We currently downgrade the shares of Hhgregg (HGG) to Underperform from Neutral.
The rating downgrade is based on weaker profits during the third quarter of 2010, which were below the Zacks Consensus Estimate due to decrease in gross margin rate, increased advertising, comparable store sales decrease of 1.5% and an increase in expenses associated with the launch of the Washington, DC market.
We are also concerned about the fierce competition and the still recovering economic condition. Further, the company’s profitability primarily depends on its ability to anticipate and respond in a timely manner to trends in consumer preferences relating to major household appliances and consumer electronics.
The company experiences seasonal fluctuations in its net sales and operating results primarily due to seasonal shopping patterns. The company usually records high net comparable store sales during the peak holiday selling season.
Third Quarter Results Below Estimates
Hhgregg Inc. reported its second-quarter income from continuing operations of $3.9 million or $0.10 per share, which was below the Zacks Consensus Estimate of $0.16. Both net income and earnings declined 20.4% and 23.1% respectively in the year-ago quarter.
However, the top line rose 44.8% to $480.9 million in the reported quarter. This was due to a net addition of 51 stores during the past one year partially offset by 1.5% decline in comparable store sales.
Outlook for 2011
Hhgregg has updated its earnings per share guidance to $1.30 to $1.35 compared to $1.35 to $1.45 stated earlier and remains cautiously optimistic about its performance going forward. This is due to limited visibility on the upcomming holiday season sales, due to significant volatility among the company’s product categories and the still challenging macro-economic environment.
Zacks Consensus Estimate Lowered
Based on weak third quarter results, the analysts lowered their estimates. The Zacks Consensus Estimates for earnings, in the last 60 days, for fiscal 2011 lowered to 76 cents per share, from 79 cents a share, reflecting a 3.8% decrease.
Further, with respect to earnings surprises, Hhgregg has reported twice below the Zacks Consensus Estimate over the last four quarters. However, with positive earnings surprises in the other two quarters, the average remains at 59.6%. This suggests that Hhgregg has outperformed the Zacks Consensus Estimate by an average of 59.6% in the last four quarters.
The company primarily competes with Gamestop Corp. (GME) and currently has Zacks #5 Rank, which translates into short-term Strong Sell recommendation.