hhgregg, Inc. (NYSE:HGG) Q1 2017 Earnings Conference Call August 4, 2016 9:00 AM ET
Robert Riesbeck – President, CEO & CFO
Lance Peterson - IR
Michael Goldsmith – UBS
Peter Keith - Piper Jaffray
Good day ladies and gentlemen, and welcome to the hhgregg first quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. If [Operator instructions]. As a reminder, this conference call is being recorded.
I would now like to turn the conference over to Lance Peterson, Director of Finance and Investor Relations. Please go ahead.
Good morning and thank you for joining us. Joining me on our call this morning is our President. Chief Executive Officer, and Chief Financial Officer, Bob Riesbeck. Bob will provide you with an update on our business operations and our most result financial results. After his prepared comments, Bob will take your questions until 10:00 a.m. Eastern Time.
During our call, we will make forward-looking statements regarding our future operating and financial performance, which are subject to significant risks and uncertainties. We believe the expectations reflected in our forward-looking statements are reasonable, but can give no assurance such expectations or any of our forward-looking statements will prove to be correct. Please refer to today’s earnings release and our current Form 10-K for additional information of these risks and uncertainties. In addition, we will discuss several non-GAAP measurements we use to assess our financial performance, including EBITDA, adjusted EBITDA, adjusted net loss, and adjusted net loss per diluted share. Please refer to our reconciliation in the non-GAAP disclosure section on our investor relations website, which can be accessed at hhgregg.com.
With that, I’d like to turn the call over to Bob.
Thank you, Lance and good morning everyone. First of all, I’d like to thank our board of directors, shareholders, our lenders, our vendors, and most importantly, our 5,100 associates for entrusting me with my new role as CEO of hhgregg. I am truly humbled by this opportunity. With the support of all of you, I believe we have great things ahead for everyone involved with hhgregg.
Over the past several months, we have made progress towards our top company goal of driving sales growth through our focus on appliances, furniture and large premium televisions. The team we put in place over the last 12 months will continue to build on this momentum to achieve our company’s growth and profitability goals and drive long term shareholder value of hhgregg.
We delivered a solid first fiscal quarter and are off to a great start to our fiscal year. Let me start with a list of the highlights from the quarter. Our comps for the first quarter were in line with our expectations and improved sequentially as well as year-over-year. Our appliance business led the way with a positive 3.7% comp in the quarter. I believe we are getting traction with our strategic revenue initiatives, specifically around appliances and furniture. We expect this to continue.
We improved our liquidity position through prudent management of working capital, cash flow generation and our recently announced amended and extended credit facility. These all position our company for financial stability and flexibility. As of June 30, 2016, we had no outstanding borrowings under our $300 million credit facility and net availability of $178.4 million.
We are pleased we protected our gross margins during a very competitive environment in the quarter. We delivered a 59 basis point improvement in gross margin through sales mix and higher gross margin rates in appliances and home products. However, even with these improvements, we did lose gross margin dollars due to our sales decline and lower gross margin rate in consumer electronics. We were able to offset some of the lower gross margin dollars caused by the consumer electronics category by continuing to effectively manage our cost structure. We therefore generated adjusted EBITDA of positive $2 million in the quarter.
We remain on plan with our logistics optimization project. We are in the process of combining our Indianapolis and Chicago distribution centers into a new facility in the Cincinnati area. With the logistical network change, the decision was made to close six stores, including all five locations in the Wisconsin market. All these stores were fully impaired in prior periods. We do not anticipate any other significant store closures.
Finally, we continue to drive sales excellence through our entire organization. Through competitive pricing, our ultimate price center, free delivery, extended financing terms, we are striving to provide the customer with the best market transaction. This has proven out as we continue to increase our customer satisfaction scores and conversion rates. In short, we gained traction and moved the company forward in our pivotal first quarter. We are pleased and are working hard to accelerate this progress.
Moving to the details of the first quarter performance, I will begin with insight by business category. First of all in our leader of appliances. As I mentioned on our last call, we are extremely focused on driving appliances since it is our most resilient category. Appliances have also been the most successful category over the history of this company and more importantly, the past two years. hhgregg is known as the go-to place for appliances in the markets we operate and we expect to continue to take advantage of this opportunity. Appliances accounted for 64% of our sales in the first fiscal quarter and this was the largest appliances sales in the first fiscal quarter in the company’s history.
As mentioned earlier, we had a positive 3.7% comp in the quarter in appliances which was a solid performance as we expected. Our comp was primarily driven by growth in both units and share. The team has built detailed plans for digital gains with the support of our vendors and utilizing free delivery, financing, pricing and our marking tools. This mix is allowing us to win and drive growth in this category.
During the quarter, we gained 70 basis points of market share across the entire appliance category per track line. Multi-door refrigeration experienced the largest share increase, nearly 400 basis points, driven by our kitchen package events throughout the quarter.
Another significant initiative is growing our Fine Lines presence in our existing fleet of stores. Our Fine Lines locations offer designated floor space in our existing stores and showcase premium brands. This focus on premium brands has helped drive additional incremental appliance business to each of the stores where we’ve added the Fine Lines. We have been very successful with our execution of this concept and we continue to accelerate our expansion of the format. In July, we announced our two year plan of adding 25 to 30 Fine Lines locations to our stores over the next 24 months. We opened three of these locations in the last quarter and are planning to open 12 more through the balance of this fiscal year. In fiscal 2018, we will open 10 to 15 additional Fine Lines locations. With the recent performance of our appliance category and our Fine Lines growth initiatives, we remain very confident in our appliance strategy.
Consumer electronics continues to be a challenge for hhgregg and the industry. This is evidenced by our negative 17.4% comp and significant margin decline in the quarter. The negative comp sales in consumer electronics was driven primarily by a negative 16.2% comp sales decline in video, which makes up 75% of this category. Driving this comp decline was primarily a double digit decrease in average selling price, which was in line with the decline reported by NPD. The average selling prices of 4K TVs in the quarter per NPD showed a decline of 29.6%. This was in line with our results. As you may recall, we over-indexed in 4K TVs.
We are working on several initiatives for the consumer electronics category to best compete in this difficult segment. We are adding key vendors and products which are not currently available to our customers. In order to make this investment, we are working through a SKU rationalization to allow for expanded premium brands and smaller sizes, both in store and online. We recently added to our leadership team for this category and expect similar improvements as we did with the team we built in appliances last fall. Both of these initiatives will be completed prior to Labor Day and will help us perform better in the consumer electronic space throughout the balance of this fiscal year.
Home products continues to be our fastest growing category. Furniture realized a positive 7% comp for the quarter, offset by a decline in bedding. We are driving a number of initiatives in the category which are resonating with the consumer. The most impactful has been our store reset initiative. We are tracking to reset 140 stores by the holiday period in all of our stores within this fiscal year. In addition, we’ve hired a general merchandise manager overseeing home furnishings. Her extensive experience in retail furniture will help drive the right product mix, pricing and promotional cadence in this category.
E-commerce also continues to be a growth driver across all of our categories as we continue to invest in our Omni-channel capabilities. During the first quarter, we generated a 33% growth in online sales, which exceeded our overall goal of 20% to 25% for the fiscal year. This is a key initiative for us so we expect to track higher than the industry for the foreseeable future. We expect our online sales to exceed $150 million this fiscal year. Our investment in e-commerce is not only for online sales, but is also driving our business to the stores. Approximately half of our sales purchased online are picked up in-store. Many customers that buy in our stores start on our website and go in-store to get the customer service of our associates and complete their transaction. This also allows us an opportunity to increase the average sales transaction.
Net advertising spend in the quarter was relatively flat to prior year. We continue to analyze the effect of every dollar we spend and look at ways to be more efficient. As discussed last quarter, we continue to promo our free delivery program, our competitive financing plans and our most popular products and broad selection. Those marketing programs continue to resonate with our customers and we are confident we have the broadest assortment of appliances in the market.
During the quarter, we continued to feature our proprietary and non-recourse hhgregg credit card. This benefit raises our total penetration by 290 basis points to 44.6% for the last 12 months, which was an increase from 41.7% experienced in the prior 12 month period. We continue to balance these investments in financing, free delivery, marketing and other promotional activities to drive sales and profitability.
We also further leveraged SG&A during the quarter as we continued to justify every dollar we spend. During the quarter, we reduced our SG&A by $3 million to help offset the video margin decline.
Since first quarter of fiscal 2017, we realized an adjusted net loss of $5.7 million or $0.21 per diluted share. This compares to an adjusted net loss of $4.8 million or $0.17 per diluted share in the first quarter of 2016. This was in line with our expectations.
As of June 30, 2016, we continue to have no outstanding debt. During the quarter, we improved our liquidity position by $34.8 million. As of June 30, 2016, we had net availability of $178.4 million, with no outstanding borrowings under our $300 million credit facility. As announced on June 28, we amended and extended the credit facility. The key changes were extending the maturity date by 5 years to June 28 of 2021. We also increased the borrowing base availability formula with the support of our lenders, increasing funds available to the company by approximately $20 million. We also decreased the maximum credit line from $400m million to $300 million subject to borrowing base availability to better align with our expected inventory levels going forward and to save on fees related to the unused borrowings.
With the recent announcement of my appointment as President and CEO, I will remain in the role of Chief Financial Officer until a replacement is appointed.
We believe we are off to a great start to our fiscal year. We are making progress on the revenue growth initiatives and are focused on improving gross margins and operating margins, while diligently managing liquidity. Our company is proving to be resilient and we will continue to be focused on long term shareholder value.
I’d now like to turn the call back to the operator for any questions.
Thank you. [Operator Instructions] The first question is from Michael Lasser with UBS.
Hey. This is Michael Goldsmith on. Good morning. It’s Michael Goldsmith on for Michael Lasser. Thanks a lot for taking my questions, Bob on your appointment.
Thank you very much.
Can you give us a sense about the comp trend throughout the quarter and the cadence, how that played out?
Actually, when you -- obviously varies by category. We performed extremely well during the holidays. Both Memorial Day and the Fourth of July were great holidays for us in appliances. Video was a steady challenge I guess throughout the quarter. In my prepared comments I mentioned about how we over-indexed in 4K. Our 4K units as a percent of our total was about 31% where the market is about 18%. So with a 30% decline in average selling prices, that was our toughest challenge for the quarter, but overall we felt very strong throughout the entire quarter clearly in appliances, also with the performance of our resets in furniture, but again challenges in the video category.
Got it. And then also, you mentioned that you experienced a competitive environment during the period. Was this incrementally different than some of the past recent quarters? And then also, how do you think your free delivery within appliances has positioned you within this competitive environment?
Based on information we have from track line, I think in appliances obviously we grew share. We grew units and I think that that was definitely -- free delivery was a driver of that, but if you also look, we have grown our margins in appliances also. So I think in the past we were discounting to offset the fact that we did not have free delivery and that discounting exceeded our cost of free delivery. So I’m very pleased with our results from that standpoint.
Great. Thank you very much.
Thank you. Our next question comes from Nick [Cosio]. Your line is now open.
Hi. Thanks for taking the question. Just first I wanted to dig into appliances a little bit more. What would be a reasonable run rate going forward for appliances as a percent of sales? Is that 64% sustainable? Is that where you want to be? How should we think about that going forward?
I think it will be more consistent with our past. I think it was stronger in this most recent quarter because of the decline in ASPs on video, but I think that over time it will start to balance back out. It will continue to be obviously our biggest focus and it will grow incrementally over time, but it won’t be sustainable at its current level. I think it will be more in line with the historical levels.
Okay, thanks. And could we try to parse out traffic versus ticket in appliances? And if you don’t want to give specific numbers, at least directionally speaking order of magnitude, what’s driving the comp? Just trying to understand the lift that we’re getting here from the free deliveries that you introduced.
Our traffic trends are still negative as I think the whole industry is. So it’s -- and we don’t look at traffic purely on a category basis. We look at it on an overall store basis. We don’t have the ability to look at it purely by category. But there’s clearly -- I would say that our support of our vendors and around the kitchen packages that we had in this last quarter was more of the traffic driver than it was free delivery. Keep in mind, with free delivery we’re basically on par with the rest of the industry. So we’ve got to be more creative I guess in driving traffic than just being on par.
Sure. And then if I could, just one more about the inventories in appliances. They were down 64 versus your comps being up and the sales up. What drove that decline? Is that the increased demand that you saw in this quarter and how do you feel about your in-stocks going into the back half of the year? Are those eventually going to come in line with sales?
I think we’re in great shape with our inventory. I think our vendor support is tremendous and I think that what we have done is again trying to be diligent as we work our way through this, if you want to call it turnaround of this business. We need to manage liquidity and we need to make sure that inventories are in line with our sales and I think that our group here, our merchants, our finance team, our entire operations team has done a great job in trying to get better aligned. I think we were probably a little heavy in the past and I think that what you see now is probably what we’re going to see going forward. We’ve still got opportunity there.
Okay, great. Thank you very much.
Thank you. Our final question comes from Peter Keith with. Piper Jaffray. Your line is now open.
Good morning. A couple of quick questions for you. Could you talk about what you’re seeing with the Fine Lines concept that’s in existing stores? We know it’s something you’ve had for about 10 years so curious why it wasn’t rolled out more aggressively before and then maybe what you’re seeing as an opportunity now to push it out to more stores.
I think the biggest opportunity we’ve had with Fine Lines is really again support of our vendors, especially our premium vendors. Keep in mind, we don’t carry a lot of that product, any of that product actually in the traditional hhgregg store. So I think that it does allow us to differentiate ourselves from the competition by having those vendors support us and grow that business. We do see basically nearly a double of our appliance business over time in our Fine Lines location once we add it. Why it wasn’t added historically? I think that we were so focused on growing the chain and expanding that we were not focused on Fine Lines. I think now we are more focused on the 220 or so stores that we have today and maximizing the profitability of those stores.
Okay, that’s helpful. Let’s see. Maybe switching topics to the TV category. So the ASP decline that you cited in 4K seemed like a pretty meaningful stepdown. Was there something that happened in this quarter and would you expect that type of ASP decline to continue?
We do. We actually -- it did happen in the quarter. It was a 29.6% decline in ASPs in 4K across the entire market. We were actually up 81% in units in 4K, but with that type of decline in ASP, it is a challenge. And so we will see that at least through the balance of this year.
Okay. Thanks a lot guys. Good luck.
Thanks everyone for your interest in hhgregg, and we look forward to giving you an update in November on our next call. Thank you everyone.
Ladies and gentlemen, thank you for participating in today’s conference. This does concludes today’s program. You may all disconnect. Everyone have a great day.
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