Massive 24% Plunge In Sales At hhgregg, Shares Collapse To $1

| About: hhgregg, Inc. (HGG)
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Sales fell 24% in the holiday quarter from a year ago, and comps were down 22%.

Appliance sales shrank 4%, home products fell 9%, and electronics cratered 39%.

Shares tumbled 24% to $1.00 after hours.

The company shifted focus from electronics to appliances in 2016, devastating sales to electronics-focused holiday shoppers.

Electronics sales fell off a cliff at retailer hhgregg (NYSE:HGG) during the holiday season, and appliances dropped, too, according to an announcement after the bell Monday.

Electronics fell a stunning 39% while appliances shed 4% and home products dropped 9%. Overall, the company's sales were down a staggering 24% from a year ago, and off 22% in comparable store sales.

In total, quarterly sales fell by $140 million year over year to $453 million. The company did not provide earnings guidance. A strategic shift from electronics to appliances in 2016 became a ticking time bomb, exploding at the end of the year, when shoppers wanted consumer electronics, not major appliances, to put under their Christmas trees.

CEO Robert Riesbeck says he's "disappointed" by the result. He chalked up the poor performance to "competitive pressures in the market, specifically in consumer electronics as it is a larger mix of our business during the holidays."

But investors were more than disappointed. Shocked traders sent the company's stock hurtling down to $1.00 after hours, having closed at $1.31 during the regular session. If the company had any idea its strategy could result in a holiday this bad, it had failed to prepare investors.

In its most recent report for the quarter ending September, the company said electronics had declined from 38% to 30% of its sales mix while appliances rose from 56% to 63%.

The de-emphasis of electronics made a degree of sense: In-store sales of consumer electronics are falling nationally as e-commerce, where hhgregg's presence is small, grabs market share. By moving away from a seemingly hopeless category, particularly the low-margin items therein, the company could focus where it felt it could be stronger: appliances, as well as furniture, a newer offering for the chain.

"We made the strategic decision to compete less in this category [consumer electronics], particularly at the entry level price points," Riesbeck said. "Going forward, we will continue our focus on our appliance and home products categories and will continue to reposition our consumer electronics business to focus on the premium models."

Both appliances and furniture have enjoyed some measure of defense from online sales, Commerce Department data shows. Amazon can't just mail a couch or refrigerator. Large, heavy freight requires special delivery, where stores with local inventory can carve out an advantage.

But despite hhgregg's refocus, appliance and furniture sales fell, too. The 4% decline in appliances managed to slow from a 10% drop a year earlier, but the chain's smaller home products category went from a 3% gain in the 2015 holiday to a 9% retreat.

The company operates 220 stores in 19 states, having closed all five of its Wisconsin locations and a suburban Chicago store in 2016. hhgregg differs from competitor Best Buy (NYSE:BBY) with its stronger focus on appliances, as well as its furniture inventory. But hhgregg also lacks Best Buy's scale, purchasing power, e-commerce sales, or turnaround story.

The company additionally announced Monday that it will write down the value of certain locations by $7 to 12 million. The company reported $97 million in net assets in its most recent earnings statement.

hhgregg will report earnings on January 26.

Analysis: hhgregg cut its electronics offerings and paid for it dearly. But the company was not rewarded with any growth in the appliance and furniture categories it emphasized. If those products were producing gains, the catastrophic electronics results could be attributed to a one-time loss that could give way to future growth. Given that the retailer slowed its losses in appliances, growth may still be possible as the company repositions itself as a stronger appliance destination in the minds of consumers.

But a 22% fall in comps is extreme. Unproven, potential, gradual future growth in appliances isn't going to repair that damage for a long time. Closing, selling, or fully or partially subleasing stores is an obvious option.

hhgregg has managed, at least until now, to avoid amassing debt. But it still has obligations, including leases that aren't expiring soon, and falling revenue to pay them. The company had just $1.2 million left in cash at the end of September, but it had $17.5 million in operating losses, $18.4 million in net losses, and $275 million in liabilities. The chain had $371 million in assets, mostly in inventory that it's having trouble moving, and it's writing down the value of its locations by as much as $12 million. With revenue falling by 24% or $140 million, something has to give.

What hhgregg's struggles mean for rival Best Buy is unclear. Losses at one chain don't necessarily mean gains for another. Best Buy's sales and earnings grew in the most recently reported quarter, and the chain has a strong e-commerce channel. But in-store sales at electronics and appliances stores fell in November, according to the Commerce Department, and store sales have continued to fall at Best Buy. The big blue box store typically previews its holiday sales numbers in mid-January and reports holiday earnings in late February or early March.

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