499. Now going forward, do you expect to make any significant changes to that strategy?

Dennis L. May

We're always looking at a different way to incentivize our core customers to use the hhgregg credit card. And there's a lot of benefits to that. Not only does it -- you give the consumer additional credit, but also creates a relationship with the consumer that drives positive behavior for the company. We're able to own a greater share of that customer's wallet, we're able to see that consumer more often. So we like everything about having that customer care -- credit card. We have a litany of different rewards that we currently give them. We're always changing those. We believe that you have to kind of mix it up and be fresh with that. And we're always looking at that. So what I would say is, yes, we will make changes, but there's nothing in particular. It'll be a constant evolution of continuing to give the consumer different benefits.

Jeremy J. Aguilar

All right, this concludes our call. I'd like to thank you for your participation, and we look forward to talking to you in November. Thank you.

Operator

Thank you, gentlemen. Ladies and gentlemen, this does conclude today's conference. Thank you for you participation, and have a wonderful day. Attendees, you may disconnect at this time.

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