Commercial Real Estate and HHGregg and Opinion and Retail and Real Estate & Retail

HHGregg's new push: Selling treadmills alongside TVs

September 1, 2012
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In HHGregg stores of the future, shoppers may be able to purchase a couch and elliptical trainer in addition to the chain’s appliances and electronics.

The company is quietly launching a test of furniture and fitness equipment, with rollouts scheduled for 31 of its more than 200 stores. It’s the latest move by the Indianapolis-based retailer to bounce back from a deep slump in the all-important video category.

That slump—spurred by a lack of exciting innovations in the TV business and the growing prevalence of “showrooming,” where consumers check out merchandise in stores but then buy online—has some investors questioning whether the company’s business model is broken.

That uncertainty has short-sellers—investors who bet shares will collapse—swarming, even though the stock already is off 58 percent since December. HHGregg’s short interest as a percentage of its float, or shares available for public trading, is now the highest of any New York Stock Exchange company, according to FactSet Research Systems.

Which helps explain why HHGregg management would be willing to mess with the product mix in its stores. Some analysts are praising the move, in part because the company is tightening up its product displays, rather than bumping any current merchandise, to make room for the tests. HHGregg says home entertainment furniture and home fitness equipment will fill about 4,000 square feet, or 13 percent, of a typical store.

“We view the furniture category positively, given our positive outlook for home-related spending,” KeyBanc Capital Markets analyst Bradley Thomas said in a report.

“The new product categories leverage HGG’s competency in large-ticket items that require distribution, customer service and home installation,” he wrote, referring to the company by its ticker symbol.

But Stifel Nicolaus analyst David Schick fears the move dilutes the brand. While he likes that HHGregg is looking for alternatives to video to fill stores, “we think fitness equipment risks HGG’s positioning as an electronics expert to either consumers or vendors,” he said in a report.

In a conference call with analysts this month, HHGregg CEO Dennis May made the case that the new products—from recliners, sofas and sectionals to treadmills, elliptical machines and recumbent bicycles—play off the company’s strengths.

“We believe these are a great complement to our current business model as they are a natural fit for the home entertainment room that centers around the large-screen TV,” he said.

And it’s not unheard of for HHGregg to veer beyond big-screen TVs, washing machines and the like. The company, for instance, has been selling mattresses since 2006. It’s a small segment, but one the company aims to expand.

For May, the product line extensions all make sense—and provide a compelling way to eke out higher sales as the TV market sputters. In fact, he said, more new product lines may be on the way.

“We believe there is an opportunity for HHGregg to broaden its product assortment into home products that require delivery or installation,” he said on the conference call.

“We believe HHGregg puts big-box products in the home better than anyone. These types of products could leverage our consultative sales force, home delivery service and private-label consumer credit card.”

A favorite of short-sellers

Short-sellers’ game is to sell borrowed shares of a stock they think is in trouble, in a bet the price will fall and they’ll be able to return the shares later by paying a lower price.

As of Aug. 15, the short position in HHGregg was 8.6 million shares, which represents a whopping 53 percent of the company’s float. Based on HHGregg’s average daily trading volume, it would take 18 days for short-sellers to unwind their positions, according to FactSet data.

Another local company—for-profit educator ITT Educational Services Inc.—has the second-largest short interest among NYSE companies as a percentage of float. Investors are rattled over ITT’s falling enrollment and the company’s struggles to provide student financing.

A big short interest isn’t necessarily bad for conventional investors, whose stock holdings can pop higher if shorts race to cover all at once. But large short positions also can make investors thinking of buying a stock wonder if they’re missing something.

“I would say at times we would shy away from companies like that because they tend to be more controversial,” said Mark Foster, chief investment officer of Kirr Marbach & Co., a Columbus, Ind., money management firm.

“And the shorts aren’t stupid. A lot of times they are smart investors who have done their homework and know the issues really well.”•

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