HHGregg's faster growth boosts risk, potential rewards

February 13, 2010

HHGregg Inc. had been in business nearly a half century when it hit the 50-store mark in 2004. It plans to open nearly that number within the next year.

The Indianapolis company plans to ramp up a distribution center in Maryland next month, setting the stage for the opening of 40 to 45 stores in the Mid-Atlantic region by March 2011.

The rollout is the most ambitious yet for HHGregg, which is capitalizing on the slumping economy to snap up real estate at bargain prices. The latest expansion will take it into territory that once was a stronghold for Richmond, Va.-based Circuit City Stores Inc., which went out of business a year ago.


Growth-stock investors like what they see and have been scarfing up HHGregg stock, which has doubled over the past year, to about $19. They’re betting the chain, which now operates 127 stores in 11 states, will successfully navigate a national expansion.

The electronics and appliance retailer “is one of the few growth companies in retail,” Daniel Binder, an analyst with Jefferies & Co. in New York, said in a report.

But HHGregg’s ambitious strategy also is fraught with risk. The retail landscape is littered with companies that lost their way when they hit the accelerator on growth. Locally, think Galyan’s Trading Co., which six years ago fell into the arms of Dick’s Sporting Goods Inc., its Pittsburgh-based rival.

Many investors and analysts see a different fate for HHGregg. Their faith stems largely from confidence in the company’s seasoned management team, led by Executive Chairman Jerry Throgmartin, 55, who joined the company 35 years ago.

They also like that HHGregg eschews hourly workers in favor of commissioned salespeople who receive extensive training on the increasingly complicated products they sell—and know how to steer customers toward the priciest, most-feature-rich offerings.

“History has shown us that our highly trained ... sales force is well-suited to educate the consumer about new technologies and how they can integrate into their connected home,” HHGregg CEO Dennis May said in a conference call with analysts this month.

But day-to-day execution is tricky, especially with the economic slump pinching consumers’ ability to drop large sums on HD TVs and front-loading washing machines.

In its latest quarter, the company managed to boost appliance sales at stores open at least a year by 7.5 percent, but it was the first increase in two years.

HHGregg also faces big challenges—along with potentially huge opportunities—on the TV front.

Flat-panel/HD TV penetration in the United States has reached 70 percent, Barclays Capital said in a report, and average selling prices are falling as consumers shift toward smaller screen sizes. Making matters worse, HHGregg and other retailers are struggling with supply shortages as manufacturers shift their attention to launching new models this spring.

But those product launches could be game-changers. They include televisions configured to play programming directly from the Internet and 3D TVs—a product that dominated the buzz at last month’s Consumer Electronics Show in Las Vegas.

“The good news is ... we’re going to be looking at a pipeline of new technology that’s as exciting as anything I’ve seen,” May said on the conference call.

But some analysts are skeptical that consumers who only recently spent more than $1,000 for an HD TV will be willing to spend even more for a 3D set anytime soon—especially given the limited availability of 3D programming.

“The hype around the 3D technology at CES was almost laughable at times,” David Strasser, an analyst with Janney Montgomery Scott, said in a report. “The industry appeared to be somewhere between hopeful and desperate for this technology to work ASAP.”

But Strasser said he expects HHGregg and other retailers to see at least indirect benefits this year.

Though initial sales likely will be modest, Strasser said, “3D TV will be a must-see product in the back half of 2010. The retailers that can display it, and show it effectively, will drive traffic in the stores.”•



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