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ITEM 1.
|
Condensed Consolidated Financial Statements
|
HHGREGG, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Three Months Ended
|
|
Nine Months Ended
|
|
|
December 31,
2016
|
|
December 31,
2015
|
|
December 31,
2016
|
|
December 31,
2015
|
|
|
(In thousands, except share and per share data)
|
|
Net sales
|
$
|
452,791
|
|
|
$
|
593,219
|
|
|
$
|
1,330,863
|
|
|
$
|
1,521,158
|
|
|
Cost of goods sold
|
353,011
|
|
|
438,189
|
|
|
969,187
|
|
|
1,093,126
|
|
|
Gross profit
|
99,780
|
|
|
155,030
|
|
|
361,676
|
|
|
428,032
|
|
|
Selling, general and administrative expenses
|
116,077
|
|
|
116,533
|
|
|
341,812
|
|
|
341,116
|
|
|
Net advertising expense
|
26,005
|
|
|
34,168
|
|
|
70,637
|
|
|
83,476
|
|
|
Depreciation and amortization expense
|
7,013
|
|
|
8,355
|
|
|
21,059
|
|
|
25,115
|
|
|
Asset impairment charges
|
7,850
|
|
|
20,910
|
|
|
9,238
|
|
|
20,910
|
|
|
Loss from operations
|
(57,165
|
)
|
|
(24,936
|
)
|
|
(81,070
|
)
|
|
(42,585
|
)
|
|
Other expense (income):
|
|
|
|
|
|
|
|
|
Interest expense
|
1,106
|
|
|
727
|
|
|
2,827
|
|
|
1,966
|
|
|
Interest income
|
(2
|
)
|
|
(2
|
)
|
|
(24
|
)
|
|
(9
|
)
|
|
Total other expense
|
1,104
|
|
|
725
|
|
|
2,803
|
|
|
1,957
|
|
|
Loss before income taxes
|
(58,269
|
)
|
|
(25,661
|
)
|
|
(83,873
|
)
|
|
(44,542
|
)
|
|
Income taxes
|
—
|
|
|
1,252
|
|
|
—
|
|
|
1,252
|
|
|
Net loss
|
$
|
(58,269
|
)
|
|
$
|
(26,913
|
)
|
|
$
|
(83,873
|
)
|
|
$
|
(45,794
|
)
|
|
Net loss per share
|
|
|
|
|
|
|
|
|
Basic and diluted
|
$
|
(2.10
|
)
|
|
$
|
(0.97
|
)
|
|
$
|
(3.02
|
)
|
|
$
|
(1.65
|
)
|
|
Weighted average shares outstanding-basic and diluted
|
27,806,460
|
|
|
27,707,978
|
|
|
27,783,216
|
|
|
27,698,789
|
|
See accompanying notes to condensed consolidated financial statements.
HHGREGG, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
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|
|
|
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|
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|
|
|
|
|
|
December 31,
2016
|
|
March 31,
2016
|
|
|
(In thousands, except share data)
|
|
Assets
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash
|
$
|
1,953
|
|
|
$
|
3,703
|
|
|
Accounts receivable—trade, less allowances of $11 and $5 as of December 31, 2016 and March 31, 2016, respectively
|
20,653
|
|
|
11,106
|
|
|
Accounts receivable—other
|
19,764
|
|
|
14,937
|
|
|
Merchandise inventories, net
|
210,820
|
|
|
256,559
|
|
|
Prepaid expenses and other current assets
|
5,545
|
|
|
6,333
|
|
|
Income tax receivable
|
68
|
|
|
1,130
|
|
|
Total current assets
|
258,803
|
|
|
293,768
|
|
|
Net property and equipment
|
74,365
|
|
|
87,472
|
|
|
Deferred financing costs, net
|
2,192
|
|
|
1,257
|
|
|
Other assets
|
2,930
|
|
|
2,855
|
|
|
Total long-term assets
|
79,487
|
|
|
91,584
|
|
|
Total assets
|
$
|
338,290
|
|
|
$
|
385,352
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
$
|
99,037
|
|
|
$
|
107,474
|
|
|
Line of credit
|
30,250
|
|
|
—
|
|
|
Customer deposits
|
61,970
|
|
|
43,235
|
|
|
Accrued liabilities
|
42,765
|
|
|
43,370
|
|
|
Total current liabilities
|
234,022
|
|
|
194,079
|
|
|
Long-term liabilities:
|
|
|
|
|
Deferred rent
|
50,438
|
|
|
59,101
|
|
|
Other long-term liabilities
|
15,224
|
|
|
10,818
|
|
|
Total long-term liabilities
|
65,662
|
|
|
69,919
|
|
|
Total liabilities
|
299,684
|
|
|
263,998
|
|
|
Stockholders’ equity:
|
|
|
|
|
Preferred stock, par value $.0001; 10,000,000 shares authorized; no shares issued and outstanding as of December 31, 2016 and March 31, 2016, respectively
|
—
|
|
|
—
|
|
|
Common stock, par value $.0001; 150,000,000 shares authorized; 41,303,240 and 41,204,660 shares issued; and 27,806,558 and 27,707,978 outstanding as of December 31, 2016 and March 31, 2016, respectively
|
4
|
|
|
4
|
|
|
Additional paid-in capital
|
305,450
|
|
|
304,325
|
|
|
Accumulated deficit
|
(116,620
|
)
|
|
(32,747
|
)
|
|
Common stock held in treasury at cost 13,496,682, shares as of December 31, 2016 and March 31, 2016
|
(150,228
|
)
|
|
(150,228
|
)
|
|
Total stockholders’ equity
|
38,606
|
|
|
121,354
|
|
|
Total liabilities and stockholders’ equity
|
$
|
338,290
|
|
|
$
|
385,352
|
|
See accompanying notes to condensed consolidated financial statements.
HHGREGG, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
|
(In thousands)
|
|
Cash flows from operating activities:
|
|
|
|
|
Net loss
|
$
|
(83,873
|
)
|
|
$
|
(45,794
|
)
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
Depreciation and amortization
|
21,059
|
|
|
25,115
|
|
|
Amortization of deferred financing costs
|
378
|
|
|
404
|
|
|
Stock-based compensation
|
1,169
|
|
|
2,423
|
|
|
Loss on early extinguishment of debt
|
126
|
|
|
—
|
|
|
Loss on sales of property and equipment
|
147
|
|
|
60
|
|
|
Asset impairment charges
|
9,238
|
|
|
20,910
|
|
|
Tenant allowances received from landlords
|
—
|
|
|
812
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
Accounts receivable—trade
|
(9,547
|
)
|
|
(3,036
|
)
|
|
Accounts receivable—other
|
(4,827
|
)
|
|
(1,512
|
)
|
|
Merchandise inventories
|
45,739
|
|
|
(82,854
|
)
|
|
Income tax receivable
|
1,062
|
|
|
4,864
|
|
|
Prepaid expenses and other assets
|
923
|
|
|
(352
|
)
|
|
Accounts payable
|
3,681
|
|
|
62,456
|
|
|
Customer deposits
|
18,735
|
|
|
(557
|
)
|
|
Income tax payable
|
—
|
|
|
1,129
|
|
|
Accrued liabilities
|
(649
|
)
|
|
11,148
|
|
|
Deferred rent
|
(8,663
|
)
|
|
(6,409
|
)
|
|
Other long-term liabilities
|
4,606
|
|
|
(1,010
|
)
|
|
Net cash used in operating activities
|
(696
|
)
|
|
(12,203
|
)
|
|
Cash flows from investing activities:
|
|
|
|
|
Purchases of property and equipment
|
(18,533
|
)
|
|
(10,406
|
)
|
|
Proceeds from sales of property and equipment
|
69
|
|
|
80
|
|
|
Purchases of corporate-owned life insurance
|
(210
|
)
|
|
(160
|
)
|
|
Net cash used in investing activities
|
(18,674
|
)
|
|
(10,486
|
)
|
|
Cash flows from financing activities:
|
|
|
|
|
Net borrowings on line of credit
|
30,250
|
|
|
—
|
|
|
Net repayments on inventory financing facility
|
(11,191
|
)
|
|
(676
|
)
|
|
Payment of financing costs
|
(1,439
|
)
|
|
—
|
|
|
Net cash provided by (used in) financing activities
|
17,620
|
|
|
(676
|
)
|
|
Net decrease in cash and cash equivalents
|
(1,750
|
)
|
|
(23,365
|
)
|
|
Cash and cash equivalents
|
|
|
|
|
Beginning of period
|
3,703
|
|
|
30,401
|
|
|
End of period
|
$
|
1,953
|
|
|
$
|
7,036
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
Interest paid
|
$
|
2,496
|
|
|
$
|
1,572
|
|
|
Income taxes received
|
$
|
(1,067
|
)
|
|
$
|
(4,721
|
)
|
|
Capital expenditures included in accounts payable
|
$
|
338
|
|
|
$
|
503
|
|
See accompanying notes to condensed consolidated financial statements.
HHGREGG, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders’ Equity
Nine Months Ended
December 31, 2016
(Dollars in thousands, Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares Outstanding
|
|
Preferred
Stock
|
|
Common
Stock
|
|
Additional
Paid-in
Capital
|
|
Accumulated Deficit
|
|
Common Stock
Held in
Treasury
|
|
Total
Stockholders’
Equity
|
|
Balance at March 31, 2016
|
27,707,978
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
304,325
|
|
|
$
|
(32,747
|
)
|
|
$
|
(150,228
|
)
|
|
$
|
121,354
|
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(83,873
|
)
|
|
—
|
|
|
(83,873
|
)
|
|
Vesting of RSUs, net of tax withholdings
|
98,580
|
|
|
—
|
|
|
—
|
|
|
(44
|
)
|
|
—
|
|
|
—
|
|
|
(44
|
)
|
|
Stock compensation expense
|
—
|
|
|
—
|
|
|
—
|
|
|
1,169
|
|
|
—
|
|
|
—
|
|
|
1,169
|
|
|
Balance at December 31, 2016
|
27,806,558
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
305,450
|
|
|
$
|
(116,620
|
)
|
|
$
|
(150,228
|
)
|
|
$
|
38,606
|
|
See accompanying notes to condensed consolidated financial statements.
HHGREGG, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
|
|
|
|
(1)
|
Summary of Significant Accounting Policies
|
Description of Business
hhgregg, Inc. (“hhgregg” or the “Company”) is an appliance, consumer electronics and home products retailer that is committed to providing customers with a truly differentiated purchase experience through superior customer service, knowledgeable sales associates and the highest quality product selections. Founded in 1955, hhgregg is a multi-regional retailer with
220
brick-and-mortar stores in
19
states that also offers market-leading global and local brands at value prices nationwide via www.hhgregg.com. The Company reports its results as
one
reportable segment.
Interim Financial Information
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). In the opinion of the Company’s management, these unaudited condensed consolidated financial statements reflect all necessary adjustments, which are of a normal recurring nature, for a fair presentation of such data. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such SEC rules and regulations. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of hhgregg and the notes thereto for the fiscal year ended
March 31, 2016
, included in the Company’s Annual Report on Form 10-K filed with the SEC on
May 19, 2016
.
The consolidated results of operations, financial position and cash flows for interim periods are not necessarily indicative of those to be expected for a full year. The Company has made a number of estimates and assumptions relating to the assets and liabilities and the reporting of sales and expenses to prepare these unaudited condensed consolidated financial statements in conformity with GAAP. Actual results could differ from those estimates.
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of hhgregg and its wholly-owned subsidiary, Gregg Appliances, Inc. (“Gregg Appliances”). Gregg Appliances has a wholly-owned subsidiary, HHG Distributing LLC (“HHG Distributing”), which has no assets or operations.
Recently Issued Accounting Pronouncements
In August 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments" ("ASU 2016-15") which addresses eight classification issues related to the statement of cash flows: (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon bonds; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years and early adoption is permitted. The Company is evaluating the effect that ASU 2016-15 will have on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, ("ASU 2016-09") which is intended to improve the accounting for share-based payment transactions as part of the FASB’s simplification initiative. The ASU changes certain aspects of the accounting for share-based payment award transactions, including: (1) accounting for income taxes; (2) classification of excess tax benefits on the statement of cash flows; (3) forfeitures; (4) minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those years with early adoption permitted. The Company is evaluating the effect that ASU No. 2016-09 will have on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02"), which requires an entity that is a lessee to recognize the assets and liabilities arising from leases on the balance sheet. This guidance also requires disclosures about the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods and early adoption is permitted. The Company does not expect to early adopt this ASU 2016-02 and is currently evaluating the effect that ASU
2016-02 will have on its consolidated financial statements and related disclosures and expects the guidance to have a material impact due to the significant number of store and distribution leases that the Company is under contract for.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) to clarify the principles used to recognize revenue for all entities. The original standard was to be effective for fiscal years beginning after December 15, 2016; however, in July 2015, the FASB approved a one-year deferral of this standard, with a new effective date for fiscal years beginning after December 15, 2017. While the Company is still in the process of evaluating the impact the adoption of this guidance will have on its financial position and results of operations, the Company does not currently expect a material impact on its consolidated financial statements, however some changes are expected regarding the timing of recognizing gift card breakage. The Company plans to complete its evaluation of the impact on its consolidated financial statements by the second half of our fiscal 2018.
Recently Adopted Accounting Pronouncements
In April 2015, the FASB issued an accounting pronouncement, FASB ASU 2015-3, related to the presentation of debt issuance costs (FASB ASC Subtopic 835-30). This standard requires debt issuance costs related to a recognized debt liability to be presented on the balance sheet as a direct deduction from the debt liability rather than as an asset. These costs continue to be amortized to interest expense using the effective interest method. In August 2015, FASB issued ASU 2015-15 Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. These pronouncements were effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015, and retrospective adoption was required. The Company adopted the pronouncements for its fiscal year beginning April 1, 2016 for costs associated with their line of credit facility. The Company's accounting policy for these costs did not change with the adoption of the new pronouncements. The Company defers such costs and presents them as an asset on the balance sheet and amortizes the costs ratably over the term of the arrangement to interest expense.
|
|
|
|
(2)
|
Fair Value Measurements
|
The Company uses a three-tier valuation hierarchy for its fair value measurements based upon observable and non-observable inputs:
Level 1 — unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
Level 2 — inputs other than quoted market prices included in Level 1 that are observable, either directly or indirectly, for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 — unobservable inputs for the asset or liability, as there is little, if any, market activity at the measurement date.
Assets and Liabilities that are Measured at Fair Value on a Non-recurring Basis
The Company has property and equipment that are measured at fair value on a non-recurring basis when impairment indicators are present. When evaluating long-lived assets for potential impairment, the Company compares the carrying amount of the asset or asset group to the asset’s or asset group’s estimated undiscounted future cash flows. If the estimated future cash flows are less than the carrying amount of the asset or asset group, an impairment loss is calculated. The impairment loss calculation compares the carrying amount of the asset or asset group to the asset’s or asset group’s estimated fair value, which is determined based on estimated discounted future cash flows. An impairment loss is recognized for the amount by which the asset’s or asset group’s carrying amount exceeds the asset’s or asset group’s estimated fair value. If an impairment loss is recognized, the adjusted carrying amount of the asset or asset group becomes its new cost basis. For a depreciable long-lived asset, the new cost basis will be depreciated (amortized) over the remaining useful life of that asset or asset group.
The categorization of the framework used to value the property and equipment is considered Level 3, due to the subjective nature of the unobservable inputs used to determine the fair value. The key inputs to the discounted cash flow model generally included the Company's forecasts of net cash generated from revenue, expenses and other significant cash outflows, such as certain capital expenditures, as well as a discount rate.
The need for an impairment analysis to be performed at several locations was triggered by declining sales and overall declines in profitability in recent periods. As a result of these analyses, for the quarter ended December 31, 2016, property and equipment at
21
locations with a net book value of
$7.2 million
were reduced to an estimated aggregate fair value of
$0.8 million
based on their projected cash flows, discounted at
15%
. This resulted in an asset impairment charge of
$6.4 million
for the three months ended December 31, 2016. For the quarter ended December 31, 2015, property and equipment at
40
locations with a net book value of
$21.7 million
were reduced to estimated aggregate fair value of
$0.8 million
based on their projected cash flows, discounted at
15%
. This resulted in an asset impairment charge of
$20.9 million
for the three and nine months
ended December 31, 2015. The fair values were determined using a probability based cash flow analysis based on management's estimates of future store-level sales, gross margins, and direct expenses.
For certain remodeled locations that were previously evaluated and a portion of property and equipment was impaired due to declining sales and profitability, the Company performed another evaluation during the nine months ended December 31, 2016. A total of
37
stores with an aggregate net book value of
$3.0 million
were reduced to an estimated aggregate fair value of
$0.2 million
based on their projected cash flows, discounted at
15%
. This resulted in a non-cash asset impairment charge of
$1.5 million
and
$2.8 million
for the three and nine months ended December 31, 2016. The fair values were determined using a probability based cash flow analysis based on management's estimates of future store-level sales, gross margins, direct expenses and capital expenditures.
The following table summarizes the fair value measurement adjustments for property and equipment recorded during the three and nine months ended December 31, 2016 and 2015 (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine months ended
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Carrying value (pre-impairment)
|
$
|
8.9
|
|
|
$
|
21.7
|
|
|
$
|
10.2
|
|
|
$
|
21.7
|
|
|
Asset impairment charge (included in income from operations)
|
7.9
|
|
|
20.9
|
|
|
9.2
|
|
|
20.9
|
|
|
Remaining net carrying value
|
$
|
1.0
|
|
|
$
|
0.8
|
|
|
$
|
1.0
|
|
|
$
|
0.8
|
|
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable—trade, accounts receivable—other, accounts payable and customer deposits approximate fair value because of the short maturity of these instruments. Any outstanding amount on the Company’s line of credit approximates fair value as the interest rate is market based.
|
|
|
|
(3)
|
Property and Equipment
|
Property and equipment consisted of the following at
December 31, 2016
and
March 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
March 31,
2016
|
|
Machinery and equipment
|
$
|
24,071
|
|
|
$
|
23,700
|
|
|
Store fixtures and furniture
|
144,844
|
|
|
150,390
|
|
|
Vehicles
|
1,737
|
|
|
1,757
|
|
|
Signs
|
10,337
|
|
|
11,959
|
|
|
Leasehold improvements
|
96,858
|
|
|
103,908
|
|
|
Construction in progress
|
826
|
|
|
1,792
|
|
|
|
278,673
|
|
|
293,506
|
|
|
Less accumulated depreciation and amortization
|
(204,308
|
)
|
|
(206,034
|
)
|
|
Net property and equipment
|
$
|
74,365
|
|
|
$
|
87,472
|
|
Net loss per basic and diluted share is calculated based on the weighted-average number of outstanding common shares. When the Company reports net income, the calculation of net income per diluted share excludes shares underlying outstanding stock options and restricted stock units with exercise prices that exceed the average market price of the Company’s common stock for the period and certain options and restricted stock units with unrecognized compensation cost, as the effect would be antidilutive. Potential dilutive common shares are composed of shares of common stock issuable upon the exercise of stock options and vesting of restricted stock units. For the three and
nine months ended December 31, 2016
and
2015
, the diluted loss per common share calculation represents the weighted average common shares outstanding with no additional dilutive shares as the Company incurred a net loss for the periods and such shares would be antidilutive.
The following table presents net loss per basic and diluted share for the three and
nine months ended December 31, 2016
and
2015
(in thousands, except share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Net loss (A)
|
$
|
(58,269
|
)
|
|
$
|
(26,913
|
)
|
|
$
|
(83,873
|
)
|
|
$
|
(45,794
|
)
|
|
Weighted average outstanding shares of common stock (B)
|
27,806,460
|
|
|
27,707,978
|
|
|
27,783,216
|
|
|
27,698,789
|
|
|
Common stock and potential dilutive common shares (C)
|
27,806,460
|
|
|
27,707,978
|
|
|
27,783,216
|
|
|
27,698,789
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
Basic (A/B)
|
$
|
(2.10
|
)
|
|
$
|
(0.97
|
)
|
|
$
|
(3.02
|
)
|
|
$
|
(1.65
|
)
|
|
Diluted (A/C)
|
$
|
(2.10
|
)
|
|
$
|
(0.97
|
)
|
|
$
|
(3.02
|
)
|
|
$
|
(1.65
|
)
|
Antidilutive shares not included in the net loss per diluted share calculation for the three months ended
December 31, 2016
and
2015
were
2,018,490
and
3,238,355
, respectively. Antidilutive shares not included in the net loss per diluted share calculation for the
nine months ended December 31, 2016
and
2015
were
2,197,979
and
3,360,010
, respectively.
Net merchandise inventories consisted of the following at
December 31, 2016
and
March 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
March 31,
2016
|
|
Appliances
|
$
|
120,144
|
|
|
$
|
126,025
|
|
|
Consumer electronics
|
71,020
|
|
|
109,418
|
|
|
Home products
|
19,656
|
|
|
21,116
|
|
|
Net merchandise inventory
|
$
|
210,820
|
|
|
$
|
256,559
|
|
A summary of debt at
December 31, 2016
and
March 31, 2016
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
March 31,
2016
|
|
Line of credit
|
$
|
30,250
|
|
|
$
|
—
|
|
On June 28, 2016, Gregg Appliances entered into Amendments No. 2 & 3 to the Amended and Restated Loan and Security Agreement (the “Amended Facility”) which amended the maximum amount available under the Amended Facility from
$400 million
to
$300 million
, comprised of a
$20 million
first-in last-out revolving tranche ("the FILO") and a
$280 million
revolver, subject to borrowing base availability, and extended the maturity date from July 29, 2018 to
June 28, 2021
.
Pursuant to the Amended Facility, the first
$20 million
of borrowings are applied to the FILO, subject to a borrowing base equal to the sum of (i)
5%
of the eligible credit card A/R and (ii)
10%
of the net orderly liquidation value of eligible inventory, in each case subject to customary reserves and eligibility criteria. Under the FILO, the inventory advance rate is reduced by
0.5%
per quarter to
6.0%
and will remain at
6.0%
unless the fixed charge coverage ratio is less than
1.0
x, then it will reduce by
0.5%
each quarter to
5.0%
. If the fixed charge coverage ratio is less than
1.0
x at that time, the inventory advance rate is reduced by
0.25%
each quarter. Interest on the borrowings under the FILO is payable at a fluctuating rate based on the bank's prime rate or LIBOR plus an applicable margin based on the average quarterly excess availability.
For borrowings greater than
$20 million
, the borrowing base is equal to the sum of (i)
90%
of the amount of eligible commercial and credit card receivables of Gregg Appliances and (ii)
90%
of the net recovery percentage multiplied by the value of eligible inventory consistent with the most recent appraisal of such eligible inventory. Interest on borrowings (other
than Eurodollar rate borrowings) is payable monthly at a fluctuating rate based on the bank’s prime rate or LIBOR plus an applicable margin based on the average quarterly excess availability. Interest on Eurodollar rate borrowings is payable on the last day of each “interest period” applicable to such borrowing or on the three month anniversary of the beginning of such “interest period” for interest periods greater than three months.
The Company pays an unused line fee at the unused line rate which is determined based on the amount of the daily average of the outstanding borrowings for the immediately preceding calendar quarter period (the “Daily Average”). For a Daily Average greater than or equal to
50%
of the defined borrowing base, the unused line rate is
0.25%
. For a Daily Average less than
50%
of the defined borrowing base, the unused line rate is
0.375%
. The Amended Facility is guaranteed by Gregg Appliances’ wholly-owned subsidiary, HHG Distributing, which has no assets or operations. The guarantee is full and unconditional, and Gregg Appliances has no other subsidiaries.
Under the Amended Facility, Gregg Appliances is not required to comply with any financial maintenance covenant but Gregg Appliances is required to maintain “excess availability” of the greater of (i)
10%
of the defined borrowing base or (ii)
$15 million
. Prior to Amendments No. 2 & 3, Gregg Appliances was not required to comply with any financial maintenance covenant unless “excess availability” was less than the greater of (i)
10.0%
of the lesser of (A) the defined borrowing base or (B) the defined maximum credit or (ii)
$20.0 million
during the continuance of which event Gregg Appliances was subject to compliance with a fixed charge coverage ratio of
1.0
to
1.0
. If Gregg Appliances has “excess availability” of less than
15%
,
12.5%
prior to Amendments No. 2 & 3, of the lesser of (A) the defined borrowing base or (B) the defined maximum credit, it may, in certain circumstances more specifically described in the Amended Facility, become subject to cash dominion control.
The Amended Facility places limitations on the ability of Gregg Appliances to, among other things, incur debt, create other liens on its assets, make investments, sell assets, pay dividends, undertake transactions with affiliates, enter into merger transactions, enter into unrelated businesses, open collateral locations outside of the United States, or enter into consignment agreements or floor plan financing arrangements. The Amended Facility also contains various customary representations and warranties, financial and collateral reporting requirements and other affirmative and negative covenants. Gregg Appliances was in compliance with the restrictions and covenants of the Amended Facility at
December 31, 2016
.
As of
December 31, 2016
and
March 31, 2016
, Gregg Appliances had
$30.3 million
and
no
borrowings, respectively, outstanding under the Amended Facility. The total borrowing availability under the Amended Facility was
$94.1 million
and
$139.9 million
as of
December 31, 2016
and
March 31, 2016
, respectively. The Company typically borrows based on LIBOR. As of
December 31, 2016
, the interest rate on the FILO based on LIBOR was
5.5%
. The interest rate on the revolver based on LIBOR was
2.5%
and
2.1%
as of
December 31, 2016
and
March 31, 2016
, respectively.
|
|
|
|
(7)
|
Stock-based Compensation
|
Effective June 20, 2014, the Company adopted an Amendment to the hhgregg, Inc. 2007 Equity Incentive Plan which increased the number of shares of common stock reserved for issuance under the Plan to
9,000,000
.
Stock Options
The following table summarizes the stock option activity under the Company’s 2007 Equity Incentive Plan for the
nine months ended December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
Number of Options
Outstanding
|
|
Weighted Average
Exercise Price
per Share
|
|
Outstanding at March 31, 2016
|
2,827,168
|
|
|
$
|
11.86
|
|
|
Granted
|
—
|
|
|
—
|
|
|
Exercised
|
—
|
|
|
—
|
|
|
Forfeited
|
(137,001
|
)
|
|
6.83
|
|
|
Expired
|
(1,291,229
|
)
|
|
13.06
|
|
|
Outstanding at December 31, 2016
|
1,398,938
|
|
|
$
|
11.25
|
|
Time Vested Restricted Stock Units
During the
nine months ended December 31, 2016
, the Company granted
1,339,530
time vested restricted stock units (“RSUs”) under the 2007 Equity Incentive Plan to certain employees and directors of the Company. The RSUs vest in equal amounts over a
three
-year period beginning on the first anniversary of the date of grant. Upon vesting, the outstanding number
of RSUs will be converted into shares of common stock. RSUs are forfeited if they have not vested before the participant's service to the Company terminates for any reason other than death or total permanent disability or certain other circumstances as described in such participant’s RSU agreement. Upon death or disability, the participant is entitled to receive a portion of the award based upon the period of time lapsed between the date of grant of the RSU and the termination of service as an employee or director. The fair value of RSU awards is based on the Company’s stock price at the close of the market on the date of grant. The weighted average grant date fair value for the RSUs issued during the
nine months ended December 31, 2016
was
$1.67
.
The following table summarizes RSU vesting activity for the
nine months ended December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Grant-Date
Fair Value
|
|
Nonvested at March 31, 2016
|
370,383
|
|
|
$
|
4.83
|
|
|
Granted
|
1,339,530
|
|
|
1.67
|
|
|
Vested
|
(121,654
|
)
|
|
5.65
|
|
|
Forfeited
|
(185,047
|
)
|
|
2.46
|
|
|
Nonvested at December 31, 2016
|
1,403,212
|
|
|
$
|
2.05
|
|
The Company is engaged in various legal proceedings in the ordinary course of business and has certain unresolved claims pending. The ultimate liability, if any, for the aggregate amounts claimed cannot be determined at this time. However, management believes, based on the examination of these matters and experiences to date, that the ultimate liability, if any, in excess of amounts already provided for in the unaudited condensed consolidated financial statements is not likely to have a material effect on its consolidated financial position, results of operations or cash flows.
|
|
|
|
(9)
|
Related Party Transaction
|
In August 2016, Gregg Appliances entered into a sponsorship agreement through December 31, 2018, with Andretti Autosport 2, Inc. ("Andretti Autosport"), a subsidiary of Andretti Autosport Holding Company, Inc. Pursuant to the agreement, Andretti Autosport will receive
$2.75 million
annually for the 2017 and 2018 racing seasons from Gregg Appliances to sponsor an Andretti Autosport racing team. Michael Andretti, a director on hhgregg's Board of Directors, serves as the Chairman, President and Chief Executive Officer of Andretti Autosport Holding Company, Inc.
|
|
|
|
|
|
ITEM 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in five sections:
|
|
|
|
•
|
Critical Accounting Policies
|
|
|
|
|
•
|
Liquidity and Capital Resources
|
|
|
|
|
•
|
Contractual Obligations
|
Our MD&A should be read in conjunction with the unaudited condensed consolidated financial statements and accompanying notes contained herein and the Consolidated Financial Statements for the fiscal year ended
March 31, 2016
, included in our latest Annual Report on Form 10-K, as filed with the SEC on
May 19, 2016
.
Overview
hhgregg is an appliance, electronics and furniture retailer that is committed to providing customers with a truly differentiated purchase experience through superior customer service, knowledgeable sales associates and the highest quality product selections. Founded in 1955, hhgregg is a multi-regional retailer with
220
brick-and-mortar stores in 19 states that also offers its market-leading global and local brands at value prices nationwide via hhgregg.com. References to fiscal years in this report relate to the respective 12 month period ended March 31. Our
2017
fiscal year is the 12 month period ending on
March 31, 2017
.
Comparable store sales are comprised of net sales at stores in operation for at least 14 full months, including remodeled and relocated stores, as well as net sales for our website. Stores that are closed are excluded from the calculation the month of closing. The method of calculating comparable store sales varies across the retail industry, and our method of calculating comparable store sales may not be the same as other retailers’ methods.
Operating Strategy and Performance.
We focus the majority of our floor space, advertising expense and distribution infrastructure on the marketing, delivery and installation of a wide selection of appliance, consumer electronics and home furniture products. We also offer additional products not available in our store locations online at www.hhgregg.com. Appliance and consumer electronics sales comprised
94%
of our net sales mix for the
nine months ended December 31,
2016
and
December 31, 2015
.
We strive to differentiate ourselves through our customer purchase experience. This starts with a highly-trained, consultative commissioned sales force which educates our customers on the features and benefits of our products, followed by rapid product delivery and installation, and ends with post-sales support services. We carefully monitor our competition to ensure that our prices are competitive in the marketplace. Our experience has been that informed customers often choose to buy a more heavily-featured product once they understand the applicability and benefits of its features. Heavily-featured products typically carry higher average selling prices and higher margins than less-featured, entry-level price point products.
In response to the declines in our overall comparable store sales, for fiscal 2017 we are focused on two specific actions.
Our first focus for fiscal 2017 is increasing net sales. The appliance category continues to be the centerpiece of our business, and as such, we continue to drive specific initiatives around the category. We continue to enhance our product selection by adding additional Fine Lines departments. Fine Lines departments incorporate ultra premium appliances brands that are only available to our customers in stores with Fine Lines departments. As of December 31, 2016, we operated 17 stores with Fine Lines departments with an additional four Fine Lines departments expected to open during the fiscal 2017 fourth quarter. In addition to the Fine Lines departments, to drive appliance revenues, we continue to offer promotions focused on appliances, including free delivery. For the
nine months ended December 31, 2016
, appliances accounted for
60%
of our total revenues and appliance same store sales had increased
1.8%
.
To further grow revenues in all departments, we expanded our product selection through www.hhgregg.com. Our investments in www.hhgregg.com are expected to increase the online purchase of products by consumers as well as expand the endless aisle concept, offering products not available in stores through www.hhgregg.com and the in-store Store2Door kiosk. The Store2Door kiosk, as well as the Store2Door web feature, allows customers to purchase products not available in the store and have them delivered to their home. During the
nine months ended December 31, 2016
, we increased online sales by 15.3%
compared to the
nine months ended December 31, 2015
. In all of our categories, we continue to offer delivery and installation capabilities and are investing in the infrastructure and revenue generating capabilities of these areas by improving upon the Store2Door service.
We continue to reset the layout of our stores to better showcase our selection of appliances, consumer electronics and home products. These changes are designed to make our stores more visually appealing to our customers, as well as to display merchandise by functionality. For instance, furniture and appliances are prominently displayed in the front of our stores successfully reset. We have completed 101 of the 114 fiscal 2017 planned existing store resets as of December 31, 2016. We plan on completing the resets of the 13 additional stores during the fourth quarter of fiscal 2017 bringing our total resets completed to 152 stores.
Our goal is to establish long-term relationships with our customers through our stores and our website. We want to gain our customer's trust during the sales process. To accomplish this goal, we will continue to train and develop our consultative sales staff to enable them to educate our customers on the benefits of our feature-rich products. We also offer the ultimate price center which shows the customer the competitor's price of most of our products in the store so that the customer can see that they are paying the lowest price possible. In addition, we offer a comprehensive suite of services including delivery and installation, third-party premium service plans and third-party in-home service and repair, and repair and maintenance of our products. By putting the customer first, we believe we gain our customer's trust and ensure that the customer has a positive sales experience, which we believe leads to repeat business.
Our second focus for fiscal 2017 is productivity. We continue to focus on reducing our overall selling, general and administrative expenses including store level, corporate and logistics expenses. We began restructuring our logistics network in our second fiscal 2017 quarter by combining our Indianapolis and Chicago distribution centers into a new facility in the Cincinnati area and right-sizing the warehouses in the Indianapolis and Chicago market for local deliveries. The restructuring was complete in October 2016. Unfortunately, the efficiencies we expected were not achieved in the quarter ended December 31, 2016. We are correcting the issues and expect to see efficiencies in the fourth quarter. To date, we incurred $5.6 million of non-recurring costs related to this logistics restructure. We also continue to evaluate inventory productivity to determine ways to reduce inventory in all categories. As a result of our evaluation, as of
December 31, 2016
, our inventory levels were down
38.1%
, or
$129.5 million
, compared to
December 31, 2015
. Finally, using the knowledge we obtained during fiscal 2016, we continue to optimize our fiscal 2017 marketing spend to the most effective mediums to drive in-store and online traffic.
Business Strategy and Core Philosophies.
Our business strategy is centered around offering our customers a superior customer purchase experience. From the time the customers walk in the door, they experience a well-designed, customer-friendly store. Our stores are brightly lit and have clearly distinguished departments that allow our customers to find what they are looking for. We greet and assist our customers with our highly-trained consultative sales force, who educate our customers about the different product features.
We believe our products are rich in features and innovation. We also believe that customers find it helpful to have someone explain the features and benefits of a product as this assistance allows them the opportunity to buy the product that most closely matches their needs. We focus our product assortment on big box items requiring in-home delivery and installation in order to utilize service offerings. We follow up on the customer purchase experience by offering delivery capabilities on many of our products and in-home installation service.
While we believe many of our product offerings are considered essential items by our customers, other products and certain features are viewed as discretionary purchases. As a result, our results of operations are susceptible to a challenging macro-economic environment. As consumers show a more cautious approach to purchases of discretionary items, customer traffic and spending patterns continue to be difficult to predict. By providing a knowledgeable consultative sales force, delivery and installation capabilities, credit offerings and expanded product offerings, we believe we offer our customers a differentiated value proposition.
Retail appliance sales are correlated to the housing industry and housing turnover. As more people purchase existing homes in the market, appliance sales tend to trend upward. Conversely, when demand in the housing market declines, appliance sales are negatively impacted. The U.S. Census Bureau’s data on New Residential Construction shows that U.S. Housing Start-Up’s experienced a 5.6% increase for the twelve-month period ended November 30, 2016 over the prior year comparable period. The appliance industry has benefited from increased innovation in energy efficient products. While these energy efficient products typically carry a higher average selling price than traditional products, they provide the consumer significant dollars in annual energy savings. Average unit selling prices of major appliances are not expected to change dramatically in the foreseeable future. For the
nine months ended December 31, 2016
we experienced a low single digit decrease in average unit selling prices in appliances compared to the
nine months ended December 31, 2015
. For the
nine months ended December 31, 2016
, we generated
60%
of total product sales from the sale of home appliances. With the addition of the Fine Lines departments, promotions aimed towards appliances and refined product assortments by geography, we were successful in driving additional traffic, and converting that into additional revenues for the appliance category for the
nine months ended
December 31, 2016
. We had a comparable store sales increase of
1.8%
in appliances for the
nine months ended December 31, 2016
.
The consumer electronics industry is dependent on new product innovations to drive sales and profitability. Innovative, heavily-featured products are typically introduced at relatively high price points. Over time, price points gradually decline to drive consumption. Accordingly, there has been consistent price compression in flat panel televisions for equivalent screen sizes in recent years without a widely accepted innovation in technology to offset this compression. As new technology has not been sufficient to keep demand constant, the industry has experienced declining demand, gross margin rates, and average selling prices. Over the last couple of years, we have proactively shifted our focus towards larger screen sizes with higher profit margins, which has also resulted in lost market share in the consumer electronics category, as we offered fewer smaller screen size televisions. In addition, we have seen the integration of traditional consumer electronics devices to connected devices in the last few years. For the
nine months ended December 31, 2016
, we generated
34%
of total product sales from the sale of consumer electronics. For calendar 2017, the U.S. Consumer Technology Association projects that unit sales of digital displays will be down 1.9% compared to calendar 2016. For the
nine months ended December 31, 2016
, we had a comparable store sales decrease of
29.6%
for consumer electronics. Our decrease in comparable store sales was due to declines in units sold, especially in smaller television screen sizes, and declines in average selling prices in all screen sizes. We have made the strategic decision to focus on the more profitable large premium televisions. As a result of this strategic decision, we would expect to continue to see declines in comparable store sales but improvements in margins.
In previous years, we have introduced new products to help offset falling market demand and market share losses of our product categories. We will continue to monitor the performance of these categories, along with market share shifts between the competitive set in our existing categories. We continue to refine our assortment in the furniture category and focus on the great room, a large room in a modern house that combines features of a living room with those of a dining room or family room. Even though we experienced a slight decrease in same store sales for our home products for the
nine months ended December 31, 2016
, we are optimistic we will benefit from the growth experienced by the industry. Our home products comparable store sales for
nine months ended December 31, 2016
decreased
3.3%
from the prior year. For the
nine months ended December 31, 2016
, we generated
6%
of total product sales from the sale of furniture and mattresses.
Seasonality.
Our business is seasonal, with a higher portion of net sales, operating costs, and operating profit realized during the quarter that ends December 31st due to the overall demand for consumer electronics during the Thanksgiving and Christmas holiday shopping season. For fiscal 2017 we had a comparable store sales decrease of
38.6%
in consumer electronics for the
three months ended December 31, 2016
resulting in lower net sales and operating profit in the quarter ending December 31, 2016 than we historically have experienced. Appliance sales are impacted by seasonal weather patterns, but are less seasonal than our electronics business and help to offset the seasonality of our overall business.
Critical Accounting Policies
We describe our critical accounting policies and estimates in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the fiscal year ended
March 31, 2016
in our latest Annual Report on Form 10-K filed with the SEC on
May 19, 2016
. There have been no significant changes in our critical accounting policies and estimates since the end of fiscal
2016
.
Results of Operations
Operating Performance.
The following table presents selected unaudited condensed consolidated financial data (in thousands, except share amounts, per share amounts, and store count data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
December 31,
|
|
December 31,
|
|
(unaudited)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Net sales
|
$
|
452,791
|
|
|
$
|
593,219
|
|
|
$
|
1,330,863
|
|
|
$
|
1,521,158
|
|
|
Net sales % decrease
|
(23.7
|
)%
|
|
(10.9
|
)%
|
|
(12.5
|
)%
|
|
(7.5
|
)%
|
|
Comparable store sales % decrease
(1)
|
(22.2
|
)%
|
|
(10.8
|
)%
|
|
(11.8
|
)%
|
|
(7.3
|
)%
|
|
Gross profit as a % of net sales
|
22.0
|
%
|
|
26.1
|
%
|
|
27.2
|
%
|
|
28.1
|
%
|
|
SG&A as a % of net sales
|
25.6
|
%
|
|
19.6
|
%
|
|
25.7
|
%
|
|
22.4
|
%
|
|
Net advertising expense as a % of net sales
|
5.7
|
%
|
|
5.8
|
%
|
|
5.3
|
%
|
|
5.5
|
%
|
|
Depreciation and amortization expense as a % of net sales
|
1.5
|
%
|
|
1.4
|
%
|
|
1.6
|
%
|
|
1.7
|
%
|
|
Asset impairment charges as a % of net sales
|
1.7
|
%
|
|
3.5
|
%
|
|
0.7
|
%
|
|
1.4
|
%
|
|
Loss from operations as a % of net sales
|
(12.6
|
)%
|
|
(4.2
|
)%
|
|
(6.1
|
)%
|
|
(2.8
|
)%
|
|
Net interest expense as a % of net sales
|
0.2
|
%
|
|
0.1
|
%
|
|
0.2
|
%
|
|
0.1
|
%
|
|
Income tax expense as a % of net sales
|
—
|
%
|
|
0.2
|
%
|
|
—
|
%
|
|
0.1
|
%
|
|
Net loss
|
$
|
(58,269
|
)
|
|
$
|
(26,913
|
)
|
|
$
|
(83,873
|
)
|
|
$
|
(45,794
|
)
|
|
Net loss per diluted share
|
$
|
(2.10
|
)
|
|
$
|
(0.97
|
)
|
|
$
|
(3.02
|
)
|
|
$
|
(1.65
|
)
|
|
Weighted average shares outstanding—diluted
|
27,806,460
|
|
|
27,707,978
|
|
|
27,783,216
|
|
|
27,698,789
|
|
|
Number of stores open at the end of period
|
220
|
|
|
227
|
|
|
|
|
|
|
|
|
|
(1)
|
Comprised of net sales at stores in operation for at least 14 full months, including remodeled and relocated stores, as well as net sales for our e-commerce site.
|
Net loss increased 117% to
$58.3 million
for the
three months ended December 31, 2016
, or
$2.10
per diluted share, compared with net loss of
$26.9 million
, or
$0.97
per diluted share, for the comparable prior year period. Net loss increased 83% to
$83.9 million
for the
nine months ended December 31, 2016
, or
$3.02
per diluted share, compared with net loss of
$45.8 million
, or
$1.65
per diluted share, for the comparable prior period. The increase in net loss for the three and
nine months ended December 31, 2016
compared to the prior year period was due to decreased net sales of
23.7%
and
12.5%
for the three and
nine months ended December 31, 2016
, respectively, and decreased gross margins, as a percentage of sales. These decreases were partially offset by a lower asset impairment charge in the current periods as compared to the prior year periods and a decrease in advertising expense.
Net sales for the
three months ended December 31, 2016
decreased
23.7%
to
$452.8 million
from
$593.2 million
in the comparable prior year period. The decrease in net sales for the three month period was primarily the result of a comparable store sales decrease of
22.2%
. Net sales for the
nine months ended December 31, 2016
decreased
12.5%
to
$1.3 billion
from
$1.5 billion
in the comparable prior year period. The decrease in net sales for the nine month period was primarily the result of a comparable store sales decrease of
11.8%
.
Net sales mix and comparable store sales percentage changes by product category for the three and
nine months ended December 31, 2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales Mix Summary
|
|
Comparable Store Sales Summary
|
|
|
Three Months Ended December 31,
|
|
Nine Months Ended December 31,
|
|
Three Months Ended December 31,
|
|
Nine Months Ended December 31,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Appliances
|
53
|
%
|
|
43
|
%
|
|
60
|
%
|
|
52
|
%
|
|
(4.2
|
)%
|
|
(10.4
|
)%
|
|
1.8
|
%
|
|
(4.1
|
)%
|
|
Consumer electronics
(1)
|
41
|
%
|
|
52
|
%
|
|
34
|
%
|
|
42
|
%
|
|
(38.6
|
)%
|
|
(12.2
|
)%
|
|
(29.6
|
)%
|
|
(12.3
|
)%
|
|
Home products
(2)
|
6
|
%
|
|
5
|
%
|
|
6
|
%
|
|
6
|
%
|
|
(9.0
|
)%
|
|
3.3
|
%
|
|
(3.3
|
)%
|
|
6.2
|
%
|
|
Total
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
(22.2
|
)%
|
|
(10.8
|
)%
|
|
(11.8
|
)%
|
|
(7.3
|
)%
|
|
|
|
|
(1)
|
Primarily consists of televisions, audio, personal electronics, computers and tablets, and accessories.
|
|
|
|
|
(2)
|
Primarily consists of furniture and mattresses.
|
The
decrease
in comparable store sales for the
three months ended December 31, 2016
was driven by a decrease in net sales in all categories. The decrease in net sales for the
nine months ended December 31, 2016
was driven by a decrease in net sales of consumer electronics and home products, slightly offset by increases in appliances net sales. The comparable store sales decrease of
4.2%
for the
three months ended December 31, 2016
in the appliance category is due to decreases in both unit demand and in average selling prices. The comparable store sales increase of
1.8%
for the
nine months ended December 31, 2016
in the appliance category is due to increases in unit demand partially offset by a decrease in average selling prices. The consumer electronics category comparable store sales declines of
38.6%
and
29.6%
for the three and
nine months ended December 31, 2016
, respectively, were primarily due to declines in units sold, especially in smaller television screen sizes, and average selling prices declines in all screen sizes. The decrease of
9.0%
in comparable store sales for the home products category for the
three months ended December 31, 2016
was largely a result of decreases in demand and average selling prices. The decrease of
3.3%
in comparable store sales for the home products category for the
nine months ended December 31, 2016
was largely a result of decreases in demand offset by increases in average selling prices.
Three Months Ended December 31, 2016
Compared to
Three Months Ended December 31,
2015
Gross profit margin, expressed as gross profit as a percentage of net sales,
decreased
for the
three months ended December 31, 2016
to
22.0%
from
26.1%
for the comparable prior year period. The decrease was primarily due to lower gross margin rates in all categories, primarily in consumer electronics, partially offset by a favorable sales mix shift to product categories with higher gross profit margin rates.
SG&A expense, as a percentage of net sales,
increased
599 basis points and decreased $0.5 million, for the
three months ended December 31, 2016
compared to the comparable prior year period. The
increase
in SG&A as a percentage of net sales was primarily the result of the deleveraging effect of the net sales decline. As a percentage of net sales, wages and occupancy costs increased 186 basis points and 142 basis points, respectively, for the
three months ended December 31, 2016
compared to the comparable prior year period. In addition, wages decreased $2.0 million primarily due to lower commissions paid as a result of decreased sales partially offset by increased wages due to the unexpected non-recurring costs relating to the distribution center consolidation. Occupancy costs decreased $1.1 million, compared to the prior year period, primarily due to lower rents due to closing stores and common annual maintenance adjustments for leased properties. Delivery services increased 138 basis points as a percentage of net sales, or $2.5 million, primarily due to the increased number deliveries in all categories due to free delivery promotions.
Net advertising expense decreased 2 basis points as a percentage of net sales, or $8.2 million, during the
three months ended December 31, 2016
compared to the prior year period due to a reduction in gross advertising spend driven by continued efficiency in our advertising spend.
Depreciation expense, as a percentage of net sales, increased 14 basis points and decreased $1.3 million, during the
three months ended December 31, 2016
compared to the prior year period. The reduction of expense was primarily the result of a lower depreciable asset base in the current year due to asset impairment charges recorded in fiscal 2016 compared to the comparable prior year period. The increase in depreciation expense as a percentage of sales is due to the deleveraging effect of the net sales decline.
Due to declining sales and overall declines in profitability in the third fiscal quarter the Company performed a detailed store impairment analysis as of December 31, 2016. As a result of this impairment analysis, property and equipment at 21 locations with a net book value of $7.2 million were reduced to estimated aggregate fair value of $0.8 million based on their projected cash flows, discounted at 15%. The Company continues to invest in its store layouts to better showcase its selections of appliances, consumer electronics and home products. For certain locations that were previously evaluated and fully impaired due to declining sales and profitability, the Company performed another evaluation as of December 31, 2016. Thirty-one stores with an aggregate net book value of $1.7 million were reduced to an estimated aggregate fair value of $0.2 million based on their projected cash flows, discounted at 15%. As a result of these analyses, the Company recorded an asset impairment charge of
$7.9 million
for the
three months ended December 31, 2016
. For the three months ended December 31, 2015, property and equipment at
40
locations with a net book value of
$21.7 million
were reduced to estimated aggregate fair value of
$0.8 million
based on their projected cash flows, discounted at
15%
.This resulted in an asset impairment charge of
$20.9 million
for the three months ended December 31, 2015. The fair values were determined using a probability based cash flow analysis based on management's estimates of future store-level sales, gross margins, and direct expenses.
There was no income tax expense or benefit recorded for the third fiscal quarter due to our full valuation allowance. For the three months ended December 31, 2015, we recorded $1.3 million income tax expense due primarily to the settlement of an Internal Revenue Service examination for the prior year.
Nine Months Ended December 31, 2016
Compared to
Nine Months Ended December 31, 2015
Gross profit margin, expressed as gross profit as a percentage of net sales,
decrease
d for the
nine months ended December 31, 2016
to
27.2%
from
28.1%
for the comparable prior year period. The decrease was primarily due to lower gross margin rates in all categories, partially offset by a favorable sales mix shift to product categories with higher gross profit margin rates.
SG&A expense, as a percentage of net sales,
increased
325 basis points, or $0.6 million, for the
nine months ended December 31, 2016
compared to the comparable prior year period. The
increase
in SG&A as a percentage of net sales was primarily the result of the deleveraging effect of the net sales decline. As a percentage of net sales, wages and occupancy costs increased 105 basis points and 82 basis points, respectively, for the nine months ended December 31, 2016 as compared to the comparable prior year period. In addition, wages decreased $1.6 million for the
nine months ended December 31, 2016
compared to the comparable prior year period primarily due to lower commissions paid as a result of decreased sales and a reduction in bonus expense in the current year as compared to the prior year period. Occupancy costs decreased $1.0 million, for the
nine months ended December 31, 2016
, compared to the prior year period, primarily due to common annual maintenance adjustments for leased properties. Delivery services increased 96 basis points as a percentage of net sales, or $6.9 million, for the
nine months ended December 31, 2016
as compared to the comparable prior year period, primarily due to the increased number deliveries in all categories due to free delivery promotions.
Net advertising expense decreased $12.8 million, or 18 basis points as a percentage of net sales, during the
nine months ended December 31, 2016
compared to the prior year period due to a reduction in gross advertising spend driven by continued efficiency in our advertising spend.
Depreciation expense, as a percentage of net sales, decreased 7 basis points, or $4.1 million, during the
nine months ended December 31, 2016
compared to the prior year period. The reduction of expense was primarily the result of a lower depreciable asset base in the current year due to asset impairment charges recorded in fiscal 2016 compared to the comparable prior year period.
Due to declining sales and overall declines in profitability in the
nine months ended December 31, 2016
the Company performed a detailed store impairment analysis as of December 31, 2016. As a result of the
nine months ended December 31, 2016
impairment analysis, property and equipment at 21 locations with a net book value of $7.2 million were reduced to estimated aggregate fair value of $0.8 million based on their projected cash flows, discounted at 15%. The Company continues to invest in its store layouts to better showcase its selections of appliances, consumer electronics and home products. For certain locations that were previously evaluated and fully impaired due to declining sales and profitability, the Company performed another evaluation as of December 31, 2016. Thirty-seven stores with an aggregate net book value of $3.0 million were reduced to an estimated aggregate fair value of $0.2 million based on their projected cash flows, discounted at 15%. As a result of these analyses, the Company recorded an asset impairment charge of
$9.2 million
for the
nine months ended December 31, 2016
. For the nine months ended December 31, 2015, property and equipment at
40
locations with a net book value of
$21.7 million
were reduced to estimated aggregate fair value of
$0.8 million
based on their projected cash flows, discounted at
15%
.This resulted in an asset impairment charge of
$20.9 million
for the three months ended December 31, 2015. The fair values were determined using a probability based cash flow analysis based on management's estimates of future store-level sales, gross margins, and direct expenses.
There was no income tax expense or benefit recorded for the
nine months ended December 31, 2016
due to our full valuation allowance. For the nine months ended December 31, 2015, we recorded $1.3 million income tax expense due primarily to the settlement of an Internal Revenue Service examination for the prior year.
Liquidity and Capital Resources
The following table presents a summary on a consolidated basis of our net cash (used in) provided by operating, investing and financing activities (dollars are in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Net cash used in operating activities
|
$
|
(696
|
)
|
|
$
|
(12,203
|
)
|
|
Net cash used in investing activities
|
(18,674
|
)
|
|
(10,486
|
)
|
|
Net cash provided by (used in) financing activities
|
17,620
|
|
|
(676
|
)
|
Our liquidity requirements arise primarily from our need to fund working capital requirements and capital expenditures. We make capital expenditures principally to fund our existing stores along with our e-commerce business and the related
supply chain infrastructure, which includes, among other things, investments in new distribution facilities, remodeling and relocation of existing stores, enhancements to our e-commerce site, as well as information technology and other infrastructure-related projects.
During the
nine months ended December 31, 2016
, we continued to invest in our infrastructure, including management information systems, e-commerce and distribution capabilities, as well as incur capital remodeling and improvement costs. Capital expenditures for fiscal
2017
will be funded through cash, borrowings under our Amended Facility described below and tenant allowances from landlords.
Cash Used in Operating Activities.
Net cash used in operating activities
primarily consists of net loss as adjusted for increases or decreases in working capital and non-cash charges such as depreciation, asset impairment, loss on early extinguishment of debt and stock compensation expense. Cash used in operating activities was $
0.7
million and $
12.2
million for the
nine months ended December 31, 2016
and
2015
, respectively. The decrease in cash used in operating activities is primarily due to a lower level of inventory in the current year and an increase in customer deposits. These increases were partially offset by an increased net loss for the nine months ended December 31, 2016, a decrease in accounts payable and accrued liabilities and decreased non-cash asset impairment charge in the current year period.
Cash Used In Investing Activities.
Net cash used in investing activities
was $
18.7
million and $
10.5
million for the
nine months ended December 31, 2016
and
2015
, respectively. The increase in cash used in investing activities is primarily due to an increase in capital expenditures. In the
nine months ended December 31, 2016
, we invested capital in six new Fine Lines departments, one store relocation, a new regional distribution center, a local delivery center, the redesign and remodeling of 101 existing stores and infrastructure and e-commerce. In the
nine months ended December 31, 2015
, we opened one new store with a Fine Lines department, redesigned and remodeled existing stores and invested in infrastructure and e-commerce.
Cash Provided by (Used In) Financing Activities.
Net cash provided by (used in) financing activities
was $
17.6
million and $
(0.7)
million for the
nine months ended December 31, 2016
and
2015
, respectively. The increase in cash provided by financing activities is due to $30.3 million of net borrowings under our Amended Facility, as described below, partially offset by greater net repayments on the inventory financing facility compared to the prior year and the payment of financing costs related to the Amended Facility.
Amended Facility.
On June 28, 2016, Gregg Appliances entered into Amendments No. 2 & 3 to the Amended and Restated Loan and Security Agreement (the “Amended Facility”) which amended the maximum amount available under the Amended Facility from $400 million to
$300 million
, comprised of a
$20 million
first-in last-out revolving tranche ("the FILO") and a
$280 million
revolver, subject to borrowing base availability, and extended the maturity date from July 29, 2018 to
June 28, 2021
. Refer to Note 6, Debt, of the Notes to Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q for further information about the Amended Facility.
The Amended Facility places limitations on the ability of Gregg Appliances to, among other things, incur debt, create other liens on its assets, make investments, sell assets, pay dividends, undertake transactions with affiliates, enter into merger transactions, enter into unrelated businesses, open collateral locations outside of the United States, or enter into consignment assignments or floor plan financing arrangements. The Amended Facility also contains various customary representations and warranties, financial and collateral reporting requirements and other affirmative and negative covenants. Gregg Appliances was in compliance with the restrictions and covenants of the Amended Facility at
December 31, 2016
.
As of
December 31, 2016
and
March 31, 2016
, Gregg Appliances had
$30.3 million
and no borrowings, respectively, outstanding under the Amended Facility. The total borrowing availability under the Amended Facility was
$94.1 million
and
$139.9 million
as of
December 31, 2016
and
March 31, 2016
, respectively. The Company typically borrows based on LIBOR. As of
December 31, 2016
, the interest rate on the FILO based on LIBOR was
5.5%
. The interest rate on the revolver based on LIBOR was
2.5%
and
2.1%
as of
December 31, 2016
and
March 31, 2016
, respectively.
Long Term Liquidity
. Anticipated cash flows from operations and funds available from our Amended Facility, together with cash on hand, is expected to provide sufficient funds to finance our operations for the next 12 months. As a normal part of our business, we consider opportunities to refinance our existing indebtedness, based on market conditions. Although we may refinance all or part of our existing indebtedness in the future, there can be no assurances that we will do so. Changes in our operating plans, lower than anticipated sales, increased expenses, reduced vendor terms, acquisitions or other events may require us to seek additional debt or equity financing. There can be no guarantee that financing will be available on acceptable terms or at all. Additional debt financing, if available, could impose additional cash payment obligations, additional covenants and operating restrictions.
Contractual Obligations
See our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the fiscal year ended
March 31, 2016
in our latest Annual Report on Form 10-K filed with the SEC on
May 19, 2016
for additional information regarding our contractual obligations.
Cautionary Note Regarding Forward-Looking Statements
Some of the statements in this document constitute “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our business’ or our industry’s actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by any forward-looking statements. Such statements include, our estimates of cash flows for purposes of impairment charges, our ability to manage costs, our ability to execute on our 2017 initiatives, innovation in the video industry, the impact and amount of non-cash charges, and shifts in our sales mix. hhgregg has based these forward-looking statements on its current expectations, assumptions, estimates and projections. While hhgregg believes these expectations, assumptions, estimates and projections are reasonable, these forward-looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond its control. These and other important factors may cause hhgregg's actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. Some of the key factors that could cause actual results to differ from hhgregg's expectations are: the ability to successfully execute the Company's strategies and initiatives, particularly in returning the Company to profitable growth; the Company's ability to increase customer traffic and conversion; competition in the retail industry; the Company's ability to maintain a positive brand perception and recognition; the Company's ability to attract and retain qualified personnel; the Company's ability to maintain the security of customer, associate and Company information; rules, regulations, contractual obligations, compliance requirements and fees associated with accepting a variety of payment methods; the Company's ability to effectively achieve cost cutting initiatives; the Company's ability to generate strong cash flows to support its operating activities; the Company's relationships and operations of its key suppliers; the Company's ability to generate sufficient cash flows to recover the fair value of long-lived assets; the Company's ability to maintain and upgrade its information technology systems; the fluctuation of the Company's comparable store sales; the effect of general and regional economic and employment conditions on the Company's net sales; the Company's ability to meet financial performance guidance; disruption in the Company's supply chain; changes in trade regulation, currency fluctuations and prevailing interest rates; and the potential for litigation. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “intend,” “tends,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of those terms or other comparable terminology. Actual events or results may differ materially because of market conditions in our industry or other factors. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our latest Annual Report on Form 10-K filed with the SEC on
May 19, 2016
. The forward-looking statements are made as of the date of this document and we assume no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements.