HHGregg’s board is bullish, but analysts remain skittish

With HHGregg Inc. continuing to struggle, and continuing to refine its product mix, analysts see little hope the Indianapolis-based chain’s slumping stock will perk up anytime soon.

But there is one avid buyer of the shares: HHGregg itself. The company scarfed up $49 million of its stock under a buyback program that ran from May 2013 to May 2014. And last month, the company launched a new buyback program, this one for $40 million.

The buybacks could help ailing stockholders, since they reduce the number of shares outstanding, giving investors who hold the remaining stock a larger slice of the earnings pie.

It’s a bullish statement by the company’s board, to be sure. But if HHGregg continues to struggle, there’s always the chance that, a year from now, second-guessers will look back and say the company grossly overpaid.

So far, it’s too early to issue a verdict. For the shares purchased under the May 2013 program, HHGregg paid an average of $14.02, well above where the stock now trades. The stock fetches around $9.20 after trading as high as $20.75 in November and as low as $7.23 in February.

During the company’s fiscal fourth-quarter earnings conference call on May 20, Oppenheimer & Co. analyst Brian Nagel raised the question of whether this was the right time to launch another aggressive buyback. The plan was announced in the same release disclosing that HHGregg lost $7.2 million in the quarter ended March 31.

“So if I step back and look at where HHGregg is right now, there’s clearly some transition happening and some struggles,” he said on the call.

Nagel noted that the company has a strong balance sheet and continues to generate significant amounts of cash. Even so, he said, “Is there any thought amongst the management team and the board to maybe pull back on the buybacks, just to give yourself that extra cushion?”

HHGregg’s interim chief financial officer, Andrew Giesler, responded that “we feel very comfortable with where the balance sheet sits.” However, he did note the board opted for a buyback that was $10 million smaller than the one in 2013.

HHGregg boasts zero debt and has an untapped $400 million credit line. So the company has the firepower to weather a lot of setbacks.

Even so, analysts are growing impatient. Sales at stores open at least 14 months slipped 7.3 percent in the latest fiscal year—the sixth consecutive annual decline.

The company has been ramping up sales of appliances, and introducing furniture and fitness equipment, to offset plunging sales of consumer electronics, which used to be its biggest business.

Analysts, though, would like to see more progress by now.

While HHGregg now has reported 11 straight quarters of comparable-store sales increases in appliances, the increase was just 0.4 percent in the latest quarter. In a report, Barclays analyst Alan Rifkin called that figure “highly disappointing, given that it more or less indicates that HHGregg is likely losing [market] share within appliances.”

Similarly, UBS analyst Michael Lasser seized on the 0.4-percent comparable-store sales decline in home furnishings, which includes furniture, fitness equipment and mattresses.

He predicted HHGregg will find traction in the segment, but said the decline “wasn’t particularly encouraging considering this product category is still in its embryonic stage for the company.”
 

May

In the fourth-quarter earnings release, CEO Dennis May said bad winter weather in the Midwest and Mid-Atlantic was partly to blame for the weak numbers. And he said a litany of initiatives is in the works that position the company for better performance later in the year.

“We believe our responsibility is to inspire and delight our customers with a truly differentiated purchase experience to bring their homes to life,” he said in the statement. “In doing so, we will improve our financial and operating results, and we will solidify our brand relevance within the marketplace.”

Those initiatives include broadening the brands of furniture the chain sells, introducing a more customer-friendly checkout system, enhancing credit offerings, and opening in-store kiosks that salespeople will use to steer customers to online-only assortments.

While HHGregg continues to face headwinds, including the growing popularity of online shopping, Stifel analyst David Schick said in a report, “This is the biggest embrace of a new direction we’ve seen from this company. They are fighting big challenges with big changes.”•