hhgregg (NYSE:HGG) has been piling on the bad news, and bottom pickers seems to love it. hhgregg - a regional big box retailer of appliances, electronics and furniture with 228 stores in 20 states reported another quarter of declining comparable store sales (6.3%), a net loss per share (adjusted and GAAP) and a staggering $43M write down of assets. Net sales for the most recent quarter declined by 5.9%. Despite this, the stock shot up 12.6% on the day they reported earnings and is up 10-15% since the initial rise.
The company's two primary areas of increased focus over the past couple years have been an effort to become one of the largest sellers of appliances in their local areas, and to increase penetration into the higher margin furniture space. As of the most recent quarterly report, appliances stood at 43% of sales, consumer electronics at 44%, home products (furniture and other) at 5%, tablets and computers make up the other 8%. The appliance category was flat in same store sales for the quarter but down for the nine month period by 2.6%. All other categories were down significantly due mostly to the increase in consumer adaptation of the Internet over big box retailers, a trend that is very likely to continue in my opinion.
My interest in hhgregg started a few months ago as a potential asset/value play due to the low amount of debt and past positive free cash flow the company could generate even when it had no earnings. Plus I have a high opinion of management, having met with some of them including now CEO Dennis May a few years ago. They are honest folks. My target price for the stock, other things being equal was $4.
Whispers of Increased TV Sales
On the fiscal Q3 conference call there were several questions by analysts about the TV category. The CEO, Dennis May spoke positively of the potential for higher priced and higher margin 4K (UHD) TVs adoption, and especially larger size TVs seeing an "uptick." I believe this is the reason the stock price jumped. To me, this bit of misplaced hope will change nothing for the low margin TV space. Many 4K TVs are coming down rapidly in price pressured by Vizio 4K TV offerings among others.
Destruction of Shareholder Value
The company reported an astonishing $43M asset impairment write-down to Property, Plant and Equipment with the immediate impact of erasing $43M of assets on the balance sheet thus decreasing book value by the same amount. What an incredible lesson for value investors. Beware assets listed as PP&E that are truly leasehold improvements. Shareholders Equity declined over the last three quarters of 2014 by 35.6% from $307M to $197M.
The recently filed quarterly 10Q stated these detrimental words about the impairment and method for calculation:
"The need for an impairment analysis to be performed was triggered by declining sales and overall profitability in recent periods. The Company has performed a detailed store impairment analysis as of December 31, 2014. For the third quarter 2014 impairment analysis, property and equipment at 48 locations with a net book value of $44.1 million were reduced to estimated aggregate fair value of $1.1 million based on their projected cash flows, discounted at 15% . This resulted in an asset impairment charge of $43.0 million for the three months ended December 31, 2014. The fair values were determined using a probability based cash flow analysis based on management's estimates of future store-level sales, gross margins, and direct expenses. For the quarter ended December 31, 2013, the Company entered into a lease modification to downsize a store. In conjunction with the downsize, the Company determined that certain of the assets in use would be abandoned at the time construction to downsize begins, and as a result determined this to be a triggering event for an impairment analysis."
The following comments from the earnings release is a nice lesson in word craft. How do you paint a rosy picture out of dismal results?
Dennis May, President and CEO commented, "The Company continues to execute on its strategic initiatives focused on transforming our business model. The Company has made progress improving on our previous quarters' sales trends, in particular in the consumer electronics and appliance businesses. Despite these improvements in our core categories, we are committed to increasing the rate of progress in improving the overall sales and profit trends in the business. To assist in our efforts, the company has recently hired several new, experienced, senior management team members to drive our strategic initiatives. Additionally, management has engaged experienced retail consultants to assist in rationalizing our marketing spend, optimizing our logistics network and accelerating our overall transformation efforts. We remain confident in our ability to make meaningful improvements in the coming fiscal year."
My interpretation: "We have no idea how to turn this business around. Our same store sales at least didn't decrease by as much as they previously were. That's an improvement right? Despite the fact that we're drowning, we still believe there is room for improvement. We can't figure it out, so we hired some new folks that maybe can. Some other folks are helping us learn how to cut costs more."
hhgregg has declining same store sales, with no reason to build out new locations. The major strategies of the company are failing to produce fruit (appliance sales and profit increases). The company has turned cash flow negative and destroyed an incredible portion of shareholder equity by way of asset impairments. There is no investment thesis for growth. The value or asset play idea is in dangerous jeopardy of further write downs to assets even with the shares trading below book value. The company is squeezed by Best Buy and Amazon in electronics and Lowes and Home Depot in appliances, plenty of competition - negating any pricing power. The structural shift to online sales will continue to hurt the company. This company is an easy sell for me after the recent bounce. However, I consider the shares a dangerous short opportunity due to low debt and the stock trading below book value.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.