HHGregg and Retailers and Merchandising and Retail and Real Estate & Retail

HHGregg ready to dust off, ramp up Fine Lines concept

July 19, 2014

Remember Fine Lines, the high-end appliance retailer HHGregg Inc. launched a decade ago, starting with a location adjacent to its East 96th Street store?

HHGregg back then said it planned to aggressively expand the concept, but it never happened. Company executives for years said nary a word about Fine Lines, even as they dotted the eastern half of the United States with conventional HHGregg stores.

Now, finally, Fine Lines is shifting into the spotlight as the struggling retailer looks for ways to enlarge its footprint in the appliance realm, in part to offset a collapse in consumer electronics sales.

The good news for HHGregg is that the appliance push is working. The company now has reported same-store sales gains in appliances for 11 consecutive quarters.

HHGregg is trying to maintain that momentum with a multi-pronged strategy, much of it built around expanding its market share on the lower and higher ends of the spectrum.

To reach lower-end customers who might get rejected for HHGregg’s credit card, the retailer has lined up other options, including rent to own. A large sign in the window of the 96th Street HHGregg says, “Get what you want without credit. Build your credit with on-time payments!”

Fine Lines is at the center of the company’s high-end effort, with plans to expand the current base of five locations by building store-within-store outposts, taking advantage of space available as HHGregg shrinks its floor plan.

“Our Fine Lines business has really had a great year, significantly outperforming our non-Fine Lines stores,” HHGregg CEO Dennis May said in a January conference call with analysts. “So Fine Lines is something that we’re going to invest in and start opening additional Fine Lines departments within stores where it demographically makes sense.”

HHGregg officials declined to elaborate, citing the fact that its latest quarter has closed but it hasn’t released results. However, David Schick, a Stifel Nicolaus analyst briefed on the company’s plans at an investment conference last month, said officials plan to double the number of Fine Lines outposts to 10 this year, with longer-term ambitions for 20 to 30 locations.

The expansion comes at a time when, overall, HHGregg has virtually put new store openings on hold. In the fiscal year that ends in March 2015, the company plans just four new locations, all in existing markets. HHGregg overall has 228 stores.

Visitors accustomed to HHGregg’s conventional stores are in for sticker shock when they walk into Fine Lines. Stainless steel is the finish of choice. And while it’s not impossible to find, say, a dishwasher for less than $1,000, much of the merchandise runs into the thousands of dollars.

A 22.4-cubic-foot, built-in KitchenAid refrigerator, for instance, has a list price of $8,799. A shopper choosing that might also be tempted by the 24-inch KitchenAid wine cellar with a list price of $1,899.

Schick said in his report that the Fine Lines strategy is in sync with a push by the appliance industry as a whole to boost sales of premium products to 10 percent of sales, up from 3 percent now.

Even conventional HHGregg stores will see a greater emphasis on higher-end appliances, Schick said in his report.

The company intends to draw attention to those products with more elaborate in-store kitchen displays, by expanding special-order capabilities and by placing more emphasis on appliances in advertising.

Appliances already are a crucial product for the company, accounting for 47 percent of sales in the last fiscal year, up from 37 percent two years earlier.

That’s partly because consumer electronics have turned south, dropping during that span from 53 percent of sales to 38 percent—leaving the company with little choice but to make hay in appliances, its only other product line big enough to swiftly move the needle on overall sales.

“This category is proving to be the cornerstone of our business,” May said during a conference call with analysts two months ago.

Stock swoon hangs over meeting

HHGregg Inc.’s annual meeting on July 29 will not be a celebratory affair. Since last summer’s gathering, the company’s shares have swooned, dropping 42 percent, to around $8.72.

Investors are anxious to see more progress from HHGregg’s rollout of new product lines, including furniture and exercise equipment.

May, 46, the CEO since 2009, has every incentive to deliver, thanks to a big stash of underwater stock options. The company’s new proxy statement shows he holds 468,200 options, with exercise prices ranging from $10.86 to $14.67 per share.

If May is able to guide the company’s stock back up to $20, he will have amassed paper profits on those options approaching $2.6 million.•

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