Expansion and Consumer Electronics and HHGregg and Retailers and Renovation/Remodeling and Facilities and Real Estate & Retail

Gregg landing in prime spots abandoned by failed retailers Circuit City, Linens & Things

June 1, 2009

Electronics retailer HHGregg Inc. has snapped up at least a dozen former Circuit City and Linens & Things locations in six states and is eyeing more of the empty big boxes in an opportunistic move toward expansion.

The locally based chain with 111 stores has made no secret of its plans to reach for the 400-store milestone in the next 10 years. But the sudden availability of 600 empty Circuit City stores and 400 Linens & Things locations—sized perfectly at about 30,000 square feet each and priced to move—may nudge that timetable forward.

New HHGregg stores are slated to replace three shuttered big boxes in North Carolina; two in Ohio; two in Georgia; two in Tennessee; and one each in Mississippi, Indiana and Florida. The stores, including a location in Evansville, are slated to open by October. The chain also has a presence in Alabama, Kentucky and South Carolina.

The company's moves are a relief to many communities that had feared long-term vacancies. One of the planned locations is in a shopping center in Southhaven, Miss., that had lost three anchors already this year. The new HHGregg stores also will replace some of the 36,000 jobs lost when Circuit City closed.

As HHGregg looks to expand, it finds itself in as enviable a position as any retailer in any category in the country, said Mark Perlstein, a partner with locally based Sitehawk Retail Real Estate.

He said HHGregg is likely paying only half as much rent in some cases as previous tenants in vacated space. It might also be collecting incentives from landlords to renovate the empty boxes.

"You've got very hungry landlords, and you've got an aggressive tenant that understands that," Perlstein said. "They're one of the few retailers in that category and size."

Company officials declined an interview invitation, citing a quiet period before its earnings announcement June 2. The company earlier said it expects to report fourth-quarter earnings of between 39 cents and 42 cents a share on revenue of $365 million, despite a same-store sales drop of 6.5 percent. HHGregg earned 31 cents per share on revenue of $324 million during the same period in 2008.

Company President Dennis May, who is scheduled to take over as CEO in August, acknowledged in March that the demise of Circuit City and Linens & Things would provide potential locations for Gregg stores.

"There are quite a few closings that have created a pretty exciting opportunity for HHGregg in terms of real estate," May said. "Also, lease rates are coming down—good news for an expanding retailer. But we're not going to overstretch our resources and liquidity as we grow. Our goal is to continue to expand out of our profits."

Two new investment firms recently took note of HHGregg's growth spurt and have launched coverage. Jefferies & Co. started the company with a buy rating and $20 target on May 21, and Oppenheimer jumped in with an outperform rating May 27. Both firms are based in New York.

But other analysts, including New York-based Standard & Poor's, are less bullish. S&P has a sell rating on the company's shares, warning about continued weakness in the housing market and a slowdown in the flat-panel-TV craze, among other concerns. It also is worried about the company's plans for 400 total stores within 10 years.

"Although HGG is gaining market share from weaker competitors, we would prefer a less aggressive time frame, as capital expenditures are putting pressure on free cash flow," S&P's analyst wrote. "Following a significant year-to-date increase in share price, we believe the shares are overvalued."

Shares in the company, founded in 1955, traded at around $17 recently, up from a low below $4 in November. That gives HHGregg a market value of $550 million.

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