hhgregg's Struggles Suggest Best Buy Could Be In Big Trouble

By Stephen D. Simpson, CFA | July 11, 2012 AAA

For all of the debate and discussion about what ails Best Buy (NYSE:BBY) and whether this large electronics and appliance retailer has a future, it's worth observing that times are just as bad (if not worse) at hhgregg (NYSE:HGG). While investors shouldn't draw straight lines between the two companies (hhgregg is much more focused on appliances and TVs), the fact remains that consumers are holding back on big-ticket spending and this does not bode well for the retailers.

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Pretty Bleak Q1 Guidance
Although hhgregg management issued full fiscal year guidance not all that long ago (May 23, in fact), it seems like the company's fiscal first quarter has gone seriously off the rails. Management gave an early look at earnings Tuesday, and it was not a pretty sight.

Management revealed that the company's loss per share for the quarter was going to come in at 16 cents to 17 cents per share, well below the Street-low estimate of a loss of 9 cents. They also lowered full-year guidance by 22 cents (or about 20%).

SEE: Can Earnings Guidance Accurately Predict The Future

As bad as the earnings apparently are, the comparables are even scarier in some respects. Overall comps were down 5.1%, despite what should have been an easy year-ago comp of -13.2%. Although appliance comps showed some relative strength (up 6.3% versus down 12.6% last year), the video business (TVs, mostly) is awful as comps fell another 16.7% after a 20.6% drop last year.

Shouldn't Video Be a Source of Strength?
What makes these numbers more concerning, and ropes Best Buy into the discussion, is that TVs are often thought of as one of the higher-ticket items that should be resistant to further penetration from the likes of Amazon (Nasdaq:AMZN). There seems to be a bigger sales/customer education component to TV sales, and the idea is that it should play to the strengths of Best Buy and hhgregg. Of course, there is the possibility that folks are going into these stores, asking a bunch of questions and then walking out and ordering their TV from Amazon.

SEE: Four Online Shopping Alternatives To Amazon

Can hhgregg Withstand Higher Promotional Activity from Competitors?
Making matters worse, hhgregg may be in the process of seeing greater promotional activity from some of its largest rivals. Lowe's (NYSE:LOW), Home Depot (NYSE:HD) and Sears (Nasdaq:SHLD) all seemed to hold back on promotional activities in appliances earlier this year, but have been ramping up those activities as of late. Although I don't think Sears is likely to be as aggressive, a big drive on the part of Lowe's (or Home Depot) to move appliances is going to be bad news for hhgregg.

SEE: What We Can Learn From 2011 Tech Leaders

The Bottom Line
My biggest fear with hhgregg, apart from the apparent slowdown in big-ticket consumer expenditures, is that their service-oriented business model may just not be practical in the current retail world. If customers are brazen enough to take up an hour of a sales rep's time going over features and product advantages/disadvantages and then use their smartphone to order the product from an online retailer while the sales rep is still standing there, then I'm not sure how a company like hhgregg prospers over the long term. Survive? Probably. But prosper? Probably not.

SEE: Choosing The Winners In The Click-And-Mortar Game

This news also points to how Best Buy really does need a far-reaching re-think of its business model. I worry that recent news regarding employee firings suggests that management is basically just operating from the generic "how to fix your business in 5 easy steps" playbook, rather than seriously reevaluating how to evolve and adapt to the new world. In any case, if this sort of generally weak sales environment persists, more dramatic steps will be essential for the company to survive, let alone thrive.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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