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hhgregg, Inc. (NYSE:HGG)

F1Q09 (Qtr End 06/30/08) Earnings Call Transcript

August 6, 2008 8:00 am ET

Executives

Andy Giesler – Director, IR

Jerry Throgmartin – Chairman and CEO

Dennis May – President and COO

Don Van der Wiel – CFO

Analysts

Mitch Kaiser – Piper Jaffray

Rick Nelson – Stephens, Inc.

Gary Balter – Credit Suisse

Brad Thomas – KeyBanc

Christina Applegate [ph] – SunTrust Robertson Humphrey

Anthony Lebiedzinski – Sidoti & Co.

Scott Tillman – Hudson Square Research

Operator

Welcome to hhgregg’s first quarter earnings conference call for fiscal 2009. This call is being recorded. At this time, all participants will be in a listen only mode and I will now turn the conference over to Mr. Andy Giesler, Director of Investor Relations for hhgregg. Please go ahead, sir.

Andy Giesler

Good morning, everyone. 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 first quarter. Dennis will provide a review of our operating performance and Don will conclude the discussion of our liquidity and capital resources and our earnings guidance. At the end of our prepared comments, we will have until 9:00 AM Eastern Time to discuss any questions that you might have.

Let me take a moment to reference the Safe Harbor Provision under the Private Securities Litigation Reform Act of 1995. During this call, we will make forward-looking statements which are subject to risks and uncertainties, which include the future operating and financial performance of the company. We refer you to today’s earnings release, the MD&A section of our form 10-Q and the risk factor section of our Form 10-K for additional discussion of these risks and uncertainties.

With that I would like to turn the call over to Jerry.

Jerry Throgmartin

Thanks, Andy. Good morning, everyone.

We are pleased with our first quarter performance and the progress that we’ve made executing our growth plan. We’ve successfully continued our expansion into Florida, opening a central distribution center to support our growth in this market. Our team is successfully executing our strategy well in a challenging environment heavily influenced by headwinds we are experiencing in the appliance category.

The year is unfolding as we had planned with our top and bottom line results in line with our expectations. Our consultative sales force continues to represent a significant competitive advantage in this tough retail climate and we continue to focus on ensuring that our stores deliver a truly unique customer purchase experience.

We recorded top line sales growth of 16.2% on the strength of our new store sales performance. Our comparable store sales declined 2.6% in line with our expectations due to the significant challenges in the appliance category coupled with the fact that we are lapping a prior year comparable store sales increase of 8.8%.

Our gross profit margin declined 60 basis points versus last year largely due to the drop in appliance sales as a percentage of consolidated sales. Appliance sales represented approximately 44% of consolidated net sales during the first quarter compared to approximately 47% during the comparable prior year period. The appliance category has historically generated higher gross profit margins than the company averaged, particularly during the first half of this fiscal year.

Net advertising expenses as a percentage of net sales increased 59 basis points with the majority of the increase tied to launching new markets in Florida. SG&A expense as a percentage of net sales increased 37 basis points due to significant investments in our growth plans comprised of store pre-opening expenses for six new store openings and one relocation this year versus 2 new store openings last year, as well as the opening of a new central distribution center hub and the creation of a divisional management team designed to eventually support approximately 30 stores in central and northern Florida.

These growth investments negatively impacted SG&A expense as a percentage of net sales by approximately 75 basis points during the first quarter, but were partially offset by effective cost control administrative expense. During these challenging economic times as always, we remain focused on our execution. I am proud of the efforts of all of our associates who continue to make compelling alternatives to low-serve big box competitors.

I will now turn the call over to Dennis to discuss our operating results in more depth.

Dennis May

Thanks, Jerry, and good morning, everyone.

I would like to spend some time discussing our operational performance clarifying how the shift in our sales mix coupled with our long-term growth investments affected the profitability for the first quarter. During the first quarter, our comparable store sales decreased by 2.6%. This was comprised of a 9.7% decline in appliances, a 5.5% increase in the video category and a 0.5% decrease in our other category, which primarily consists of audio, personal electronics, notebook computers, mattresses and furniture and accessories.

The 9.7% comparable stores sales decrease in the appliance category primarily reflected double digit comparable store sales decline at the entry level and lower mid price point major appliance products. High efficiency front load laundry and refrigeration ran modest comparable store unit increases and contributed to higher average selling prices for the entire appliance category.

The weaker comparable store sales performance for the appliance category relative to the video category and the other category contributed to an approximate 3% decline in the appliance category share of our consolidated sales mix. We expect as in past downturns that appliance unit shipments rebound with the economy, returning to its long-term historical pattern of low single digit unit growth. When this rebound occurs, we expect the appliance share of our consolidated sales mix will return in line with its historical norms.

The decline in appliance balance of sales during the first quarter coupled with the categories higher than company average gross margin rates especially skewed during the spring and summer months drove the vast majority of our gross profit margins rate decline. We expected the impact of the appliance headwind to be less significant during the second half of the fiscal year not only due to the less difficult year-over-year comparable stores sale comparison but also due to the natural shift in our balance of appliances in the spring and summer to video in the fall and winter.

The 5.5% comparable stores sales increase in video reflect a 9.5% increase from the prior year. The video sales performance was fueled by triple digit comparable store sales growth large flat panel LCD television in screen size 45 inch and up, outpacing the double digit sales decline in projection television. We continue to enjoy triple digit sales growth in 120 hertz LCD television. During the first quarter, more than 90% of our television sales were in LCD and plasma flat panel television with micro display making up a majority of the remainder.

Collectively these factors contributed to a moderate improvement in video gross profit margin percentage despite declining ASPs on equivalent screen sizes. Simply put, we continue to sell on more heavily featured mix of television and larger screen sizes than the industry which enables us to achieve a better gross profit margin than the industry average.

The 0.5% [ph] decrease in comparable stores sales in the other category followed an 18.7% increase in the comparable prior year period. The comparable stores sales decreased in the other product category due to decreased sales of mattresses and personal electronics, partially offset by increased sales in notebook computers and furniture and accessories. The decrease in mattress sales coupled with the increase in notebook computer sales partially offset by an increase in accessories and furniture had a modest negative impact on our consolidated gross profit margin rate.

Net advertising expense as a percentage of sales increased from 4.4% from the prior year to 4.9% in the current year with a majority of the increase tied to launching the new market in Florida. We entered each new demographic market area with a target share of voice for the marketplace. We typically add locations quickly to these DMAs to leverage our marketing investments. We plan to add six locations in our core Florida DMA in central and northern Florida over the next two quarters which will improve our net advertising ratio in those markets.

SG&A expense as a percentage of net sales delevered by 37 basis points due to significant growth investments. These growth investments were comprised of store pre-openings and associated six new store openings and one relocation this year versus two new store openings last year, as well as the opening of our new central distribution center hub and creation of a divisional management team designed to support approximately 30 stores in central and northern Florida. These growth investments negatively impacted SG&A expense as a percentage of net sales by approximately 75 basis points during the first quarter, but were partially offset by effective cost control over general and administrative expense and a reduction of bonus expense.

As with our advertising expense ratio, the deleveraging impact of the third central distribution center and the divisional management infrastructure on our SG&A ratio will correct itself as we add additional new stores in Florida. Our third central distribution center currently serves 7 stores spread over central and northern Florida. By comparison, our other two central distribution centers currently support a total of 90 stores in eight states, producing far more effective production leverage rations.

The Florida CDC has been scaled effectively and efficiency to support approximately 30 store locations. We expect to see appreciable improvement in the third CDC’s expenses ratio as we plan to add 6 more stores in Florida prior to this Thanksgiving. We continue to enjoy solid new store performance as we expand in Florida as well into the existing markets. We believe that we have successful built an infrastructure that will support our additional growth. We will continue to monitor the overall economic environment and prudently evaluate new stores and other growth investments to enable us to further our track record of growing profitability. We’ve gotten off to a solid start in fiscal 2009 and are on track to achieve our operating and financial objectives for the year.

With that, I would like to turn the call over to Don to discuss our liquidity and capital resources and fiscal 2009 guidance.

Don Van der Wiel

Thanks, Dan, and good morning, everyone.

We ended the first quarter of fiscal 2009 with $2.1 million of cash compared to $1.3 million in the prior year comparable quarter. As of June 30, 2008, we had $45 million of borrowings under our line of credit and $3.7 million in outstanding letters of credit drawn on our revolving credit facility, leaving us a net borrowing availability of approximately $51.3 million. As of yesterday, we had $31.7 million cash borrowing and $3.7 million in outstanding letters of credit drawn on our revolving credit facility leaving us with a net availability of approximately $64.6 million. As of June 30, our borrowings were primarily tied to a slowing and inventory turnover productivity, significantly influenced by the new and under leveraged third distribution center.

While nearly half of the borrowings were anticipated based on the inherent lack of inventory productivity in our new CDC that initially serves a few number of stores, the remaining unplanned borrowing were tied to lower than expected inventory productivity in our existing markets. Since June 30, we have improved our inventory turnover productivity in our Midwest and Southeast divisions. Inventory productivity in these existing markets is expected to return to historical levels by the end of this second quarter. We expect that consolidated inventory productivity will improve to historical levels by the end of the fiscal year as we continue to add stores in Florida and leverage that central distribution facility.

At this time, we’d like to reaffirm our sales and earnings guidance for fiscal 2009. Comparable stores sales are expected to decline in the low single digits. Net sales are expected to grow between 19% and 21% and diluted net income per share is anticipated to range between $1.13 and $1.20 for fiscal 2009. The company has identified additional attractive real estate opportunities and now plan to open between 18 and 20 new stores during fiscal 2009 compared with prior guidance of 15 to 17 new. Accordingly, capital expenditures net of sale and leaseback proceeds are now expected to range between 29 million and 31 million for fiscal 2009 compared to our prior guidance of 28 million to 30 million.

Let me now provide specific projections for quarterly comparable store sales, we expect to see improvement in this metric during the second half of the fiscal year reflecting not only the less difficult year-over-year comparison but also the natural shift in our balance of sale during the year from appliances in the spring and summer to video in the fall and winter. Likewise, we do not provide specific quarterly forecasts for diluted net income per share, but we expect similar difficult year-over-year comparison during the second quarter not only due to the expected trends in comparable stores sales, but also due to the incidence and concentration of pre-opening expenses associated with our front loaded stores openings for this year, as well as the deleveraging impact of our third central distribution center.

With that, I’d like to turn the call back over to Jerry for some closing remarks.

Jerry Throgmartin

Thanks, Don.

It’s obviously a tough consumer environment with certain parts of our business encountering stiff macro economic headwind. Our 2009 guidance reflects those realities. Having said that, we’re confident in our business model, our people and our ability to continue to deliver an incomparable customer purchase experience. We continue to enjoy strong new store performance as we expand in Florida as well as other existing markets.

We believe that we’ve successfully built an infrastructure that will accommodate our additional growth. We will continue to monitor the overall economic environment and ensure that we continue our track record of profitable growth. We’ve gotten off to a solid start in fiscal 2009 and are on track to achieve our operating and financial objectives for the year.

At this time, I’d like to turn the call back to the operator so that we may entertain any questions that you may have.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And we’ll take our first question from Mitch Kaiser from Piper Jaffray.

Mitch Kaiser – Piper Jaffray

Thanks, guys. Good morning. On the store openings, I think pre-opening is about 200,000, is that right, Don?

Don Van der Wiel

On average you are correct. I think what you will see is that it tends to vary and it does vary depending on the size of the market. So for example entering our large Greenfield market such as Orlando, geographically are further away from our store base than they on existing small markets such as the Birmingham. We are going to see higher pre-opening expenses for those large Greenfield markets. Conversely smaller non-Greenfield markets, existing markets, backfill markets will pass on considerably smaller pre-opening expenses, but on average 200,000 is still a very reasonable estimate.

Mitch Kaiser – Piper Jaffray

Okay, and sorry if I missed it. Did you say the number of stores you expect to open in Q2 because I know you’ve only opened one last second quarter?

Dennis May

We will open that. Q2 is going to be a very active quarter for us, pretty active quarter for us, Mitch. We’ve quite a – yes, a total of four in second quarter. So as you think about as we roll through that quarter before for the second quarter for us, in addition to that, Mitch, the other comment I would make is the Florida market for us – we actually opened six quarter prior to Thanksgiving in the Florida market (inaudible) obviously being in the third quarter.

Mitch Kaiser – Piper Jaffray

Okay. And I know you mentioned the commentary about the inventory productivity and the feeling that it’s going to be in better shape in the second quarter – at the end of the second quarter, how would you categorize where you might see more inventory, is it in appliances or in video or how should we be thinking about that or is it specific to one region?

Dennis May

It really is more across the board, Mitch. The comment I would make there, we are an industry-leading retailer in our sector in inventory productivity. We always pride ourselves on best in class in this metric. So, we’ve already really gotten our arms around this very quickly, we’ve made significant progress even since the end of the quarter, so we feel very good about the progress we are making. There is really no particular area, maybe it you might say a little more in video, but as we sit here today, we feel very good about the progress we’ve made and solid productivity moving forward.

Mitch Kaiser – Piper Jaffray

Okay. And then lastly, could you just share with us what vendors are saying just on price declines on the TV category and maybe just talk about where you see kind of aggregate supply in the US at this point?

Dennis May

Yes. One of the comments we made in our script, Mitch, was that we continue to see obviously pricing moving in a pretty rationale method and manner. Although pricing are coming down on like for like screen sizes, overall ASPs in the TV category continue to be very good for us in the overall business because of the shit mix that we make. And as we leverage our sales force and the way that we go to the market educating the customer, we continue to see very strong and stable ASPs out of the TV category. There is so much new technology in the marketplace today and when you think about the mix of 120-hertz and so much product and 1080p and thinking about that we really – we see nothing but good things for that area. As we look into the fall selling seasons, we just feel like there is so much new innovation in the marketplace and our sales force can stand in front of those products educate the consumers and collect for all that technology.

Mitch Kaiser – Piper Jaffray

Okay, thank you.

Dennis May

As you think about – one comment, as you think about ASP declines for like for like models this year versus previous years, it’s actually it’s very much on track if not behind some of the industry forecast.

Mitch Kaiser – Piper Jaffray

Okay. So, in terms of percentage, what are you thinking there?

Dennis May

The industry typically throws around that 15% to 20% like for like model on pricing movement and we would expect that to be a very reasonable assumption.

Mitch Kaiser – Piper Jaffray

Okay, thank you.

Jerry Throgmartin

– recall ASPs being very strong.

Mitch Kaiser – Piper Jaffray

Okay, good luck guys. Thanks.

Operator

And we will take our next question from Rick Nelson from Stephens, Inc.

Rick Nelson – Stephens, Inc.

Thank you and good morning.

Jerry Throgmartin

Good morning, Rick.

Rick Nelson – Stephens, Inc.

I’ve a question about the gross margin, I understand the mix shift away from appliances but if you could address what’s happening to gross margin within the major categories?

Dennis May

Well, major categories, like for like categories, our margins have been very, very stable. We are very pleased with our ability to navigate through the quarter and deliver really, really strong gross margin. As we said earlier, our margin decline, the slight margin decline is a reflection of the shift mix between appliances and video. Appliance for us carry a somewhat higher gross margin especially in the first and second quarter of our fiscal year due to the decline in appliances and the strong performance in our video business, that created that slight margin decline. Category to category, we are very pleased with our margin.

Rick Nelson – Stephens, Inc.

Got you. The appliance manufactures are putting through price increases as we speak, just wondering how you see that affecting demand and are you going to be able to pass those on to the customer?

Dennis May

Well, there’s a couple things about that. As manufacturers, appliance manufacturers change the cost of an item, they also change what they call the MAP of that item, meaning the minimum advertised prices. So you think about a particular product category on appliances, all of the pricing moves. So a $999 refrigerator becomes $1,049, the $1,199 becomes $1,299, but the margins stay the same or get better, meaning that if I was making 28% gross margins at $1,099, that goes to $1,199 retail, my gross margin stays the same, if not improve. So at a minimum it’s a margins natural component.

Rick Nelson – Stephens, Inc.

So, are margin percentages (inaudible)?

Dennis May

– percent neutral. So, we are no impacted by that. The other it’s difficult to say what impact that has over our ASPs. The consumers buys product to really a budget. They really don’t buy to a feature content, so if a consumer has a budget saying they want to spend $1,200 on a refrigerator when they come into the store, the fact that all the pricing band we’ve moved $50 or $75, it doesn’t necessarily mean that you are automatically going to get an ASP lift of $50, because the consumer may say I don’t care that at price, this is my budget. So, our history shows us in ASPs, as we think about that that sometimes they have a greater impact and sometimes they don’t. So it kind of depends on what category.

Jerry Throgmartin

Rick, this is Jerry. The other add on that I’d make to Dennis’ comment is as you talk with the appliance manufactures and they study how this will impact demand, Dennis walked you through the price progression and how consumers may settle in at a price point, the consumer in today’s economy is that is really affected and maybe the most compressed at the entry level price point. A washer going from $299 to $329 is not what’s going to keep that consumers out of the market. That consumers is out of that market already. Until things get better that consumers – and when you look at the appliance industry and the unit loss in the appliance industry, a lot of it is at the low and entry level. And not surprisingly, that consumers that’s most impacted during an economy like this. So our comfort level – I think early in your question was why do we believe that will do to overall demand, and we don’t see that making a significant change in the overall demand for our product.

Rick Nelson – Stephens, Inc.

Got you, thank you for that Jerry and Dennis. One additional question, could you discuss the momentum of the business during this quarter, the comps kind of do they accelerate, de-accelerate?

Dennis May

This is Dennis. We really don’t breakdown individual months. Kind of what we’d say about our quarter is the trends that are impacting the quarter both positively and negatively really are longer-term issues and there are differences in the components that are driving the video business. Those are annual factors. The components that are creating the headwind for our appliance business, those are annual factors. They are really not factors that are going to drag or spike a business in a given month. So as we think about our performance as we said before, we anticipated the drag on our appliance business in Q1. As don mentioned, Q2 is going to have an impact because that would be so much of our business in appliances in our second quarter. We feel we are right on track, we feel very strong about our back half for all the same reasons. Appliance has become a smaller portion of our business in the back half the video business becomes a large potion of the business in the back half. The video business becomes a large portion of our business in the back half. And we also are coming up against much more typical comp store year-over-year comparison. In our first quarter last year, we are up against an 8.8% comp increase, second (inaudible) comp increase. So as you think about the back half of this year, we are pretty excited.

Rick Nelson – Stephens, Inc.

Got you. Thank you and good luck.

Jerry Throgmartin

Thank you.

Operator

We’ll take our next question from Gary Balter from Credit Suisse.

Gary Balter – Credit Suisse

Thank you. it’s Gary and Seth on the phone. Good quarter in light of the circumstances of the macro environment, a few questions that possibly could help us with – essentially four questions. First is more general, like you announced more store openings than we had in our model, but the top line was effectively the same guidance, and the bottom line, and you are going to have more store opening costs. Can you talk about new store productivity assumptions, is that lower now, is that why the top line doesn’t change and also how are you making up the margin if you are going to have additional store opening costs?

Dennis May

Would you go ahead and take that?

Don Van der Wiel

Hi, Gary. What it really comes down to is, as you now we have a pretty long lead time in getting the stores opened, so these are going to be stores that quite frankly open at the tail end of the year, Gary, and that’s why we didn’t change the top line. So, to your point that we are very pleased with the new store sales performance. I think it was evidenced pretty strongly in the first quarter. We got out of the box, our initial results in Florida are very much in line with our expectations, very pleased with our store opening performance, and I think I was fairly reflective in our sales performance in the first quarter.

Gary Balter – Credit Suisse

And on the expense side, are you – how are you offsetting the additional expenses?

Don Van der Wiel

What that comes down to is I think that we are pleased with our expense management that we’ve been exercising a lot of diligence in managing our G&A expense, Gary, and we are sort of expecting that to wash its way out.

Dennis May

The other comment that I would make, this is Dennis, is that these additional stores that we’ve added to the guidance are more backfill locations in existing markets. You get two things in that. First of all, the pre-opening expense and as Don touched on earlier is much lower in the existing markets. You‘ve already got the infrastructure in place. And the other component of that is, those stores albeit toward the end of fiscal year will do nothing but leverage existing SG&A because we are opening them in existing markets.

Gary Balter – Credit Suisse

Okay. Second question is on the TV, you talked a lot about how pricing is better right now and that business had a good quarter actually in that. Can you talk a little bit first of all if you sold any of your 11 inch OLED TV, sort of curiosity, but that’s not the question, there is some worry in the industry that as we hit Christmas, the supply may pick up or at least the demand may not be strong enough as the supply, what are your thoughts on that?

Dennis May

Yes, there is a lot of talk about that, especially early in the calendar year from a lot of the capacity analysts and that type of thing. Gary, as you know, there’s some new factories and plants coming on line that are gen 8 factories and we think that’s going to be good for the business because the focus of those factories are going to be in large screen sizes. If you think about this TV industry, as we it here today, the household penetration on digital television, not high definition, but digital television is still less than or right at 50%. So, the runway in front of the TV business, the flat panel TV business is very extreme and exciting prospects. As you think about capacity for the fall selling seasons, we feel very comfortable with our conversations with our suppliers and the trips that we’ve made that as this flat panel TV business has become more mature, the manufacturers have a much better handle on what that business looks like and their ability to forecast supply and demand. I’ve got to give them a lot of credit in the improvements they’ve made in that area and I think capacity will match us, supply and demand will be a good match for this fall selling season, it’s not something we are really concerned about at this point.

Gary Balter – Credit Suisse

Have you sold any of your 11 inch –

Dennis May

We have not yet. Yes, that product is pretty hard to get and we’ve done some special orders on it. We haven’t put displays samples out there yet. We can send you one.

Gary Balter – Credit Suisse

Will you have that for Christmas?

Dennis May

It is a great product, we would anticipate, yes. Again, I’d see that product is going to be (inaudible) very hard to get.

Gary Balter – Credit Suisse

With oil prices going up, one of the other things I was trying to see is more the emphasis on energy efficiency fall editions because the original plasmas and LCDs have not been that energy efficient, is that something you are emphasizing in your stores now?

Dennis May

We are both in the appliance area and the electronics area. We are in the process of launching a new marketing campaign called hhgreen [ph], we are very excited about it both in our pre-prints or television commercials on our web. We are really being able to stand in front of the product and educate the customer about the energy efficient components of these new products is going to be very, very important. If you think about high efficiency laundry or high efficiency appliances, the manufacturers are bringing out so much new technology there. The government has ensured everybody’s wares is passing even tougher standards on Energy Star products, there’s tax rebates, sales tax rebates for consumers buying Energy Star product, so it’s going to be very, very important. This past weekend we had our first recycling event, we sponsored with one of our suppliers on the TV side of the business where the customer could bring in their old inefficient TV, buy an Energy Star TV, so there is a lot of momentum in this area and I think it’s only going to pick up whether the consumer is just a green focused consumer or they are focused on saving money. The main factors are going to be bringing a lot of product to the market that’s going to supply that demand. And we think with our sales force that can educate consumer help them understand the features and the benefits of these product is going to be really good for the business.

Gary Balter – Credit Suisse

And then switching over to the appliance side, you mentioned obviously that sales are under – are being challenged just from the macro, it doesn’t appear just looking at the numbers that you’ve lost any market share and also given your gross margin it doesn’t appear that there is anything too aggressive, is that a fair assumption?

Dennis May

Yes. We are always – you always try to balance whenever you put together your marketing plan, we want to maximize market share as much as possible, we want to exploit every opportunity, but on the same end of that, we’ve got to be good stores with the gross margin. So, the comps and balance between promotion, maximizing share and maintain margins, we feel really good about how we’ve been able to maintain that. We’ve such a strong merchandising staff here with our senior merchants, 20 plus year veterans and they continue to do a good job of navigating through a pretty competitive market.

Gary Balter – Credit Suisse

There has been some talk about Sears getting a bit more aggressive in fact something that you’re seeing?

Dennis May

Gary, we don’t really comment about specific retailers. I would say the appliance business is always highly competitive. What I would comment on, we’ve seen overall page count and what I would call share of voice from not just one competitor but form quite a few of our competitors this summer go up. We’ve seen a lot of promotional activity in the appliance category, hasn’t been so much around pricing as much as just been around people trying to drive awareness and share of voice in that area.

Gary Balter – Credit Suisse

Then the last question, I will let somebody else ask is, you are negative in the other category and most of that you mentioned was mattresses, given you are still adding DCs, are you rethinking the space allocations in the other category given what probably will continue to be weakness in mattresses?

Dennis May

We feel pretty good about it. The mattress bedding business growth, we don’t dedicate a huge portion of space there. I think the average department growth is about 11,000 square feet. So it is not something that we dedicate a huge square footage to. We still feel good about that business, it leverages our sales force, it leverages our home delivery, makes it more efficient there, and is highly, highly profitable. So, we feel good about that. We are always analyzing every product category and how much space we get out of it, how much advertising to make us as efficient a process.

Jerry Throgmartin

Gary, this is Jerry. I would also – I would say that when we look at our mattress business, obviously that’s a pretty discretionary purchase and when in a economy as well I can put off the purchase of a new mattress. However on occasions, if we were to reduce space allocation of mattresses at this time during an economic downturn, our selection at that point would basically say we are really not interested in the business, and it is our sense that if we are going to be in a business, the consumer has to feel like we are committed to it as they come in. As Dennis said, we don’t have a huge amount of space, but we have inadequate selection to show that we are committed to the business and we want to stay committed to the businesses for our key competitive advantages. And as the economy turns back, we’ll feel good about those businesses.

Gary Balter – Credit Suisse

Thank you very much for your time.

Jerry Throgmartin

Thanks, Gary.

Operator

(Operator instructions) And we will go next to Brad Thomas from KeyBanc.

Brad Thomas – KeyBanc

Good morning.

Jerry Throgmartin

Good morning, Brad.

Brad Thomas – KeyBanc

Wanted to follow up on your comments about SG&A and have the new store openings in the distribution center weighed on margin by about 75 basis points, would you expect the same level of headwind in the second quarter?

Dennis May

The comment I would make there, Brad, just to repeat again our – we are very pleased with the entry into the market. As you kind of think about opening a new market, your first launch of that market, your first launch of the distribution facility is going to be the most challenging, and we’ve got that under our belt. We’re really pleased with how we’ve entered the market not only from just getting stores open, but there’s a lot of customer metrics that we look to for long term success in the market and we enter that. The productivity at the distribution facilities, the operational execution in the stores are very, very sold. So, when you get out of the – and the reason I bring that up is when you get out of the gate really well there, you really build a platform for success, customers' satisfaction levels and stock percent and all those things. So as you think about how we navigate through this year, first quarter would be the biggest drag. Second quarter, you are going to be more efficient and then obviously as you go into that Christmas selling season with six additional stores being added, that’s when you really start to drive some efficiency.

Brad Thomas – KeyBanc

Okay, great. And then Dennis just a follow up on the increase in store openings, I know you had mentioned that these are going to be backfill locations, but are these going to be additional Florida stores?

Dennis May

A combination would be Florida and one in existing southeast market.

Brad Thomas – KeyBanc

Okay, great. Then a follow-up on the appliances I know that the weaknesses tend to be in the entry level products, do these entry level products tend to be more replacement products when there is a breakdown in someone’s product or are customers just pushing off, may eventually be a purchase that they do have to make later on, how should we think about that?

Dennis May

The industry, they kind of break the appliance business into three buckets. You have the builder component, you have the aspirational bucket and that’s the customers that just want to buy because they want it, and then you have the replacement business. And so Jerry’s point and Don’s point they made earlier, we are seeing the most compression at the lower and mid price points. And I think that that consumer is just weighed upon by the economy more, Brad. So I think that they are not buying the product until their oven breaks. So a larger portion of that business is going to be replacement and it’s only after their existing product breaks up. I think that’s the reason you see the compression there.

Brad Thomas – KeyBanc

Okay. And then just one last follow up on the television, your margins seems to be holding up very well and you also commented that the average screen size has continued to rise, could you just talk a little bit about your success with selling more (inaudible) as well as your attachment rates for installations and how that’s trended?

Dennis May

Absolutely. We look at our overall TV business and think about it from a couple of different points. You have a part of that business that is replacing two televisions, those tend to be smaller screen sizes and that business is robust also. But our focus has been and always will be our ability to sell large screen televisions. And that’s where we really shine, that’s where our business model and our level of execution are focused around installation really comes through. So we do see screen sizes continue to rise. Our mix of 45 inch and up is going to continue to increase this year. 50 inch and up, there is a lot of really exciting things going on in the 58 inch category, 52 inch product categories this fall. So we think we are really going to have some success in those areas. Our extended warranty penetration continues to be quite strong. We’ve really had a lot of success in executing the extended warranties and feel good about that penetration.

Brad Thomas – KeyBanc

On the margin in a economy that seems to be a little bit rougher right now, our customers are a little bit more discriminating about whether they get an installation?

Dennis May

No. We’ve seen our penetration of extended warranties has been very good, very stable, and our installation business has been very good also, because that‘s such a major purchase, Brad. You are making a few thousand dollar investment, if you don’t have the ability to install it yourself, which I don’t, kind of then you just don’t have it and you need that level of service. So we’ve seen those percentages both in extended warranty and in installation to be very stable.

Brad Thomas – KeyBanc

Okay, great. Well thanks so much and best of luck.

Jerry Throgmartin

Thanks, brad.

Operator

And we will take our next question from David Magee from SunTrust Robertson Humphrey.

Christina Applegate – SunTrust Robertson Humphrey

Hi, this I Christina Applegate [ph] on the call for David, just a couple of questions, first I was wondering if you could give some commentary on your promotional expectations going forward, and particularly for the holiday?

Dennis May

The promotional environment that we have today is really pretty similar to what we’ve seen this quarter versus earlier in the year. It is really pretty comparable to the promotional environment we saw this time last year. So, it’s not changed dramatically. It’s a highly competitive business as always. We really don’t see a lot of shifting sands, nothing significant in the marketplace that would make us say that the promotional environment has shifted. As we think about the fall selling season, we think it is going to be a competitive Christmas selling season as every Christmas selling season is competitive, but again do not anticipate anything significantly different this Christmas versus prior Christmas.

Christina Applegate – SunTrust Robertson Humphrey

Okay. And then with appliance– I don’t mean to belabor the point, but it sounds like while weak during the first quarter, they were tracking pretty much on expectation, and I was just wondering if there is anything in the trends there that would lead you to think that it might take a little longer than you originally thought for trends in the category to return to mean and stabilize?

Dennis May

I think the – as you think about the appliance business, I think some of the optimism that the industry has forecasted in the back half of the appliance business for next year is really a function of just having softer year over year comparison, not necessarily that the industry is going to improve, because the industry is just going to comp – the industry is going to comp over a softer year, because if you think about the appliance industry again for a second, you are really dealing with a second year of comp decline. Although hhgregg was up last year and comps were performing for the appliances, the industry was actually down. So now, you are talking about a second year of comp store declines for the industry. So a lot of that optimism is not necessarily coming out of housing and getting better or anything on those lines as much as the overall industry is just comping against softer numbers on an annualized basis.

Jerry Throgmartin

This is jerry and I would add to – in discussions with the appliance manufacturers probably late last year, I think a lot of people thought that the appliance business would be down and then have somewhat of a snapback to previous levels, and I think the general thinking now is that the industry, looking in the rear view mirror prior to last year had exceptional years and that as the economy has dipped, that it will level out and then you will see more traditional growth. Rather than snapping back to 2006 levels, the general thinking now is that is going to level out now and then you will begin to see some more traditional low single digit growth in that business.

Now there are a lot of different ideas when you talk to different people on, well, when is it going to start rising, et cetera? I think the general consensus right now throughout the industry is they don’t see it getting a lot worse, but I don’t think anybody at this point in time sees it on the rise yet. But I think that as it begins to come back, you will see it gradually creep back, you will not see it snap back to the 2006 levels. It is not going to be one of those situations, at least that‘s the general thinking in the manufacturing world.

Christina Applegate – SunTrust Robertson Humphrey

And then just finally looking further out into next year, any initial thoughts on where your new store growth will be concentrated?

Dennis May

What’ve said is that we are a growth story, we’ve always as we talk about our long-term prospects, we are more excited today than we’ve ever been about hhgregg’s position in the marketplace. Both the consumers and our suppliers are hungry for and looking for a competitive retailer that provides a high level of service so that the consumers like our model, our suppliers like our model, so our growth model has been and will continue to be in that range. We said that 15 to 25% year over year growth with low single digit comp store performance. As we look out across the country, we are excited to be opening our 100th store coming up here every soon, and we think the runway in front of this is so tremendous across the country. We just recently had a meeting with all of our suppliers, just talking about the company’s growth prospects and the level of support that we get from them is extreme, and I think the organization is right on track with its long term growth target.

Christina Applegate – SunTrust Robertson Humphrey

Okay, thanks very much

Operator

And we will take our next question from Anthony Lebiedzinski from Sidoti & Co..

Anthony Lebiedzinski – Sidoti & Co.

Good morning. I was wondering if you guys could comment on the comp breakdown between traffic versus ticket and also was there any cannibalization effect in the quarter ?

Dennis May

You went in and out there, can you repeat that question please?

Anthony Lebiedzinski – Sidoti & Co.

Sure absolutely. The question is about the same store sales, the traffic versus ticket breakdown, and also was there any cannibalization effect that during the quarter as you opened the stores?

Dennis May

We would – the way I would track I’d say that our traffic was down – our traffic was great, our conversion rate actually improved within the quarter. So, we are very pleased with that, very pleased with our store execution. So, as you think about ticket versus traffic and conversion, we improved in conversion. Certainly our traffic was down, our ASPs were actually up during that particular quarter. Your question as it relates to cannibalization, anytime we backfill a market with an existing store, you are going to get some level of cannibalization. It was relatively – when you think about the entire chain, very nominal. The thing that you love about backfilling and adding any existing stores is though it may have some cannibalization of your comp, the ROI and the leverage that it brings to your advertising, your distribution is a great return for the shareholder.

Anthony Lebiedzinski – Sidoti & Co.

Okay. And I was wondering if you guys could comment on comp sales by market or by region a little bit more specifically?

Dennis May

For competitive reasons, we really don’t give a lot of color around market-to-market deployments. What I would say is when you are in as many markets such as we are now, you certainly see some variance between one market and another. Our job as a retailer is to identify those variances, work on them diligently. And any time we have a negative many market or any category, we are not happy about it, and we are very diligent about making share that we can maximize share, but we do have some market to market volatility but it is not one that we give transparency on.

Anthony Lebiedzinski – Sidoti & Co.

And as far as the rise in inventories, how much would our say was because of the new distribution center and new stores, and can you give us a little bit more color about the rise in inventory versus the rise in sales in the quarter?

Dennis May

It was a combination of the both of them. Florida was certainly part of that. When we went into the Florida market, we were so focused on making sure the consumer had a positive experience form an in stock perspective, and we’ve got off to a good start in the market. Consumer had a great experience, so part of that was Florida and another part was the Midwest and southeast. What I would say is, even as sit here today, even since the end the quarter, we’ve made all the progress in both Florida and we’ve made a lot of all the progress in the southeast and Midwest division. So, the improvement in productivity and inventory we are seeing across the entire chain. And again we always pride ourselves in being world-class in inventory productivity. We are highly confident when we talk to you this time next quarter you are going to clearly see us back on track to be out on front of that issue again.

Anthony Lebiedzinski – Sidoti & Co.

Okay, thank you.

Dennis May

Thank you.

Operator

And we will go next to Scott Tillman from Hudson Square Research.

Scott Tillman – Hudson Square Research

Thanks, good morning.

Jerry Throgmartin

Good morning, Scott.

Scott Tillman – Hudson Square Research

A few quick questions, first of all, earlier it was asked about your growth expectations for next year, specifically do you see the need to add another CDC next year, will you be able to backfill sufficiently to not have to open another one?

Dennis May

Well, as we look at our – again from a competitive perspective, we try to stay pretty close to the west there about our long-term expansion plans. But when you just think about historically how many stores the company would leverage out of the central distribution facility and think about that, our expectation is that we would be able to drive quite a bit of leverage and a lot of runway out of our existing distribution network.

Scott Tillman – Hudson Square Research

Second question, also a follow up, there has been some discussion on the promotional environment this morning, specifically on appliances and just overall, are there any categories where you have seen a heightened promotional activity, especially with back to school and accessories, the notebooks or the Olympics and the lead into pre-season that you expect to sort of fall by the wayside by the time the holidays are around?

Dennis May

No, it’s really been very stable. We track – we have more metrics to track promotions that you might believe possible, but a lot goes into a promotion. There is pricing, there’s financing, there’s delivering, installation offers and all those things are really relatively stable across all of our product categories this year versus last year. And as we view the back to school and fall selling season, our expectation is that it’ll be very similar.

Scott Tillman – Hudson Square Research

And then lastly on the advertising front, the media companies are certainly seeing a reduction in advertising revenue. Wondering if you are beginning to see any dollar efficiency there not marketing efficiencies because of store build out, but actually getting more for your money in terms of media buys?

Dennis May

What I would say there is certainly a lot of news out here about that both in print and on TV. hhgregg like many other retailers though, we continue to invest our dollars differently and continue to evolve the web, direct mail, and all those things are changing the ways the consumer gets their advertising. So, as we look both this year and into the future, I would say it is an evolution that we continue to reallocate our dollars to how the consumer wants to be marketed to. So, we don’t necessarily see significant changes in rate buys per se, there are some changes. But I think probably the bigger game changer is going to be where and what medias you spend your money on as a retailer.

Scott Tillman – Hudson Square Research

Thank you.

Dennis May

Thank you.

Operator

This concludes today’s hhgregg conference call. We thank you for your participation, you may now disconnect.

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