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BEHIND THE NEWS: Now it's time for Hhgregg to prove itself-again

July 30, 2007

Hhgregg Inc. has been around for 52 years. Forget about all that. To Wall Street, the company is an upstart that's yet to prove itself.

Such is the reality for the Indianapolis-based retailer of consumer electronics and appliances, which staged its initial public offering July 19. It raised $48 million by selling shares at $13 apiece. Three institutional investors collected another $74 million by scaling back their holdings.

Now, Hhgregg's considerable accomplishments-including more than $1 billion in annual sales and 79 stores scattered across eight states-are little more than ancient history.

As David Menlow, president of ipofinancial.com, put it, "What we are looking at here is an adolescent who just received a driver's license. There is a cautious sense of optimism about this company that will have to be proved time and again."

So far, investors who placed their faith in Hhgregg and bought into the IPO have been rewarded. The shares now trade at around $15.25, a 17-percent increase from the offering price-a runup that has swelled the company's stock market value to $482 million.

Dig a little deeper, and the price loses some sheen. In Securities and Exchange Commission filings, the company had said it wanted to set its IPO price at $15 to $17 a share.

Menlow figures a recent spate of huge private equity IPOs that performed in disappointing fashion "poisoned the well to a certain extent," tempering investor enthusiasm for Hhgregg and other firms selling stock to the public.

A company spokesman said executives are not able to comment, citing the 25-day SEC-mandated "quiet period" that follows IPOs.

Even so, it's a safe bet Hhgregg's financial backers aren't feeling unlucky about $13. That represents a 160-percent premium to the $5 average price they paid for their shares.

With impressive gains in hand, big investors understandably were eager to cash in some of their chips.

As part of the offering, the Los Angeles-based private equity firm Freeman Spogli & Co. sold 4.6 million shares for nearly $60 million. The selloff, combined with the company's issuance of new shares, cut Freeman Spogli's stake from 64 percent to 42 percent.

The California State Teachers' Retirement System sold 758,000 shares for almost $10 million, shrinking its stake from 10 percent to 7 percent.

Lots of upside?

If Hhgregg performs well, there will be lots more money made.

The prospectus the company dangled in front of investors said all the right things to entice the growth-stock crowd. Despite competing against retail titans like Best Buy, the document noted, Hhgregg has proven it can charge into new markets and rapidly build a major market share.

Since 1999, the company has moved successfully into seven new markets. The next stop is the Raleigh/ Durham, N.C., area. Then it's onward "to the highly attractive Florida market," according to the prospectus, which says the company sees longterm potential for more than 400 U.S. stores.

If the company delivers, CEO Jerry Throgmartin and other company brass will be very rich men.

The wealth the 52-year-old Throgmartin already has amassed in company stock isn't shabby. According to the prospectus, he owns 3 million shares worth $40 million. In addition, he has a big stash of stock options. If the stock price hits $20, he'll be sitting on paper option profits topping $10 million.

Tough act to follow

Even if Hhgregg fares well, its stock performance is unlikely to match that of Calumet Specialty Products Partners, the last Indianapolis firm to go public.

The low-profile, west-side refining and petroleum products company debuted in January 2006. Since then, its shares have rocketed 136 percent. Including reinvested dividends, the return tops 152 percent.

Analysts say the company has benefited from strong demand for oil, as well as from its production of a range of high-margin specialty petroleum products.

Calumet's base oils help Goodyear and Michelin make tires, for instance. Its waxes wind up in Duraflame fireplace logs. Its solvents turn up in WD-40, Liquid Nails and Turtle Wax.
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