H.H. Gregg betting big on flat screens

December 11, 2006

Locally based Gregg Appliances Inc. found itself flat-footed last holiday season when consumers lost interest in traditional big-screen TVs and demanded flat-panels instead.

The popular televisions were in short supply at H.H. Gregg stores.

This year, that shouldn't be a problem.

Gregg is betting that a huge selection of flat-panel TVs--already one of the year's best-selling products--will help buoy sales. The privately held company could use a boost. Sales growth has been sluggish since the Los Angeles-based investment firm Freeman Spogli & Co. purchased 80 percent of Gregg through a leveraged buyout in February 2005.

"We think it'll be a good holiday season," said Gregg Appliances CEO Jerry Throgmartin, 51. "We're in one of the hottest product categories there is right now. Flat-panel television has gotten to price points where the majority of consumers can afford them."

Nationwide, high-definition LCD TVs are selling for an average of about $1,200, down from $1,700 two years ago. High-definition plasmas, which sold for more than $5,000 two years ago, now are averaging about $2,600, according to The NPD Group, a Port Washington, N.Y.-based consumer and retail information company.

And sales of flat-panel TVs over the crucial Thanksgiving weekend portend a bountiful holiday season for electronics retailers. For the week ending Nov. 25, sales of LCD TVs over 30 inches rose 297 percent over 2005, while plasma TV sales climbed 140 percent, according to NPD.

Stocking up on the hottest electronics item is both a blessing and a curse for the 74-store chain, which posted $900 million in revenue in the fiscal year that ended last March. Other electronics stores such as Best Buy and Circuit City also are well stocked with flat-panel TVs this year. And Wal-Mart has entered the fray, offering deep discounts. Adding to the challenge are constantly falling prices on electronics, which squeeze profit margins.

To guard against relying too much on TVs, Gregg has widened its offerings. The company added Serta bedding to its merchandise mix last year, and it continues to focus on sales of high-end appliances, which have more stable prices than electronics.

The company also re-entered the computer business in the last few months, offering name-brand laptops. When Gregg stopped selling computers in 2002, they had become "clone desktop" products that required little or no customer service, said Gregg President Dennis May, 38. That is changing as computer screens become interchangeable with TV screens.

"As media begins to merge, we believe that's an area we need to participate in," May said.

H.H. Gregg has been a nimble survivor in the fickle business of electronics for more than 50 years. It was founded in Indianapolis in 1955 as an appliance store, but it wasn't long before the company began selling black-and-white and color TVs.

"They're clearly a powerhouse in their marketplace," said Alan Wolf, retail editor of Twice magazine, a New York-based trade publication covering consumer electronics. "They've got a great niche: They're a neighborhood chain with quasi-national buying power."

Wolf said Gregg has followed its game plan, adding new stores, upgrading its existing stores, and maintaining a quality shopping experience. He said the company invested too heavily in rear-projection TVs last year, just as they were falling out of favor, but seems to be back on track.

"They're in the process of making up for lost time," Wolf said.

Overcoming miscalculations can be difficult when so many other stores are ready to pounce.

H.H. Gregg does business in the "worst part of retailing" in terms of competition, said Purdue retailing professor Richard Feinberg.

"The products are essentially the same, and it's very hard for H.H. Gregg to come up with a price that beats the national chains," said Feinberg, director of the Purdue Retail Institute and Center for Customer-Driven Quality.

Gregg has managed to survive a parade of now-defunct electronics challengers locally, including Highland, Fretter and Incredible Universe. The company operates in eight states in the Midwest and South, targeting markets with high incomes and strong housing starts. When it enters a market, it seeks to build enough stores to streamline distribution and justify advertising costs.

Gregg's sales for the first two quarters of this year totaled $441 million, up 11 percent from a year earlier. However, most of that gain came from the opening of 10 new stores. Sales at existing stores climbed just 1.1 percent.

For the last full fiscal year, the company reported a same-store sales increase of 1.7 percent. By comparison, Best Buy's same-store sales grew 4.9 percent and Circuit City's grew 8.2 percent.

It posted profit for the year of $22 million--a figure that would have been much higher were it not for debt the company took on as part of Freeman Spogli's leveraged buyout. Gregg now has $167 million in long-term debt and spends $18 million a year on interest payments.

In the first half of this fiscal year, profit was $2.1 million, compared with a loss of $4.1 million in the same period a year earlier.

As part of the buyout, Gregg issued $165 million in bonds. At the time, the issue received a lukewarm assessment from New York-based Moody's Investors Service, which put it in a category of bonds that lack "characteristics of a desirable investment."

Moody's described the outlook as stable but said the rating reflected Gregg's small size, competition with much larger and better capitalized players, and its high leverage.

So far, though, the company has been able to handle the new debt while also continuing to expand. The chain has grown from 58 locations to 74 since the buyout.

"We're navigating through what we think has been a relatively difficult retail environment," Throgmartin said. "We believe we've maximized our opportunity. Do we have upside? Certainly."

The company has made some changes since Freeman Spogli purchased control from the Throgmartin family.

Most notably, Gregg now outsources its service and extended-warranty coverage. That's common in the business, since maintaining a service department is costly and rarely generates profit, Wolf said.

"I think it's invisible to the consumer as long as the service is effectively done in a timely manner," Wolf said. "It frees them up to focus on their core retail business."

Since the nature of the business means products and prices are often similar across retailers, Gregg has sought to differentiate itself with customer service.

Many of the company's 2,900 employees are highly trained and earn commissions, which now is a rarity among electronics stores.

The company is betting consumers will want delivery, installation and helpful sales associates to go along with their new flat-panel TVs.

Wal-Mart might be able to offer low prices, but its sales associates aren't as drilled in the subtle differences between models.

"I don't remember any time Wal-Mart wasn't a big competitor," Throgmartin said. "They continue to be, but I also think their format is dramatically different than ours. Customers have to figure out all the differences on their own."

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