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HHGregg looks to grow as other consumer electronic businesses falter

November 24, 2008
HHGregg Inc. CEO Jerry Throgmartin seems almost annoyed when analysts or journalists ask about competitors. In his mind, rivals come and go. His job is to help his own, 107-store chain prosper.

"We really are careful to focus on our business and the execution of our business, rather than what's going on with the others," he reiterated during a Nov. 6 conference call with securities analysts.

It's a strategy that has served Throgmartin, 53, well through the years. Since the early 1990s, HHGregg expanded from local to regional to national as a host of competitors with similar growth aspirations flamed out and landed in bankruptcy court.

Remember Fretter and Highland Superstores? Both charged into Indianapolis in the early 1990s, only to retreat on their way to oblivion.

But even Throgmartin and his top lieutenants have to admit the collapse of Richmond, Va.-based Circuit City Stores Inc. isn't just more of the same.

Circuit City, the No. 2 consumer electronics retailer, early this month announced it would close 155 of its 721 U.S. stores, including its location near Washington Square Mall. A few days later, it filed for Chapter 11 bankruptcy protection, casting uncertainty over whether the company will stay in business.

HHGregg officials say 30 of the Circuit City stores already slated for closure overlap with their stores, giving the Indianapolis chain a golden opportunity to scoop up customers without any additional investment.

"What I would go on to say is that we are aggressively competing ... to make sure we get an unfair share of that market share," HHGregg President Dennis May said on the conference call.

Analysts agree it's a big opportunity, though they say liquidation sales at closing stores could pinch sales at nearby HHGregg locations in the next few months.

The investment firm Barclays Capital says 18 of the stores Circuit City is closing are within one mile of an HHGregg store. It figures HHGregg could capture 25 percent of those stores' sales.

Benefits could be far broader, of course, if Circuit City vanishes from the consumer electronics landscape, leaving Best Buy as the sole national powerhouse.

"Depending on what happens to Circuit City, [HHGregg] could find itself as the No. 2 player in the space sometime over the next couple of years," David Magee, an analyst with SunTrust Robinson Humphrey, wrote in a report.

Challenging terrain

Remaining successful will be no cakewalk for HHGregg, however, especially if consumer confidence — and thus consumer spending — remains in the dumps.

The chain saw same-store sales tumble 8.8 percent in the quarter ended Sept. 30, and it acknowledges that this year's foray into Florida, one of the nation's most economically battered states, hasn't worked out as well as hoped so far.

HHGregg said new stores typically generate 95 percent of the sales of mature stores, a threshold they've failed to meet in Florida. Company officials add they still believe the company's push into the state will pay off.

To be sure, retailers of all stripes are battening down the hatches trying to get through what analysts say might prove to be the worst holiday shopping season in a generation.

On Nov. 18, FTI Consulting of West Palm Beach, Fla., projected that sales for the season will fall 1 percent this year — the first decline since 1990.

"For the past few weeks, the sector has watched the country's biggest retailers deliver tepid to terrible third-quarter numbers and offer glum forecasts for the fourth quarter," FTI Senior Managing Director Bob Duffy said in a summary of the report.

Throgmartin sounds charged up for the challenge. On the conference call, he said, "These ... economic times are a tremendous test to the resiliency of our business model," which focuses on providing superior customer service using commissioned salespeople.

It's a winning model in tough times, he said, because compensation and manager bonuses decline when sales are lower. Meanwhile, those competitors Throgmartin doesn't like to dwell on are saddled with fixed costs for hourly wages whether or not the cash registers are ringing.

Still, the uncertainty has pummeled nearly all retail stocks, including HHGregg's. The company's shares now fetch only about $4 apiece — down 70 percent from the July 2007 initial-public-offering price.

At that price, SunTrust's Magee sees a big opportunity. He argued that HHGregg "is well-managed and, as such, can manage through challenges better than its peers."

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