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UPDATE: Analyst mixed on plan for Gregg IPO

April 18, 2007

Hhgregg Inc.’s $172 million initial public offering might draw a mixed reaction from investors, who’ll like that the company is reducing debt but not that its profit margin has been shrinking, an analyst said today.

But there’s little doubt the Indianapolis-based consumer electronics and appliance retailer will be able to pull off the offering, in part because its lead underwriters are Wall Street heavyweights Credit Suisse and Lehman Brothers, said the analyst, David Menlow, president of New Jersey-based Ipofinancial.com.

Because of the involvement of those investment firms, “this requires a second look, even if people say they don’t like the financials at first blush,” Menlow said.

In conjunction with the offering, the company is changing its corporate name from Gregg Appliances Inc. to Hhgregg Inc., according to the IPO plan filed with the Securities and Exchange Commission this morning.

The company disclosed few details in the filing, such as how many shares it would sell or at what price. But it did say it plans to use proceeds to pay down debt. Doing so, Menlow said, could allow the company to be more nimble, positioning it to exploit expansion opportunities.

The company has been laden with debt since the Los Angeles investment firm Freeman Spogli & Co. acquired majority control of the family business through a leveraged buyout in February 2005.

Hhgregg operates 77 stores in Indiana, Ohio, Georgia, Tennessee, Kentucky, North Carolina, South Carolina and Alabama. In the fiscal year ended in March 2006, the company posted profit of $22.2 million on $900 million in sales.

Menlow said investors might fret that the company’s EBITDA—earnings before interest, taxes, depreciation and amortization—has been growing more slowly than sales. EBITDA as a percentage of sales fell every year from 2002 through 2005, before ticking up in the last fiscal year.

In the consumer electronics market, Hhgregg competes against such national chains as Best Buy and Circuit City. Major rivals in the appliance business include Sears and Lowe’s.

In the filing, Hhgregg said its competitive strengths include superior customer service and a proven ability to successfully enter new markets. In recent years, new markets have included Atlanta, as well as Knoxville, Tenn., and Charlotte, N.C.

The company intends to list its stock on the New York Stock Exchange under the symbol HGG.

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