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hhgregg, Inc. (NYSE:HGG)

F4Q08 Earnings Call

June 3, 2008 9:00 am ET

Executives

Andy Giesler – Director, Investor Relations

Jerry Throgmartin - Chairman and CEO

Dennis May - President and COO

Don Van der Wiel - Chief Financial Officer

Analysts

Mitch Kaiser – Piper Jaffray

Brian Nagel – UBS

Gary Balter – Credit Suisse

David Magee – Suntrust Robinson Humphrey

Rick Nelson – Stephens Inc.

Michael Lasser – Lehman Brothers

Anthony Lebiedzinski – Sidoti & Company

Jack Balos – Midwood Research

Operator

(Operator Instructions) Welcome to hhgregg’s Fourth Quarter Earnings Conference Call for Fiscal 2008. At this time I would like to turn the conference over to Andy Giesler, Director of Investor Relations for hhgregg.

Andy Giesler

My name is Andy Giesler and I’m the Director of Investor Relations for hhgregg. With me today are Jerry Throgmartin our Chairman and CEO, Dennis May our President and COO, and Don Van der Wiel our Chief Financial Officer.

During today’s call Jerry will share some highlights from our fourth quarter and fiscal year ended March 31, 2008. Don will discuss our operating results and liquidity and capital resources and Dennis will conclude with a discussion on trends we are seeing in the marketplace, an update on our growth plans and our outlook for fiscal 2009. At the end of our prepared comments will have until 10:00 am Eastern time to discuss any questions you might have.

Let me take a moment to reference the Safe Harbor Provision under the Private Securities Litigation Reform Act of 1995. During the call we will make forward looking statements which are subject to risks and uncertainties which include the future operating and financial performance of the company. We refer you to today’s press release and the risk factors and MG&A sections that were recently filed prospectus and 10-K for additional discussions of these risks and uncertainties.

In addition we will discuss adjusted EBITDA and net income and diluted earnings per share as adjusted to exclude the loss of the early extinguishment of debt, of the debt refinancing completed in connection with our initial public offering July 2007 which are considered non-GAAP measurements. We use adjusted EBITDA to measure operating performance as well as determine compliance with certain covenants under our credit agreement.

Please refer to our reconciliation of adjusted EBITDA to net income and our computation of net income and diluted earnings per share as adjusted in the non-GAAP disclosure section on our Investor Relations website which can accessed at ww.hhgregg.com. With that I would like to turn the call over to Jerry.

Jerry Throgmartin

We finished up fiscal 2008 with solid results during the fourth quarter recording a 14.4% increase in sales and a 0.8% same store sales increase while successfully opening six new stores. This increase in same store sales came on top of a 13% increase on the prior year. Our fourth quarter diluted net income per share was $0.31 versus $0.28 for the comparable prior year period. Our adjusted EBITDA increased 6.9% to $22.8 million for the three months ended March 31, 2008 as compared to $21.3 million for the comparable prior period.

For the full fiscal year we recorded sales increase of 18.6% driven by a 4.8% same store sales increase and 14 new store openings. Our full year diluted net income per share as adjusted to exclude the cost of our initial public offering was $1.07 per share compared with $0.76 per share in the prior year. This represents a 40.8% increase over the prior year. In addition, our adjusted EBITDA increased 23.6% to $80.9 million for the 12 months ended March 31, 2008 as compared with $65.5 million for the comparable prior period.

We are justifiably pleased with our operating results and many accomplishments during fiscal 2008. We stayed focused on execution at the store level to deliver an uncompromised customer purchase experience. This enabled us to gain market share in each of our major categories of business and generate profitable growth during a challenging economic environment. On July 19, we marked a significant milestone in our company’s 53 year history as we completed our initial public offering and the listing of our stock on the New York Stock Exchange.

We continue our disciplined self funded growth opening 14 stores during the fiscal year or an 18.2% unit growth rate. Very consistent with the 18.3% compound annual growth rate that we have delivered since the beginning of fiscal 1999. We strengthened the depth and talent of our leadership team adding Chief Human Resource Officer and many director level positions across the organization.

In addition, we made significant progress on our ERP system migration successfully implemented a demand management and forecasting tool to add more robust analytical capabilities to our inventory management process and opened an off site data center to enhance our disaster recovery capabilities. Lastly we generated enough free cash flow to optionally pay down $10 million of our term loan.

Our operating performance is a product of the superb efforts of our associates who have done an outstanding job of meeting and exceeding our customer’s expectations. Our consultative sales force is a significant competitive advantage during this challenging economic environment offering the advantages of a higher close rate yet a more variable at risk cost structure.

We look forward to fiscal 2009 assured in our ability to deliver a superior customer purchase experience and to continue to grow our market share. We currently plan to open between 15 and 17 new stores in fiscal 2009 with most scheduled to be open before Thanksgiving. As always all these stores will be funded from free cash flow. We continue to enjoy strong new store performance as we enter Florida and are confident that we are on course to achieve our long term objective of a profitable 15% to 18% unit growth rate and build a national footprint of over 400 stores in the continental United States.

I’ll now turn the call over to Don.

Don Van der Wiel

During this call I’ll focus the operating results discuss on the fourth quarter ended March 31, 2008. Net sales for the quarter increased 14.4% to $324.2 million from $283.4 million for the prior year quarter. The increase in sales for the fourth quarter was primarily attributable to the addition of 14 stores during the past 12 months coupled with a 0.8% increase in comparable store sales. Our comparable store sales performance for the quarter reflects a higher average selling price driven by continued increases in sales of higher priced items in video and major appliances.

Our video comparable store sales were up 2.9% fueled by double digit LCD flat panel television sales growth particularly in larger screen sizes outpacing the double digit sales decline in projection and tube televisions. LCD and Plasma flat panels now represent approximately 90% of our video balance of sale with micro displays comprising the majority of the remainder.

Our appliance comparable store sales decreased by 4.9%, the category was negatively impacted by a decline in entry and mid-level price points offset by continued double digit increases in high efficiency front load laundry and three door refrigeration. Overall we believe that we continue to gain significant market share in major appliances during the quarter as the industry shipments decreased at a far greater rate than our comparable store sales.

In our other category which is primarily comprised of audio, personal electronics, mattresses, and notebook computers we saw a same stores sales increase of 10.8%. This increase was due to improvements in most of the sub-categories including cameras, camcorders and notebook computers.

Our gross profit margin decreased by 50 basis points to 31.5% for the three months ended March 31, 2008, compared to the three months ended March 31, 2007. The decrease in gross profit margin expressed as a percentage of sales was attributable to slight year over year margin declines in video and appliances coupled with a shift of our balance of sale attributable to rapid sales growth in personal digital electronics and notebook computers.

SG&A expenses decreased by 0.5% as a percentage of sales from 22% for the three months ended March 31, 2007, to 21.5% for the three months ended March 31, 2008. The decrease in the SG&A rate for the three months ended March 31, 2008, was due primarily to improvements in salaries and wages and the leveraging effect of our sales growth across many expense categories. Partially offset principally by increases in rent, professional fees, amortization and depreciation expense and pre-opening expense associated with six new store openings in the quarter.

Net advertising expenses as a percentage of sales increase 0.5% to 4% for the three months ended March 31, 2008, from 3.5% for the three months ended March 31, 2007. The increase was attributable to heavier spending associated with more brand openings and increased advertising waiting compared to the prior year.

Other expense decreased to $2.2 million for the three months ended March 31, 2008, from $5.5 million for the three months ended March 31, 2007. This decrease was primarily comprised of a $1.7 million reduction in net interest expense and significantly lower debt levels coupled with a $1.6 million reduction in loss on early extinguishment of debt related to debt reduction in fiscal 2008 and 2007. We paid down $10 million of term loans at our option during the fourth quarter fiscal 2008 and repurchased 28.8 million of our 9% senior notes on the open market during the fourth quarter fiscal 2007.

Net income for the quarter was $10.3 million compared to $8.3 million for the prior year. Net income as adjusted for early extinguishment of debt was $10.5 million as compared to $9.5 million in the prior year. The improvement in earnings reflects comparable store sales growth and reduced interest expense due to significant debt de-leveraging during the past 12 months.

We ended the fourth quarter fiscal 2008 with $1.9 million of cash compared to $1.5 million in the prior year comparable quarter. As of March 31, 2008, we had no borrowings under our line of credit and $3.7 million in outstanding letters of credit drawn on a revolving credit facility leaving us a net borrowing availability of approximately $86.2 million.

On February 28th Moody’s upgraded our corporate family debt rating two levels to Ba3 from B2. This upgrade resulted in a 25 basis point decline in our libor denominated term loan borrowing costs. As of yesterday we had $36.7 million of cash borrowings and $3.7 million in outstanding letters of credit drawn on our revolving credit facility leaving us with a net availability of approximately $59.7 million.

The increase in borrowings reflected an increased inventory commitment associated with the opening of a third central distribution center in Florida and eight new stores concentrated over the past two months. This commitment is completely in line with our expectations and has been fully contemplated in our guidance.

Inventory productivity will improve to historical levels by the end of the fiscal year as we continue to add stores in Florida and leverage our central distribution facility. Gross capital expenditures were $42.2 million in fiscal 2008 as compared to $19.5 million in fiscal 2007. The increase was primarily attributable to a greater number of store openings in fiscal 2008 coupled with higher infrastructure expenditures particularly in information technology and distribution.

Our gross capital expenditures related to growth which includes new stores and distribution centers were $23.6 million in fiscal 2008 or 56% of total gross capital expenditures for the fiscal year. The majority of the balance of the gross capital expenditures was system related capital expenditures along with remodels and corporate and other. The gross capital expenditures related to growth were partially offset by pre-arranged forward funding transactions which are recorded as sale and lease back transactions.

We received cash proceeds totaling $7.3 million on these pre-arranged transactions during fiscal 2008. In addition, we still have an additional $3 million of proceeds due on the fiscal 2008 transactions which will be collected during the first quarter of fiscal 2009. Consequently our capital expenditures net of sales and lease back proceeds were $31.9 million which was in line with our guidance.

I would now like to turn the call over to Dennis to discuss our operating trends, growth plans and outlook for fiscal 2009.

Dennis May

As Jerry mentioned earlier we are pleased with our performance not only relative to our peers but also in absolute terms in light of the general economic conditions. We drove comparable store sales increases in each of our major categories for fiscal 2008. Fiscal 2008 same store sales in video increased 4.7%. Appliance comps were up 1.6%. The other category comps comprised of audio, personal electronics, mattresses, notebook computers and furniture and accessories were up 15.9%.

Both the consumer electronics and home appliance industries have experienced attractive growth rates over the past several years driven by product innovations and introductions particularly in the premium segment that we target. Our average selling prices for major appliances have increased for the last three fiscal years in part due to innovation and high efficiency laundry and three door refrigeration. This trend has added stability to our sales performance relative to our consumer electronics focus competitors.

Improvements in form and aesthetics have become increasingly important factor in major appliance purchase decisions. Accordingly the rise in average units selling prices of major appliances that we have benefited from over the past three fiscal years is not expected to change dramatically for the foreseeable future. During the fourth quarter our appliance comparable store sales declined 4.9% as we came up against our prior year comparable store sales increase of 9.3% as well as an industry wide slow down amid the slumping economy and down turn in housing market.

According to the Association of Home Appliance Manufacturers major appliance new shipments declined 9.6% for the three months ended March 31, 2008, compared to the comparable prior year period. We tailored our appliance category assortment toward the middle to upper price point appliances which contributed to an increased average unit selling prices in our appliance category during our fourth quarter, buffering our comparable store sales performance and enabling us to build market share during the economic slow down.

Consumer electronics industry depends on new products to drive sales and profitability. Innovative, highly featured products are typically introduced at a relatively high price point. Over time price points are gradually reduced to drive consumption. Last year the industry experienced approximately 20% compression in video pricing for equivalent screen sizes compared to the prior year, which is very much in line with targeted long term industry averages.

This engineered price compression makes larger and heavier featured products more affordable to more people and has contributed to three consecutive years of increased average unit selling prices in our video category. According to the Consumer Electronics Association or the CEA sales of consumer electronics are expected to remain strong, growing by 6.1% in calendar 2008 due to the continued adoption of digital and more portable products along with continuing trends of price declines for higher ticket items such as flat panel television.

The CEA projects digital television sales to grow at a compound annual rate of 5.9% through 2011 in part due to the FCC mandate that all televisions incorporate a digital tuner by 2009. During the fourth quarter ended March 31, 2008, our video comparable store sales increased 2.9% while the MPD group reported that a 4.4% decline in video industry sales during the same period compared to the comparable prior year period. We accomplished this by shifting our sales mix to focus on newer, higher margin items such as 1080p and 120 Hz technologies and larger screen sizes.

Our other category continues to perform well as we focus on expanding our assortment in cameras, camcorders and notebook computers. These categories helped drive traffic to our stores and increased the number of times that a customer is exposed to our unique customer purchase experience. We continue to execute a disciplined and profitable growth plan adding 14 new stores for an 18.2% unit growth in fiscal 2008. Since the beginning of fiscal 1999 we have grown our store base at an 18.3% unit compound annual growth rate.

During the fourth quarter we opened six new stores including two in Ohio, one in Winston-Salem, North Carolina, one in Chattanooga, Tennessee, one in Jacksonville, Florida and one in Daytona Beach, Florida. We were very pleased with our new store performance this year with new units exceeding our sales and profit goals.

Since March 31 we have opened six new units including four in greater Orlando, Florida, one in Tallahassee, Florida and one in Mansfield, Ohio. The initial results have been very positive. To support our new stores in Florida we have opened a new central distribution center located in Davenport, Florida as well as a regional distribution center in Jacksonville. In keeping with our store management model we sent existing teams to operate our new Florida distribution centers. This has helped ensure a smooth opening in operations of both centers off to a quick start.

As we consider the current economic environment and assess current industry business trends we believe it is prudent to plan for soft consumer demand for the foreseeable future. Accordingly we are projecting a diluted net income per share of $1.13 to $1.20. This projection reflects anticipated net sales growth of 19% to 21% driven largely by 15 to 17 new store openings with the majority scheduled to occur during the first half of the fiscal year.

We currently estimate a comparable store sales decline in the low single digits for the fiscal year. Capital expenditures for fiscal 2009 net of sale and lease back proceeds and expected to range between $28 and $30 million. While we do not provide specific projections for quarterly comparable store sales we expect to see continued improvement in this metric as the year progresses reflecting not only the more difficult year over year comparison during the first half but also the natural shift in our balance of sale during he year from appliances in the Spring and Summer to video in the fall and winter.

Likewise we do not provide specific quarterly forecast for diluted net income per share but we expect similar difficult year over year comparisons during the first half not only due to the expected trends comparable store sales but also due to the incidence and concentration of pre-opening expenses associated with our front loaded store opening plans for the year.

The actual amount of our fiscal 2009 capital expenditures and other investments if any both of which support our growth strategy can vary significantly from planned levels depending on general economic conditions and opportunities available to us.

I would like to conclude by thanking our associates for an outstanding execution and performance during the year. Their commitment to provide compelling customer purchase experience clearly drove our strong results. At this time I would like to turn the call back over to the operator so that we may entertain any questions that you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Mitch Kaiser – Piper Jaffray.

Mitch Kaiser – Piper Jaffray

I’m just curious you mentioned what you thought the price compression was for 2007 on TVs could you give us a sense for what your current thinking is for 2009. What we’re hearing is kind of that supply remains very tight and that price compression might even be a little less than that 20% this year relative to the 20% in 2007.

Dennis May

We anticipate pricing compression for the upcoming year to be less than 2007 levels. That has, depending on which industry number you pick out; there are various metrics out there. Everything that we have seen, whether it be from CEA or MPD or display search indicates that it’s a less of a level in 2008 than in 2007, although 2007 was a pretty good number. One point of clarity around that, when we talk about pricing compression we’re talking about saying like for like models. ASPs, average selling price for the video industry was actually up in 2007 over 2006 and is expected to be up in 2008 over 2007.

Mitch Kaiser – Piper Jaffray

You’ve made a point about the mix and obviously appliances mix up as a percent of sales in the first half of the year. I think you’re calling out that appliances will probably be weak relative to video is that an accurate assessment?

Dennis May

That is correct. We see the consumer electronics business being stronger for us relative to the appliance business.

Mitch Kaiser – Piper Jaffray

In terms of the Florida stores could you comment on how they did relative to expectations?

Dennis May

We’re very pleased with their performance, very much in line with our expectations. Obviously we’ve just recently opened there but we’ve gotten out of the gate very well.

Mitch Kaiser – Piper Jaffray

On new store productivity what’s a number that we should be using for 2009?

Dennis May

I don’t know that we necessarily break out a productivity number. What we would say there is we are pleased with the results. They mature very quickly. What we said publicly in the past is they come out of the gate with 90% to 95% productivity.

Operator

Your next question comes from Brian Nagel – UBS.

Brian Nagel – UBS

With respect to the gross margin, I saw the decline here in Q4. Can you help us understand better is that a function of mix shift, what there any increased promotion activity or just general trend in the business. The second question I have, we’re now a little more than a couple months into your first quarter, any comments on how sales are tracking so far here in ’08?

Don Van der Wiel

What we would see within our gross margin structure is very stable gross margins within our category performance so we’re very pleased not only as we look back but also forward we anticipate that stable margins within the categories. What you do see year round our gross margin is a mix shift. In the appliance business which carries higher gross margin, as you think about gross margins from a category perspective we see a lot of stability there, some slight compression maybe but really what you see is you see a mix shift within the categories that has an impact to gross margins.

Brian Nagel – UBS

As far as the business thus far in the new fiscal year?

Don Van der Wiel

We cannot comment on that.

Brian Nagel – UBS

Another question, along the same lines, a lot of talk out there about what impact, if any, the tax rebates are having. Have you seen any indications from your customers that tax rebates are making for hhgregg stores?

Jerry Throgmartin

Its difficult to ascertain the consumer, there’s a lot of effects out there plus and minus for the consumer. It’s really difficult to draw out what impact that’s having. What we would say is regardless of the macro economic conditions or regardless of the industry trends we are fired up about our business model. We’re excited about where we’re positioned and we’re confident we’re going to gain market share and continue to gain market share in our core businesses.

Operator

Your next question comes from Gary Balter – Credit Suisse.

Gary Balter – Credit Suisse

I’ve been waiting for you guys to make a bid for Circuit City along with everybody else. You have a stronger balance sheet than the people that bid for it. Could you comment, you’re thought on what’s going on? Sears looked like they got a little more aggressive on the appliances over the last few months. If you could comment on that, if you want to stick to market discussions rather than specifics. Also on consumer electronics is there anything going on competitively you mentioned that pricing was actually more stable this year is that what you expect to see for the rest of the year?

Dennis May

What we see out of the promotional calendar it’s competitive as always but we don’t see anything that’s significantly out of line with what we see in the normal due course of business either appliances or electronics. That’s how we see the world today. We feel pretty good about what’s happening from the market perspective. I think you see that showing up as you see that typical pricing compression that stability if you will that you saw in the electronics business last year I think you see that from a couple standpoints.

First of all the manufacturers have been good stewards of managing inventory channels and I think that the industry has been relatively stable from a promotional perspective.

Gary Balter – Credit Suisse

The new categories could you discuss a little bit where you’ve been surprised either positively or negatively as you add them?

Dennis May

I think we’ve been probably the most surprised/pleased if you will with, as we’ve gotten into the notebook computer business. Our posture there is that we want to participate in that business because there’s a lot of technology and innovation coming down the pipeline about the digital home and home networking and that type of thing so we felt like we wanted to be in that business to support our video component and support our loyal customers.

We’ve been very pleased with how the consumer has received us in that category. We continue to manage it very closely and monitor it very closely but we’ve been very pleased there.

Gary Balter – Credit Suisse

Anything that you feel hasn’t work as well as you would like.

Dennis May

No, I can’t say that any new category that we’ve tried recently has not met our expectations.

Gary Balter – Credit Suisse

Are the mattresses still doing well?

Dennis May

It’s in line with our expectations. It’s well documented that that industry is soft right now. It’s in line with our expectations also.

Gary Balter – Credit Suisse

In notebooks are you adding any new brands?

Dennis May

At this time no. We continue to monitor that assortment very closely. Inventory productivity and inventory turns is very, very high on our radar screen as we look at computer business, to make sure we are good stewards there. We watch that very closely.

Operator

Your next question comes from David Magee – Suntrust Robinson Humphrey.

David Magee – Suntrust Robinson Humphrey

As you’ve moved down into northern Florida are you seeing anything different with regard to the mix of the business down there, anything different regarding the customers you are able to attract or what different kinds of competition are you seeing down there?

Dennis May

We just had a post mortal meeting around merchandising analysis and interestingly enough we have not ascertained anything significantly different than our typical mix in Florida so far.

David Magee – Suntrust Robinson Humphrey

With regard to field costs being higher are you able to do anything to defray the impact of that year to year whether it’s through your inbound or through deliveries wherever your explosion may be?

Dennis May

The focus for us is and always needs to be, to be as efficient as we most possibly can in our distribution and transportation model. We constantly are looking at that to see how we take costs out. How do we handle the product as efficiently as we can? We have a lot of active projects in place that we working on and looking at driving, transportation and inventory metric efficiencies. That’s an ongoing project for the company.

David Magee – Suntrust Robinson Humphrey

Are you able to tweak whatever you might charge for certain deliveries?

Dennis May

We price to the market. We constantly are looking at where the market is at and we will price to the market. That can vary market to market. We have outstanding delivery, we provide tremendous service there. We also want to make sure that we are collecting what we can in the marketplace. It’s a function of what the market will yield.

Operator

Your next question comes from Rick Nelson – Stephens Inc.

Rick Nelson – Stephens Inc.

Can you talk about the new low priced flat panel TVs that have come up from Sony and others coming and how do you see that impacting your business?

Dennis May

It’s not necessarily a new phenomenon. Every manufacturer is always looking at how they gain more market share. Every year or every other year you’ll see different product cycles and different product assortments coming out from suppliers. What I would say about that product line, Sony has come out with an entry level product line that’s available through the mass channel. It is available to us also. Our assortment, as always we will compete across all the price points.

For us it’s a deminimus impact because we educate the customer. An educated customer steps up and buys a better product; the better products drive better gross margins. We look at that and we see it generating interest in the channel but we feel and are very confident that we are well positioned to compete and continue to advertise aggressively. See consumer, educate those consumer and convert those consumers into profitable customers for us.

Rick Nelson – Stephens Inc.

A question on store openings, did I hear it correctly that you already opened eight stores in the June quarter?

Jerry Throgmartin

Six within the quarter.

Rick Nelson – Stephens Inc.

How many more would you anticipate this quarter?

Dennis May

What we said is the majority of our store openings this year will be in the first half or first two quarters within the year. The majority of our store openings will be prior to Christmas, which we’re excited about. We’re exited about the locations the stores are opening. We’re excited we’re able to frontload those locations. I think it speaks to some of the good work that’s been done by the real estate and construction team here at the company.

Rick Nelson – Stephens Inc.

A question on SG&A you were able to leverage a flat comp this quarter. I know you have this variable cost model would you expect a negative comp you would be able to leverage that?

Don Van der Wiel

I don’t think that would be prudent to expect to be able to leverage a negative comp in the first quarter. We’re going to have some significant pre-opening expense during the first quarter. I don’t think that would be a reasonable expectation.

Rick Nelson – Stephens Inc.

But for the year?

Don Van der Wiel

For the year we’re very confident in our ability to manage our expenses and we’re going to do our best to do what we’ve done for the past several years.

Dennis May

It’s a constant balance. We’re a growth company, we have exciting growth in not only this fiscal year but in our long term growth horizon is very, very exciting. There’s tremendous runway in front of this organization. We have to balance being good stewards for SG&A during a soft economy with all the exciting prospects the company has in front of it from a long term perspective. We’ve got to make those growth investments, we’ve got to position the company to continue to succeed in its growth plan at the same time we will be good stewards for the SG&A.

Operator

Your next question comes from Michael Lasser – Lehman Brothers.

Michael Lasser – Lehman Brothers

Given the state of the macro backdrop it’s likely that the commercial real estate market will soften a bit. How do you think about balancing growth in the near term with perhaps holding off and allocating capital during a period where they’ll probably be more favorable lease rates down the road?

Don Van der Wiel

The way we look at it we’re expecting to self fund all of our growth right now. We feel very comfortable; we’re very pleased with the productivity of our stores given the existing rent structure. Having said that if rent structures improve we’ll be especially pleased to see that as well.

Michael Lasser – Lehman Brothers

For the upcoming year are you anticipating any meaningful differences on a geographic basis in the performance of your stores?

Jerry Throgmartin

I don’t think we’re thinking about meaningful differences in the different geographies. The industries that Dennis alluded to earlier and the impact of the appliance industry certainly there are areas of the country that have been hit harder by that. I think if you look at California specifically, if you look at Arizona specifically we’re not in those regions. People have mentioned Florida but what we have said about Florida is that it’s new to us and we’re off the ground in Florida meeting our expectations.

We’re pretty confident that the regions will operate consistent to what they have been and as Don and Dennis said it is a challenging environment but it’s a great opportunity. Our model is being embraced by the consumers in every new market that we go to and it’s a great time to position ourselves with our expansion and our growth with a model that produces the kind of profit free cash flow that we have to take that out and get it seeded whenever we have the opportunity.

Michael Lasser – Lehman Brothers

Performance on a regional basis is consistent with how the markets have performed over the last few quarters or years.

Dennis May

As we look at regional performance for us we’re boringly consistent. We try to always strive for that. We think that’s a good thing. We will always have some variability from market to market and what we do as a company is attack that with execution, to improve the overall performance within that. That’s always been our company focus.

As we look at expansion, I think is your question also, our expectations are just as we’ve been on our growth path for the last 10 years we are going to enter that market quickly penetrate the market and gain significant market share. The consumer likes our business model, they like our style of service, they like the fact that we compete on price but we differentiate through customer service and I think the model just continues to bear itself out time and time again.

Michael Lasser – Lehman Brothers

I don’t think anyone has every accused you of being boring. I know you said that the new stores have performed largely within your expectations but if you just do a back of the envelope calculation for new store productivity in the fourth quarter it seemed like it was a little bit lower than where it had been trending. Is there any dynamic that’s going on there that might explain it?

Jerry Throgmartin

I think it was much more a reflection of how back loaded some of those stores were. Several opened at the very tail end of the quarter. Our belief system and what we’ve seen is stores have very much met or exceeded our expectations from sales and profit and compared to our chain average. We’ve been very pleased.

Michael Lasser – Lehman Brothers

Have you guys been able to perhaps quantify the benefit from front end loaded the stores in fiscal 2009 compared to 2008 and how that’s going to impact the overall growth rate?

Jerry Throgmartin

Maybe I don’t understand the question fully but we’re expecting 19% to 21% sales growth holistically combined with a low single digit comp decline for the year. Perhaps you can rephrase the question.

Operator

Your next question comes from Anthony Lebiedzinski – Sidoti & Company.

Anthony Lebiedzinski – Sidoti & Company

Following upon the question regarding the sales growth. What kind of square footage growth do you expect in fiscal ’09?

Dennis May

It’s comparable. Our prototype is 30,000 square feet.

Anthony Lebiedzinski – Sidoti & Company

So the stores are still the same size?

Dennis May

The stores are still the same size. We’re very pleased with the success of our prototypical store both in profitability, merchandizing, categories and the shifting sands we feel like that prototype is right within where we need to be in our box size. Our square footage growth is going to track our revenue growth.

Anthony Lebiedzinski – Sidoti & Company

If I take mid point of your new store openings, that’s 16 roughly so about 17.5% growth in terms of the square footage?

Dennis May

Yes.

Anthony Lebiedzinski – Sidoti & Company

Then the low single digit comps declined, are you looking for but you expect sales of 19% to 21% so is that just a function of you guys just opening stores late in fiscal ’08 that’s why you’re seeing, actually total sales up that way.

Dennis May

That’s the correct way to think about it.

Anthony Lebiedzinski – Sidoti & Company

Regarding your home appliance business it looks like the entry level price points were weak in the December quarter and here in the March quarter you said the entry and mid level were weak. I was wondering regarding the high end appliances it seems like that has been doing well for quite some time. How long do you think this is sustainable as far as the popularity of the high efficiency laundry and three door refrigeration?

Dennis May

We still see very good runway in front of those categories. If you look at the penetration level of front load laundry for example and the consumers that actually have those products. It’s still a low number. We look at high efficiency laundry is still a continuing growth category for us. Three door refrigeration and the whole efficiency story is only going to get stronger. There’s a new energy star level so the new generation of appliances coming out are even dramatically more efficient than even the old energy star appliances.

That savings story gets stronger and stronger for the consumer. As the consumer continues to increase their appetite to be green that continues to gain momentum that’s going to drive more business, more focus from the consumer perspective and our perspective around efficiencies and energy savings. One of the advantages of our business model is we have a professional sales person on the floor that can clearly educate the consumer and help them convert the value proposition of these energy savings.

I think the industry will continue to gain and energy and efficiency product I think that hhgregg will continue to outperform the industry in these categories also.

Anthony Lebiedzinski – Sidoti & Company

Last question regarding your CapEx guidance. What are the main reasons for the CapEx being lower in fiscal ’09 versus ’08?

Don Van der Wiel

It’s primarily a reflection of the level of maintenance CapEx coming down. We’ve broken out the growth CapEx expressed in terms of gross capital expenditures and that number is also being aided in the decline in growth. Capital expenditures net of sale and lease backs were benefiting from an out of period $3 million sale and lease back proceeds from the 2008 transactions. They’re a combination of factors but I think that sort of sums it all up.

Operator

Your next question comes from Jack Balos – Midwood Research.

Jack Balos – Midwood Research

I have a few questions regarding expenses. You mentioned that there was improvement in salaries and wages during the quarter even though you are only up 0.8% comps can you elaborate on that?

Don Van der Wiel

We were able to drive efficiencies it was really a reflection of the efficiency within the store. We were very pleased with the fact that we were able to drive those efficiencies.

Jack Balos – Midwood Research

What efficiencies do you mean, different scheduling or?

Don Van der Wiel

It comes down to a question of balancing the growth of the profitability. We were just able to drive and we’ve expressed that we’ve been able to drive efficiencies and leverage on our payroll on very low comps. We were just able to continue to execute that leverage. Would you expect that to continue in this fiscal year?

Don Van der Wiel

We’re going to be as efficient as we can be but quite frankly projecting slight decline in comps. We do not expect to be able to drive leverage on negative comps.

Jack Balos – Midwood Research

Are you also budgeting for a higher percent of sales for advertising this year as you did last year?

Dennis May

As we look into our future we’re going to continue, how I would answer that is we’re going to continue to advertise aggressively. We’re going to continue to promote within the marketplace. We believe our out performance of our industry peers centers around a couple things. It centers around three things; how aggressive we’ve been in the marketplace promoting our brand. It centers around our store execution and it centers around our ability to focus in the right categories.

Those three levers have not changed, we’re going to continue to advertise aggressively in the marketplace, we’re going to continue to execute well and we’re going to continue to focus on the businesses that drive our overall comps.

Jack Balos – Midwood Research

Was the decline in comps for this year would you expect another increase in advertising a percent of sales versus last year?

Jerry Throgmartin

I don’t think we identified that. I think as Dennis said in today’s environment the consumers need a reason to go out and shop. We continue to advertise aggressively because you’ve got to give the consumer a reason to go out and shop. We monitor our advertising with the necessary invitations to the consumer to get out and shop and the stewardship over the costs to make sure that its productive and I think we’ve rolled all of that into what we believe will produce about a 9% increase in earnings.

I think that’s accounted for in the earnings but we will continue to be aggressive in our advertising posture but I don’t know that we’ve rolled it out specifically to the percent the way you asked the question.

Jack Balos – Midwood Research

Is there anything you can do, have you been affected by higher fuel costs?

Jerry Throgmartin

I think we’re doing everything we can do. As Dennis stated earlier there’s a function in the marketplace and we have seen in the marketplace home delivery costs being raised in the marketplace and we’re at the market price. We won’t be the leader taking it up but we will be where the marketplace is. Obviously the consumer is affected by that. We don’t see that necessarily from our suppliers in getting the product to us. Obviously it’s rolled into their costs.

I think what you have seen over the past couple years from the appliance manufacturers are some price increases and fuel costs and materials costs have lead to some of those. I think those are rolled into the cost of the product. Personally I think we’re looking at fuel cost and yes we’re doing all that we can to mitigate that internally. The real impact of that is I think being seen in the attitude of the consumer and how much is going into their gas tank and how much discretionary they have to spend especially at the low end of the product spectrum.

Operator

Your next question comes from Brian Nagel – UBS.

Brian Nagel – UBS

A question on Blu-Ray. We’ve had the resolution between them and the competing format what do you see in your stores, any benefit of this over the past few months?

Dennis May

There are a couple benefits; first of all it gives the consumer a very clear direction on how to receive high def content. Anytime you have a format, or I think there’s a lot of confusion and the consumer tends to wait. Specifically within selling Blu-Ray products I think it’s clear the way for that product to be even more dynamic. The product is selling well for us today.

We see Blu-Ray as a clear growth category for us as it goes through the year. During the first calendar quarter there was certainly a constrained inventory issues within the industry. As you think about Blu-Ray and look at the first quarter results you’ve got to remember that there was availability issue. I don’t think the Blu-Ray camp was quite prepared from an inventory perspective so they got caught a little short.

The other thing important to point out about Blu-Ray now, is it going to be a high category this fall. It also just continued to drive picture performance cell strategies. When you think about Blu-Ray you think about 1080p, you think about 120 Hz type televisions because it is the best way to demonstrate those type of televisions and it’s the best way for the consumer to get that content.

If you’re a Blu-Ray customer then you are a large screen customer typically you’re a 1080p customer and you’re going to be interested in 120 Hz and all the value propositions that better products bring to the market. We’re really excited about Blu-Ray and what it means for us in the future.

Operator

Your last question comes from Mitch Kaiser – Piper Jaffray.

Mitch Kaiser – Piper Jaffray

Just a couple housekeeping questions, what tax rate and share outstanding should we use based on the guidance you gave for ’09?

Don Van der Wiel

I’d expect a similar effective rate and number of shares.

Mitch Kaiser – Piper Jaffray

So flat at 33.1%.

Don Van der Wiel

Yes.

Operator

That does conclude our question and answer session and also our conference today. We thank you for your participation and have a great day.

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Source: hhgregg, Inc. F4Q08 (Qtr End 03/31/08) Earnings Call Transcript
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