Hhgregg Inc. has blasted past the $1 billion-in-sales barrier. Next stop, $5 billion?
Such a colossal number might sound far-fetched for the Indianapolis-based electronics and appliance retailer, which remains minuscule compared with rivals like Best Buy and Sears. But not to the retail veterans plotting the company’s growth strategy.
They’re not talking publicly these days, because the company is in a so-called quiet period as it readies for its $172 million initial public offering. But a 102-page prospectus for the offering, filed with the Securities and Exchange Commission May 25, suggests management has every intention of taking the regional chain national.
Recent growth has been impressive in itself. The filing shows Hhgregg rung up $1.06 billion in sales in the fiscal year that ended March 31, up nearly 18 percent from a year earlier. While much of the gain stems from new-store openings, sales at existing stores jumped a robust 5.5 percent. Over the last four years, revenue has risen 70 percent and the store count has climbed 60 percent, reaching 79.
Now, the filing says, Hhgregg is ready to accelerate growth, opening as many as 15 stores this fiscal year, up from 10 the prior year. The company says it plans to increase its roster of stores by a compound annual rate of 15 percent to 18 percent over the next few years, and sees long-term potential for more than 400 U.S. stores.
“That sounds pretty aggressive,” said Robert Shortle, an investment banker with locally based Periculum Capital.
Yet faster growth also brings higher risk. As the company notes in its filing, “If we fail to successfully manage the challenges our planned growth poses … our net sales and profitability could be materially adversely affected.” In other words, it’s all too easy for managers who hit the gas on expansion to lose control of the business.
The good news is that Hhgregg is seasoned at the growth game. Since 1999, the company has rolled into seven new markets, most recently Atlanta; Charlotte, N.C.; Knoxville, Tenn.; and Birmingham, Ala. It initially jumps in with enough stores to justify advertising costs, then fills out the market over time. The company says the approach allows it to rapidly build a major market share, despite being a newcomer.
The next stop on the growth spree is the Raleigh/Durham, N.C., area. Then it’s onward “to the highly attractive Florida market, which we think will provide significant store growth opportunities in the future,” the filing says. Therein may lie the rub: Hhgregg is far from the only retailer enticed by Florida’s population boom. Rivals like Home Depot and Circuit City are chasing strong demographics, too.
In the filing, Hhgregg says, in effect, that it’s happy to battle anyone. It’s already proven it can compete against the national and regional players-differentiating itself by offering sameday delivery on virtually all its products, and by employing a heavily trained, commissioned sales force.
That may sound like a competitive disadvantage when some of its rivals are all too happy to hire cheerful high school students. But Hhgregg argues otherwise. It says in the filing that “sales associates are customer-focused and have the knowledge necessary to articulate the features and benefits of our products. We believe that when fully informed, customers frequently purchase higher-end, feature-rich products.”
It all adds up to “superior store economics,” the company says, compared with other consumer electronics retailers. The company’s operating profit in its most recent fiscal year was more than 5 cents per dollar of sales. That’s on par with Best Buy’s, even though the Minneapolis-based chain has the advantage of massive scale.
Sound like Hhgregg’s management is on to something big? Perhaps. But the retail landscape is littered with chains with national aspirations that lost their way.
For a cautionary tale, look no further than Plainfield-based Galyan’s Trading Co. Before its 2001 initial public offering, Galyan’s was majority owned by the Los Angeles investment firm Freeman Spogli & Co.-the same firm that now owns a controlling stake in Hhgregg.
Not long after Galyan’s shares debuted at $19, the company made a series of mistakes-including signing leases for questionable locations and tinkering with the store format-that threw everything off course.
Because of the rapid growth, a Galyan’s executive said at the time, “You couldn’t touch or get your arms around the business as readily as you could previously.”
Galyan’s brass had hoped to create a national sporting goods powerhouse, and perhaps even buy archrival Dick’s Sporting Goods Inc. Instead, as struggles continued, Galyan’s board agreed in 2004 to sell to Pittsburgh-based Dick’s for $362 million in cash and assumed debt. The per-share price was 12 percent less than investors had paid in the IPO three years earlier.
Let’s hope for a happier ending this time around.