Economy and Banking & Finance and Real Estate & Retail

BEHIND THE NEWS: Plans in beaten-down state test HHGregg's strategy

April 21, 2008

HHGregg Inc.'s audacious expansion strategy is about to get its biggest test.

Since 1999, the Indianapolis-based electronics and appliance retailer has charged into eight new metro areas, adding 78 stores in such markets as Atlanta; Knoxville, Tenn.; Birmingham, Ala.; and Charlotte, N.C.

The company doesn't tiptoe in. It starts with multiple stores to justify the cost of building distribution infrastructure and launching an advertising blitz. The strategy has allowed it to swiftly build major market shares everywhere it's gone.

Now, it's headed to Florida, a strategy the company laid out early last year as it was enticing investors to its initial public offering, which it completed in July. In regulatory filings back then, the company confidently described it as "the highly attractive Florida market." It sounded like the path to riches.

Since then, the Sunshine State has lost much of its glow. Housing prices, which during the boom years rose at rates Hoosiers would find unfathomable, have tumbled in many parts of the state. And the credit crunch has left many Florida families in a financial vice.

"There are pockets of pretty severe pain throughout the state," said Sean Snaith, director of the Institute for Economic Competitiveness in the University of Central Florida's College of Business Administration.

HHGregg officials are undeterred. They opened their first three Florida stores in recent weeks-giving the chain a total of 92 locations in nine states-and plan another wave of openings soon. Over the next two to three years, the company plans to open about 30 stores in northern and central Florida, said Andy Giesler, its director of investor relations.

"We are still very confident and very excited about our entrance into the Florida market," Giesler said. He noted that, even with the slowdown in the state's housing market, Florida still has more housing starts per year than all of HHGregg's Midwestern markets combined.

The company's Florida plans don't include south Florida, which has been especially hard hit by the economic slump, in part because of rampant real estate speculation. The weakest communities, Snaith said, are those with beachdriven, vacation-driven economies. Areas with more diversified economies, such as central Florida, "have kind of a floor that keeps housing from spiraling into the abyss."

Across Florida, the tough times won't last forever, of course. Though Snaith thinks the state's economy will remain sluggish through most of 2009, "once we get into 2010, we are forecasting more typical Florida-like growth."

For now, though, conditions are far from ideal for a retail newcomer with little or no name recognition. A sputtering economy, falling home values and skyrocketing gas prices are enough to rattle even the most free-spending consumer. Amid such travails, will shoppers still plunk down $1,000 for the latest high-definition flat-screen TV?

The good news is that HHGregg's sales chainwide have held up well so far, even as many other retailers experience hard times. The company said comparable-store sales rose 6.3 percent in the nine months ended Dec. 31.

And HHGregg is becoming a grizzled veteran of the expansion game. In regulatory filings, it calls its store concept "highly portable," meaning it can replicate success in one market in many others-a boast it's been able to back up.

Now, conditions outside its control are putting that win streak to the test.

Company officials are girding for the challenge.

"It would be nice to open during a boom," Dan Turner, vice president of sales in Florida for HHGregg, told The Orlando Sentinel. "But we really feel the market has nowhere to go but up."

Nat City's cloudy future

By the standards of the mergercrazed world of banking, National City Corp. is one of the city's old-line financial institutions. It entered Indianapolis in 1992 by buying locally based Merchants National Corp. for $641 million.

Now, the future of the Cleveland-based bank, which has the second-biggest share of local deposits, hangs in the balance.

The company has been buffeted by mortgage and housing woes, and is under pressure from regulators to bolster its capital. Early this month, it said it had hired an adviser and was exploring strategic options.

It's unclear whether the bank will engineer an outright sale or just a capital infusion from a private equity firm or financial institution. The Wall Street Journal reported that the Bank of Nova Scotia, Canada's third-largest bank, has offered to buy at least a stake in National City.

The paper said National City appears reluctant to pursue a deal with Cleveland-based KeyCorp or Cincinnatibased Fifth Third Bancorp. A deal with either could lead to substantial cuts in overlapping operations in Indianapolis and other Midwestern markets
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