HHGregg strategy shift vaults stock to 52-week high

Shares of HHGregg Inc. have been on a tear lately, rising nearly 160 percent since the start of the year, as a company shift in strategy seems to have caught Wall Street’s attention.

The Indianapolis-based appliance and electronics retailer’s stock hit a sort of milestone Aug. 20, closing above $18 for the first time since early 2011, and climbing steadily from a year-to-date low of $7 in January. The stock was up another 40 cents Thursday morning, to $18.42.

HHGregg's resurgence is part of a larger recovery within the electronics sector.

Shares of competitor Best Buy Co. Inc. jumped 13 percent Tuesday, as cost-cutting efforts helped to increase the company's profit. Best Buy has been cutting costs and revamping stores to offset tough competition from discounters and online retailers, boosting its stock above $34 after dropping to a low of $11.20 early this year.

And shares of regional electronics chain Conns Inc. have rebounded from a 52-week low of $21.28 to $62.45. 

HHGregg executives declined to discuss the recent surge in the company’s stock price. But CEO Dennis May said in a conference call with analysts early this month that HHGregg’s decision to expand its product line has lessened its reliance on sales of flat-screen televisions, a product decimated by brutal price competition.

New products such as entertainment furniture, fitness equipment and mattresses, in addition to a continued focus on appliances, have helped the company improve its earnings, despite reporting a loss in its latest quarter.

The company saw a smaller loss of $1.3 million, or 4 cents per share, for the fiscal first quarter ended June 30, down from $5.7 million, or 16 cents per share, in the same period a year ago.

Same-store revenue, which measures sales at stores open more than a year, was more positive, increasing 0.8 percent.

The transformation of HHGregg’s stores may surprise consumers accustomed to its traditional inventory heavy on cameras, camcorders and televisions.

“During the spring, we tested an expanded assortment of furniture products in our Chicago stores, and have been very pleased with the results,” May said during the call. “We are in the process of rolling out that assortment of furniture, which will include expanded room settings, sofas and loveseats, recliners, as well as the introduction of dinettes to our store mix.”

HHGregg’s strategy to expand its product line is part of a larger effort to maintain its bricks-and-mortar presence while improving e-commerce sales, even as it reduces new-store footprints to 25,000 square feet to better compete in the changing retail landscape.

Chicago-based Zacks Equity Research seems to be sold on HHGregg’s strategy, recently upgrading company shares from neutral to outperform while increasing its stock-price target to $21.

“The company’s long term fundamentals are appealing as management is geared to improve its business performance with the help of several strategic initiatives designed to boost traffic in its stores,” Zack’s said in a report.

One of the initiatives is the promotion of its private-label credit card. That card, offered through GE Capital with an annual rate of 29.99 percent, can take it only so far—given that one-third of its applicants get rejected.

So HHGregg is putting together credit options for customers with spottier credit. And it also has rolled out rent-to-own, an option it now offers in more than half of its 228 stores.

“While it is too soon to tell what the impact will be on our results, we believe the majority of this business will be incremental as it allows us to expand our credit offerings to existing customers within our store,” May said.

HHGregg, traditionally a purveyor of premium products, hopes the credit options will give more consumers the means to purchase its big-ticket items.

May said in the call that HHGregg will continue to carry quality brands, though he acknowledged that the company needs to offer cheaper products to appeal to more consumers, especially as it relates to fitness equipment.

Still, there are reservations about whether HHGregg's stock market value will continue rising.

"We see future downside risk to [HHGregg] shares as we believe the weak industry and competitors’ initiatives to improve performance are negatively impacting HHGregg’s positioning in the consumer electronics market, and will continue to do so," a Barclays analyst wrote in a report.