UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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| ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended March 31, 20132014
OR
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| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-33600
hhgregg, Inc.
(Exact name of registrant as specified in its charter)
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| Delaware | | 20-8819207 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
4151 East 96th Street Indianapolis, IN | | 46240 |
| (Address of principal executive offices) | | (Zip Code) |
| Registrant’s telephone number, including area code: (317) 848-8710 |
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| Securities registered pursuant to Section 12(b) of the Act: |
| Title of each class | | Name of each exchange on which registered |
| Common Stock, par value $.0001 per share | | New York Stock Exchange |
Securities registered pursuant to section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes ý No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes ý No
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. |
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| | Large accelerated filer | ¨ | Accelerated Filer | ý |
| | Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes ý No
The aggregate market value of the voting and non-voting common stock held by non-affiliates of the registrant as of the last day of the second fiscal quarter ended September 30, 20122013 was approximately $118,810,727244,450,241 based on the closing stock price of $6.9017.91 per share on that day. (For purposes of this calculation all of the registrant’s directors and executive officers are deemed affiliates of the registrant.)
The number of shares of hhgregg, Inc.’s common stock outstanding as of May 15, 20132014 was 31,471,45328,460,218.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive Proxy Statement (to be filed pursuant to Regulation 14A within 120 days after the Registrant’s fiscal year-end of March 31, 20132014) for the regular meeting of stockholders to be held on July 30, 201329, 2014 are incorporated by reference into Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTESCONTENTS
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| Part I. | |
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| Item 1. | Business | |
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| Item 1A. | Risk Factors | |
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| Item 1B. | Unresolved Staff Comments | |
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| Item 2. | Properties | |
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| Item 3. | Legal Proceedings | |
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| Item 4. | Mine Safety Disclosures | |
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| Part II. | |
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| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | |
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| Item 6. | Selected Financial Data | |
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| Item 7. | Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations | |
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| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk | |
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| Item 8. | Financial Statements and Supplementary Data | |
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| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |
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| Item 9A. | | |
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| Item 9B. | Other Information | |
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| Part III. | |
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| Item 10. | Directors, Executive Officers and Corporate Governance | |
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| Item 11. | Executive Compensation
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| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
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| Item 13. | Certain Relationships and Related Transactions, and Director Independence | |
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| Item 14. | Principal Accounting Fees and Services | |
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| Part IV. | |
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| Item 15. | | |
Cautionary Note Regarding Forward-Looking Statements
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”), provide a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about their companies. Some of the statements in this document and any documents incorporated by reference constitute “forward-looking statements” within the meaning of Section 21E of the Exchange Act. 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 businesses or our industries’ 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 statements about our plans, strategies, prospects, changes, outlook and trends in our business and the markets in which we operate, statements around our ability to grow within our existing and new markets;operate; our drivers of customer loyalty, referrals and repeat business; the impact of a motivated full-time sales force; timeline for new stores to generate positive cash flow and cash payback; our ability to expand our store concept to markets where there is demand for our product mix and customer service; expectations around slowing future store growth; expectations around becoming a national retailer; future focus on enhancing store productivity within existing markets, evolving our sales mix, enhancing our service offerings and expanding and targeting our customer base; our approach to building store density; impact of our store development strategy on our results of operation, net sales growth and capital expenditures; the number of store openings in fiscal 2014;2015; how we enhance our brand image and customer experience; awareness around our financing offers and expectations around testing new offerings;offers; other new credit offerings; non-recourse nature of financing offerings; increasing our service offerings; changes to our e-commerce experience; our new point-of-sale system; improvements to customer delivery capabilities; the richness of our products'products’ features and innovations; our ability to compete in our market and industry; brand recognition and reputation; customer purchases of higher-margin, feature rich products; the outcome and impact of legal proceedings; payment of dividends; emphasis on appliances in our marketing strategies; expectations around the U.S. housing market and general economy; new product tests and launches and offerings; reshaping our videoconsumer electronics product category strategy and finding a more favorable mix of product offerings; shifting our product mix away from consumer electronic categories and increasing our product offerings around home entertainment furniture fitness equipment and new product categories; impact of accounting policies and estimates; expectations around capital expenditures; our revolving credit facility; ability to fund operations; ability to refinance existing indebtedness; ability to obtain additional debt financing; future payments under our Non-Qualified Deferred Compensation Plan; our interest rate risk; and our tax assets. 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. These statements are only predictions. Actual events or results may differ materially because of market conditions in our industries or other factors that are in some cases beyond our control. All of the forward-looking statements are subject to risks and uncertainties. The forward-looking statements are made as of the date of this document or the date of the documents incorporated by reference in this document, as the case may be, 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. Some of the key factors that could cause actual results to differ from our expectations are:
our ability to successfully execute our strategies and initiatives, particularly in the sales mix shift and consumer electronics category;
our ability to maintain a positive brand perception and recognition;
the failure of manufacturers to introduce new products and technologies;
competition in existing, adjacent and new metropolitan markets;
our ability to maintain the security of customer, associate and Company information;
our ability to roll out new credit offerings to customers;
our ability to effectively manage and monitor our operations, costs and service quality;
our ability to maintain and upgrade our information technology systems;
our ability to maintain and develop our multi-channel sales and marketing strategies;
competition from internet retailers;
our ability to meet delivery schedules;
the effect of general and regional economic and employment conditions on our net sales;
our ability to maintain a positive brand perceptionattract and recognition;retain qualified sales personnel;
our ability to successfully execute our strategies and initiatives;meet financial performance guidance;
our ability to roll out new credit offeringsgenerate sufficient cash flows to customers;
our ability to maintainrecover the securityfair value of customer, associate and Company information;
the impact of average selling prices on net sales;
competition in existing, adjacent and new metropolitan markets;
competition from internet retailers;
ability to modify our product mix based on changes in consumer trends and preferences;
our ability to effectively manage and monitor our operations, costs and service quality;long-lived assets;
our reliance on a small number of suppliers;
rapid inflation or deflation in core product prices;
the failure of manufacturers to introduce new products and technologies;
customer acceptance of new technology;
our dependence on our key management personnel;
our ability to attract and retain qualified sales personnel;
our ability to negotiate with our suppliers to provide product on a timely basis at competitive prices;
the identification and acquisition of suitable sites for our stores and the negotiation of acceptable leases for those sites;
fluctuation in seasonal demand;
our ability to maintain our rate of growth and penetrate new geographic areas;
our ability to maintain and upgrade our information technology systems;
the effect of a disruption at our regional distribution centers;
changes in cost for advertising; and
changes in trade regulation, currency fluctuations and prevailing interest rates.rates; and
the potential for litigation.
Other factors that could cause actual results to differ from those implied by the forward-looking statements in this Annual Report on Form 10-K are more fully described in the “Risk Factors” section and elsewhere herein. Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements included herein are made only as of the date hereof.hereof or the date of the document incorporated by reference into this document, as the case may be. Except as required by law, we do not undertake and specifically decline any obligation to update any of these forward-looking statements or to publicly announce the results of any revisions to these forward-looking statements to reflect future events or developments.
Our Company
Unless the context otherwise requires, the use of the terms “we”, “us”, “our”, “hhgregg” and the “Company” in this Annual Report on Form 10-K refers to hhgregg, Inc. and our subsidiaries. Our fiscal year ends on March 31.31, refer to Note 1 of the Condensed Consolidated Financial Statements.
We are a specialty retailer of home appliances, televisions, computers, tablets, consumer electronics, home entertainment furniture, mattresses, fitness equipment and related services operating under the name hhgregg™. As of March 31, 20132014, we operated 228 stores in Alabama, Delaware, Florida, Georgia, Illinois, Indiana, Kentucky, Louisiana, Maryland, Mississippi, Missouri, New Jersey, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia, West Virginia, and Wisconsin. During fiscal 2014, we adopted a new company purpose statement; “To inspire and delight our customers with a truly differentiated purchase experience to help bring their homes to life.”We differentiate ourselves from our competitors by providing our customers with a consultative and educational purchase experience. We also distinguish ourselves by offering next-dayexperience, combined with delivery capabilities on many of our products. Our superior customer purchase experience has enabled us to successfully compete against the other leading videoappliance and applianceconsumer electronics retailers over the course of our 58-year59-year history. We operate in one reportable segment. Wesegment and do not have international operations.
We design our stores to be visually appealing to our customers and to highlight our premium selection of appliances, consumer electronics, and consumer electronics.furniture. We carry approximately 350 models of major appliances in stock and a large selection of TVs, consumer electronics, computers and mobile products, home entertainmenttablets, furniture, mattresses and fitness equipment. We utilize appliance displays, digital product centers, flat panel television display walls appliance displays and digital product centersroom settings to showcase our broad selection of products with advanced features and functionality. Our new store prototypes typically range from 25,000 to 30,000 square feet and are located in power centers or freestanding locations in high traffic areas, as close as feasible to our major competitors. We drive store traffic and enhance our brand recognition through year-round television advertising, weekly newspaper inserts, e-mail, direct mail, e-mailsocial media and web promotions.
Our sales can be categorized in the following manner:
Appliances: We offer a broad selection of major appliances, including the latest generation refrigerators, cooking ranges, dishwashers, freezers, washers and dryers, sold under a variety of leading brand names. Representative brands include Amana, Electrolux, Frigidaire, GE, Haier, KitchenAid, LG, Maytag, Samsung and Whirlpool. For fiscal 20132014, home appliances represented 42%47% of net sales.
VideoConsumer electronics: We offer a broad selection of the latest videoconsumer electronics products, such as LED televisions, audio systems, cameras and Blu-ray players. Representative brands include Coby, Curtis, Hisense,Haier, LG, Samsung, Seiki, Sharp, Sony and Toshiba. For fiscal 20132014, videoconsumer electronics products represented 36%38% of net sales.
Computing and mobile phoneswireless: We offer a broad selection of computer and mobile phonewireless products, including notebook computers, tablets and mobile phones. Representative brands include Apple, Asus, Curtis, Dell, Kindle, Lenovo, Hewlett Packard, Samsung, Sony Toshiba and VerizonToshiba. For fiscal 20132014, computing and mobile phoneswireless represented 11%10% of net sales. We offered contract-based mobile phones in fiscal 2014, but we intend to exit the contract-based mobile phone business during the first fiscal quarter of 2015. Historically, this business negatively impacted the Company’s overall operating profitability, and the decision to exit the business better aligns with our long-term strategic initiatives.
OtherHome products: We offer audio products, fitness equipment, furniture, mattresses and other select popular consumer electronicshome products. Representative brands include Ashley, ProForm, Serta, Tech Craft and accessories. Products such as home audio systems, cameras, personal navigation systems, gaming bundles and advanced cables generate and support store traffic and create cross-selling opportunities with our core products.Tempur-Pedic. For fiscal 20132014, otherhome products represented 11%5% of net sales.
Additionally, we sell a suite of services including third-party premium service plans (“PSPs”), third-party in-home service and repair of our products, next-day delivery and installation and in-home repair and maintenance. Services and PSP revenues are included as a component of net sales in the categories listed above. Our suite of services is aimed at enhancing our customers’ superior purchase experience.
We believe the following strengths contribute significantly to our success and position us for growth within our existing and new markets:
Superior customer purchase experienceHighly trained sales associates.. We provide a superior purchase experience to our customers through our in-store experience, high level of customer service and delivery and installation capabilities, which we believe drives customer loyalty, referrals and repeat business. We are able to educate our customers on the features and benefits of the products we offer through our extensively trained, commissioned sales force. Approximately 94%93% of our sales associates are full-time employees,
supporting our goal of hiring individuals who are career oriented and motivated. We believe that, when fully informed, customers frequently purchase higher-end, feature-rich products. Our ability to drive sales of more advanced appliance and videoconsumer electronics products has made us an important partner for our vendors to present their state-of-the-art offerings and enables us to be among the first to introduce new products and technologies in our stores. We believe this further enhances our brand image and customer experience. We provide our customers with an effective multi-channel experience which allows them to move seamlessly across our website, mobile app, social media, call center and store.
Best in class delivery and installation capabilities. We provide a superior purchase experience to our customers through our in-store experience, high level of customer service and delivery and installation capabilities, which we believe drives customer loyalty, referrals and repeat business. We offer next-day delivery for many of our products and also provide quality in-home installation services. These features significantly enhance our ability to sell large, more complex products. Our network of 1514 regional and local distribution centers provides a local supply of inventory that supports our next-day delivery strategy. We conduct a significant number of customer surveys each year to ensure customer satisfaction and to provide us with feedback to continue improving our superior customer purchase experience.
Expanded credit offerings. In addition to our private-label credit card, we have expanded our credit offerings to include “rent to own” and secondary financing options for customers that would not ordinarily qualify for the private label card. We continue to seek alternative financing offerings in order to meet our customers needs.
Multi-channel. We have enhanced our multi-channel capabilities to allow consumers to experience an integrated online and in-store purchase experience. Our multi-channel approach gives customers the ability to make a purchase in store, to buy online and pick up either in store or to buy online and have the product shipped or delivered. We have added features including an expanded assortment of products available online only, mobile commerce capabilities, and online credit applications. We plan to continue to focus investment in our multi-channel capabilities in fiscal 2015.
Balanced mix of premium appliances, consumer electronics and videofurniture products. We offer an extensive selection of premium appliances, consumer electronics and videofurniture products. Historically, our appliance and furniture business has provided us with financial stability and consistently strong cash flow while our videoconsumer electronics products are typically more seasonal in nature. Our cash flow tends to be more stable over the long term as a result of our balanced merchandise mix of appliances and video products. In addition, the combination of appliances, and large screen televisions and furniture, each of which frequently requires home delivery and installation, provides us with an additional stream of revenue related to in-home delivery and installation.
Proven ability to successfully penetrate new markets. We seek to expand our highly portable store concept into new markets where we believe there is significant underlying demand for our product mix and customer services, as well as an attractive demographic profile. We have successfully opened or acquired stores in 17 new metropolitan markets in the past five years, most recently in the Milwaukee and Green Bay, Wisconsin, Springfield, Illinois and St. Louis, Missouri markets. We typically enter a market with a scaled presence to efficiently leverage our advertising spending, regional management and delivery and distribution infrastructure. Within a short time period, usually not exceeding 18 months, we grow our store count in the new market to optimize leverage of our fixed costs and our market share. In fiscal 2014, we plan to slow our short term growth by opening a limited number of stores in existing markets. This will allow us to focus on maximizing the productivity of our existing store base and continue to enhance our product and service offerings. In the long-term, we continue to believe that we will be a national retailer.
Customer Purchase Experience
Our goal is to serve our customers in a manner that generates loyalty, referrals and repeat business. We focus on making every customer’s purchase experience a positive one and aim to be the primary destination for home appliances, and consumer electronics and furniture in our markets. We employ multiple internal systems to ensure customer satisfaction in each of our markets, and we focus on offering a comprehensive suite of services such as delivery and home installation to our customers. We aim to offer the customer a convenient shopping experience by locating our stores in high traffic areas with a focus on visibility, access and parking availability.
Our philosophy for providing our customers with a superior purchase experience includes:
employing a highly motivated, commissioned sales force and training them so they are able to educate our customers on the benefits of feature-rich, higher margin products;
offering a deep product assortment in core categories;
providing a warm and bright store ambiance that showcases our products well;
providing quick and efficient delivery for many of our products and quality in-home installation services;
offering extended-term financing through third-party providers to qualified customers;
soliciting customer feedback to allow us to monitor and improve individual store and employee performance; and
offering customer support through our central call center seven days per week.
Private Label Credit CardAttractive Finance Offerings.. We offer customers financing through a private label credit card with a third-party financial institution. The third-party financial institution assumes the risk of collection from our customers and has no recourse against us for any uncollected amounts. Private label credit card sales accounted for 35%36%, 31%34% and 29%31% of our net sales in fiscal 2014, 2013 and 2012, respectively. During fiscal 2013, we rolled out a “lease to own” option, which is non-recourse to the Company.
2012 and 2011, respectively.During fiscal 2014, we rolled out a secondary finance offering for lower-middle income customers that do not qualify for the private label credit card, which is non-recourse to the Company as well. We have continued to increase the awareness of our financing offers with customers and expect to continue to test new offerings in fiscal 2014.
Product Service and Support. We currently outsource product service and repair2015 to provide financing options to more of our products sold with and without extended warranties. The majority of extended warranties we sell to our customers are third-party PSPs. The PSPs typically extend three to five years beyond the manufacturer’s warranty and cover all service and repair-related maintenance. We closely monitor the performance of our third-party vendor to ensure the quality and timeliness of their repair services. We offer customer support via our central customer service call center. Our service center is open seven days a week and provides customers with a toll-free resource to ask product and other support-related questions. We complete the customer purchase experience by offering a full array of in-store and in-home product services, including PC optimization and home theater and appliance installation to ensure the customer is able to fully enjoy their purchase.customers.
Merchandising and Purchasing
Merchandise. We focus on offering extensive product and brand selections. We offer a broad selection of leading brands at everyday competitive prices and provide a balance of appliances, videoconsumer electronics products, computing, and home products and other consumer electronics.products. Our premium products help drive margins and profitability while our lower-margin products help drive customer traffic. Our balanced mix of premium appliances and video products historically hasfurniture have provided us with financial stability and consistently strong cash flow while our consumer electronics products are typically more stable and less-seasonal cash flow.seasonal in nature.
Product Categories. We sell a wide variety of appliances, audio products, computers, consumer electronics, fitness equipment, furniture, mobile phones, notebook computers, mattresses, and video products.tablets. The table below lists selected products and representative brands for our core merchandise categories:
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| Category | | Selected Products | | Representative Brands |
| Appliances | | Washers and dryers, refrigerators, cooking ranges, dishwashers, freezers, and air conditioners | | Amana, Electrolux, Frigidaire, GE, Haier, KitchenAid, LG, Maytag, Samsung and Whirlpool |
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VideoConsumer electronics | | Flat panel televisions, and Blu-Ray and DVD players, audio and small electronics | | Coby, Curtis, Hisense,Haier, LG, Samsung, Seiki, Sharp, Sony and Toshiba |
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Computing and mobile phoneswireless | | Computers, computer accessories, mobile phones and tablets * | | Apple, Asus, Curtis, Dell, Kindle, Lenovo, Hewlett Packard, Samsung, Sony Toshiba and VerizonToshiba |
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OtherHome products | | Digital camcorders, digital cameras,Bedding, fitness equipment gaming bundles,and home furniture home theater receivers, mattresses, MP3 players, personal navigation, speaker systems and telephones | | Ashley, Canon, Nikon, Samsung,ProForm, Serta, Tech Craft, and SonyTempur-Pedic |
* We will exit the contract-based mobile phone business during the first fiscal quarter of 2015.
Vendor Relationships. Our top 10 and 20 suppliers accounted for 79.3%83.1% and 90.5%93.2%, respectively, of merchandise purchased by us during fiscal 20132014. Our key suppliers include Apple, Ashley, Curtis, Frigidaire, GE, Haier, HP, LG, Samsung, Sharp, Sony, Toshiba and Whirlpool.
Our purchasing strategy varies by vendor and product line. We do not have long-term contracts with any of our major suppliers. Inventory purchases are managed through the placement of purchase orders with our vendors. Our ability to sell a broad selection of products has made us an important partner to our vendors for showcasing their higher-marginheavily featured product offerings and introducing new products and technologies to consumers. In an effort to support our strategy, vendors offer us various incentives including volume discounts, trade financing, co-op advertising, purchase discounts and allowances, promotional items and in some cases, inventory on a consignment basis.
Personnel and Training
Commissioned Sales Associates. We seek to hire individuals who are career-oriented and motivated by a commission-based environment. Approximately 94%93% of our sales associates are full-time employees. Our sales associates are compensated based on both sales and profitability of the products and services they sell. New sales associates are required to complete 80 hours of initial in-house training focused on product knowledge and functionality, customer service and general store operations. Sales associates also participate in on-going training for an average of ten hours per month to stay current with new
product offerings and customer service initiatives. This on-going training includes quarterly meetings with vendors to learn about upcoming product releases.
Manager-In-Training (MIT) Program. We operate a professional development program that provides managers with a variety of tools and training to assist them in leading their associates and meeting their performance objectives. Manager candidates undergo comprehensive training in store operations, sales, management and communication skills so that they can eventually manage their own stores and have the opportunity to become regional managers. Candidates first participate in our MIT program, which develops each manager’s managerial and supervisory skills. After completion of our training programs,
manager candidates work as assistant managers. Managers earn an opportunity to operate higher-volume stores as they demonstrate greater proficiency in their management skills.
Our store and regional managers are essential to our store expansion strategy. We use experienced store and regional managers from our existing markets to open new markets.success. Our MIT program provides a pipeline of future store and regional managers. This program enables us to staff our management positions in new stores from a pool of experienced managers and backfill the openings created in existing stores with well-developed, internal promotions.
Distribution and Warehousing
Our distribution and warehousing functions are designed to optimize inventory availability and turnover, increase delivery efficiency, and minimize product handling. Our distribution and warehousing system at March 31, 20132014 consisted of five regional distribution centers, or RDCs, and 10nine local distribution centers, or LDCs. RDCs receive products directly from manufacturers and stock merchandise for local customer delivery as well as store and LDC replenishment. LDCs receive inventory daily from their respective RDCs or directly from manufacturers for home delivery. Merchandise is generally not transferred between stores. Our RDCs and LDCs operate seven days a week. All of our distribution facilities are leased.
The following table sets forth certain information relating to our RDCs and LDCs as of March 31, 20132014:
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| Facility | Opening Date | | Area Served | | Size (sq. ft) |
| RDC: | | | | | |
| Atlanta, Georgia | January 2003 | | Southeast | | 273,200 |
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| Brandywine, Maryland | March 2010 | | Mid-Atlantic | | 393,440 |
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| Aurora, Illinois | July 2011 | | Great Lakes | | 247,360 |
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| Indianapolis, Indiana | June 1986 | | Midwest | | 319,458 |
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| Davenport, Florida | April 2008 | | Florida | | 282,126 |
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| LDC: | | | | | |
| Charlotte, North Carolina | April 2005 | | Charlotte | | 60,000 |
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| Cincinnati, Ohio | March 1999 | | Cincinnati | | 100,800 |
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| Cleveland, Ohio | September 2001 | | Cleveland | | 100,80060,000 |
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| Columbus, Ohio | August 1999 | | Columbus | | 89,643 |
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Jacksonville, Florida | March 2008 | | Jacksonville | | 71,760 |
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| Pembroke Park, Florida | May 2011 | | Miami | | 66,095 |
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| Nashville, Tennessee | October 2006 | | Nashville | | 50,000 |
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| Philadelphia, Pennsylvania | April 2010 | | Philadelphia | | 86,304 |
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| Pittsburgh, Pennsylvania | September 2011 | | Pittsburgh | | 20,465 |
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| Raleigh, North Carolina | August 2007 | | Raleigh | | 108,000 |
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Typically, large appliances, large-screen televisions, home entertainmentfitness equipment, furniture mattresses, and fitness equipmentmattresses are delivered to a customer’s home. The majority of our customers purchasing these products also use our delivery or installation service. Our stores carry a limited inventory of these larger items to accommodate customers who prefer to transport merchandise themselves. Smaller-sized items such as Blu-Ray players, digital cameras, notebook computers, small appliances, tablets and televisions less than 50 inches are adequately stocked in-store to meet customer demand.
Our delivery is outsourced in all of our markets. Our outsourcing partners assign certain contractors to us and those contractors deliver products exclusively for us, generally carry our logo on their vehicles and wear hhgregg uniforms. This allows us to maintain our brand identity and high customer service levels following the purchase of our products. We remain the customer’s primary point of contact throughout the delivery and installation process regardless of whether or not the service is outsourced, thereby ensuring that we maintain control over the quality of the service provided. We also closely monitor our delivery partners to assess our customers’ satisfaction with their services. We are not subject to any long-term agreements with any of our delivery partners.
Advertising and Promotion
We utilize ongoing advertising and weekly promotions to increase our brand awareness and to drive online and in-store traffic. We aggressively promote our products and services through the use of several mediums, which includes preprinted newspaper inserts, television, e-mail communications, direct mail, e-mail communications, radio, digital advertising, social media, and web promotions. We currently outsource creative and media placement to advertising agencies, but handle newspaper insert and direct mail design and placement internally.
We enter new major markets with a comprehensive brand awareness campaign for a three-week period leading up to our grand opening. During the week of grand opening, we utilize a combination of television, radio, direct mail, social media and special newspaper insert offers to drive traffic to our stores.
E-commerce
Our mobile and desktop website, www.hhgregg.com, featureshhgregg.com, provides a 24/7 shopping experience for our full linecustomers and helps reduce the complexity of products and services and provides usefulproduct decisions for big ticket home product purchases by providing product information, to consumers on the features and benefits of our products and services, customer ratings and reviews, availability of rebate incentive opportunities, store locations and hours of operation. Our website has an updated lookThese tools help consumers make more informed decisions and feel,give them confidence as wethey undertake the purchasing process. Additionally, these tools drive in-store purchases of our merchandise and services. We have added significant cosmetic and functionality enhancements.enhancements to the site in both platforms. We offer both online shopping with home delivery, as well as an in-store pickup option to increase customer traffic. Purchases can be made using our online financing application process. We also utilizeare continuing to enhance our expanded assortment, content and mobile technology in an effort to enhance the internet as an important customer information resource to drive in-store purchases ofseamless shopping experience for our merchandise and services.customers.
Management Information Systems
We have been systematically updating and upgrading our management information systems in a multi-phase process to improve the efficiency of our store operations and enhance critical corporate and business planning functions. During the past five years, we:
implemented new database servers in order to improve overall system performance;
installed a newenhanced our enterprise data warehouse to better integrate operating and merchandising information in a relational data base environment;
implemented aupgraded our demand management and forecasting tool to add more robust analytical capabilities to our inventory management process;
opened an off-site data center to enhance our disaster recovery capabilities;
implemented a new web platform; and
have been instarted the processphased roll out of developing a plan to replace ournew point of sale system.
Our management information systems include a wide-area network linking our stores and distribution centers to our corporate offices. This provides real-time polling of sales, scheduled deliveries and inventory levels at the store and distribution center level. In our distribution centers, we use radio frequency networks to assist in receiving, stock put-away, stock movement, order filling, cycle counting and inventory management.
Competition
The appliance and consumer electronics industries are highly competitive and concentrated among a group of major retailers. The home furnishing industry, including the furniture and mattress businesses, are highly fragmented with sales coming from various types of retailers. Our stores compete against other consumer electronics retailers, home furnishing retailers, specialty home office retailers, mass merchants, home improvement superstores and internet-based businesses. Our stores also compete against independent dealers, regional chain discount stores, wholesale clubs and other specialty single- and multi-unit retail stores. Mass merchants continue to increase their offerings of consumer electronics products. Additionally, internet retailers continue to gain market share in smaller size consumer electronics products.
We compete against national retailers including Best Buy, Costco, Home Depot, Lowe’s, Sam’s Club, Sears, Target, and Wal-Mart in the vast majority of our markets. We also compete against regional retailers, such as BrandsMart and Fry’s, in several of our markets.
The appliance and consumer electronics industriesOur product offerings compete on product selection, price and customer service. We differentiate ourselves through our emphasis on an extensive product offering, customer service and satisfaction while matching our competitors on price. We believe that our highly trained commissioned sales force, broad product and brand offerings and customer support services, including delivery and installation and finance offerings, allow us to compete effectively in our markets for the following reasons:
Our commissioned sales force is motivated to attend to customer needs quickly and is knowledgeable about the products we carry. The majority of our key competitors pay their sales force on an hourly basis. Because our sales staff is commissioned and highly trained in product knowledge, we believe our sales force is driven to more quickly and efficiently assist our customers in making their purchase decisions. We believe that when fully informed, customers purchase higher-end, feature-rich products due to an appreciation of the performance of those products.
By combining this knowledgeable sales force with a broad selection of key brands and products with complex, premium features, we differentiate ourselves from our competitors.
We promote our products both in our stores and through advertising. We also highlight our service offerings, such as next-day delivery, in home installation and private-label and other credit financing promotions. These services are key to our customer base which appreciates better product information, high-end products, quality delivery and installation, and financing offers.
Industry trends
We also believe that we have and may benefit from several key industry trends, including:
The introduction of new technologies that encourage consumers to upgrade existing products such as OLED (organic light-emitting diode) and ultra HD televisions and tablets.
Increasing demand for ultra large screen televisions, which typically sell at a higher price point, and carry higher gross margin rates, and require delivery and installation.
The rationalization of national and regional competitors leading to market share opportunities.
Product category trends
The following statistics support our opportunities for growth in various product categories:
Appliances. According to the U.S. Department of Commerce - Bureau of Economic Analysis, personal consumption for home appliances were $45.5 billion in 2013, an increase of 3.6% from $43.9 billion in 2012. Major household appliances, such as refrigerators, stovetops, dishwashers and washer/dryers, account for approximately 86.7% of this total at $39.4 billion in 2013. For the fiscal year ended 2014, we generated 47% of total product sales from the sale of home appliances.
Consumer electronics and computing. According to the U.S. Department of Commerce - Bureau of Economic Analysis, personal consumption for consumer electronics was $212.2 billion in 2013, a 3.5% increase from 2012. From this total, televisions accounted for $38.3 billion compared to $37.3 billion in the prior year, and personal computers and equipment accounted for $53.7 billion compared to $50.9 billion in the prior year. For the fiscal year ended 2014, we generated 48% of total product sales from the sale of consumer electronics and computing.
Home products. According to the U.S. Department of Commerce - Bureau of Economic Analysis, personal consumption for household furniture was $95.3 billion in 2013, an increase of 1.4% from $94.0 billion in 2012. For the fiscal year ended 2014, we generated 5% of total product sales from the sale of furniture and mattresses. For fiscal 2015 we plan to expand our offerings in this product category.
Environmental Matters
We are not aware of any federal, state or local provisions which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, that have materially affected, or are likely to materially affect, our net earnings or competitive position, or have resulted or are expected to result in material capital expenditures. During fiscal 20132014, we had no capital expenditures for environmental control facilities and no such expenditures are anticipated in the foreseeable future.
Seasonality
We experience seasonal fluctuations in our net sales and operating results due in part to seasonal shopping patterns for our products. For example, in fiscal 20132014 and 20122013, we generated 32.3%30.2% and 33.3%32.3%, respectively, of our net sales in the fiscal
quarter ended December 31, which includes the holiday selling season. We also incur significant additional costs and expenses during the fiscal quarter ended December 31 due to increased staffing levels and higher purchase volumes.
Trade Names and Trademarks
We have registered, acquired the registration of, have pending registrations for, or claim ownership of the following trade names and trademarks for use in our business: Extraordinary Appliances for the Heart of your Home®, hhgregg™®, HHGREGG.COM®, H.H. Gregg Appliances Electronics ComputersHHGOLD®, HHGREEN®, Fill Your Home with Happy™, Fine Lines®, GIVING YOU THE POWER TO GO GREEN®, HHGhhgregg Fine Lines (and Design)®, Fine Lines®, hhgregg Fine LinesYour Happy Home Store™, Fine Points®, Fine Treats™ and, Price and Advice Guaranteed (and Design)®, Simply Put™, Smart Enough to Make it Simple™, We Make Em’ Simple™, Webstock®.
Employees
As of March 31, 20132014, we employed approximately 6,3006,100 employees, of whom approximately 84% were full-time. We have no collective bargaining agreements covering any of our employees and have never experienced any material labor disruption. We consider our employee relations to be good.
Available Information
We are subject to the reporting requirements of the Exchange Act and its rules and regulations. The Exchange Act requires us to file reports, proxy statements and other information with the U.S. Securities and Exchange Commission (SEC). Copies of these reports, proxy statements and other information can be read and copied at:
SEC Public Reference Room
100 F Street N.E.
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
The SEC maintains a website that contains reports, proxy statements and other information regarding issuers that file electronically with the SEC. These materials may be obtained electronically by accessing the SEC’s website at http://www.sec.gov.
We make available, free of charge on our website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act, as soon as reasonably practicable after we electronically file these documents with, or furnish them to, the SEC. These documents are posted on our website at www.hhgregg.com — select the “Investor Relations” link and then the “Financials and SEC Filings” link.
We also make available, free of charge on our website, the charters of the Audit Committee, Compensation Committee, Executive Committee and Nominating and Corporate Governance Committee, as well as the Code of Business Conduct and Ethics, Whistleblower Policy, Related Party Policy and the Corporate Governance Guidelines. These documents are posted on our website at www.hhgregg.com — select the “Investor Relations” link and then the “Corporate Governance” link.
Copies of any of the above-referenced documents will also be made available to any stockholder, free of charge, upon written request to:
hhgregg, Inc.
Sr. Vice President of Finance
4151 E 96th Street
Indianapolis, IN 46240
Described below are certain risks that our management believes are applicable to our business and the industry in which we operate. You should carefully consider each of the following risks and all of the information set forth in this Annual Report on Form 10-K.
If any of the events described below occur, our business, financial condition, results of operations, liquidity or access to the capital markets could be materially adversely affected. The following risks could cause our actual results to differ materially from our historical experience and from results predicted by forward-looking statements made by us or on our behalf related to conditions or events we anticipate may occur in the future. All forward-looking statements made by us or on our behalf are qualified by the risks below.
If we fail to anticipate changes in consumer preferences and maintain positive brand perception and recognition, our net sales and profitability may decline.
Our products must appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to change. Our ability to maintain and increase net sales depends to a large extent on the periodic introduction and availability of new products and technologies. Our success depends upon our ability to anticipate and respond in a timely manner to trends in consumer preferences relating to major household appliances and consumer electronics such as high efficiency appliances and high definition televisions. These products are subject to significant technological changes and pricing limitations and are subject to the actions and cooperation of third parties, such as movie distributors and television and radio broadcasters, all of which could affect the success of these and other new consumer electronics technologies. It is possible that new products will never achieve widespread consumer acceptance. Our margins are enhanced due to our ability to sell more feature-rich products with higher margins early in the product life cycle, thus a lack of new products in the market would impair our ability to maintain gross margins as a percentage of sales. Significant deviations from the anticipated consumer preferences for the products we sell could result in lost net sales and lower margins due to the need to mark down excess inventory. If we are unable to effectively introduce and sell new products to our customers, our business and results of operations could be adversely affected.
Additionally, we believe that recognition and the reputation of our brands are crucial to our success. The increasing usage of web-based social media means that consumer feedback and other information about our Company are shared with a broad audience in a manner that is easily accessible and rapidly disseminated. The impact of such feedback could negatively affect our brand perception and recognition, and as a result could result in declines in customer loyalty, lower employee retention and productivity, vendor relationship issues and other factors, all of which could materially affect our profitability.
Our success depends upon our effective execution of our strategies.
Our success depends on our ability to effectively identify, develop and execute our strategies. Our failure to properly deploy and utilize capital and other resources may adversely affect our initiatives designed to better position our business to drive additional traffic and increase sales in our comparable store base. Our ability to maintain and increase net sales depends to a large extent on our ability to introduce new product offerings that effectively utilize one or all of our key business strategies: providing customers with highly trained and consultative sales associates, best in class delivery and installation services, and compelling financing offers. If we fail to appropriately train our sales associates on our new product offerings, it is possible that they may not have enough product knowledge to meet customer needs. If we do not prepare effectively with our third party delivery and installation providers, it is possible that the quality of delivery and installation could be sacrificed, and it could damage our reputation. Additionally, for big ticket items we need to be able to provide compelling financing offers, failure to do so will result in lower sales volumes.
We have made additional investments in advertising and inventory of our home entertainment furniture and fitness equipment product offerings. If the strategy of increasing our emphasis on home entertainment furniture and fitness equipment offerings is unsuccessful, it could have a materially adverse effect on our net sales and results of operations. We will continue to test new product offerings in the future, but if those offerings are not accepted, it could materially adversely affect our net sales and results of operations.
We have decided to exit the contract based mobile phone business during fiscal 2015 in order to better align with the long-term strategic initiatives discussed herein, and improve profitability. If the strategy of exiting the mobile phone business negatively impacts the sales of other product categories or is otherwise unsuccessful, it could have a materially adverse effect on our net sales and results of operations.
We also continue to act upon our new store development strategy of opening stores in groups within a market in order to achieve efficiencies and maximize profitability; and our business strategy of offering customers a superior purchase experience. Failure to execute these initiatives and strategies could have a material adverse effect on our business, financial condition and results of operations.
If we fail to anticipate changes in consumer preferences and maintain positive brand perception and recognition or if there is a lack of new product introductions and innovation, our net sales and profitability may decline.
Our products must appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to change. Our ability to maintain and increase net sales depends to a large extent on the periodic introduction and availability of new products and technologies. Our success depends upon our ability to anticipate and respond in a timely manner to trends in consumer preferences relating to major household appliances and consumer electronics such as high efficiency appliances and ultra high definition televisions. It is possible that new products will never achieve widespread consumer acceptance. Our margins are enhanced due to our ability to sell more feature-rich products with higher margins early in the product life cycle, thus a lack of new products in the market would impair our ability to maintain gross margins as a percentage of sales. Significant deviations from the anticipated consumer preferences for the products we sell could result in lost net sales and lower margins due to the need to mark down excess inventory. If we are unable to effectively introduce and sell new products to our customers, our business and results of operations could be adversely affected.
Additionally, we believe that recognition and the reputation of our brands are crucial to our success. The increasing usage of web-based social media means that consumer feedback and other information about our Company are shared with a broad audience in a manner that is easily accessible and rapidly disseminated. The impact of such feedback could negatively affect our brand perception and recognition, and as a result could result in declines in customer loyalty, lower employee retention and productivity, vendor relationship issues and other factors, all of which could materially affect our profitability.
The retail market for major home appliances, consumer electronics and home furniture is intensely competitive. We currently compete against a diverse group of Contents
Our business is dependent on the general economic conditions in our markets.
In general, our sales depend on discretionary spending by our customers. General economic factorsnational retailers, including Best Buy, Costco, Home Depot, Lowe’s, Sam’s Club, Sears, Target, and other conditionsWal-Mart, internet retailers, regional or independent specialty retail stores and mass merchandisers that may affect our business, include periods of slow economic growth or recession, political factors including uncertainty in social or fiscal policy, an overly anti-business climate or sentiment, volatility and/or lack of liquidity from time to time in U.S. and world financial markets and the consequent reduced availability and/or higher cost of borrowing to hhgregg and its customers, slower rates of growth in real disposable personal income, sustained high rates of unemployment, high consumer debt levels, increasing fuel and energy costs, inflation or deflation of commodity prices, natural disasters, and acts of terrorism and developments in the war against terrorism. Additionally, any of these circumstances concentrated in the regionsell many of the U.S. in whichsame or similar major home appliances, consumer electronics and home furniture that we operatedo. There are few barriers to entry and as a result new competitors may enter our existing or new markets at any time.
We may not be able to compete successfully against existing and future competitors. Some of our competitors have financial resources that are substantially greater than ours and may be able to purchase inventory at lower prices. Our competitors may respond more quickly to new or emerging technologies and may have greater resources to devote to discounts, promotions and sales of products and services. They may also have financial resources that enable them to weather economic downturns better than us.
Our existing competitors or new entrants into our industry may use a number of different strategies to compete against us, including:
lower pricing;
more aggressive advertising and marketing;
enhanced product and service offerings;
extension of credit to customers on terms more favorable than we make available;
innovative store formats, including store within a store;
improved retail sales methods;
online product offerings; and
expansion into markets where we currently operate.
Competition could have a material adverse effect on ourcause us to lose market share, net sales and resultscustomers, which could negatively impact our comparable store sales, increase expenditures or reduce prices or margins, any of operations. General economic conditions and discretionary spending are beyond our control and are affected by, among other things:
consumer confidence in the economy;
unemployment trends;
consumer debt levels;
consumer credit availability;
the housing and home improvement markets;
gasoline and fuel prices;
interest rates and inflation;
slower rates of growth in real disposable personal income;
natural disasters;
national and international security concerns;
tax rates and tax policy; and
other matters that influence consumer confidence and spending.
Volatility in financial markets may cause some of the above factors to change with an even greater degree of frequency and magnitude. The above factors could result in slowdown in the economy or an uncertain economic outlook, which could have a material adverse effect on our business and results of operations.
Other conditions that may impact our results of operations include disruptions in the availability of content such as sporting events or other televised content. Such disruptions may influence the demand for hardware that our customers purchase to access such content, which would have an adverse effect on our results of operations.
Regulatory and other developments could impact our credit card financing offers available to customers and have a material adverse impact on our net sales and profitability.
We offer private-label credit cards through a third-party financial institutioninstitutions that managesmanage and directly extendsextend credit to our customers. Cardholders who choose the private-label card can receive low- or no-interest promotional financing on qualifying purchases. If a customer utilizes a deferred interest financing offer and fails to comply with the terms of the offer, all deferred interest becomes due and payable to the third-party financial institution. Private label credit card sales accounted for 35%36%, 31%34% and 29%31% of our net sales in fiscal 20132014, 20122013 and 20112012, respectively. We view these arrangements as a way to generate incremental sales of products and services from customers who prefer the financing terms to other available forms of payment, and incremental income from the bounties, rebates and commissions received from our banking partner. During fiscal 2014,2013, we planrolled out a “lease to roll out lease to own optionsown” option through a third party provider to all stores by the end of the second fiscal quarter. This will allow us to offer credit offerings tofor customers who had been historically turned downdo not qualify for credit through our private-label card. Additionally,credit options, and in fiscal 2014 we plan to testrolled out a secondary finance offering for the lower-middle income consumer.
Recently enacted legislative and regulatory changes that focus on a variety of credit related matters have had no material adverse impact on our operations to date. However, if future legislative or regulatory restrictions or prohibitions arise that affect our ability to offer promotional financing and we are unable to adjust our operations in a timely manner, our net sales and profitability may be materially adversely affected.
Additionally, as the economic and regulatory environment in the banking industry continue to change, banks continue to re-evaluate their strategies, practices and terms, including, but not limited to, the levels at which consumer credit is granted and the strategic focus on various business segments, such as the private-label retail partner card business. If any of our credit card programs ended prematurely, the terms and provisions, or interpretations thereof, were substantially modified, or approval rates or types of financing offered to our customers amended, promotional financing volumes, and our net sales and results of operations, could be materially adversely affected.
We have many competitors, direct and indirect. If we fail to execute our merchandising, marketing and distribution strategies effectively, those competitors could take sales and market share from us.
The retail market for consumer electronics and major home appliances is intensely competitive. We currently compete against a diverse group of national retailers, including Best Buy, Home Depot, Lowe’s, Sears, Wal-Mart, internet retailers, regional or independent specialty retail stores and mass merchandisers that sell many of the same or similar major home appliances and consumer electronics that we do. There are few barriers to entry and as a result new competitors may enter our existing or new markets at any time.
We may not be able to compete successfully against existing and future competitors. Some of our competitors have financial resources that are substantially greater than ours and may be able to purchase inventory at lower prices. Our competitors may respond more quickly to new or emerging technologies and may have greater resources to devote to discounts, promotions and sales of products and services. They may also have financial resources that enable them to weather economic downturns better than us. As it relates to internet retailers, we will need to ensure we have an effective multi-channel strategy.
Our existing competitors or new entrants into our industry may use a number of different strategies to compete against us, including:
lower pricing;
more aggressive advertising and marketing;
enhanced product and service offerings;
extension of credit to customers on terms more favorable than we make available;
innovative store formats;
improved retail sales methods;
online product offerings;
not charging sales tax at the time of sale on internet purchases; and
expansion into markets where we currently operate.
Competition could cause us to lose market share, net sales and customers, which could negatively impact our comparable store sales, increase expenditures or reduce prices or margins, any of which could have a material adverse effect on our business and results of operations.
If we do not maintain the security of customer, associate, or Company information, we could damage our reputation, incur substantial additional costs and become subject to litigation.
Any significant compromise or breachThe use and handling of personally identifiable data by our business, our business associates and third parties is regulated at the state, federal and international levels. We are also contractually obligated to comply with certain industry standards regarding payment card information. Increasing costs associated with information security, such as increased investment in
technology, the costs of compliance and costs resulting from consumer fraud could cause our business and results of operations to suffer materially. Additionally, the success of our online operations depends upon the secure transmission of customer associateand other confidential information over public networks, including the use of cashless payments. While we take significant steps to protect this information, lapses in our controls or Company datathe intentional or negligent actions of employees, business associates or third parties may undermine our security could significantly damage our reputation andmeasures. As a result, in additional costs, lost sales, fines and lawsuits. The regulatory environment related to information security and privacy is increasingly rigorous, with new and constantly changing requirements applicableunauthorized parties may obtain access to our business, including butdata systems and misappropriate customer and other confidential data. There can be no assurance that advances in computer capabilities, new discoveries in the field of cryptography or other developments will prevent the compromise of our customer transaction processing capabilities and customer personal data. Furthermore, because the methods used to obtain unauthorized access change frequently and may not limitedbe immediately detected, we may be unable to Payment Card Industry compliance,and such compliance with those requirements could result in additional costs.anticipate these methods or promptly implement preventative measures. There is no guarantee that the procedures that we have implemented to protect against unauthorized access to secured data are adequate to safeguard against all data security breaches. If anyAny such compromise of our security or breach werethe security of information residing with our business associates or third parties could have a material adverse affect on our reputation and may expose us to occur,material costs, penalties, compensation claims, lost sales, fines and lawsuits. In addition, any compromise of our data security may materially increase the costs we incur to protect against such breaches and could subject us to additional legal risk.
Failure to effectively manage our costs could have a material adverse affect on our profitability.
Certain elements of our cost structure are largely fixed in nature. The negative impact of consumer spending on our sales results makes it more challenging for us to maintain or increase our operating income. The competitiveness in our industry and increasing price transparency means that the focus on achieving efficient operations is greater than ever. As a result, we must continuously focus on managing our cost structure. Failure to manage our labor and benefit rates, advertising and marketing expenses, operating leases, other store expenses or indirect spending could materially adversely affect our results of operations.
Our comparable store sales may not be an indication of our future results of operations because they fluctuate
significantly.
Our historical comparable store sales growth figures have fluctuated significantly from quarter to quarter. A number of factors have historically affected, and will continue to affect, our comparable store sales results, including:
Changes in competition, such as pricing pressure, and the opening of new stores by competitors in our markets;
General economic conditions;
New product introductions;
Consumer trends;
Changes in our merchandise mix;
Changes in the relative sales price points of our major product categories;
Ability to offer credit programs attractive to our customers;
The impact of any new stores on our existing stores, including potential decreases in existing stores’ sales as a result of opening new stores;
Weather conditions in our markets;
Timing of promotional events;
Timing, location and participants of major sporting events;
Reduction in new store openings;
The percentage of our stores that are mature stores;
The locations of our stores and the traffic drawn to those areas;
How often we update our stores; and
Our ability to execute our business strategies effectively.
Changes in our quarterly and annual comparable store sales results could cause the price of our common stock to fluctuate significantly.
Our ability to maintain and increase both net sales and product margins depends to a large extent on the periodic introduction and availability of new products and technologies.
We believe that the introduction and continued growth in consumer acceptance of new products will have a significant impact on our ability to increase net sales and maintain product margins. Our products are subject to significant technological changes, and we are dependent on our suppliers to continually invest in research and development to ensure we have new products and technologies in our stores. Innovative, heavily-featured products are typically introduced at relatively high price points. In response to continuing pressure from consumers and our competitors, price points may be reduced more quickly and to a greater degree, as compared to our prior practice in order to drive consumption. As a result, unit sales must increase at a greater rate than average selling prices decline in order to maintain or grow comparable store sales. If new product introductions do not drive enough sales volume at higher price points, prices will have to be reduced in order to sell existing inventory, which may negatively impact our ability to maintain our historical comparable store sales levels. If there were no new technologies or features in our products, we would see a material adverse impact to our net sales and product margins.
If our third-party delivery services are unable to meet our promised delivery schedule, our net sales may decline due to a decline in customer satisfaction.
We offer next-day delivery on many of the products we sell. Our deliveries are outsourced to third-party delivery services. Our third-party delivery services are subject to risks that are beyond our control. If our products are not delivered to our customers on time, our customers may cancel their orders or we may lose business from these customers in the future. As a result, our net sales and profitability may decline.profitability.
Any failure of our information technology infrastructure or management information systems could cause a disruption in our business and our results of operations could be materially adversely impacted.
Our ability to operate our business from day to day largely depends on the efficient operation of our information technology infrastructure and management information systems. We use our management information systems to conduct our operations and for critical corporate and business planning functions, including store operations, sales management, merchandising, marketing, supply chain and inventory management, financial reporting and accounting, delivery and other customer services and various administrative functions. Our systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches, catastrophic events such as fires, tornadoes and hurricanes, and usage errors by our employees. Operating legacy systems subject us to inherent costs and risks associated with maintaining, upgrading and replacing these systems and retaining sufficiently skilled personnel to maintain and operate the systems, demands on management time, and other risks and costs. Any failure that is not covered by our disaster recovery plan could cause an interruption in our operations and adversely affect our results of operations.
Additionally, we anticipate implementingare rolling out a new point-of-sale system during fiscal 2014.2015. We expect that our implementation plan will include sufficient testing and backup plans and implementation will be conducted in a manner that will not create a significant business interruption or sacrifice the integrity of the data produced by these systems. This initiative is highly complex and includes replacing legacy systems, upgrading existing systems, and acquiring new systems and hardware with updated functionality. The risk of disruption is increased in periods when such complex and significant systems changes are undertaken. Any failure in our implementation plan could cause an interruption in our operations and adversely affect our results of operations.
As customer-facing technology systems become an increasingly important part of our multi-channel sales and marketing strategy, the failure of those systems to perform effectively and reliably could keep us from delivering positive customer experiences.
Access to the internet from computers, tablets, smart phones and other mobile communication devices has empowered our customers and changed the way they shop and how we interact with them. Our website, hhgregg.com, is a sales channel for our products, and is also a method of making product information available to them that impacts our in-store sales. In addition to hhgregg.com, we have multiple affiliated websites and mobile apps through which we seek to inform, cross-sell, and otherwise interact with our customers. Performance issues with these customer-facing technology systems, including temporary outages caused by distributed denial of service or other cyber-attacks, or a complete failure of one or more of them without a disaster recovery plan that can be quickly implemented could quickly destroy the positive benefits they provide to our business and negatively affect our customers’ perceptions of hhgregg as a reliable online vendor and source of information about appliances, consumer electronics, furniture and other home products and services, which could negatively affect our results of operations.
If our third-party delivery services are unable to meet our promised delivery schedule, our net sales may decline due to a decline in customer satisfaction.
We offer delivery capabilities on many of the products we sell. Our deliveries are outsourced to third-party delivery providers. Our third-party delivery services are subject to risks that are beyond our control. If our products are not delivered to our customers on time, our customers may cancel their orders or we may lose business from these customers in the future. As a result, our net sales and profitability may decline.
Our comparable store sales may not be an indication of our future results of operations because they fluctuate
significantly.
Our historical comparable store sales figures have fluctuated significantly from quarter to quarter. A number of factors have historically affected, and will continue to affect, our comparable store sales results, including:
Changes in competition, such as pricing pressure, and the opening of new stores by competitors in our markets;
General economic conditions;
New product introductions;
Consumer trends;
Changes in our merchandise mix;
Changes in the relative sales price points of our major product categories;
Ability to offer credit programs attractive to our customers;
The impact of any new stores on our existing stores, including potential decreases in existing stores’ sales as a result of opening new stores;
Weather conditions in our markets;
Timing of promotional events;
Reduction in new store openings;
The percentage of our stores that are mature stores;
The locations of our stores and the traffic drawn to those areas;
How often we update our stores; and
Our ability to execute our business strategies effectively.
Changes in our quarterly and annual comparable store sales results could cause the price of our common stock to fluctuate significantly.
Our business is dependent on the general economic conditions in our markets.
In general, our sales depend on discretionary spending by our customers. General economic factors and other conditions that may affect our business, include periods of slow economic growth or recession, political factors including uncertainty in social or fiscal policy, an overly anti-business climate or sentiment, volatility and/or lack of liquidity from time to time in U.S. and world financial markets and the consequent reduced availability and/or higher cost of borrowing to us and our customers, slower rates of growth in real disposable personal income, sustained high rates of unemployment, high consumer debt levels, increasing fuel and energy costs, inflation or deflation of commodity prices, natural disasters, and acts of terrorism and developments in the war against terrorism. Additionally, any of these circumstances concentrated in the region of the U.S. in which we operate could have a material adverse effect on our net sales and results of operations. General economic conditions and discretionary spending are beyond our control and are affected by, among other things:
consumer confidence in the economy;
unemployment trends;
consumer debt levels;
consumer credit availability;
the housing and home improvement markets;
gasoline and fuel prices;
interest rates and inflation;
slower rates of growth in real disposable personal income;
natural disasters;
national and international geopolitical concerns;
tax rates and tax policy; and
other matters that influence consumer confidence and spending.
Volatility in financial markets may cause some of the above factors to change with an even greater degree of frequency and magnitude. The above factors could result in slowdown in the economy or an uncertain economic outlook, which could have a material adverse effect on our business and results of operations.
Other conditions that may impact our results of operations include disruptions in the availability of content such as sporting events or other televised content. Such disruptions may influence the demand for hardware that our customers purchase to access such content, which would have an adverse effect on our results of operations.
If we fail to hire, train and retain key management, qualified managers, sales associates and other employees, we could have difficulty implementing our business strategy, which may result in reduced net sales, operating margins and profitability.
A key element of our competitive strategy is to provide product expertise to our customers through our extensively trained, commissioned sales associates which, we believe, results in more of our customers purchasing higher-margin, feature-rich products. If we are unable to attract and retain qualified personnel as needed in the future, including qualified sales personnel and candidates for our MIT program, our level of customer service may decline, which may decrease our net sales and profitability. Other factors that impact our ability to maintain sufficient levels of qualified employees in all areas of the business include, but are not limited to, the Company’s reputation, employee morale, the current macroeconomic environment, competition from other employers, and our ability to offer adequate compensation packages. Adverse changes in health care costs could also adversely impact our ability to achieve our operational and financial goals and to offer attractive benefit programs to our employees. Our ability to control labor costs, which may impact our ability to hire and retain qualified personnel, is subject to numerous external factors, including prevailing wage rates, the impact of legislation or regulations governing healthcare benefits or labor relations, such as the Employee Free Choice Act, and health and other insurance costs. Additionally, the National Labor Relations Board could significantly impact the nature of labor relations in the U.S. and how union elections and contract negotiations are conducted. If our labor and/or benefit costs increase, we may not be able to hire or maintain qualified personnel to the extent necessary to execute our competitive strategy, which could adversely affect our results of operations.
Failure to meet the financial performance guidance or other forward-looking statements we have provided to the public could result in a decline in our stock price.
We may provide public guidance on our expected financial results for future periods. Although we believe that this guidance provides investors and analysts with a better understanding of management’s expectations for the future and is useful to our stockholders and potential stockholders, such guidance is comprised of forward-looking statements subject to the risks and uncertainties described in this report and in our other public filings and public statements. Our actual results may not always be in line with or exceed the guidance we have provided. If our financial results for a particular period do not meet our guidance or the expectations of investment analysts or if we revise our guidance for future periods, the market price of our common stock may decline.
We could incur charges due to impairment of long-lived assets.
At March 31, 2014, we had long-lived asset balances of $193.9 million, which are subject to periodic testing for impairment. See Note 2 of Notes to Condensed Consolidated Financial Statements for further information. A significant amount of judgment is involved in the periodic testing. Failure to achieve sufficient levels of cash flow generated from operations at individual store locations could result in impairment charges for the related fixed assets, which could have a material adverse effect on our reported results of operations. Impairment charges, if any, resulting from the periodic testing are non-cash.
A disruption in our relationships with, or in the operations of, any of our key suppliers could cause our net sales and profitability to decline.
The success of our business and our growth strategy depends to a significant degree on our relationships with our suppliers. Our largest suppliers include Apple, Ashley, Curtis, Frigidaire, GE, Haier, HP, LG, Samsung, Sharp, Sony, Toshiba and
Whirlpool. We do not have long-term supply agreements or exclusive arrangements with our major suppliers. We typically order our inventory through the issuance of individual purchase orders to vendors. We have no contractual assurance of the continued supply of merchandise in the amount and assortment we currently offer our customers and we may be subject to rationing by
suppliers. In addition, we rely heavily on a relatively small number of suppliers. Our top 10 and 20 suppliers represented 79.3%83.1% and 90.5%93.2%, respectively, of our purchases in fiscal 20132014. The loss of any one or more of our key suppliers or our failure to establish and maintain relationships with these and other suppliers could materially adversely affect our supply and assortment of products, as we may not be able to find suitable replacements to supply products at competitive prices.
Our suppliers also supplyprovide us with marketing funds and volume rebates. If our suppliers fail to continue these incentives, it could have a material adverse effectaffect on our net sales and results of operations.
If products that we purchase from vendors are damaged or prove to be defective, we may not be able to return products to these vendors and obtain refunds of our purchase price or obtain other indemnification from them. Our vendors’ limited capacities may result in a vendor’s inability to replace any defective merchandise in a timely manner. In addition, our vendors’ limited capitalization or liquidity may mean that a vendor that has supplied defective merchandise will not be able to refund the purchase price to us or pay us any penalties or damages associated with any defects, which could have a material adverse affect on our net sales and results of operations.
The ongoing global crisisfinancial condition of our suppliers may also adversely affect our suppliers’their access to capital and liquidity with which to maintain their inventory, production levels and product quality and to operate their businesses, all of which could adversely affect our supply chain. ItNegative impacts on the financial condition of any of our suppliers may cause suppliers to reduce their offerings of customer incentives and vendor allowances, cooperative marketing expenditures and product promotions. It may also cause them to change their pricing policies, which could impact demand for their products. The ongoing crisiscurrent weakness in, and market instability makevolatility of, the overall economy makes it difficult for us and our suppliers to accurately forecast future product demand trends, which could cause us to carry too much or too little merchandise in various product categories.
Disruptions in our supply chain and other factors affecting the distribution of our merchandise could adversely impact our business.
Any disruption in the operation of our distribution centers could result in our inability to meet our customers’ delivery requirements, higher costs, inability to stock our stores, or longer lead time associated with distributing merchandise. Any such disruption within our supply chain network, including damage or destruction to one of our five regional distribution centers, could result in decreased net sales, increased costs and reduced profits.
We are subject to certain statutory, regulatory and legal developments which could have a material adverse impact on our business.
Our statutory, regulatory and legal environment exposes us to complex compliance and litigation risks that could materially adversely affect our operations and financial results. The most significant compliance and litigation risks we face are:
The difficulty of complying with sometimes conflicting statutes and regulations in local, state and national jurisdictions;
The impact of proposed, new or changing statues and regulations, including, but not limited to, corporate governance matters, environmental, financial reform, Health Insurance Portability and Accounting Act, health care reform, labor reform, Payment Card Industry compliance, and/or other as yet unknown legislation that could affect how we operate and execute our strategies as well as alter our expense structure;
The impact of changes in tax laws (or interpretations thereof by courts and taxing authorities) and accounting standards;
The impact of litigation trends, including class action lawsuits involving consumers and stockholders, and labor and employment matters; and
Changes in trade regulations, currency fluctuations, economic or political instability, natural disasters, public health emergencies and other factors beyond our control may increase the cost of items we purchase or create shortages of these items, which in turn could have a material adverse effect on our cost of goods, or may force us to increase prices, thereby adversely impacting net sales and profitability.
Adapting to regulatory changes and defending against lawsuits and other proceedings may involve significant expense and divert management’s attention and resources from other matters which could adversely affect our results of operations.
Failure to effectively manage our costs could have a material adverse affect on our profitability.
Certain elements of our cost structure are largely fixed in nature. Consumer spending remains uncertain, which makes it more challenging for us to maintain or increase our operating income. The competitiveness in our industry and increasing price transparency means that the focus on achieving efficient operations is greater than ever. As a result, we must continuously focus on managing our cost structure. Failure to manage our labor and benefit rates, advertising and marketing expenses, operating leases, other store expenses or indirect spending could materially adversely affect our profitability.
If we fail to hire, train and retain key management, qualified managers, sales associates and other employees, we could have difficulty implementing our business strategy, which may result in reduced net sales, operating margins and profitability.
One key element of our competitive strategy is the experience and continued service of our senior management. We have employment agreements with these key officers which include secrecy, non-competition and other customary provisions. If members of senior management cease to be active in the management of our business or decide to join a competitor or otherwise compete directly or indirectly with us, our business and operations could be harmed, and we could have difficulty in implementing our strategy, which may result in reduced net sales, operating margins and profitability.
Another key element of our competitive strategy is to provide product expertise to our customers through our extensively trained, commissioned sales associates which, we believe, results in more of our customers purchasing higher-margin, feature-rich products. If we are unable to attract and retain qualified personnel as needed in the future, including qualified sales personnel and candidates for our MIT program, our level of customer service may decline, which may decrease our net sales and profitability. Our ability to control labor costs, which may impact our ability to hire and retain qualified personnel, is subject to numerous external factors, including prevailing wage rates, the impact of legislation or regulations governing healthcare benefits or labor relations, such as the Employee Free Choice Act, and health and other insurance costs. Additionally, the National Labor Relations Board could significantly impact the nature of labor relations in the U.S. and how union elections and contract negotiations are conducted. If our labor and/or benefit costs increase, we may not be able to hire or maintain qualified personnel to the extent necessary to execute our competitive strategy, which could adversely affect our results of operations.
Failure to meet the financial performance guidance or other forward-looking statements we have provided to the public could result in a decline in our stock price.
We may provide public guidance on our expected financial results for future periods. Although we believe that this guidance provides investors and analysts with a better understanding of management's expectations for the future and is useful to our stockholders and potential stockholders, such guidance is comprised of forward-looking statements subject to the risks and uncertainties described in this report and in our other public filings and public statements. Our actual results may not always be in line with or exceed the guidance we have provided. If our financial results for a particular period do not meet our guidance or the expectations of investment analysts or if we revise our guidance for future periods, the market price of our common stock may decline.
Our growth strategy depends in part on our ability to open and profitably operate new stores in existing and new geographic markets. If we fail to successfully manage the challenges our planned growth poses, fail to maintain our financial and internal controls and systems or encounter unexpected difficulties during our expansion, our net sales and profitability could be materially adversely affected.
New stores that we open may not be profitable or may take longer than anticipated to open or to reach desired levels of profitability. Furthermore, the addition of new stores in existing markets may adversely affect the performance of nearby stores. Collectively, this could lower our profit, operating income and profit margins. There are a number of factors that could affect our ability to open or acquire, as well as operate new stores at profitable levels consistent with our existing stores, including:
the inability to identify and acquire suitable store sites and to negotiate acceptable leases for these sites;
competition in existing, adjacent and new markets;
the failure to open enough stores in new markets to achieve a sufficient market presence to compete successfully;
the unfamiliarity with local real estate markets and demographics in adjacent and new markets;
difficulties associated with the hiring, training and retention of additional sales personnel and store managers;
the inability to obtain government approvals, licenses and permits in a timely manner;
the failure to adequately supervise construction and manage development costs;
the inability to secure adequate landlord financing;
difficulties or delay in obtaining construction materials and labor; and
problems or delays in pre-opening store promotion and related publicity.
In addition, our growth plans will require management to expend significant time, effort and resources to ensure the continuing adequacy of our financial and other internal controls, operating procedures, information systems, product purchasing, inventory management, warehousing and distribution systems and employee training programs. We may not be
able to effectively manage these increased demands or respond on a timely basis to the changing demands that our planned expansion will impose on our management, financial and other internal controls and information systems. If we fail to successfully manage the challenges our planned growth poses, fail to improve these systems and controls or encounter unexpected difficulties during our expansion, our net sales and profitability could be materially adversely affected.
Lack of available retail store sites on terms acceptable to us, rising real estate prices and other costs and risks relating to new store openings could severely limit our growth opportunities. Our strategy includes opening stores in new and existing markets. We must successfully choose store sites, execute favorable real estate transactions on terms that are acceptable to us, hire competent personnel and effectively open and operate these new stores. Our plans to increase our number of retail stores will depend in part on the availability of existing retail stores or store sites. A lack of available financing on terms acceptable to real estate developers or a tightening credit market may adversely affect the number or quality of retail sites available to us. We cannot assure you that stores or sites will be available to us, or that they will be available on terms acceptable to us. If additional retail store sites are unavailable on acceptable terms, we may not be able to carry out a significant part of our growth strategy. Rising real estate costs and acquisition, construction and development costs could also inhibit our ability to grow. If we fail to locate desirable sites, obtain lease rights to these sites on terms acceptable to us, hire adequate personnel and open and effectively operate these new stores, our financial performance could be adversely affected. In addition, our expansion in new and existing markets may present competitive, distribution, merchandising and regulatory challenges that differ from our current challenges, including competition among our stores, diminished novelty of our store design and concept, added strain on our distribution centers, additional information to be processed by our management information systems and diversion of management attention from operations, such as the control of inventory levels in our stores. We also cannot guarantee that we will be able to obtain and distribute adequate product supplies to our stores or maintain adequate warehousing and distribution capability at acceptable costs. New stores also may have lower than anticipated sales volumes relative to previously opened stores during their comparable years of operation, and sales volumes at new stores may not be sufficient to achieve store-level profitability or profitability comparable to that of existing stores. New stores in new markets, where we are less familiar with the target customer and less well-known, may face different or additional risks and increased costs compared to stores operated in existing markets or new stores in existing markets. For example, expansion into new markets could bring us into direct competition with retailers with whom we have no past experience as direct competitors. We also may not be able to advertise cost-effectively in new or smaller markets in which we have less store density, which could slow sales growth at such stores. To the extent that we are not able to meet these various challenges, our sales could decrease, our operating costs could increase and our profitability could be impacted.
Our executive officers, directors and stockholders affiliated with our directors own a large percentage of our voting common stock and could limit the influence of our other stockholders on corporate decisions.
Our executive officers, directors, current holders of more than 5% of our outstanding common stock and their respective affiliates beneficially own, in the aggregate, approximately 56.5%53.1% of our outstanding common stock. Should some of these stockholders act together, they would be able to control all matters requiring approval by our stockholders, including mergers, sales of assets, the election of directors or other significant corporate transactions. The interests of these stockholders may not always coincide with our corporate interests or the interests of our other stockholders, and they may act in a manner with which our other stockholders may not agree or that may not be in the best interests of our other stockholders.
We may be subject to periodic litigation and other regulatory proceedings. These proceedings may be affected by changes in laws and government regulations or changes in the enforcement thereof.
We are involved in a number of legal proceedings that arise from time to time in the ordinary course of business. Litigation is inherently unpredictable, and the outcome of some of these proceedings and other contingencies could require us to take or refrain from taking action which, in either case, could adversely affect our operations or reduce our net income. Additionally, defending against these lawsuits and proceedings may involve significant expense and diversion of management’s attention and resources from other matters.
We have anti-takeover defense provisions in our certificate of incorporation and bylaws that may deter potential acquirers and depress the price of our common stock.
Our certificate of incorporation and bylaws contain provisions that could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of us. These provisions:
authorize our board of directors to issue “blank check” preferred stock and determine the powers, preferences and privileges of those shares without prior stockholder approval;
limit the calling of special meetings of stockholders; and
| |
| • | impose a requirement that an affirmative vote of the holders of 66 2/3% of the outstanding shares of common stock is required to amend certain provisions of the certificate of incorporation and bylaws. |
Under these various provisions in our certificate of incorporation, bylaws, a takeover attempt or third-party acquisition of us, including a takeover attempt that may result in a premium over the market price for shares of our common stock, could be delayed, deterred or prevented. In addition, these provisions may prevent the market price of our common stock from increasing in response to actual or rumored takeover attempts and may also prevent changes in our management. As a result, these anti-takeover and change of control provisions may limit the price investors are willing to pay in the future for shares of our common stock.
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| ITEM 1B. | Unresolved Staff Comments. |
None.
Stores and Store Operations
Operations. Our store operations are organized into 22 geographic regions. Each region is supervised by a regional manager who monitors store operations and meets regularly with store managers to discuss merchandising, new product introductions, sales promotions, customer feedback and store operating performance. A store is typically overseen by a general manager, two sales managers and a staff averaging 20 salespeople and 10eight additional support staff. Our stores are open seven days and six nights a week.
Locations. As of March 31, 20132014, we leased all of our stores and distribution centers, which are located in Alabama, Delaware, Florida, Georgia, Illinois, Indiana, Kentucky, Louisiana, Maryland, Mississippi, Missouri, New Jersey, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia, West Virginia, and Wisconsin. Our stores average approximately 32,000 square feet. We also lease our corporate headquarters which is located in Indianapolis, Indiana. Our corporate headquarters includes a store, corporate training center, regional distribution and warehousing facility, and corporate call center. Our distribution and warehousing system consists of five regional distribution centers, or RDCs, and tennine local distribution centers, or LDCs. For a description of our RDCs and LDCs, see “Item 1. Business-Distribution and Warehousing.”
The following table sets forth our current store locations:locations. During fiscal 2014 there were no store openings or store closures.
|
| | | | | | | | | | | |
| State | Stores Opened at March 31, 2012 | | Store
Openings | | Store
Closures | | Stores Opened at March 31, 2013 |
| Alabama | 6 |
| | — |
| | — |
| | 6 |
|
| Delaware | 3 |
| | — |
| | — |
| | 3 |
|
| Florida | 34 |
| | 1 |
| | — |
| | 35 |
|
| Georgia | 15 |
| | 1 |
| | — |
| | 16 |
|
| Illinois | 15 |
| | 4 |
| | — |
| | 19 |
|
| Indiana | 18 |
| | 1 |
| | — |
| | 19 |
|
| Kentucky | 6 |
| | — |
| | — |
| | 6 |
|
| Louisiana | — |
| | 3 |
| | — |
| | 3 |
|
| Maryland | 11 |
| | — |
| | — |
| | 11 |
|
| Mississippi | 1 |
| | — |
| | — |
| | 1 |
|
| Missouri | — |
| | 3 |
| | — |
| | 3 |
|
| New Jersey | 3 |
| | — |
| | — |
| | 3 |
|
| North Carolina | 17 |
| | — |
| | — |
| | 17 |
|
| Ohio | 28 |
| | — |
| | — |
| | 28 |
|
| Pennsylvania | 18 |
| | 1 |
| | — |
| | 19 |
|
| South Carolina | 7 |
| | — |
| | — |
| | 7 |
|
| Tennessee | 11 |
| | — |
| | — |
| | 11 |
|
| Virginia | 15 |
| | — |
| | — |
| | 15 |
|
| West Virginia | — |
| | 1 |
| | — |
| | 1 |
|
| Wisconsin | — |
| | 5 |
| | — |
| | 5 |
|
| | 208 |
| | 20 |
| | — |
| | 228 |
|
|
| | |
| State | Stores Opened at March 31, 2014 |
| Alabama | 6 |
|
| Delaware | 3 |
|
| Florida | 35 |
|
| Georgia | 16 |
|
| Illinois | 19 |
|
| Indiana | 19 |
|
| Kentucky | 6 |
|
| Louisiana | 3 |
|
| Maryland | 11 |
|
| Mississippi | 1 |
|
| Missouri | 3 |
|
| New Jersey | 3 |
|
| North Carolina | 17 |
|
| Ohio | 28 |
|
| Pennsylvania | 19 |
|
| South Carolina | 7 |
|
| Tennessee | 11 |
|
| Virginia | 15 |
|
| West Virginia | 1 |
|
| Wisconsin | 5 |
|
| 228 |
|
Market and Site Selection. We target markets that meet our demographic and competitive criteria, including areas that demonstrate above average economic growth and household incomes, and home ownership rates. Our target markets typically
include most or all of our major competitors. When considering new sites, we analyze total store and market potential and advertising and occupancy costs for a market, as well as proximity to distribution facilities. Within our markets, we open or acquire our stores in power centers or freestanding locations in high traffic areas, usually near our major competitors. Primary site evaluation criteria include total sales volume potential, co-tenancies, traffic patterns, visibility, access, parking availability
and occupancy costs. We initially open multiple stores in a new market and add stores to the market over time to increase market share and improve the leverage of our fixed costs.
Store Development Strategy. Over the past several years, we have adhered closely to a development strategy of adding stores to metropolitan markets in clusters to achieve rapid market share penetration and more efficiently leverage our distribution network, advertising and regional management costs. Our expansion plans include looking for new markets where we believe there is significant underlying demand for stores, typically in areas that have historically demonstrated above-average economic growth, strong household incomes and growth in new housing starts and/or remodeling activity. We plan to continue to follow our approach of building store density in each major market and distribution area, which in the past has helped us to improve our market share and realize operating efficiencies.
In the past five years, we have successfully entered 17 new metropolitan markets, most recently in Milwaukee and Green Bay, Wisconsin, Springfield, Illinois, and St. Louis, Missouri. Historically, we have been able to locate and open stores profitably in a wide variety of trade areas by negotiating lease terms that we believe are favorable. Approximately 12 to 18 months are required for site approval, lease negotiation, property build out, the hiring and training of associates and the stocking of inventory before the opening of a store. This timeframetime frame can be reduced to six to nine months when no new property build-out is required. In fiscal 2013,2014, we opened 20relocated four stores, and began construction on one new stores, predominately instore that is planned to open during the St. Louis, Missouri and Milwaukee, Wisconsin markets.first fiscal quarter of 2015.
In order to focus on maximizing the sales and profitability of our existing store base, our near term expectations will be to maintain slow our store growth by opening a limited number of stores in existing markets where we can leverage current distributing, advertising and regional management infrastructure. We plan to focus on continuing to evolve our sales mix, expanding and targeting our customer base, and enhancing our product and service offerings.
Our long term expectations areexpectation is to become a national retailer. There are several opportunities on which we will seek to capitalize when completing this long term strategy: opportunities in the real estate market, consumer acceptance of our model, strong vendor support, and availability of field talent. As we execute this strategy, we will continue to monitor the balance between profitability, stockholder return and liquidity.
|
| |
| ITEM 3. | Legal Proceedings. |
We are engaged in various legal proceedings in the ordinary course of business and have certain unresolved claims pending. Although we diligently defend against these claims, we may enter into discussions regarding settlement of these and other lawsuits and may enter into settlement agreements, if we believe settlement is in the best interests of our Company and our stockholders. 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 consolidated financial statements is not likely to have a material effect on our consolidated financial position, results of operations or cash flows.
|
| |
| ITEM 4. | Mine Safety Disclosures. |
Not applicable.
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| |
| PART II. |
| | |
| ITEM 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Market for Registrant'sRegistrant’s Common Equity
Our common stock is traded on the New York Stock Exchange under the ticker symbol "HGG"“HGG”. The table below sets forth the high and low sales prices of our common stock as reported on the New York Stock Exchange — Composite Index during the periods indicated.
| | | | Stock Price | Stock Price |
| | High | | Low | High | | Low |
| Fiscal 2014 | | | | |
| Fourth Quarter | | $ | 13.82 |
| | $ | 7.24 |
|
| Third Quarter | | 18.57 |
| | 13.87 |
|
| Second Quarter | | 20.46 |
| | 14.89 |
|
| First Quarter | | 17.53 |
| | 11.09 |
|
| Fiscal 2013 | | | | | | |
| Fourth Quarter | $ | 11.35 |
| | $ | 7.00 |
| $ | 11.35 |
| | $ | 7.00 |
|
| Third Quarter | 8.50 |
| | 5.94 |
| 8.50 |
| | 5.94 |
|
| Second Quarter | 11.64 |
| | 6.17 |
| 11.64 |
| | 6.17 |
|
| First Quarter | 11.80 |
| | 9.59 |
| 11.80 |
| | 9.59 |
|
| Fiscal 2012 | | | | |
| Fourth Quarter | $ | 13.81 |
| | $ | 10.03 |
| |
| Third Quarter | 16.45 |
| | 9.48 |
| |
| Second Quarter | 13.64 |
| | 9.75 |
| |
| First Quarter | 15.47 |
| | 12.02 |
| |
Holders
As of April 30, 20132014, there were 7263 holders of record of our common stock (which does not include the number of individual beneficial owners whose shares were held on their behalf by brokerage firms in street name).
Dividends
We did not pay cash dividends on our common stock during the last two fiscal years and do not expect to pay cash dividends in the near future. In addition, the terms of our credit facilities place restrictions on our ability to pay dividends and otherwise transfer assets to our stockholders. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources” for more information on our credit facilities.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
From time to time, we repurchase our common stock in the open market pursuant to programs approved by our Board.Board of Directors. We may repurchase our common stock for a variety of reasons, such as acquiring shares to offset dilution related to equity-based
incentives, including stock options and restricted stock units, and optimizing our capital structure.
On May 24, 201216, 2013, our Board of Directors authorized a new sharestock repurchase program (the “May 20122013 Program”) allowing the Company to repurchase up to $50.0 million of its common stock. The sharestock repurchase program allows for the repurchase of our common stock on the open market or in privately negotiated transactions in accordance with applicable laws and regulations, and expires on May 23, 201322, 2014. The previous share repurchase program expired on May 19, 2012. During fiscal 2012,2014, we repurchased 3.73.5 million shares at a cost of $47.649.1 million. At the end of fiscal 2014, $0.9 million remained available for the repurchase of stock under the May 2013 Program. The previous stock repurchase program expired on May 23, 2013. During fiscal 2013, we repurchased 5.5 million shares at a cost of $48.2 million. At
On May 14, 2014, the endCompany’s Board of fiscal 2013, $1.8Directors authorized a new stock repurchase program allowing it to repurchase up to $40 million of its common stock, which becomes effective on May 20, 2014. The stock repurchase program allows the $50.0 millionCompany to purchase its common stock on the open market or in privately negotiated transactions in accordance with applicable laws and regulations, and expires on May 20, 2015 unless shortened or extended by the Company’s Board of share repurchases authorized by our Board in May 2012 was available for future share repurchases.Directors.
We consider several factors in determining when to make sharestock repurchases including, among other things, our cash needs, the availability of funding, our future business plans and the market price of our stock.
The following table presents the total number of shares of our common stock that we purchased during the fourth quarter of fiscal 20132014, the average price paid per share, the number of shares that we purchased as part of our publicly announced
repurchase program, and the approximate dollar value of shares that still could have been purchased at the end of the applicable
fiscal period, pursuant to our May 20122013 Program (in thousands, except share repurchase program:
|
| | | | | | | | | | | | | |
| Period | Total Number of
Shares Purchased | | Average Price Paid
Per Share | | Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs | | Approximate Dollar Value
of Shares that May Yet
Be Purchased Under
the Plans or Programs |
| January 1, 2013 to January 31, 2013 | — |
| | $ | — |
| | — |
| | $ | 19,959 |
|
| February 1, 2013 to February 28, 2013 | 1,899,401 |
| | 9.58 |
| | 1,899,401 |
| | 1,768 |
|
| March 1, 2013 to March 31, 2013 | — |
| | — |
| | — |
| | 1,768 |
|
| Total | 1,899,401 |
| | 9.58 |
| | 1,899,401 |
| | 1,768 |
|
|
| | | | | | | | | | | | | |
| Period | Total Number of
Shares Purchased | | Average Price Paid
Per Share | | Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (1) | | Approximate Dollar Value
of Shares that May Yet
Be Purchased Under
the Plans or Programs (1) |
| January 1, 2014 to January 31, 2014 | 54,966 |
| | $ | 8.21 |
| | 54,966 |
| | $ | 9,698 |
|
| February 1, 2014 to February 28, 2014 | 901,446 |
| | 8.93 |
| | 901,446 |
| | 1,644 |
|
| March 1, 2014 to March 31, 2014 | 75,402 |
| | 10.47 |
| | 75,402 |
| | 855 |
|
| Total | 1,031,814 |
| | $ | 9.01 |
| | 1,031,814 |
| | $ | 855 |
|
| |
| (1) | All of the above repurchases were made on the open market at prevailing market rates plus related expenses. |
Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes information as of March 31, 20132014 relating to our equity compensation plans to which grants of options, restricted stock units or other rights to acquire shares of our common stock may be granted from time to time:
| | | | | (a) | | (b) | | (c) | | (a) | | (b) | | (c) |
| Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights (#) | | | | Weighted-average exercise price of outstanding options, warrants and rights ($) | | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (#) | | Number of securities to be issued upon exercise of outstanding options, warrants and rights (#) | | | | Weighted-average exercise price of outstanding options, warrants and rights ($) (1) | | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (#) |
| Equity compensation plans approved by securities holders | | 3,478,062 |
| | (1) | | $ | 15.81 |
| | (2) | | 1,996,714 |
| | 3,375,711 |
| | $ | 13.61 |
| | 1,591,416 |
|
| Equity compensation plans not approved by security holders | | N/A |
| | | | N/A |
| | | | N/A |
| | N/A |
| | | | N/A |
| | | | N/A |
|
| Total | | 3,478,062 |
| | | | $ | 15.81 |
| | | | 1,996,714 |
| | 3,375,711 |
| | | | $ | 13.61 |
| | | | 1,591,416 |
|
| |
| (1) | Consists of 35,333 options issued pursuant to the Gregg Appliances Inc. 2005 Stock Option Plan and 3,442,729 options issued pursuant to the hhgregg, Inc. 2007 Equity Incentive Plan. |
| |
(2) | This number reflects the exclusion of 155,600143,503 shares in the form of restricted stock units granted pursuant to our equity plans included in column (a). These awards allow for the distribution of shares to the grant recipient upon vesting and do not have an associated exercise price. Accordingly, these awards are not reflected in the weighted-average exercise price. |
hhgregg Stock Comparative Performance Graph
The information contained in this hhgregg Stock Comparative Performance Graph section shall not be deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that we specifically incorporate it by reference into a document filed under the Securities Act of 1933 or the Exchange Act.
The graph and table below compares the cumulative total stockholder return on hhgreggour common stock fromfor the initial public offering (IPO) date of July 19, 2007 through March 31, 2013last five fiscal years with the cumulative total return on the Standard & Poor’s 500 Index (S&P 500), and the Standard & Poor’s Retail Composite Index (S&P Retail Composite Index). The S&P Retail Composite Index is a capitalization-weighted index of domestic equities traded on the NYSE and NASDAQ, and includes high-capitalization stocks representing the retail sector of the S&P 500.
The graph assumes an investment of $100 at the close of trading on July 19, 2007, the hhgregg IPO date,March 31, 2009 in hhgregg common stock, the S&P 500 and the S&P Retail Composite Index and reinvestment of any dividends. The comparison in the graph below is based solely on historical data and is not intended to forecast the possible future performance of our common stock.
| | | | July 19, 2007 | | March 31, 2009 | | March 31, 2010 | | March 31, 2011 | | March 31, 2012 | | March 31, 2013 | FY 2009 | | FY 2010 | | FY 2011 | | FY 2012 | | FY 2013 | | FY 2014 |
| hhgregg, Inc. | 100 |
| | 108.81 |
| | 194.15 |
| | 103.00 |
| | 87.54 |
| | 85.00 |
| 100 |
| | 178.37 |
| | 94.63 |
| | 80.42 |
| | 78.09 |
| | 67.92 |
|
| S&P 500 | 100 |
| | 51.38 |
| | 75.30 |
| | 85.37 |
| | 90.69 |
| | 101.04 |
| 100 |
| | 146.57 |
| | 166.17 |
| | 176.53 |
| | 196.67 |
| | 234.67 |
|
| S&P Retail Index | 100 |
| | 56.24 |
| | 86.14 |
| | 98.97 |
| | 119.20 |
| | 103.59 |
| |
| S&P Retail Composite Index | | 100 |
| | 180.27 |
| | 221.74 |
| | 267.35 |
| | 306.98 |
| | 367.74 |
|
|
| |
| ITEM 6. | Selected Financial Data. |
The following table sets forth our selected historical consolidated financial data and store operating information as of the dates and for the periods indicated. The selected historical consolidated statement of income and balance sheet data as of and for each of the fiscal years ended March 31, 2014, 2013, 2012, 2011, and 2010 and 2009 are derived from, and are qualified in their entirety by, our historical audited consolidated financial statements. Historical results are not necessarily indicative of the results to be expected in the future. You should read the following data together with “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical consolidated financial statements and the related notes. In the following tables (including the footnotes thereto), dollars are in thousands, except share and per share data and as otherwise indicated. We have not declared cash dividends for the periods indicated below.
| | | | Fiscal Year Ended March 31, | Fiscal Year Ended March 31, |
| | 2013 (2) | | 2012 (2) | | 2011 (1)(2) | | 2010 (1) | | 2009 (2) | 2014 (2) (10) | | 2013 (2) | | 2012 (2) (9) | | 2011 (1)(2) | | 2010 (1) |
| Statement of Income Data: | | | | | | | | | | | | | | | | | | |
| Net sales | $ | 2,474,759 |
| | $ | 2,493,392 |
| | $ | 2,077,651 |
| | $ | 1,534,253 |
| | $ | 1,396,678 |
| $ | 2,338,570 |
| | $ | 2,474,759 |
| | $ | 2,493,392 |
| | $ | 2,077,651 |
| | $ | 1,534,253 |
|
| Gross profit | 717,586 |
| | 720,388 |
| | 629,760 |
| | 466,941 |
| | 435,108 |
| 664,539 |
| | 717,586 |
| | 720,388 |
| | 629,760 |
| | 466,941 |
|
Income from operations (9) | 43,759 |
| | 109,800 |
| | 86,271 |
| | 68,791 |
| | 69,643 |
| 2,677 |
| | 43,759 |
| | 109,800 |
| | 86,271 |
| | 68,791 |
|
Net income (9) | $ | 25,369 |
| | $ | 81,373 |
| | $ | 48,208 |
| | $ | 39,198 |
| | $ | 36,497 |
| $ | 228 |
| | $ | 25,369 |
| | $ | 81,373 |
| | $ | 48,208 |
| | $ | 39,198 |
|
| Share and Per Share Data: | | | | | | | | | | | | | | | | | | |
| Weighted average shares outstanding | | | | | | | | | | | | | | | | | | |
| Basic | 34,430,641 |
| | 37,749,354 |
| | 39,394,708 |
| | 36,649,515 |
| | 32,391,392 |
| 30,209,928 |
| | 34,430,641 |
| | 37,749,354 |
| | 39,394,708 |
| | 36,649,515 |
|
| Diluted | 34,496,788 |
| | 38,079,685 |
| | 40,368,223 |
| | 37,990,208 |
| | 33,063,511 |
| 30,683,989 |
| | 34,496,788 |
| | 38,079,685 |
| | 40,368,223 |
| | 37,990,208 |
|
Net income per share (9) | | | | | | | | | | | | | | | | | | |
Basic(3) | $ | 0.74 |
| | $ | 2.16 |
| | $ | 1.22 |
| | $ | 1.07 |
| | $ | 1.13 |
| $ | 0.01 |
| | $ | 0.74 |
| | $ | 2.16 |
| | $ | 1.22 |
| | $ | 1.07 |
|
Diluted (4) | $ | 0.74 |
| | $ | 2.14 |
| | $ | 1.19 |
| | $ | 1.03 |
| | $ | 1.10 |
| $ | 0.01 |
| | $ | 0.74 |
| | $ | 2.14 |
| | $ | 1.19 |
| | $ | 1.03 |
|
| Cash Flow Data: | | | | | | | | | | | | | | | | | | |
Net capital expenditures (5) | $ | 54,020 |
| | $ | 81,429 |
| | $ | 59,938 |
| | $ | 58,510 |
| | $ | 21,117 |
| $ | 22,257 |
| | $ | 54,020 |
| | $ | 81,429 |
| | $ | 59,938 |
| | $ | 58,510 |
|
| Operating Statistics: | | | | | | | | | | | | | | | | | | |
| Gross profit (as a percentage of net sales) | 29.0 | % | | 28.9 | % | | 30.3 | % | | 30.4 | % | | 31.2 | % | 28.4 | % | | 29.0 | % | | 28.9 | % | | 30.3 | % | | 30.4 | % |
Income from operations (as a percentage of net sales) (9) | 1.8 | % | | 4.4 | % | | 4.2 | % | | 4.5 | % | | 5.0 | % | 0.1 | % | | 1.8 | % | | 4.4 | % | | 4.2 | % | | 4.5 | % |
Working capital (as a percentage of net sales) (6) | 7.0 | % | | 7.4 | % | | 7.7 | % | | 12.0 | % | | 5.1 | % | 6.5 | % | | 7.0 | % | | 7.4 | % | | 7.7 | % | | 12.0 | % |
| Number of stores, end of period | 228 |
| | 208 |
| | 173 |
| | 131 |
| | 110 |
| 228 |
| | 228 |
| | 208 |
| | 173 |
| | 131 |
|
| Total store square footage (in thousands) | 7,309 |
| | 6,772 |
| | 5,737 |
| | 4,403 |
| | 3,698 |
| 7,309 |
| | 7,309 |
| | 6,772 |
| | 5,737 |
| | 4,403 |
|
Comparable store sales decrease (7) | (8.7 | )% | | (1.1 | )% | | (4.0 | )% | | (6.6 | )% | | (8.3 | )% | (7.3 | )% | | (8.7 | )% | | (1.1 | )% | | (4.0 | )% | | (6.6 | )% |
Inventory turnover (8) | 5.9x |
| | 7.2x |
| | 7.0x |
| | 6.2x |
| | 7.0x |
| 5.5x |
| | 5.9x |
| | 7.2x |
| | 7.0x |
| | 6.2x |
|
| Balance Sheet Data: | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | $ | 48,592 |
| | $ | 59,244 |
| | $ | 72,794 |
| | $ | 157,837 |
| | $ | 21,496 |
| $ | 48,164 |
| | $ | 48,592 |
| | $ | 59,244 |
| | $ | 72,794 |
| | $ | 157,837 |
|
| Total assets | 676,421 |
| | 642,784 |
| | 549,645 |
| | 605,919 |
| | 350,375 |
| 625,963 |
| | 676,421 |
| | 642,784 |
| | 549,645 |
| | 605,919 |
|
| Total debt, including current portion | — |
| | — |
| | — |
| | 88,341 |
| | 92,608 |
| — |
| | — |
| | — |
| | — |
| | 88,341 |
|
| Stockholders’ equity | 346,658 |
| | 359,520 |
| | 316,586 |
| | 253,408 |
| | 125,153 |
| 307,134 |
| | 346,658 |
| | 359,520 |
| | 316,586 |
| | 253,408 |
|
| |
| (1) | Fiscal 2011 and fiscal 2010 net income includes losses related to the early extinguishment of debt of $2.1 million and $0.1 million, respectively. Please refer to footnote 6 of the notes to our audited consolidated financial statements included elsewhere herein for a discussion of the fiscal 2011 amount. |
| |
| (2) | Fiscal 2014, fiscal 2013, fiscal 2012, fiscal 2011 and fiscal 20092011 net income includes $0.6 million, $0.5 million, $0.8 million, $0.1 million and $0.6$0.1 million, respectively, of asset impairment charges. Impairment charges were related to specific stores where the expected future cash flows were less than the carrying amount of the property. Please refer to footnote 1(i) of the notes to our audited consolidated financial statements included elsewhere herein for a discussion of the impairment charges for fiscal 2013,2014, fiscal 20122013 and fiscal 2011.2012. |
| |
| (3) | Basic net income per share is calculated by dividing net income by the weighted-average number of common shares outstanding. |
| |
| (4) | Diluted net income per share is calculated by dividing net income by the weighted-average number of common shares outstanding adjusted by the number of additional shares that would have been outstanding had the potentially dilutive common shares from outstanding options and restricted stock units been issued. |
| |
| (5) | Represents the capital expenditures offset by the proceeds and deposits received from sale leaseback transactions. |
| |
| (6) | Working capital represents current assets excluding customer deposits and the current portion of deferred income taxes less current liabilities as of the end of the respective fiscal year-end, expressed as a percentage of net sales. |
| |
| (7) | Comprised of net sales at stores operating for at least 14 full months, including remodeled and relocated locations and our website. |
| |
| (8) | Inventory turnover for the specified period is calculated by dividing our cost of goods sold for the fiscal year by the average of the beginning and ending inventory for that period. |
| |
| (9) | Fiscal 2012 net income, income from operations, and net income per share include $40.0 million of life insurance proceeds. |
| |
| (10) | Fiscal 2014 net income, income from operations, and net income per share include a pre-tax charge of $2.9 million to exit the contract-based mobile phone business. |
|
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| ITEM 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
You should read this discussion and analysis of our financial condition and results of operations in conjunction with our “Selected Historical Consolidated Financial and Other Data,” and our consolidated financial statements and related notes appearing elsewhere in this report. Some of the statements in the following discussion are forward-looking statements. See “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” for more information.
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 seven sections:
Overview
Critical Accounting Estimates
Results of Operations
Liquidity and Capital Resources
Impact of Inflation
Contractual Obligations
Off Balance Sheet Items
Overview
hhgregg, Inc. is a specialty retailer of home appliances, televisions, computers, tablets, consumer electronics, computers and mobile products, home entertainment furniture, mattresses, fitness equipment and related services operating under the name hhgregg™. As of March 31, 20132014, we operated 228 stores in Alabama, Delaware, Florida, Georgia, Illinois, Indiana, Kentucky, Louisiana, Maryland, Mississippi, Missouri, New Jersey, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia, West Virginia, and Wisconsin. We operate in one reportable segment. We do not have international operations. References to fiscal years in this report relate to the respective 12 month period ended March 31.
Our 20132014 fiscal year is the 12 month period that ended on March 31, 20132014.
Throughout our MD&A, we refer to comparable store sales. Comparable store sales is 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. 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.
This overview section is divided into fourthree sub-sections discussing our operating strategy and performance, store development strategy, business strategy and core philosophies and seasonality.
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 premium appliance, consumer electronics and videohome furniture products. We carry approximately 350 models of major appliances in stock, and a large selection of TVs, as well as, computers, consumer electronics, furniture, fitness equipment, mattresses, computers and mobile products, home entertainment furniture, and fitness equipment.tablets. Appliance and videoconsumer electronics sales comprised 78%85% and 80%86% of our net sales mix for the twelve months ended March 31, 20132014 and 20122013, respectively.
We strive to differentiate ourselves through our customer purchase experience starting 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 ending with post-sales support services. We carefully monitor our competition to ensure that our prices are competitive in the market place. 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 largely resulting from the performance of the videoconsumer electronics category, we have developed threefour major initiatives for fiscal 2014, which are2015. These include continuing to evolveredefine our sales mix, further differentiating our customer experience, expanding our basee-commerce capabilities and launching new customer facing technologies. We have also developed a new “purpose” statement, “To inspire and delight our customers with a truly
differentiated purchase experience to help bring their homes to life.” We believe that our fiscal 2015 initiatives support this “purpose”, and that the success of customers and enhancing our service offerings.these strategies will result in consumers recognizing hhgregg as a “home products” retailer.
Our first initiative for fiscal 20142015 is to reshaperedefining our sales mix through a continued increase ininvestment and focus on the appliance, category as well asand furniture categories while stabilizing the introduction of new products and categories.consumer electronics category. Our sales in the appliance category have increased on a
comparative basis over the past seveneleven quarters, and we have continuedthis category has proven to gain market share inbe the cornerstone of our markets.business. To maintain thiscontinue to drive growth, we plan toare enhancing our displays of complete kitchen solutions, providing a differentiated product assortment based on geography and demographics, more than doubling our current number of 5 Fine Lines locations, and enhancing our special order capabilities. In addition, we will continue to place a greater emphasis on the appliances category in our marketing strategiesbranding and continueadvertisement messages. The U.S. Census Bureau’s data on New Residential Construction shows that 2014 U.S. Housing Start-Up’s experienced a 9% increase for the twelve month period ended March 31, 2014 over the prior year comparable period. Additionally, according to improve on our service offerings within the category.U.S. Department of Commerce - Bureau of Economic Analysis, personal consumption expenditures for home appliances increased 3.6% from $43.9 billion in 2012 to $45.5 billion in 2013. We also expect that as the U.S. housing market and general economy continues to improve, the appliance industry will experience increases in demand. While this data indicates that the housing market has improved year over year, there is no guarantee that the improvement in the housing market will continue and will not be impacted in the future by factors such as rising interest rates. Despite these trends, the appliance industry has had a slow start in the first half of the calendar year. We believe that part of this impact was weather related and expect the industry to perform better the remainder of the calendar year. Additionally, during our previous fiscal 2013,year we tested and launched new products and categories, including home entertainmentrolled out an expanded offering of furniture and home fitness products. GivenIn the early successcurrent year we are in the process of these new categories, we plan to test additionaltransitioning our furniture products in our stores including dinette sets and bedroom packages, as well as expandingassortment by increasing the number of room packagesbrands that we sell, resulting in a greater assortment of furniture merchandise at a variety of price-points, which we believe better match our stores.customers’ taste. While we do not expect to dedicate any incremental floor space to this new selection of furniture at this time, we will continue to optimize our floor space that is already dedicated to furniture. The videoconsumer electronics category will continue to be an important category for us but our emphasisduring this fiscal year and beyond. During fiscal 2015, we will be on largerseek to stabilize consumer electronics sales through further investing in large screen sizes, OLED technology and areashaving an expansive selection of ultra HD/4K products. Despite the new technology and innovations in this category, we expect to continue to see negative comparable store sales within consumer electronics, driven by continued pressure in the video category that we believe we can add valuecategory. As it relates to the sale with our sales force. Within the videocomputing and wireless category, we plan to improveexit the contract-based mobile phone business during the first fiscal quarter of 2015. Historically, this business has negatively impacted the Company’s overall operating profitability, and the decision to exit this business better aligns with our balance of gross profit and market share through positioning our new assortment strategy.
Our second initiative for fiscal 2014 islong-term strategic initiatives. Additionally, we plan to expand our customer base through increased credit offerings, creating a new ad campaign and focusing greater attention on promoting compelling offers of consumer electronicscontinue to drive traffic through consistent marketing of the Apple iPad and iPod products that we began offering in fiscal 2014. We expect that with the continued innovations to connected devices, we will utilize these products to drive greater traffic to our stores. Our ultimate goal of redefining our sales mix is to lift the average sales units of our stores.
During fiscal 2015 we plan to continue to develop and enhance our credit offerings. Over the past 12 months, our non-recourse private label credit card penetration has increased 440approximately 282 basis points to 34%36%. We continue to encourage the use of the card, not only through unique benefits such as in store payment options, but throughreward offers such asand extended financing options. Over the past two years we have grown our 5% discount on qualifying purchases. In addition to our private label credit card, we also plan toofferings, beginning with the roll out leaseof a “lease to own options through a third party provider to all stores byown” option in fiscal 2013, and the endroll out of the second fiscal quarter of fiscal 2014. This will allow us to offer credit offerings to customers who historically had been turned down for credit through our private label card. Additionally, we plan to test a secondary finance offering forin fiscal 2014, both through third party providers and non-recourse to our business. We are continuing to modify our credit offerings to best meet the lower-middle income consumer.ongoing needs of our customers. We believe that enhancingcontinuing to enhance our credit offerings will generate greater brand loyalty, higher average sales per transaction, and increased premium service plan sales. To supplement
Our second initiative for fiscal 2015 is continuing to enhance and differentiate our initiativescustomer experience. hhgregg provides customers an educated sales force to expandassist them in making informed decisions about their purchase. We are continuing to refine our selling techniques to embrace technology, and utilize omni-channel strategies to better connect with our customer base we selectedin store. Our goal will be to better serve and engage our customers by providing a new advertising agency to assist us in delivering the marketing messages necessary to execute on our initiatives.truly differentiated shopping and purchase experience. We plan to launchestablish trust in this experience through a new advertising campaign duringvery transparent online price comparison tool inside of the second fiscal quarter of 2014.store. Additionally, our goal will be to eliminate pain points that most often frustrate customers who are buying large products for their homes. We also planbelieve that the key to utilize innovations in consumer electronics to drive additional customer traffic.unlocking our brand potential is through a truly differentiated purchase experience.
Our third initiative for fiscal 20142015 is enhancing our e-commerce capabilities to enhanceprovide our service offerings, with particular emphasis oncustomers a truly omni-channel shopping experience, allowing them to move seamlessly across the various mediums, including, store, web, mobile, social and call center. During fiscal 2015, we plan to invest in infrastructure upgrades, additional web-application capabilities, enhancing our website capabilities. By partnering with a third partymobile application and continue to add greater selection to our expanded assortment. During fiscal 2014, we expect to more than doubleimplemented an expanded aisle concept which tripled our product assortment online through an expanded aisle. We also plan to update our mobile commerce site by allowing greater functionality, including transacting through the site. Additionally,carrying products that are not available in stores. During fiscal 2015 we plan to enhancegrow our current partner base by seeking opportunities with other vendors, and adding an in-store kiosk where our associates can assist our customers in purchasing these products. Additional enhancements include improving our nationwide delivery model, adding additional payment options for efficient checkout, and making
personalization updates such as profile improvements, recommendations and communication. We are pleased with the in-storecontinued growth in e-commerce as we have seen nearly 60% sales growth calendar year to date. We know that many consumers start their research online and we want to continue to make hhgregg.com an advantage for our brand.
Our fourth initiative for fiscal 2015 is to launch new customer experience byfacing technologies. We are currently implementing aour new point of sale system, whichand expect to be completed by the end of the fiscal second quarter of 2015. The new system will provide operational improvements, customer service improvements and a streamlined checkout process. The new point of sale system that we plan to implement will not only have new digital capabilities, but expedite the check-out processprocess. Additionally, we expect to decreaseimplement a new delivery tracking system. The goal of the timesystem is to completenot only provide more efficient delivery routes, but more importantly, to provide an integrated tool that allows for communication before, during and after the delivery process. We understand that having a sale. We also plandelivery come to continuea customer’s house may require a customer to improve our customer service by raising the standards of execution by our sales team members. This will include reshaping our new hire training and our manager-in-training curriculum, as well as additional product training around our new product offerings. Alongleave work or juggle their schedule, with additional training,that in mind, we will also be adding tablet technology to our delivery drivers enabling greaterdeploying a solution that allows constant communication between the delivery driverteam and the customer. This will help ensure that we provide the customer with a seamless, on-schedule, best in class home delivery. We believeexpect to have the core functionality of this will continue to differentiate ussystem in place in all of our commitment to be best-in-class in home delivery and installation.distribution centers by the end of May, fiscal 2015.
Key Metrics
The following table summarizes certain operating data that we believe are important to an understanding of our operating model:
| | | | | Fiscal Year Ended March 31, | | Fiscal Year Ended March 31, |
| | | 2013 | | 2012 | | 2011 | | 2014 | | 2013 | | 2012 |
Inventory turnover (1) | | 5.9x |
| | 7.2x |
| | 7.0x |
| | 5.5x |
| | 5.9x |
| | 7.2x |
|
Working capital (as a percentage of net sales) (2) | | 7.0 | % | | 7.4 | % | | 7.7 | % | | 6.5 | % | | 7.0 | % | | 7.4 | % |
Net capital expenditures (as a percentage of net sales) (3) | | 2.2 | % | | 3.3 | % | | 2.9 | % | | 1.0 | % | | 2.2 | % | | 3.3 | % |
Income from operations (as a percentage of net sales) (4) | | 1.8 | % | | 4.4 | % | | 4.2 | % | | 0.1 | % | | 1.8 | % | | 4.4 | % |
| |
| (1) | Inventory turnover for the specified period is calculated by dividing our cost of goods sold for the fiscal year by the average of the beginning and ending inventory for that period. |
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| (2) | Working capital represents current assets excluding customer deposits and the current portion of deferred income taxes less current liabilities as of the end of the respective fiscal year-end, expressed as a percentage of net sales. |
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| (3) | Net capital expenditures represent capital expenditures less proceeds and deposits from sale and leaseback transactions, expressed as a percentage of net sales. |
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| (4) | For the fiscal year ended March 31, 2012, income from operations includes $40.0 million of life insurance proceeds. |
We focus on leveraging our semi-fixed expenditures in advertising, distribution and regional management through closely managing our inventory, working capital and store development expenditures. Our inventory has averaged 6.76.2 turns per year over the past three fiscal years. During fiscal 2014, our net sales decline had a negative impact on our inventory turnover calculation. During fiscal 2013, we rolled out new product categories of home entertainment furniture and fitness equipment, which elevated inventory levels as compared to the prior year. Our working capital, expressed as a
percentage of net sales, has averaged 7.4%7.0% over the past three fiscal years. Our net capital expenditures, measured as a percentage of net sales, have averaged 2.8%2.2% over the past three fiscal years.
Business Strategy and Core Philosophies. Our business strategy is focused 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 the customers about the different product features.
We believe our products are rich in features and innovation. We 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 next-day 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. Factors such as changes in consumer confidence, unemployment, consumer credit availability and the condition of the housing market have negatively impacted our core product categories and added volatility to our overall business. 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 capabilities, credit offerings and expanded product offerings, we believe we offer our customers a differentiated value proposition. There are many variables that affect consumer demand for the home product purchases that we offer, including:
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| • | Real disposable personal income is projected to grow at a stronger pace in 2014 than in 2013. The 2013 gain was depressed by tax increases, and dividend and bonus payments that were accelerated in 2012. Real disposable personal income is forecasted to increase 2.3% in calendar 2014, up from the 0.7% gain recorded in 2013, based on the March 2014 Blue Chip Economic Indicators®. * |
The average unemployment rate for 2014 is forecasted to decline to 6.4%, according to the March 2014 Blue Chip Economic Indicators, which would be an improvement from the 7.4% average recorded in 2013. The unemployment rate should continue to trend lower as the job market continues to expand at a moderate pace.
Recent evidence suggests that home prices will continue to increase. In 2013, home price appreciation improved to an estimated 4.0%, according to the Federal Home Finance Agency index, up from flat growth in 2012. The gains were driven by increasing demand and lower inventories of homes for sale. Economists generally expect home price increases to moderate in 2014 but remain positive.
Housing turnover increased 9.0% in 2013, according to The National Association of Realtors and U.S. Census Bureau, compared with 9.7% growth in 2012. However, turnover remains 34% below its peak in 2005. Turnover is generally expected to continue to increase in 2014, though at a more moderate rate.
*Blue Chip Economic Indicators® (ISSN: 0193-4600) is published monthly by Aspen Publishers, 76 Ninth Avenue, New York, NY 10011, a division of Wolters Kluwer Law and Business. Printed in the U.S.A.
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 is alsoare negatively impacted. 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 save 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. According to the U.S. Department of Commerce - Bureau of Economic Analysis, personal consumption for home appliances were $45.5 billion in 2013, an increase of 3.6% from $43.9 billion in 2012. Major household appliances, such as refrigerators, stovetops, dishwashers and washer/dryers, account for approximately 86.7% of this total at $39.4 billion in 2013. For the fiscal year ended 2014, we generated 47% of total product sales from the sale of home appliances.
The consumer electronics industry depends 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 are gradually reduced to drive consumption. Accordingly, there has been consistent price compression in flat panel televisions for equivalent screen sizes in recent years.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 seen falling demand, gross margin rate declines, and average selling price declines. The price compression was heightened especially during the third fiscal quarter of 2014 due to greater than normal promotional environment of the holiday season. We chose to not fully participate in the promotional environment and instead chose to focus on managing inventory levels to match the product demand of our business. This resulted in lost market share. Over the past few months,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 videoconsumer electronics category, as we offered fewer smaller screen size televisions. As we look forward, we believe the video industry will have a stronger innovation cycle in the coming year. This should drive higher average selling prices in the category as consumer preference shifts towards new products such as OLED and ultra HD TV’s and larger screen sizes. In addition, we have seen the evolution of traditional consumer electronics devices change to connected devices in the last few years. We have added product SKU’s related to connected devices, and will continue to utilize product innovations in this category to generate traffic. Despite the new technology innovations aforementioned, we may continue to experience a decline in overall consumer electronics sales for a variety of the reasons discussed herein. In future years, we will continue to evaluate our mix of product offerings in the videoconsumer electronics category to maximize profit margins without significant loss of market share, while also featuring key opening price points to drive traffic.
Other While the direction of consumer electronics categories have also experienced significant demand pressure. Cameras, camcorders, mp3 players,sales for our Company are not certain, we believe there is opportunity for growth based on the following statistical information. According to the U.S. Department of Commerce - Bureau of Economic Analysis, personal consumption for consumer electronics was $212.2 billion in 2013, a 3.5% increase from 2012.
From this total, televisions accounted for $38.3 billion compared to $37.3 billion in the prior year, and GPS devices have been largely replaced bypersonal computers and equipment accounted for $53.7 billion compared to $50.9 billion in the useprior year. For the fiscal year ended 2014, we generated 48% of smart phones. As such,total product sales from the sale of consumer electronics and computing.
During fiscal 2014 we continue to shiftexpanded our product mix away from these categories and into the computing and mobile phone category.
In addition to testing new products in existing categories, we have also expanded into newnewest product categories that fit our core competencies, includingwithin home entertainment furnitureproducts by adding room settings, additional mattresses and fitness equipment.dinette sets. We will continue to refine our assortment in these categories as we learn more about their success inthe furniture category by expanding our stores.selection from one brand to several brands. We expect to test various products such as other types of home furniture including, but not limited to, dinette setsoutdoor casual living and bedroom furniture.
Wepieces. As we are also testing additional credit offeringscurrently experiencing growth in this product category, we are optimistic about the growth experienced by the industry as well. According to the U.S. Department of Commerce - Bureau of Economic Analysis, personal consumption for our consumers. As over one-thirdhousehold furniture was $95.3 billion in 2013, an increase of our1.4% from $94.0 billion in 2012. For the fiscal year ended 2014, we generated 5% of total product sales today are transacted onfrom the hhgregg private label credit card,sale of furniture and mattresses. For fiscal 2015 we want to be ableplan to expand our consumer base to allow new consumers to shopofferings in our stores. We expect to add a lease to own program through a third party provider to all stores by the end of the fiscal second quarter of 2014, and expect to test a secondary financing offer for the lower-middle end income consumer. We expect these programs will be non-recourse to the Company through the use of third party solutions.
Store Development Strategy. Over the past several years, we have adhered closely to a development strategy of adding stores to metropolitan markets in clusters to achieve rapid market share penetration and more efficiently leverage our distribution network, advertising and regional management costs. Our expansion plans include looking for new markets where we believe there is significant underlying demand for stores, typically in areas that have historically demonstrated above-average economic growth, strong household incomes and growth in new housing starts and/or remodeling activity. Our markets
typically include most or all of our major competitors. We plan to continue to follow our approach of building store density in each major market and distribution area, which in the past has helped us to improve our market share and realize operating efficiencies.
Our near term expectations will be to slow our store growth and shift the balance of our focus to sales and profit productivity in our existing store base. We plan to focus our time and investments on enhancing our store productivity within our existing markets through growth in both new and existingthis product categories, as well as increasing our focus on large deliverable home products, along with growing our competencies with our e-commerce platform. We expect this short-term reduction in the number of new store openings to favorably impact our results of operations as a result of the decrease in store opening costs. Additionally, we would expect modest declines in capital expenditures due to the decrease in new store capital expenditures. We also expect to see a decline in our net sales growth as compared to previous years’ results due to fewer anticipated new store additions.
During the past twelve months, we opened 20 new stores. Of the new store openings in fiscal 2013, 17 were opened in new markets or markets entered into last fiscal year, including Champaign, Springfield and Chicago, Illinois; New Orleans, Louisiana; St. Louis, Missouri; Pittsburgh, Pennsylvania; and Green Bay and Milwaukee, Wisconsin.category.
Seasonality. Our business is seasonal, with a higher portion of net sales, operating costs, and operating profit realized during the quarter that ends December 31 due to the overall demand for consumer electronics during the holiday shopping season. Appliance sales isare impacted by seasonal weather patterns, but isare less seasonal than our electronics business and helps to offset the seasonality of our overall business. During the fourth fiscal quarter of 2014 extreme weather conditions negatively impacted traffic and operating performance in the majority of our stores.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). In connection with the preparation of our consolidated financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our consolidated financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our consolidated financial statements are presented fairly and in accordance with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.
Our significant accounting policies are discussed in Note 1, Summary of Significant Accounting Policies, of the notes to our consolidated financial statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Management believes that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Management has reviewed these critical accounting estimates and related disclosures with the Audit Committee of our Board of Directors.
Vendor Allowances
We receive funds from our vendors for various programs including volume purchase rebates, marketing support, inventory markdowns, margin protection, product training and sales incentives. Vendor allowances provided as a reimbursement of specific, incremental and identifiable costs incurred to promote a vendor’s products are included as an expense reduction when the cost is incurred. All other vendor allowances are initially deferred and recorded as a reduction of merchandise inventories. The deferred amounts are then included as a reduction of cost of goods sold when the related product is sold.
We have two primary types of vendor allowances that do not represent reimbursements of specific, incremental and identifiable costs. The first type of allowance is calculated based on a specific percentage of our purchases. In most cases the percentage is not dependent on any monthly, quarterly or annual purchase volumes or any other performance terms with our vendors. Additionally, these allowances are deducted directly from the amounts we owe to the vendor for the product. For this type of vendor allowance, we record inventory at net cost (i.e. invoice cost less vendor allowance) at the time of receipt.
The second type of vendor allowance is based on the satisfaction of certain terms of the vendor program. We determine the amount of the accrued vendor allowance by estimating the point at which we will have completed our performance under the program and estimate the earned allowance at the balance sheet date using the rates negotiated with our vendors and actual purchase volumes to date.
During the year, due to complexity and diversity of the individual vendor programs, we perform analyses and review historical trends to ensure the amounts earned are appropriately recorded. Amounts accrued throughout the year could be impacted if actual purchase volumes differ from projected purchase volumes. Additionally, on a monthly basis we review the collectability of the accrued vendor allowances and adjust for any valuation concerns.
We have not made any material changes in the accounting methodology used to record vendor allowances in the past three fiscal years.
We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate our vendor allowances. If actual results are not consistent with the assumptions and estimates used, we may be exposed to additional adjustments that could materially impact, positively or negatively, our gross margin and inventory. However, substantially all vendor allowance receivables and deferrals outstanding at year end are collected and recognized within the following quarter, and therefore do not require subjective long-term estimates. Adjustments to gross margin and inventory in the following fiscal year have historically not been material. A 10% difference in our vendor allowance receivables at March 31, 20132014, would have affected net earnings by approximately $0.60.3 million in fiscal 20132014.
Inventory Reserves
We value our inventory at the lower of the cost of the inventory or fair market value through the establishment of markdown and inventory loss reserves. Our markdown reserve represents the excess of the carrying amount, typically average cost, over the amount we expect to realize from the ultimate sale or other disposal of the inventory. Markdowns establish a new cost basis for our inventory. Subsequent changes in facts or circumstances do not result in the restoration of previously recorded markdowns or an increase in the newly established cost basis. During fiscal 2014, we increased our reserve approximately $1.8 million in anticipation of our planned exit from the contract-based mobile phone business.
Our markdown reserve contains uncertainties because the calculation requires management to make assumptions and to apply judgment regarding inventory aging, forecasted consumer demand, the promotional environment and technological obsolescence. We have not made any material changes in the accounting methodology used to establish our markdown reserve during the past three fiscal years.
We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate our markdown reserve. However, if estimates regarding consumer demand are inaccurate or changes in technology or customer preferences affect demand for certain products in an unforeseen manner, we may be exposed to losses or gains that could be material. A 10% difference in our actual markdown reserve at March 31, 20132014, would have affected net earnings by approximately $0.20.3 million in fiscal 20132014.
Our inventory loss reserve represents anticipated physical inventory losses (e.g., theft) that have occurred since the last physical inventory date. Physical inventory counts are taken on a regular basis to ensure the inventory reported in our consolidated financial statements is properly stated. During the interim period between physical inventory counts, we reserve for anticipated physical inventory losses on a consolidated basis.
Our inventory loss reserve contains uncertainties because the calculation requires management to make assumptions and to apply judgment regarding a number of factors, including historical results and current inventory loss trends. We have not made any material changes in the accounting methodology used to establish our inventory loss reserve during the past three fiscal years.
We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate our inventory loss reserve. However, if our estimates regarding physical inventory losses are inaccurate, we may be exposed to losses or gains that could be material. A 10% difference in actual physical inventory losses reserved for at March 31, 20132014, would have affected net earnings by less than $0.1 million in fiscal 20132014.
Long-Lived Assets
Long-lived assets other than goodwill and indefinite-lived intangible assets, which are separately tested for impairment, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
When evaluating long-lived assets for potential impairment, we first compare 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, we calculate an impairment loss. 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 may be based on estimated discounted future cash flows. We recognize an impairment loss if the amount of the asset’s or asset group’s carrying amount
exceeds the asset’s or asset group’s estimated fair value. If we recognize an impairment loss, 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.
Our impairment loss calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values, including forecasting useful lives of the assets and selecting the discount rate that reflects the risk inherent in future cash flows.
We have not made any material changes in our impairment loss assessment methodology during the past three fiscal years.
We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate long-lived asset impairment losses. However, if actual results are not consistent with our estimates and assumptions used in estimating future cash flows and asset fair values, we may be exposed to losses that could be material. For the fiscal yearyears ended March 31, 20132014, 20122013 and 2011,2012, we recorded a pre-tax impairment loss of $0.6 million, $0.5 million, and $0.8 million, and $0.1 million, respectively, related to asset impairment of our retail locations.respectively.
Accruals for Uncertain Tax Positions and Income Taxes
Accounting guidance on income taxes prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
We are subject to U.S. federal and certain state and local income taxes. Our income tax returns, like those of most companies, are periodically audited by federal and state tax authorities. These audits include questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. At any one time, multiple tax years are subject to audit by the various tax authorities. In evaluating the exposures associated with our various tax filing positions, we record a liability for more likely than not exposures. A number of years may elapse before a particular matter for which we have established a liability is audited and fully resolved or clarified. We adjust our liability for unrecognized tax benefits and income tax provision in the period in which an uncertain tax position is effectively settled, or the statute of limitations expires for the relevant taxing authority to examine the tax position or when more information becomes available.
We use significant estimates that require management’s judgment in calculating our provision for income taxes. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and the deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our consolidated financial position, results of operations, or cash flows.
Our effective income tax rate is also affected by changes in tax law, the tax jurisdiction of new stores or business ventures, the level of earnings and the results of tax audits. In assessing the recoverability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon generation of future taxable income during the periods in which temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment and ensuring that the deferred tax asset valuation allowance is adjusted as appropriate.
Although management believes that the judgments and estimates discussed herein are reasonable, actual results could differ, and we may be exposed to losses or gains that could be material.
To the extent we prevail in matters for which a liability has been established, or are required to pay amounts in excess of our established liability, our effective income tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement generally would require use of our cash and may result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement may be recognized as a reduction in our effective income tax rate in the period of resolution. At March 31, 20132014 and 20122013, we had no liability for unrecognized tax benefits.
Revenue Recognition
We recognize revenue, net of estimated returns, at the time the customer takes possession of the merchandise or receives service. We honor returns from customers within 30 days from the date of sale and provide allowances for estimated returns based on historical experience.
We sell gift cards to our customers in our retail stores and online. We do not charge administrative fees on unused gift cards and our gift cards do not have an expiration date. We recognize revenue from gift cards when: (i) the gift card is redeemed by the customer or (ii) the likelihood of the gift card being redeemed by the customer is remote, which we refer to as gift card breakage, and we determine that we do not have a legal obligation to remit the value of unredeemed gift cards to the
relevant jurisdictions. We determine our gift card breakage rate based on historical redemption patterns. Prior to fiscal 2011, we did not have historical data to estimate gift card breakage and thus did not recognize any gift card breakage in earnings. Breakage recognized was not material to our results of operations during fiscal 20132014, 20122013 or 20112012.
We sell premium service plans (“PSPs”) on appliance and electronic merchandise for periods ranging up to 10 years. For PSPs sold by us on behalf of a third party, the net commission revenue is recognized at the time of sale. We are not the primary obligor on PSPs sold on behalf of third parties. Funds received for PSPs in which we are the primary obligor are deferred and the incremental direct costs of selling the PSPs are capitalized and amortized on a straight-line basis over the term of the service agreement. Costs of services performed pursuant to the PSPs are expensed as incurred.
Our revenue recognition accounting methodology contains uncertainties because it requires management to make assumptions regarding and to apply judgment to estimate future sales returns. Our estimate of the amount and timing of sales returns is based primarily on historical transaction experience.
We have not made any material changes in the accounting methodology used to measure sales returns or recognize revenue for PSPs sold during the past three fiscal years.
We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to measure sales returns or recognize revenue for our gift card program. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material.
A 10% change in our sales return reserve at March 31, 20132014 would have affected net earnings by less than $0.1 million in fiscal 20132014.
Self-Insured Liabilities
We are self-insured for certain losses related to workers’ compensation, medical insurance, general liability and motor vehicle insurance claims. However, we obtain third-party insurance coverage to limit our exposure to these claims.
The following table provides our stop loss coverage for the fiscal years ended March 31, 20132014, 20122013 and 20112012 (in thousands):
| | | | | Fiscal Year ended March 31, | | Fiscal Year Ended March 31, |
| | | 2013 | | 2012 | | 2011 | | 2014 | | 2013 | | 2012 |
| Workers’ Compensation — per occurrence | | $300 | | $300 | | $300 | | $300 | | $300 | | $300 |
| Workers’ Compensation — per occurrence (OH) | | $500 | | $500 | | $500 | | $500 | | $500 | | $500 |
| General Liability — per occurrence | | $250 | | $250 | | $250 | | $250 | | $250 | | $250 |
| Motor Vehicles — per occurrence | | $100 | | $100 | | $100 | | $100 | | $100 | | $100 |
| Medical Insurance — per participant, per year | | $300 | | $300 | | $150 | | $300 | | $300 | | $300 |
When estimating our self-insured liabilities, we consider a number of factors, including historical claims experience, demographic factors, severity factors and valuations provided by independent third-party actuaries. On a quarterly basis, management reviews its assumptions and the valuation provided by an independent third-party actuary to determine the adequacy of our self-insured liabilities.
Our self-insured liabilities contain uncertainties because management makes assumptions and applies judgment to estimate the ultimate cost to settle reported claims and claims incurred but not reported at the balance sheet date.
We have not made any material changes in the accounting methodology used to establish and adjust our self-insured liabilities during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate our self-insured liabilities. However, if actual results are not consistent with our estimates or assumptions, we may be exposed to losses or gains that could be material. A 10% change in our self-insured liabilities at March 31, 20132014, would have affected net earnings by approximately $0.50.4 million in fiscal 20132014.
Results of Operations
Operating Performance. The following table presents selected consolidated financial data (in thousands, except share amounts, per share amounts, and store count data):
| | | | Years Ended | Years Ended |
| March 31, | March 31, |
| | 2013 | | 2012 | | 2011 | 2014 | | 2013 | | 2012 |
| Net sales | $ | 2,474,759 |
| | $ | 2,493,392 |
| | $ | 2,077,651 |
| $ | 2,338,570 |
| | $ | 2,474,759 |
| | $ | 2,493,392 |
|
| Net sales % (decrease) increase | (0.7 | )% | | 20.0 | % | | 35.4 | % | (5.5 | )% | | (0.7 | )% | | 20.0 | % |
Comparable store sales % decrease (1) | (8.7 | )% | | (1.1 | )% | | (4.0 | )% | (7.3 | )% | | (8.7 | )% | | (1.1 | )% |
| Gross profit as a % of net sales | 29.0 | % | | 28.9 | % | | 30.3 | % | 28.4 | % | | 29.0 | % | | 28.9 | % |
| SG&A as a % of net sales | 20.5 | % | | 20.0 | % | | 20.7 | % | 21.1 | % | | 20.5 | % | | 20.0 | % |
| Net advertising expense as a % of net sales | 5.1 | % | | 4.7 | % | | 4.2 | % | 5.3 | % | | 5.1 | % | | 4.7 | % |
| Depreciation and amortization expense as a % of net sales | 1.6 | % | | 1.4 | % | | 1.3 | % | 1.8 | % | | 1.6 | % | | 1.4 | % |
| Life insurance proceeds as a % of net sales | — | % | | 1.6 | % | | — | % | — | % | | — | % | | 1.6 | % |
| Income from operations as a % of net sales | 1.8 | % | | 4.4 | % | | 4.2 | % | 0.1 | % | | 1.8 | % | | 4.4 | % |
| Net interest expense as a % of net sales | 0.1 | % | | 0.1 | % | | 0.2 | % | 0.1 | % | | 0.1 | % | | 0.1 | % |
| Loss related to early extinguishment of debt as a % of net sales | — | % | | 0.1 | % | | — | % | |
| Net income | $ | 25,369 |
| | $ | 81,373 |
| | $ | 48,208 |
| $ | 228 |
| | $ | 25,369 |
| | $ | 81,373 |
|
| Net income per diluted share | $ | 0.74 |
| | $ | 2.14 |
| | $ | 1.19 |
| $ | 0.01 |
| | $ | 0.74 |
| | $ | 2.14 |
|
| Weighted average shares outstanding—diluted | 34,496,788 |
| | 38,079,685 |
| | 40,368,223 |
| 30,683,989 |
| | 34,496,788 |
| | 38,079,685 |
|
| Number of stores open at the end of period | 228 | | 208 |
| | 173 |
| 228 | | 228 |
| | 208 |
|
| |
(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 website. |
Net income was $0.2 million, or $0.01 per diluted share, for fiscal 2014 compared with net income of $25.4 million, or $0.74 per diluted share for fiscal 2013 compared with net income ofand $81.4 million, or $2.14 per diluted share for fiscal 2012 and $48.2 million, or $1.19 per diluted share for fiscal 2011. The decrease in net income for fiscal 20132014 as compared to fiscal 20122013 was largely due to a comparable store sales decrease of 7.3% and a decrease in the gross margin rate from 29.0% to 28.4%. The decrease in net income for fiscal 2013 as compared to fiscal 2012 was primarily the result of the receipt of $40.0 million of life insurance proceeds in fiscal 2012, a comparable store sales decrease of 8.7%, an increase in SG&A as a percentage of net sales and an increase in net advertising as a percentage of net sales, partially offset by the net addition of 20 stores during the past 12 monthsfiscal 2013 and a modest increase in gross margin as a percentage of net sales. The increase in net income for fiscal 2012 as compared to fiscal 2011 was the result of the receipt of $40.0 million of life insurance proceeds and a 20.0% increase in net sales due to the net addition of 35 stores, offset by a comparable store sales decrease of 1.1%, a decrease in gross profit as a percentage of net sales and an increase in net advertising as a percentage of net sales.
Net sales decreased0.7% 5.5% in fiscal 2014 to $2.34 billion from $2.47 billion in fiscal 2013. Net sales decreased 0.7% in fiscal 2013 to $2.47 billion from $2.49 billion in fiscal 2012. Net sales increased 20.0% in fiscal 2012 to $2.49 billion from $2.08 billion in fiscal 2011. The decrease in net sales for fiscal 2014 was attributable to a comparable store sales decrease of 7.3%. The decrease in net sales for fiscal 2013 was attributable to a comparable store sales decrease of 8.7%, partially offset by the net addition of 20 stores during the past 12 months. The increase in net sales for fiscal 20122013 was primarily attributable to the net addition of 35 stores during fiscal 2012 partially offset by a 1.1% decrease in comparable store sales..
Net sales mix and comparable store sales percentage changes by product category for fiscal 20132014, 20122013 and 20112012 were as follows:
|
| | | | | | | | | | | | | | | | | |
| | Net Sales Mix Summary | | Comparable Store Sales Summary |
| | Twelve Months Ended March 31, | | Twelve Months Ended March 31, |
| | 2013 | | 2012 | | 2011 | | 2013 | | 2012 | | 2011 |
| Appliances | 42 | % | | 37 | % | | 36 | % | | 4.6 | % | | 3.0 | % | | (0.2 | )% |
| Video | 36 | % | | 43 | % | | 46 | % | | (22.6 | )% | | (8.7 | )% | | (6.3 | )% |
Computing and mobile phones (1) | 11 | % | | 9 | % | | 6 | % | | 8.0 | % | | 52.9 | % | | 21.6 | % |
Other (2) | 11 | % | | 11 | % | | 12 | % | | (13.5 | )% | | (9.2 | )% | | (14.2 | )% |
| Total | 100 | % | | 100 | % | | 100 | % | | (8.7 | )% | | (1.1 | )% | | (4.0 | )% |
|
| | | | | | | | | | | | | | | | | |
| | Net Sales Mix Summary | | Comparable Store Sales Summary |
| | Twelve Months Ended March 31, | | Twelve Months Ended March 31, |
| | 2014 | | 2013 | | 2012 | | 2014 | | 2013 | | 2012 |
| Appliances | 47 | % | | 42 | % | | 37 | % | | 3.0 | % | | 4.6 | % | | 3.0 | % |
Consumer electronics (1) | 38 | % | | 44 | % | | 53 | % | | (18.8 | )% | | (22.7 | )% | | (9.6 | )% |
Computing and wireless (2) | 10 | % | | 11 | % | | 9 | % | | (14.7 | )% | | 7.2 | % | | 53.0 | % |
Home products (3) | 5 | % | | 3 | % | | 1 | % | | 35.8 | % | | 24.5 | % | | 31.4 | % |
| Total | 100 | % | | 100 | % | | 100 | % | | (7.3 | )% | | (8.7 | )% | | (1.1 | )% |
| |
(1) | Primarily consists of computers, mobile phonesaccessories, audio, personal electronics and tablets.televisions. |
| |
(2) | Primarily consists of accessories, audio,computers, mobile phones and tablets. We will exit the contract-based mobile phone business during the first fiscal quarter of 2015. |
| |
(3) | Primarily consists of fitness equipment, furniture mattresses and personal electronics.mattresses. |
Fiscal Year EndedMarch 31, 2014 Compared to Fiscal Year EndedMarch 31, 2013
The increase in comparable store sales within the appliance category for the 12 month period ended March 31, 2014 as compared to the 12 month period ended March 31, 2013 was due to an increase in both unit demand and average selling prices. The decrease in comparable store sales for the consumer electronics category for the 12 month period ended March 31, 2014 was due primarily to double digit declines in units sold within the video category, largely resulting from our strategy of offering fewer entry level models and a greater mix of larger screen televisions. The decrease in comparable store sales within the computing and wireless category for the 12 month period was driven by decreased demand for computers and mobile phones and a decrease in the average selling prices for computers and tablets, partially offset by double digit increased demand for tablets. The increase in comparable store sales within the home products category was a result of sales of furniture and fitness equipment.
Gross profit margin, expressed as gross profit as a percentage of net sales, decreased approximately 58 basis points for the 12 months ended March 31, 2014 to 28.4% from 29.0% for the comparable prior year period. The decrease in gross profit margin for the period was a result of decreases in gross profit margin rates across the majority of our categories, partially offset by a favorable product sales mix shift.
SG&A expense, as a percentage of net sales, increased 58 basis points for the 12 months ended March 31, 2014, compared to the prior year period. The increase in SG&A as a percentage of net sales was a result of a 36 basis points increase in occupancy costs as a percentage of net sales due to the deleveraging effect of the net sales decline, a 37 basis points increase in-home delivery expense as a percentage of net sales due to a higher sales mix of deliverable product, and the write-off of store fixtures associated with the Company’s changing product mix. This increase was partially offset by an 18 basis points decrease in bank transaction fees as a result of the increased use of the private-label credit card which carries a lower fee than other credit transactions, as well as decreases in other SG&A expenses as a result of cost control measures.
Net advertising expense, as a percentage of net sales, increased 24 basis points during the 12 months ended March 31, 2014, compared to the prior year period. The increase as a percentage of net sales was driven largely by the deleveraging effect of the net sales decline.
Depreciation and amortization expense, as a percentage of net sales, increased 22 basis points for the 12 months ended March 31, 2014 compared to the prior year period. The increase as a percentage of net sales was primarily due to the deleveraging effect of our net sales decline.
Our effective income tax rate for the 12 months ended March 31, 2014decreased to (2.7)% from 38.8% in the comparable prior year period. The decrease in the adjusted effective income tax rate is primarily the result of a proportionate increase in federal income tax credits and the decrease in pretax income when compared to the prior year period.
Fiscal Year Ended March 31, 2013 Compared to Fiscal Year EndedMarch 31, 2012
The increase in comparable store sales within the appliance category for the 12 month period ended March 31, 2013 as compared to 12 month period ended March 31, 2012 was due to an increase in both unit demand and average selling prices. The decrease in comparable store sales for the video category for the 12 month period ended March 31, 2013 was due primarily to double digit declines in units sold, slightly offset by low single digit increases in average selling prices, largely resulting from our strategy of offering fewer entry level models and a greater mix of larger screen televisions. The increase in comparable store sales within the computing and mobile phones category for the 12 month period was driven by increased demand for tablets and mobile phones, partially offset by decreased demand for notebook computers. The decrease in comparable store sales within the other category was primarily the result of double digit comparable store sales decreases in cameras, camcorders and small electronics partially offset by sales increases in mattresses and sales from the home entertainment furniture and fitness equipment categories.
Gross profit margin, expressed as gross profit as a percentage of net sales, increased approximately 10 basis points for the 12 months ended March 31, 2013 to 29.0% from 28.9% for the comparable prior year period. The increase in gross profit margin for the period was due to increases in gross margin rates within the appliance, video and other categories coupled with a positive shift in our overall net sales mix to the appliance category, partially offset by declines in the computing and mobile phones category. The appliance category was favorably impacted by a continued mix shift to higher efficiency products which generate higher gross margin rates. The increase in the video category gross margin rate was largely due to a favorable mix of larger LED model screen sizes, which generate higher gross margin rates than smaller screen LCD models. The increase in the other category was due to an increase in sales of mattresses and the addition of home entertainment furniture and fitness equipment, partially offset by gross margin pressure in audio and accessories. The decrease in computing and mobile phones was the result of gross margin rate declines largely within mobile phones, which was primarily due to an assortment change within mobile phones that occurred during the fourth fiscal quarter.
SG&A expense, as a percentage of net sales, increased 52 basis points for the 12 months ended March 31, 2013,, compared to the prior year period. The increase in SG&A as a percentage of net sales was largely a result of increases in occupancy costs as a percentage of net sales due to the deleveraging effect of the comparable store sales decline in addition to an increase in-home delivery expense as a percentage of net sales due to a higher sales mix of deliverable product. This increase was partially offset by decreases in other SG&A accountsexpenses as a result of cost control measures.
Net advertising expense, as a percentage of net sales, increased 36 basis points during the 12 months ended March 31, 2013, compared to the prior year period. The increase as a percentage of net sales was driven largely by the sales deleveragedeleveraging effect of our net sales decline.
Depreciation and amortization expense, as a percentage of net sales, increased 27 basis points for the 12 months ended March 31, 2013 compared to the prior year period. The increase as a percentage of net sales was primarily due to the capital spend associated with the 20 new stores opened during the past 12 monthsfiscal 2013 and the deleveraging effect of our net sales decline.
Our effective income tax rate for the 12 months ended March 31, 2013increased to 38.8% from 24.1% in the comparable prior year period. Excluding the impact of the non-taxable life insurance proceeds received in fiscal 2012, the adjusted effective income tax rate was 38.4% for the fiscal year ended March 31, 2012. The increase in the adjusted effective income tax rate, which excludes the impact of the non-taxable life insurance proceeds, is primarily the result of federal income tax credits
recognized in fiscal 2012 under the Hiring Incentives to Restore Employment Act of 2010. These credits were no longer available in fiscal 2013.
Fiscal Year EndedMarch 31, 2012 Compared to Fiscal Year Ended March 31, 2011
Our 1.1% comparable store sales decrease for the 12 months ended March 31, 2012 was primarily driven by the 8.7% decrease in the video category, which was the result of a double digit decline in average selling prices partially offset by increased unit demand. The 3.0% comparable store sales increase in appliances was due to an increase in both demand and average selling prices, driven largely by our initiatives to capture market share and outpace the marketplace in comparable store sales growth. The comparable store sales increase in the computing and mobile phones category was driven by increased demand in notebook computers and the additional offering of tablets and mobile phones in fiscal 2012. The 9.2% comparable store sales decrease in the other category was due primarily to double digit comparable store sales decreases in small electronics and mid single digit decreases in cameras and camcorders, offset by strong double digit growth in mattresses.
Gross profit increased $90.6 million for the 12 months ended March 31, 2012 when compared with the prior year, which represents a decrease of 142 basis points as a percentage of net sales. The gross profit margin percentage decrease was largely due to gross profit margin pressure in the video category, which was primarily the result of increased promotional activity in the category. The computing and mobile phones category, which carries a gross profit margin percentage lower than our company average, increased as an overall percentage of our net sales mix, which resulted in a decrease in our total gross profit margin percentage. The appliance category experienced a modest increase in gross profit margin percentage compared with the prior year period.
SG&A expense increased $68.8 million, or as a percentage of net sales, decreased 69 basis points for the 12 months ended March 31, 2012, compared with the prior year period. The improvement in SG&A was largely due to slight decreases in occupancy costs and wage expenses, offset by a slight increase in delivery costs, which was a result of an increase in appliances as a percentage of our total net sales.
Net advertising expense, as a percentage of net sales, increased 51 basis points during the year ended March 31, 2012. Net advertising expense was $117.4 million for the 12 months ended March 31, 2012 compared to $87.3 million for the comparable prior year period. The increase in advertising expense as a percentage of net sales was driven largely by increased promotions to drive market share and the launch of our new mobile phones category.
Other expense was $2.6 million for the 12 months ended March 31, 2012 compared to $7.0 million in the prior year period. The change in other expense was primarily due to a loss on early debt extinguishment of $2.1 million incurred in fiscal 2011 and lower interest expense as a result of lower debt levels in fiscal 2012 as compared to the prior year.
Our effective income tax rate for the fiscal year ended March 31, 2012 decreased to 24.1% compared to 39.2% in the comparable prior year period. The decrease in the effective income tax rate was primarily due to the impact of non-taxable life insurance proceeds received and federal income tax credits recognized under the Hiring Incentives to Restore Employment Act of 2010.
Liquidity and Capital Resources
The following table presents a summary on a consolidated basis of our net cash provided by (used in) operating, investing and financing activities (dollars are in thousands):
| | | | March 31,
2013 | | March 31,
2012 | | March 31,
2011 | March 31,
2014 | | March 31,
2013 | | March 31,
2012 |
| Net cash provided by operating activities | $ | 66,053 |
| | $ | 117,037 |
| | $ | 58,997 |
| $ | 82,651 |
| | $ | 66,053 |
| | $ | 117,037 |
|
| Net cash used in investing activities | (53,986 | ) | | (81,349 | ) | | (59,785 | ) | (22,724 | ) | | (53,986 | ) | | (81,349 | ) |
| Net cash used in financing activities | (22,719 | ) | | (49,238 | ) | | (84,255 | ) | (60,355 | ) | | (22,719 | ) | | (49,238 | ) |
Our liquidity requirements arise primarily from our need to fund working capital requirements and capital expenditures. We make capital expenditures principally to fund our expansion strategy, which includes, among other things,in investments in new stores and new distribution facilities, remodeling and relocation of existing stores, as well asand information technology and other infrastructure-related projects that support our expansion.operations.
During fiscal 20142015, we plan to open a limited number oftwo to four new stores, inrelocate several stores, downsize one store from 60,000 square feet to 37,000 square feet, add several Fine Lines to existing markets.stores, and move one regional distribution center. In addition, we plan to continue to invest in our infrastructure, including management information systems and distribution capabilities, as well as incur capital remodeling and improvement costs.capabilities. We expect capital expenditures, net of sale and leaseback proceeds and tenant allowances
from landlords, for fiscal 20142015 store openings and relocations to range between $2820 million and $3223 million. We expect capital expenditures for fiscal 20142015 will be funded through cash and cash equivalents, income from operations, borrowings under our Revolving CreditAmended Facility and tenant allowances from landlords.
Net cash provided by operating activities. Net cash provided by operating activities primarily consists of net income as adjusted for increases or decreases in working capital and non-cash charges such as depreciation, asset impairment, deferred taxes and stock-based compensation expense. Cash provided by operating activities was $66.182.7 million, $117.066.1 million and $59.0117.0 million for fiscal 20132014, 20122013 and 20112012, respectively. The increase in cash provided by operating activities from fiscal 2014 to fiscal 2013 is primarily a result of an increase in net cash provided by working capital, offset by a decrease in other operating activities and net income. Net cash provided by working capital was $28.9 million, an increase of $53.0 million from the comparable prior period. Adjustments for other operating activities positively impacted operating cash flows by $53.6 million, a decrease of $11.3 million from the comparable prior period, primarily due to a decrease of $8.9 million in cash received from landlords for tenant allowances due to opening fewer stores in the current period compared to the prior period, a decrease of $8.0 million in our deferred income tax provision, offset by various increases in other operating activities. The decrease in cash provided by operating activities from fiscal 20132012 to fiscal 20122013 is primarily due to life insurance proceeds of $40.0 million received in fiscal 2012, a decrease in our net investment in merchandise inventories (merchandise inventories less accounts payable) and the net change in our other current operating assets and liabilities, and the decrease in cash received from landlords for tenant allowances due to opening fewer stores in the current period compared to the prior period. The net change in other current operating assets and liabilities was primarily a result of differences in timing of customer sales and vendor payments. The increase in cash provided by operating activities from fiscal 2011 to fiscal 2012 is primarily due to the $40.0 million in life insurance proceeds received in fiscal 2012, a decrease in our net investment in merchandise inventories (merchandise inventories less accounts payable), an increase in tenant allowances received from landlords, and a decrease in the excess tax benefits from stock-based compensation. These increases in cash provided by operating activities were partially offset by the net change in our other current operating assets and liabilities, the change in which was primarily a result of differences in timing of customer sales and vendor payments.
Net cash used in investing activities. Net cash used in investing activities was $54.022.7 million, $81.354.0 million, and $59.881.3 million for fiscal 20132014, 20122013 and 20112012, respectively. The decrease for fiscal 20132014 compared to fiscal 20122013 in cash used in investing activities is due to lower purchases of property and equipment associated with the opening of new stores. In fiscal 20132014, we openeddid not open any new stores as compared to 20 new stores compared to 35 storesstore openings in fiscal 20122013. Capital expenditures in fiscal 2014 related to store relocations and remodels, as well as management information systems and infrastructure. The increasedecrease for fiscal 20122013 compared to fiscal 20112012 is primarily due to capital expenditures related tolower purchases of property and equipment associated with the opening of new stores. We opened 20 new stores in fiscal 2013 compared to 35 new stores in fiscal 2012 compared to 43 new stores in fiscal 2011, however the expenditures for fiscal 2011 stores were primarily incurred during fiscal 2012 due to the timing of the store openings..
Net cash used in financing activities. Net cash used in financing activities was $22.760.4 million, $49.222.7 million, and $84.349.2 million for fiscal 20132014, 20122013 and 20112012 respectively. The increase in cash used in financing activities from fiscal 2014 to fiscal 2013 is due to a decrease in net borrowings provided by an inventory financing facility of $12.7 million, a decrease in cash provided by bank overdrafts of $23.0 million, an increase in funds used for treasury stock repurchases of $0.9 million, offset by an increase in proceeds from exercise of stock options of $1.5 million. The decrease in cash used in financing activities from fiscal 2013 to fiscal 2012 iswas primarily due to net borrowings provided by an inventory financing facility entered into during the current yearfiscal 2013 of $9.0$9.0 million,, an increase in cash provided by bank overdrafts of $16.3$16.3 million,, an increase in proceeds from exercise of stock options of $1.9$1.9 million,, offset by an increase in funds used for treasury stock repurchases of $0.7 million. The decrease in cash used in financing activities from fiscal 2012 to fiscal 2011 was primarily due to payments totaling $89.9 million, including principal repayments to retire our term debt and transaction costs to amend our Revolving Credit Facility in fiscal 2011, offset by $47.6 million in repurchases of common stock during fiscal 2012.$0.7 million.
Senior Secured Term Loan. Amended Facility.On July 25, 2007,29, 2013, Gregg Appliances entered into a senior credit agreement (the “Term B Facility”) with a bank group obtaining $100 million senior secured term loan B maturing on July 25, 2013. On March 29, 2011, Gregg Appliances repaid the Term B Facility loan balance in full using excess cash. In connection with this repayment, we recorded a pre-tax loss relatedAmendment No. 1 to the early extinguishment of debt of $1.8Amended and Restated Loan and Security Agreement (the “Amended Facility”) to increase the maximum credit available to $400 million which was primarily due to the write off of capitalized debt issuance costs and the termination of an interest rate swap arrangement.
Revolving Credit Facility. The capacity for borrowings under the Company’s Revolving Credit Facility is $300from $300 million,, subject to borrowing base availability.availability, and extend the term of the facility to expire on July 29, 2018. The facility expireswas set to expire on March 29, 2016.
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. 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 unused line rate 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 0.375%0.25%. For a Daily Average less than 50% of the defined borrowing base, the unused line rate is 0.50%0.375%. The Revolving CreditAmended 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.
Pursuant to the Revolving CreditAmended Facility, the borrowing base is equal to the sum of (i) the lesser of (a) 90% of the net orderly liquidation valueamount of allthe eligible inventory of Gregg Appliances or (b)commercial accounts, (ii) 75% of the net book valueamount of such eligible inventory and (ii) 90% of all commercial and credit card receivables of Gregg Appliances in each case subject to customary reserves and eligibility criteria.(iii) 90% of the net recovery percentage multiplied by the value of eligible inventory consistent with the most recent appraisal of such eligible inventory.
Under the Revolving CreditAmended Facility, Gregg Appliances is not required to comply with any financial maintenance covenant unless “excess availability” is 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 is subject to compliance with a fixed charge coverage ratio of 1.0 to 1.0.
Pursuant to the Revolving CreditAmended Facility, if Gregg Appliances has “excess availability” of less than 12.5% 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 Revolving CreditAmended Facility, become subject to cash dominion control.
The Revolving CreditAmended 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 Revolving CreditAmended 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 inof the Revolving CreditAmended Facility at March 31, 20132014.
As of March 31, 20132014 and 20122013, Gregg Appliances had no borrowings outstanding under the Revolving CreditAmended Facility. As of March 31, 2014, Gregg Appliances had $5.3 million of letters of credit outstanding, which expire through December 31, 2014. As of March 31, 2013, Gregg Appliances had $4.9 million of letters of credit outstanding which expire through December 31, 2013. As of March 31, 2012, Gregg Appliances had $5.2 million of letters of credit outstanding which expired by December 31, 20122013. The total borrowing availability under the Revolving CreditAmended Facility was$169.5 million and $189.8 million and $175.0 million, as of March 31, 20132014 and 20122013, respectively. The interest rate based on the bank’s prime rate was 3.75% and 4.25% as of March 31, 20132014 and March 31, 20122013, respectively.
Inventory Financing Facility. was 4.25%.We also have an inventory financing facility, which is a $20 million unsecured credit line that is non-interest bearing and is not collateralized with the inventory purchased. The facility includes customary covenants as well as customary events of default.
Long Term Liquidity. Anticipated cash flows from operations and funds available from our Revolving Credit Facility, together with cash on hand, should 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, 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. We also have an inventory financing facility. Our inventory financing facility is a $20 million unsecured credit line that is non-interest bearing and is not collateralized with the inventory purchased. The facility includes customary covenants as well as customary events of default.
Impact of Inflation
The impact of inflation and changing prices has not been material to our net sales or net income in any of the last three fiscal years. Highly competitive market conditions and the general economic environment have minimized inflation’s impact on the selling prices of our products and our expenses. In addition, price deflation and the continued commoditization of key technology products in the videoconsumer electronics category affect our ability to increase our gross profit margin in the videoconsumer electronics category.
Contractual Obligations
Our contractual obligations at March 31, 20132014 were as follows (dollars are in thousands):
| | | | | Payments due by period | | Payments due by period |
| | | Total | | Less than 1 year | | 1-3 years | | 4-5 years | | More than 5 years | | Total | | Less than 1 year | | 1-3 years | | 4-5 years | | More than 5 years |
| Operating lease obligations | | $ | 724,250 |
| | $ | 87,022 |
| | $ | 174,145 |
| | $ | 161,001 |
| | $ | 302,082 |
| | $ | 561,620 |
| | $ | 87,425 |
| | $ | 165,224 |
| | $ | 148,379 |
| | $ | 160,592 |
|
| Advertising commitments | | 15,080 |
| | 11,067 |
| | 3,695 |
| | 318 |
| | — |
| | 4,013 |
| | 1,810 |
| | 2,203 |
| | — |
| | — |
|
| Revolving Credit Facility | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | | $ | 739,330 |
| | $ | 98,089 |
| | $ | 177,840 |
| | $ | 161,319 |
| | $ | 302,082 |
| | $ | 565,633 |
| | $ | 89,235 |
| | $ | 167,427 |
| | $ | 148,379 |
| | $ | 160,592 |
|
The above contractual obligation table excludes any future payments made in connection with our Non-Qualified Deferred Compensation Plan. The aggregate balance outstanding for all participants in the plan as of March 31, 20132014 was approximately $5.45.2 million. We are unable to estimate the timing of these future payments under the plan.
We lease our retail stores, warehouse and office space, corporate airplane and certain vehicles under operating leases. Our noncancelable lease agreements expire at various dates through fiscal year 2027,2026, require various minimum annual rentals, and contain certain options for renewal. The majority of the real estate leases require payment of property taxes, normal
maintenance and insurance on the properties. Total rent expense with respect to real property was approximately $88.290.4 million, $80.988.2 million and $68.980.9 million in fiscal 20132014, 20122013 or 20112012, respectively. Contingent rentals based upon sales are applicable to certain of the store leases. Contingent rent expense was approximately $0.1 million in each of fiscal 20132014, 20122013 and 20112012. Total rental expense with respect to real property has increased as a result of store relocations in fiscal 2014, and the increase in the number of our stores.stores from fiscal 2012 to 2013.
Off Balance Sheet Items
We do not have any off balance sheet arrangements. We finance some of our development programs through sale and leaseback transactions, which involve selling stores to third parties and then leasing the stores back under leases that are accounted for as operating leases in accordance with U.S. GAAP. A summary of our operating lease obligations by fiscal year is included in the “Contractual Obligations” section above. Additional information regarding our operating leases is available in “Business—Properties,” and Note 9,8, Leases, in the Notes to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
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| ITEM 7A. | Quantitative and Qualitative Disclosures about Market Risk. |
In addition to the risks inherent in our operations, we are exposed to certain market risks, including interest rate risk. As of March 31, 20132014, our debt was comprised of our Revolving Credit Facility. Interest on borrowings under our Revolving Credit Facility is payable monthly at a fluctuating rate based on the bank’s prime rate or LIBOR plus an applicable margin. As of March 31, 20132014, we had no cash borrowings under our Revolving Credit Facility.
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| | |
| ITEM 8. | Financial Statements and Supplementary Data. | |
| | | |
| INDEX TO CONSOLIDATED FINANCIAL STATEMENTS |
| HHGREGG, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS |
| | | |
Management'sManagement’s Report on the Consolidated Financial Statements | |
| | |
Management'sManagement’s Report on Internal Control Over Financial Reporting | |
| | |
| Report of Independent Registered Public Accounting Firm | |
| | |
Consolidated Statements of Income for Fiscal Years Ended March 31, 2014, 2013 2012 and 20112012 | |
| |
Consolidated Statements of Comprehensive Income for Fiscal Years Ended March 31, 2013, 2012 and 2011 | |
| | |
Consolidated Balance Sheets as of March 31, 20132014 and 20122013 | |
| | |
Consolidated Statements of Stockholders'Stockholders’ Equity for Fiscal Years Ended March 31, 2014, 2013 2012 and 20112012 | |
| | |
Consolidated Statements of Cash Flows for Fiscal Years Ended March 31, 2014, 2013 2012 and 20112012 | |
| | |
| Notes to Consolidated Financial Statements | |
Management’s Report on the Consolidated Financial Statements
Our management is responsible for the preparation, integrity and objectivity of the accompanying consolidated financial statements and the related financial information. The consolidated financial statements have been prepared in conformity with U.S. GAAP and necessarily include certain amounts that are based on estimates and informed judgments. Our management also prepared the related financial information included in this Annual Report on Form 10-K and is responsible for its accuracy and consistency with the consolidated financial statements.
The accompanying consolidated financial statements have been audited by KPMG LLP, an independent registered public accounting firm, which conducted its audits in accordance with the standards of the Public Company Accounting Oversight Board (U.S.). The independent registered public accounting firm’s responsibility is to express an opinion on the consolidated financial statements based on its audits in accordance with the standards of the PCAOB.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting is designed under the supervision of our principal executive officer and principal financial and accounting officer, and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includeincludes those policies and procedures that:
| |
| (1) | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and the dispositions of our assets; |
| |
| (2) | Provide reasonable assurance that our transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and Board of Directors; and |
| |
| (3) | Provide reasonable assurance regarding prevention or timely detection of the unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements. |
Under the supervision and with the participation of our management, including our principal executive officer and principal financial and accounting officer, we assessed the effectiveness of our internal control over financial reporting as of March 31, 20132014, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework.Framework (1992). Based on our assessment, we have concluded that our internal control over financial reporting was effective as of March 31, 20132014. During our assessment, we did not identify any material weaknesses in our internal control over financial reporting. KPMG LLP, an independent registered public accounting firm, has audited the consolidated financial statements included in this Annual Report on Form 10-K and, as a part of this audit, has issued their report, included in Item 8, Financial Statements and Supplementary Data, on the effectiveness of our internal control over financial reporting. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that the control may become inadequate because of a change in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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| | |
/s/ DENNIS L. MAY | | /s/ JANDREW S. GIESLEREREMY J. AGUILAR |
| Dennis L. May | | Jeremy J. AguilarAndrew S. Giesler |
| Chief Executive Officer | | Interim Chief Financial Officer |
| (Principal Executive Officer) | | (Principal Financial and Accounting Officer) |
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
hhgregg, Inc.:
We have audited the accompanying consolidated balance sheets of hhgregg, Inc. and subsidiaries (the ���Company”“Company”) as of March 31, 20132014 and 20122013, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended March 31, 20132014. We also have audited the Company’s internal control over financial reporting as of March 31, 20132014, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management’s report on internal control over financial reporting under Item 8. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of hhgregg, Inc. and subsidiaries as of March 31, 20132014 and 20122013, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 20132014, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 20132014, based on criteria established in Internal Control — Integrated Framework (1992) issued by COSO.
/s/ KPMG LLP
Indianapolis, Indiana
May 20, 20132014
HHGREGG, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended March 31, 20132014, 20122013, and 20112012
| | | | 2013 | | 2012 | | 2011 | 2014 | | 2013 | | 2012 |
| | (In thousands, except share and per share data) | (In thousands, except share and per share data) |
| Net sales | $ | 2,474,759 |
| | $ | 2,493,392 |
| | $ | 2,077,651 |
| $ | 2,338,570 |
| | $ | 2,474,759 |
| | $ | 2,493,392 |
|
| Cost of goods sold | 1,757,173 |
| | 1,773,004 |
| | 1,447,891 |
| 1,674,031 |
| | 1,757,173 |
| | 1,773,004 |
|
| Gross profit | 717,586 |
| | 720,388 |
| | 629,760 |
| 664,539 |
| | 717,586 |
| | 720,388 |
|
| Selling, general and administrative expenses | 507,755 |
| | 498,600 |
| | 429,823 |
| 493,950 |
| | 507,755 |
| | 498,600 |
|
| Net advertising expense | 125,433 |
| | 117,423 |
| | 87,340 |
| 124,179 |
| | 125,433 |
| | 117,423 |
|
| Depreciation and amortization expense | 40,135 |
| | 33,752 |
| | 26,238 |
| 43,120 |
| | 40,135 |
| | 33,752 |
|
| Life insurance proceeds | — |
| | (40,000 | ) | | — |
| — |
| | — |
| | (40,000 | ) |
| Asset impairment charges | 504 |
| | 813 |
| | 88 |
| 613 |
| | 504 |
| | 813 |
|
| Income from operations | 43,759 |
| | 109,800 |
| | 86,271 |
| 2,677 |
| | 43,759 |
| | 109,800 |
|
| Other expense (income): | | | | | | | | | | |
| Interest expense | 2,344 |
| | 2,658 |
| | 4,992 |
| 2,465 |
| | 2,344 |
| | 2,658 |
|
| Interest income | (9 | ) | | (23 | ) | | (22 | ) | (10 | ) | | (9 | ) | | (23 | ) |
| Loss related to early extinguishment of debt | — |
| | — |
| | 2,071 |
| |
| Total other expense | 2,335 |
| | 2,635 |
| | 7,041 |
| 2,455 |
| | 2,335 |
| | 2,635 |
|
| Income before income taxes | 41,424 |
| | 107,165 |
| | 79,230 |
| 222 |
| | 41,424 |
| | 107,165 |
|
| Income tax expense | 16,055 |
| | 25,792 |
| | 31,022 |
| |
| Income tax (benefit) expense | | (6 | ) | | 16,055 |
| | 25,792 |
|
| Net income | $ | 25,369 |
| | $ | 81,373 |
| | $ | 48,208 |
| $ | 228 |
| | $ | 25,369 |
| | $ | 81,373 |
|
| Net income per share | | | | | | | | | | |
| Basic | $ | 0.74 |
| | $ | 2.16 |
| | $ | 1.22 |
| $ | 0.01 |
| | $ | 0.74 |
| | $ | 2.16 |
|
| Diluted | $ | 0.74 |
| | $ | 2.14 |
| | $ | 1.19 |
| $ | 0.01 |
| | $ | 0.74 |
| | $ | 2.14 |
|
| Weighted average shares outstanding-basic | 34,430,641 |
| | 37,749,354 |
| | 39,394,708 |
| 30,209,928 |
| | 34,430,641 |
| | 37,749,354 |
|
| Weighted average shares outstanding-diluted | 34,496,788 |
| | 38,079,685 |
| | 40,368,223 |
| 30,683,989 |
| | 34,496,788 |
| | 38,079,685 |
|
See accompanying notes to consolidated financial statements.
HHGREGG, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years Ended March 31, 2013, 2012, and 2011
|
| | | | | | | | | | | |
| | 2013 | | 2012 | | 2011 |
| | (In thousands) |
| Net income | $ | 25,369 |
| | $ | 81,373 |
| | $ | 48,208 |
|
| Other comprehensive income, net of tax | | | | | |
| Unrealized gain on hedge arrangement, net of tax | — |
| | — |
| | 462 |
|
| Early termination of hedge arrangement, net of tax | — |
| | — |
| | 520 |
|
| Total other comprehensive income, net of tax | — |
| | — |
| | 982 |
|
| Comprehensive income | $ | 25,369 |
| | $ | 81,373 |
| | $ | 49,190 |
|
See accompanying notes to consolidated financial statements.
HHGREGG, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 20132014 and 2012
2013
| | | | 2013 | | 2012 | 2014 | | 2013 |
| | (In thousands, except share data) | (In thousands, except share data) |
| Assets | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | $ | 48,592 |
| | $ | 59,244 |
| $ | 48,164 |
| | $ | 48,592 |
|
| Accounts receivable—trade, less allowances of $1 and $25, respectively | 24,271 |
| | 19,467 |
| |
| Accounts receivable—trade, less allowances of $132 and $1, respectively | | 15,121 |
| | 24,271 |
|
| Accounts receivable—other | 18,748 |
| | 18,630 |
| 16,467 |
| | 18,748 |
|
| Merchandise inventories, net | 315,562 |
| | 282,409 |
| 298,542 |
| | 315,562 |
|
| Prepaid expenses and other current assets | 5,567 |
| | 5,562 |
| 6,694 |
| | 5,567 |
|
| Income tax receivable | 1,414 |
| | — |
| 1,380 |
| | 1,414 |
|
| Deferred income taxes | 5,758 |
| | 9,639 |
| 6,220 |
| | 5,758 |
|
| Total current assets | 419,912 |
| | 394,951 |
| 392,588 |
| | 419,912 |
|
| Net property and equipment | 217,911 |
| | 204,273 |
| 193,882 |
| | 217,911 |
|
| Deferred financing costs, net | 1,992 |
| | 2,656 |
| 2,334 |
| | 1,992 |
|
| Deferred income taxes | 35,252 |
| | 38,970 |
| 35,182 |
| | 35,252 |
|
| Other assets | 1,354 |
| | 1,934 |
| 1,977 |
| | 1,354 |
|
| Total long-term assets | 256,509 |
| | 247,833 |
| 233,375 |
| | 256,509 |
|
| Total assets | $ | 676,421 |
| | $ | 642,784 |
| $ | 625,963 |
| | $ | 676,421 |
|
| | | | | | | |
| Liabilities and Stockholders’ Equity | | | | | | |
| Current liabilities: | | | | | | |
| Accounts payable | $ | 150,333 |
| | $ | 122,596 |
| $ | 140,806 |
| | $ | 150,333 |
|
| Customer deposits | 38,042 |
| | 28,993 |
| 41,518 |
| | 38,042 |
|
| Accrued liabilities | 49,422 |
| | 43,735 |
| 50,898 |
| | 49,422 |
|
| Income tax payable | 2,145 |
| | 4,358 |
| 122 |
| | 2,145 |
|
| Total current liabilities | 239,942 |
| | 199,682 |
| 233,344 |
| | 239,942 |
|
| Long-term liabilities: | | | | | | |
| Deferred rent | 77,777 |
| | 71,304 |
| 73,493 |
| | 77,777 |
|
| Other long-term liabilities | 12,044 |
| | 12,278 |
| 11,992 |
| | 12,044 |
|
| Total long-term liabilities | 89,821 |
| | 83,582 |
| 85,485 |
| | 89,821 |
|
| Total liabilities | 329,763 |
| | 283,264 |
| 318,829 |
| | 329,763 |
|
| Stockholders’ equity: | | | | | | |
| Preferred stock, par value $.0001; 10,000,000 shares authorized; no shares issued and outstanding as of March 31, 2013 and 2012, respectively | — |
| | — |
| |
| Common stock, par value $.0001; 150,000,000 shares authorized; 40,640,743 and 40,066,005 shares issued; and 31,468,453 and 36,351,716 outstanding as of March 31, 2013 and 2012, respectively | 4 |
| | 4 |
| |
| Preferred stock, par value $.0001; 10,000,000 shares authorized; no shares issued and outstanding as of March 31, 2014 and 2013, respectively | | — |
| | — |
|
| Common stock, par value $.0001; 150,000,000 shares authorized; 41,121,390 and 40,640,743 shares issued; and 28,460,218 and 31,468,453 outstanding as of March 31, 2014 and March 31, 2013, respectively | | 4 |
| | 4 |
|
| Additional paid-in capital | 287,806 |
| | 277,846 |
| 297,199 |
| | 287,806 |
|
| Retained earnings | 154,650 |
| | 129,281 |
| 154,878 |
| | 154,650 |
|
| Common stock held in treasury at cost, 9,172,290 and 3,714,289 shares as of March 31, 2013 and 2012, respectively | (95,802 | ) | | (47,570 | ) | |
| | 346,658 |
| | 359,561 |
| |
| Note receivable for common stock | — |
| | (41 | ) | |
| Common stock held in treasury at cost, 12,661,172 and 9,172,290 shares as of March 31, 2014 and March 31, 2013, respectively | | (144,947 | ) | | (95,802 | ) |
| Total stockholders’ equity | 346,658 |
| | 359,520 |
| 307,134 |
| | 346,658 |
|
| Total liabilities and stockholders’ equity | $ | 676,421 |
| | $ | 642,784 |
| $ | 625,963 |
| | $ | 676,421 |
|
See accompanying notes to consolidated financial statements.
HHGREGG, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity
Years Ended March 31, 20132014, 20122013, and 20112012
(Dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Shares | | Preferred Stock | | Common Stock | | Additional Paid-in Capital | | Accumulated Other Comprehensive Loss | | (Accumulated Deficit) Retained Earnings | | Note Receivable For Common Stock | | Common Stock Held in Treasury | | Total Stockholders’ Equity |
| Balance at March 31, 2010 | 38,517,388 |
| | $ | — |
| | $ | 4 |
| | $ | 254,770 |
| | $ | (982 | ) | | $ | (300 | ) | | $ | (84 | ) | | $ | — |
| | $ | 253,408 |
|
| Net income | | | | | | | | | | | 48,208 |
| | | | | | 48,208 |
|
| Other comprehensive income, net of tax: | | | | | | | | | 982 |
| | | | | | | | 982 |
|
| Payments received on notes receivable for issuance of common stock | — |
| | — |
| | — |
| | — |
| | | | — |
| | 43 |
| | — |
| | 43 |
|
| Exercise of stock options | 1,919,485 |
| | — |
| | — |
| | 4,955 |
| | | | — |
| | — |
| | — |
| | 4,955 |
|
| Stock compensation expense | — |
| | — |
| | — |
| | 5,199 |
| | | | — |
| | — |
| | — |
| | 5,199 |
|
| Excess tax benefit from stock-based compensation | — |
| | — |
| | — |
| | 14,913 |
| | | | — |
| | — |
| | — |
| | 14,913 |
|
| Net settlement of shares - taxes | (712,136 | ) | | — |
| | — |
| | (11,122 | ) | | | | — |
| | — |
| | — |
| | (11,122 | ) |
| Balance at March 31, 2011 | 39,724,737 |
| | $ | — |
| | $ | 4 |
| | $ | 268,715 |
| | $ | — |
| | $ | 47,908 |
| | $ | (41 | ) | | $ | — |
| | $ | 316,586 |
|
| Net income | | | | | | | | | | | 81,373 |
| | | | | | $ | 81,373 |
|
| Exercise of stock options and vesting of RSUs | 341,268 |
| | — |
| | — |
| | 2,464 |
| | | | — |
| | — |
| | — |
| | 2,464 |
|
| Stock compensation expense | — |
| | — |
| | — |
| | 5,935 |
| | | | — |
| | — |
| | — |
| | 5,935 |
|
| Excess tax benefit from stock-based compensation | — |
| | — |
| | — |
| | 732 |
| | | | — |
| | — |
| | — |
| | 732 |
|
| Repurchase of common stock | (3,714,289 | ) | | — |
| | — |
| | — |
| | | | — |
| | — |
| | (47,570 | ) | | (47,570 | ) |
| Balance at March 31, 2012 | 36,351,716 |
| | $ | — |
| | $ | 4 |
| | $ | 277,846 |
| | $ | — |
| | $ | 129,281 |
| | $ | (41 | ) | | $ | (47,570 | ) | | $ | 359,520 |
|
| Net income | | | | | | | | | | | 25,369 |
| | | | | | 25,369 |
|
| Payments received on notes receivable for issuance of common stock | — |
| | — |
| | — |
| | — |
| | | | — |
| | 41 |
| | — |
| | 41 |
|
| Exercise of stock options and vesting of RSUs | 574,738 |
| | — |
| | — |
| | 4,356 |
| | | | — |
| | — |
| | — |
| | 4,356 |
|
| Stock compensation expense | — |
| | — |
| | — |
| | 5,150 |
| | | | — |
| | — |
| | — |
| | 5,150 |
|
| Excess tax benefit from stock-based compensation | — |
| | — |
| | — |
| | 454 |
| | | | — |
| | — |
| | — |
| | 454 |
|
| Repurchase of common stock | (5,458,001 | ) | | — |
| | — |
| | — |
| | | | — |
| | — |
| | (48,232 | ) | | (48,232 | ) |
| Balance at March 31, 2013 | 31,468,453 |
| | $ | — |
| | $ | 4 |
| | $ | 287,806 |
| | $ | — |
| | $ | 154,650 |
| | $ | — |
| | $ | (95,802 | ) | | $ | 346,658 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Shares | | Preferred Stock | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Note Receivable For Common Stock | | Common Stock Held in Treasury | | Total Stockholders’ Equity |
| Balance at March 31, 2011 | 39,724,737 |
| | $ | — |
| | $ | 4 |
| | $ | 268,715 |
| | $ | 47,908 |
| | $ | (41 | ) | | $ | — |
| | $ | 316,586 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | 81,373 |
| | — |
| | — |
| | 81,373 |
|
| Exercise of stock options | 341,268 |
| | — |
| | — |
| | 2,464 |
| | — |
| | — |
| | — |
| | 2,464 |
|
| Stock compensation expense | — |
| | — |
| | — |
| �� | 5,935 |
| | — |
| | — |
| | — |
| | 5,935 |
|
| Excess tax benefit from stock-based compensation | — |
| | — |
| | — |
| | 732 |
| | — |
| | — |
| | — |
| | 732 |
|
| Repurchase of common stock | (3,714,289 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (47,570 | ) | | (47,570 | ) |
| Balance at March 31, 2012 | 36,351,716 |
| | $ | — |
| | $ | 4 |
| | $ | 277,846 |
| | $ | 129,281 |
| | $ | (41 | ) | | $ | (47,570 | ) | | $ | 359,520 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | 25,369 |
| | — |
| | — |
| | 25,369 |
|
| Payments received on notes receivable for issuance of common stock | — |
| | — |
| | — |
| | — |
| | — |
| — |
| 41 |
| | — |
| | 41 |
|
| Exercise of stock options | 574,738 |
| | — |
| | — |
| | 4,356 |
| | — |
| | — |
| | — |
| | 4,356 |
|
| Stock compensation expense | — |
| | — |
| | — |
| | 5,150 |
| | — |
| | — |
| | — |
| | 5,150 |
|
| Excess tax benefit from stock-based compensation | — |
| | — |
| | — |
| | 454 |
| | — |
| | — |
| | — |
| | 454 |
|
| Repurchase of common stock | (5,458,001 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (48,232 | ) | | (48,232 | ) |
| Balance at March 31, 2013 | 31,468,453 |
| | $ | — |
| | $ | 4 |
| | $ | 287,806 |
| | $ | 154,650 |
| | $ | — |
| | $ | (95,802 | ) | | $ | 346,658 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | 228 |
| | — |
| | — |
| | 228 |
|
| Exercise of stock options | 480,647 |
| | — |
| | — |
| | 5,814 |
| | — |
| | — |
| | — |
| | 5,814 |
|
| Stock compensation expense | — |
| | — |
| | — |
| | 4,428 |
| | — |
| | — |
| | — |
| | 4,428 |
|
| Excess tax deficiency from stock-based compensation | — |
| | — |
| | — |
| | (849 | ) | | — |
| | — |
| | — |
| | (849 | ) |
| Repurchase of common stock | (3,488,882 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (49,145 | ) | | (49,145 | ) |
| Balance at March 31, 2014 | 28,460,218 |
| | $ | — |
| | $ | 4 |
| | $ | 297,199 |
| | $ | 154,878 |
| | $ | — |
| | $ | (144,947 | ) | | $ | 307,134 |
|
See accompanying notes to consolidated financial statements.
HHGREGG, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended March 31, 20132014, 20122013, and 20112012
| | | | 2013 | | 2012 | | 2011 | 2014 | | 2013 | | 2012 |
| | (In thousands) | (In thousands) |
| Cash flows from operating activities: | | | | | | | | | | |
| Net income | $ | 25,369 |
| | $ | 81,373 |
| | $ | 48,208 |
| $ | 228 |
| | $ | 25,369 |
| | $ | 81,373 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | |
| Depreciation and amortization | 40,135 |
| | 33,752 |
| | 26,238 |
| 43,120 |
| | 40,135 |
| | 33,752 |
|
| Amortization of deferred financing costs | 664 |
| | 664 |
| | 1,198 |
| 604 |
| | 664 |
| | 664 |
|
| Stock-based compensation | 5,150 |
| | 5,935 |
| | 5,199 |
| 4,428 |
| | 5,150 |
| | 5,935 |
|
| Excess tax benefits from stock-based compensation | (586 | ) | | (732 | ) | | (14,913 | ) | |
| Gain on sales of property and equipment | (216 | ) | | (332 | ) | | (379 | ) | |
| Loss on early extinguishment of debt | — |
| | — |
| | 2,071 |
| |
| Excess tax deficiency (benefits) from stock-based compensation | | 849 |
| | (586 | ) | | (732 | ) |
| Loss (gain) on sales of property and equipment | | 1,646 |
| | (216 | ) | | (332 | ) |
| Deferred income taxes | 7,599 |
| | 9,382 |
| | 11,612 |
| (392 | ) | | 7,599 |
| | 9,382 |
|
| Asset impairment charges | 504 |
| | 813 |
| | 88 |
| 613 |
| | 504 |
| | 813 |
|
| Tenant allowances received from landlords | 11,608 |
| | 22,895 |
| | 16,040 |
| 2,705 |
| | 11,608 |
| | 22,895 |
|
| Changes in operating assets and liabilities: | | | | | | | | | | |
| Accounts receivable—trade | (4,804 | ) | | (10,536 | ) | | (1,619 | ) | 9,150 |
| | (4,804 | ) | | (10,536 | ) |
| Accounts receivable—other | 507 |
| | (2,836 | ) | | 3,605 |
| 2,407 |
| | 507 |
| | (2,836 | ) |
| Merchandise inventories | (33,153 | ) | | (70,401 | ) | | (10,505 | ) | 17,020 |
| | (33,153 | ) | | (70,401 | ) |
| Income tax receivable/payable | (3,173 | ) | | 3,037 |
| | 2,523 |
| |
| Income tax receivable | | (815 | ) | | (960 | ) | | — |
|
| Prepaid expenses and other assets | 575 |
| | 4,606 |
| | (2,706 | ) | (1,066 | ) | | 575 |
| | 4,606 |
|
| Accounts payable | 6,932 |
| | 38,374 |
| | (48,976 | ) | 6,125 |
| | 6,932 |
| | 38,374 |
|
| Customer deposits | 9,049 |
| | 7,202 |
| | 1,461 |
| 3,476 |
| | 9,049 |
| | 7,202 |
|
| Income tax payable | | (2,023 | ) | | (2,213 | ) | | 3,037 |
|
| Accrued liabilities | 5,687 |
| | (3,403 | ) | | 16,735 |
| 1,476 |
| | 5,687 |
| | (3,403 | ) |
| Deferred rent | (5,760 | ) | | (2,819 | ) | | 1,914 |
| (7,115 | ) | | (5,760 | ) | | (2,819 | ) |
| Other long-term liabilities | (34 | ) | | 63 |
| | 1,203 |
| 215 |
| | (34 | ) | | 63 |
|
| Net cash provided by operating activities | 66,053 |
| | 117,037 |
| | 58,997 |
| 82,651 |
| | 66,053 |
| | 117,037 |
|
| Cash flows from investing activities: | | | | | | | | | | |
| Purchases of property and equipment | (54,020 | ) | | (83,054 | ) | | (59,938 | ) | (22,257 | ) | | (54,020 | ) | | (83,054 | ) |
| Net proceeds from sale leaseback transactions | — |
| | 1,625 |
| | — |
| — |
| | — |
| | 1,625 |
|
| Proceeds from sales of property and equipment | 34 |
| | 80 |
| | 153 |
| 217 |
| | 34 |
| | 80 |
|
| Purchases of corporate-owned life insurance | | (684 | ) | | — |
| | — |
|
| Net cash used in investing activities | (53,986 | ) | | (81,349 | ) | | (59,785 | ) | (22,724 | ) | | (53,986 | ) | | (81,349 | ) |
| Cash flows from financing activities: | | | | | | | | | | |
| Purchases of treasury stock | (48,232 | ) | | (47,570 | ) | | — |
| (49,145 | ) | | (48,232 | ) | | (47,570 | ) |
| Proceeds from exercise of stock options | 4,356 |
| | 2,464 |
| | 4,955 |
| 5,814 |
| | 4,356 |
| | 2,464 |
|
| Excess tax benefits from stock-based compensation | 586 |
| | 732 |
| | 14,913 |
| |
| Net settlement of shares - payment of tax withholding | — |
| | — |
| | (11,122 | ) | |
| Net increase (decrease) in bank overdrafts | 11,506 |
| | (4,776 | ) | | (2,263 | ) | |
| Payment on notes payable | — |
| | — |
| | (908 | ) | |
| Net borrowings on inventory financing facility | 9,024 |
| | — |
| | — |
| |
| Excess tax (deficiency) benefits from stock-based compensation | | (849 | ) | | 586 |
| | 732 |
|
| Net (decrease) increase in bank overdrafts | | (11,506 | ) | | 11,506 |
| | (4,776 | ) |
| Net (repayments) borrowings on inventory financing facility | | (3,723 | ) | | 9,024 |
| | — |
|
| Payment of financing costs | — |
| | (88 | ) | | (2,440 | ) | (946 | ) | | — |
| | (88 | ) |
| Payment for early debt extinguishment | — |
| | — |
| | (87,433 | ) | |
| Other, net | 41 |
| | — |
| | 43 |
| — |
| | 41 |
| | — |
|
| Net cash used in financing activities | (22,719 | ) | | (49,238 | ) | | (84,255 | ) | (60,355 | ) | | (22,719 | ) | | (49,238 | ) |
| Net decrease in cash and cash equivalents | (10,652 | ) | | (13,550 | ) | | (85,043 | ) | (428 | ) | | (10,652 | ) | | (13,550 | ) |
| Cash and cash equivalents | | | | | | | | | | |
| Beginning of period | 59,244 |
| | 72,794 |
| | 157,837 |
| 48,592 |
| | 59,244 |
| | 72,794 |
|
| End of period | $ | 48,592 |
| | $ | 59,244 |
| | $ | 72,794 |
| $ | 48,164 |
| | $ | 48,592 |
| | $ | 59,244 |
|
| Supplemental disclosure of cash flow information: | | | | | | | | | | |
| Interest paid | $ | 1,903 |
| | $ | 2,119 |
| | $ | 3,979 |
| $ | 1,881 |
| | $ | 1,903 |
| | $ | 2,119 |
|
| Income taxes paid | $ | 11,629 |
| | $ | 13,219 |
| | $ | 1,975 |
| $ | 3,418 |
| | $ | 11,629 |
| | $ | 13,219 |
|
| Capital expenditures included in accounts payable | $ | 1,491 |
| | $ | 1,216 |
| | $ | 6,581 |
| $ | 1,068 |
| | $ | 1,491 |
| | $ | 1,216 |
|
See accompanying notes to consolidated financial statements.
HHGREGG, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| |
| (1) | Summary of Significant Accounting Policies |
Description of Business
hhgregg, Inc. is a specialty retailer of home appliances, televisions, computers, tablets, wireless devices, consumer electronics, computers and mobile products, home entertainment furniture, mattresses, fitness equipment and related services operating under the name hhgregg™. As of March 31, 20132014, the Company had 228 stores located in Alabama, Delaware, Florida, Georgia, Illinois, Indiana, Kentucky, Louisiana, Maryland, Mississippi, Missouri, New Jersey, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia, West Virginia, and Wisconsin. The Company operates in one reportable segment.
hhgregg was formed in Delaware on April 12, 2007. As part of a corporate reorganization effected on July 19, 2007, the stockholders of Gregg Appliances Inc. (“Gregg Appliances”) contributed all of their shares of Gregg Appliances to hhgregg in exchange for common stock of hhgregg. As a result, Gregg Appliances became a wholly-owned subsidiary of hhgregg.
| |
| (b) | Principles of Consolidation |
The consolidated financial statements include the accounts of hhgregg and its wholly-owned subsidiary, Gregg Appliances (the "Company"“Company” or "hhgregg"“hhgregg”). The financial statements of Gregg Appliances include its wholly-owned subsidiary HHG Distributing LLC (“HHG Distributing”), which has no assets or operations. All intercompany balances and transactions have been eliminated upon consolidation.
Management uses estimates and assumptions in preparing financial statements in conformity with accounting principles generally accepted in the United States. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates and assumptions.
The Company’s fiscal year is the twelve month period ended March 31.
| |
| (e) | Cash and Cash Equivalents |
Cash primarily consists of cash on hand and bank deposits. Cash equivalents primarily consist of money market accounts and other highly liquid investments with an original maturity of three months or less when purchased.less. The amounts ofCompany had no cash equivalents at March 31, 20132014 and2012 were $45.0 million and $0.0 million, respectively. The weighted-average interest on cash equivalents at March 31, 2013 was 0.01%2013. The Company hadno outstanding checks in excess of funds on deposit (book overdrafts) at March 31, 20132014 and2012 of $11.5 million andat March 31, $0.0 million2013.
Accounts receivable are recorded at the invoiced amount and are subject to finance charges. Accounts receivable-trade primarily consists of credit card receivables. Accounts receivable-other consists mainly of amounts due from vendors for advertising and volume rebates. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers. Activity for the allowance for doubtful accounts for the years ended March 31, 2013, 2012 and 2011, in thousands, was as follows:
|
| | | | | | | | | | | | | | | | |
| | | Allowance for Doubtful Accounts |
| | | Balance at beginning of period | | Charged to Costs and Expenses | | Deductions | | Balance at End of Period |
| Year ended March 31, 2013 | | $ | 25 |
| | $ | 15 |
| | $ | (39 | ) | | $ | 1 |
|
| Year ended March 31, 2012 | | 134 |
| | 84 |
| | (193 | ) | | 25 |
|
| Year ended March 31, 2011 | | 177 |
| | 92 |
| | (135 | ) | | 134 |
|
| |
| (g) | Merchandise Inventories |
Inventory is valued at the lower of the cost of the inventory or fair market value through the establishment of markdown and inventory loss reserves. The Company’s markdown reserve represents the excess of the carrying amount, typically average cost, over the amount it expects to realize from the ultimate sale or other disposal of the inventory. Subsequent changes in facts or circumstances do not result in the restoration of previously recorded markdowns or an increase in that newly established cost basis.
The Company purchases a significant portion of its merchandise from two vendors. For the year ended March 31, 2014, two vendors accounted for 29.2% and 17.1%, respectively, of merchandise purchases. For the year ended March 31, 2013, two vendors accounted for 27.5% and 17.0%, respectively, of merchandise purchases. For the year ended March 31, 2012, two vendors accounted for 20.5% and 15.2%, respectively, of merchandise purchases. For the year ended March 31, 2011, two vendors accounted for 19.1% and 18.4%, respectively, of merchandise purchases.
The Company included amounts due to a third party financing company for use under an inventory financing facility, entered into during the first quarter of fiscal 2013, within accounts payable in the accompanying consolidated balance sheet. Borrowings and payments on the inventory financing facility are classified as financing activities in the consolidated statements of cash flows. The inventory financing facility is a $20 million unsecured credit line that is non-interest bearing and is not collateralized with the inventory purchased. The facility includes customary covenants as well as customary events of default. The amounts borrowed on the credit line fluctuate on a daily basis, but as of the end of each quarter and as of March 31, 2013, thebasis. The amount of borrowings included within accounts payable was as follows: June 30, 2012, $11.1 million; September 30, 2012, $13.2 million; December 31, 2012, $4.3 million; andof March 31, 2014 and 2013 $9.0were $5.3 million. and $9.0 million, respectively. As of March 31, 2014 and 2013, the Company had $14.7 million and $11.0 million available under the facility.facility, respectively. The Company incurred no interest on the borrowings for the yearyears ended March 31, 2014 and 2013.
| |
| (h) | Property and Equipment |
Property and equipment are recorded at cost and are depreciated over their expected useful lives on a straight-line basis. Leasehold improvements are depreciated over the shorter of the lease term or expected useful life. Repairs and maintenance costs are charged directly to expense as incurred. In certain lease arrangements, the Company is considered the owner of the building during the construction period. At the end of the construction period, the Company will sell and lease the location back applying provisions of lease accounting guidance. Any gains on sale and leaseback transactions are deferred and amortized over the life of the respective lease. The Company does not have any continuing involvement with the sale and leaseback locations, other than a normal leaseback, and the locations are accounted for as operating leases. In fiscal 2014 and 2013, the Company did not execute any sale and leaseback transactions. In fiscal 2012, the Company executed one sale and leaseback transaction netting $1.6 million in proceeds on the sale.
Property and equipment consisted of the following at March 31, 20132014 and 20122013 (in thousands):
| | | | | 2013 | | 2012 | | 2014 | | 2013 |
| Machinery and equipment | | $ | 25,328 |
| | $ | 23,340 |
| | $ | 28,478 |
| | $ | 25,328 |
|
| Store fixtures and furniture | | 175,659 |
| | 146,924 |
| | 180,799 |
| | 175,659 |
|
| Vehicles | | 2,269 |
| | 2,286 |
| | 2,207 |
| | 2,269 |
|
| Signs | | 19,163 |
| | 16,969 |
| | 19,545 |
| | 19,163 |
|
| Leasehold improvements | | 172,952 |
| | 146,983 |
| | 178,888 |
| | 172,952 |
|
| Construction in progress | | 5,995 |
| | 11,429 |
| | 8,167 |
| | 5,995 |
|
| | | 401,366 |
| | 347,931 |
| | 418,084 |
| | 401,366 |
|
| Less accumulated depreciation and amortization | | (183,455 | ) | | (143,658 | ) | | (224,202 | ) | | (183,455 | ) |
| Net property and equipment | | $ | 217,911 |
| | $ | 204,273 |
| | $ | 193,882 |
| | $ | 217,911 |
|
Estimated useful lives by major asset category are as follows:
|
| | |
| Asset | | Life (in years) |
| Machinery and equipment | | 5-7 |
| Store fixtures and furniture | | 3-7 |
| Vehicles | | 5 |
| Signs | | 7 |
| Leasehold improvements | | 5-15 |
Depreciation and amortization expense for the years ended March 31, 20132014, 20122013 and 20112012 was $40.143.1 million, $33.840.1 million and $26.233.8 million, respectively.
| |
| (i) | Impairment of Long-Lived Assets |
Long-lived assets other than goodwill and indefinite-lived intangible assets, which are separately tested for impairment, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. 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 may be 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.
For the fiscal year ended March 31, 20132014, the Company had one store which performed lower than chain average duerecorded an asset impairment charge as a result of entering into a lease modification to decreasing salesdownsize a store. In conjunction with the downsize, the Company determined that certain of the assets in use would be abandoned at the time construction to downsize begins, and profit contribution, and triggered the needas a result determined this to be a triggering event for furtheran impairment analysis to be completed.performed in accordance with guidance on impairment of long-lived assets. The estimated undiscounted future cash flows generated by the store was less than its carrying amount, therefore the carrying amount of the assets related to this store were reduced to fair value. In addition, the Company recorded an asset impairment charge during fiscal 2014 as a result of idling certain store fixtures associated with the Company’s changing product mix. The Company determined this to be a triggering event for an impairment analysis to be performed, and the carrying amount of the assets were reduced to fair value. During fiscal years ended March 31, 20122013 and 20112012, the Company hadone and two separate stores in each year respectively, whose profit contributions were significantly lower than the chain average due to decreased sales at each respective location. This decrease in profit in all instances triggered the need for an impairment analysis to be performed in accordance with guidance on impairment of long-lived assets. The estimated undiscounted future cash flows generated byBased on the stores were less than their carrying amounts, thereforeabove reasons, the carrying amounts of the assets related to these stores were reduced to fair value, resulting in a pre-tax charge of $0.50.6 million, $0.80.5 million and $0.10.8 million for the years ended March 31, 20132014, 20122013 and 20112012, respectively.
| |
| (j) | Deferred Financing Costs |
Costs incurred related to debt financing are capitalized and amortized over the life of the related debt as a component of interest expense. Debt financing costs are related to the Company’s Revolving Credit Facility as discussed in note 65 below. The Company recognized related amortization expense of deferred financing costs of $0.70.6 million, $0.7 million and $1.20.7 million for the years ended March 31, 20132014, 20122013 and 20112012, respectively. In fiscal 2011, $1.2 million of deferred financing costs were written off in connection with the Company’s early extinguishment of debt related primarily to the Revolving Credit Facility and Term B Facility.
| |
| (k) | Self-Insured Liabilities |
The Company is self-insured for certain losses related to workers’ compensation, medical insurance, general liability and motor vehicle insurance claims. However, the Company obtains third-party insurance coverage to limit its exposure to these claims. The following table provides the Company’s stop loss coverage for the fiscal years ended March 31, 20132014, 20122013 and 20112012 (in thousands):
| | | | | Fiscal Year Ended March 31, | | Fiscal Year Ended March 31, |
| | | 2013 | | 2012 | | 2011 | | 2014 | | 2013 | | 2012 |
| Workers’ Compensation — per occurrence | | $ | 300 |
| | $ | 300 |
| | $ | 300 |
| | $ | 300 |
| | $ | 300 |
| | $ | 300 |
|
| Workers’ Compensation — per occurrence (OH) | | $ | 500 |
| | $ | 500 |
| | $ | 500 |
| | $ | 500 |
| | $ | 500 |
| | $ | 500 |
|
| General Liability — per occurrence | | $ | 250 |
| | $ | 250 |
| | $ | 250 |
| | $ | 250 |
| | $ | 250 |
| | $ | 250 |
|
| Motor Vehicles — per occurrence | | $ | 100 |
| | $ | 100 |
| | $ | 100 |
| | $ | 100 |
| | $ | 100 |
| | $ | 100 |
|
| Medical Insurance — per participant, per year | | $ | 300 |
| | $ | 300 |
| | $ | 150 |
| | $ | 300 |
| | $ | 300 |
| | $ | 300 |
|
When estimating self-insured liabilities, a number of factors are considered, including historical claims experience, demographic factors, severity factors and valuations provided by independent third-party actuaries. Quarterly, management reviews its assumptions and the valuations provided by independent third-party actuaries to determine the adequacy of the self-insured liabilities.
| |
| (l) | Accrued Straight-Line Rent |
Retail and distribution operations are conducted from leased locations. The leases generally require payment of real estate taxes, insurance and common area maintenance, in addition to rent. The terms of the lease agreements generally range from 10 to 15 years. Most of the leases contain renewal options and escalation clauses, and certain store leases require contingent rents based on factors such as specified percentages of revenue or the consumer price index.
For leases that contain predetermined fixed escalations of the minimum rent, the related rent expense is recognized on a straight-line basis from the date the Company takes possession of the property to the end of the lease term. Any difference
between the straight-line rent amounts and amounts payable under the leases are recorded as part of deferred rent. Cash or lease incentives received upon entering into certain store leases (tenant allowances) are recognized on a straight-line basis as a reduction to rent from the date the Company takes possession of the property through the end of the lease term. The unamortized portion of tenant allowances is recorded as a part of deferred rent. For leases that require contingent rents, management makes an estimate of the contingent rent annually and recognizes the related rent expense on a straight-line basis over the year. As of March 31, 20132014 and 20122013, deferred rent included in long-term liabilities in the Company’s consolidated balance sheets was $77.873.5 million and $71.377.8 million, respectively.
Transaction costs associated with the sale and leaseback of properties and any related deferred gain or loss are recognized on a straight-line basis over the initial period of the lease agreements. The Company does not have any retained or contingent interests in the properties, nor does the Company provide any guarantees in connection with the sale and leaseback of properties, other than a corporate-level guarantee of lease payments. At March 31, 20132014 and 20122013, deferred gains of $2.01.7 million and $2.32.0 million, respectively, were recorded in other long term liabilities relating to sale and leaseback transactions.
The Company recognizes revenue from the sale of merchandise at the time the customer takes possession of the merchandise. The Company recognizes revenue related to the delivery of merchandise at the time the merchandise is delivered. The Company honors returns from customers within 30 days from the date of sale and provides allowances for returns based on historical experience. The Company recorded an allowance for sales returns in accrued liabilities of $0.50.6 million and $0.70.5 million at March 31, 20132014 and 20122013, respectively. The Company recognizes service revenue at the time that evidence of an agreement exists, the service is completed, the price is fixed or determinable, and collectability is reasonably assured.
The Company sells gift cards to its customers in its retail stores and online. The Company does not charge administrative fees on unused gift cards and the Company’s gift cards (other than promotional rebate gift cards) do not have an expiration date. Revenue is recognized from gift cards when: (i) the gift card is redeemed by the customer or (ii) the likelihood of the gift card being redeemed by the customer is remote, referred to as gift card breakage, and the Company determines that it does not have a legal obligation to remit the value of unredeemed gift cards to the relevant jurisdictions. The Company determines it’s gift card breakage rate based on historical redemption patterns. Breakage recognized was not material to the Company’s results of operations during fiscal 20132014, 20122013 or 20112012.
The Company sells premium service plans (“PSPs”) on appliance and electronic merchandise for periods ranging up to 10 years. For PSPs sold by the Company on behalf of a third party, the net commission revenue is recognized at the time of sale. The Company is not the primary obligor on PSPs sold on behalf of third parties. Funds received for PSPs in which the Company is the primary obligor are deferred in accrued liabilities and other long-term liabilities in the Company’s consolidated
balance sheets, and the incremental direct costs of selling the PSPs are capitalized and amortized on a straight-line basis over the term of the service agreement. Costs of services performed pursuant to the PSPs are expensed as incurred.
The information below provides the changes in the Company’s deferred revenue on extended service agreements for the years ended March 31, 20132014, 20122013 and 20112012 (in thousands):
| | | | | 2013 | | 2012 | | 2011 | | 2014 | | 2013 | | 2012 |
| Deferred revenue on extended service agreements: | | | | | | | | | | | | |
| Balance at beginning of year | | $ | 623 |
| | $ | 485 |
| | $ | 377 |
| | $ | 1,048 |
| | $ | 623 |
| | $ | 485 |
|
| Revenue deferred on new agreements | | 4,111 |
| | 2,403 |
| | 1,945 |
| | 5,439 |
| | 4,111 |
| | 2,403 |
|
| Revenue recognized | | (3,686 | ) | | (2,265 | ) | | (1,837 | ) | | (5,064 | ) | | (3,686 | ) | | (2,265 | ) |
| Balance at end of year | | $ | 1,048 |
| | $ | 623 |
| | $ | 485 |
| | $ | 1,423 |
| | $ | 1,048 |
| | $ | 623 |
|
For revenue transactions that involve multiple deliverables, we defer the revenue associated with any undelivered elements. The amount of revenue deferred in connection with the undelivered elements is determined using the relative fair value of each element, which is generally based on each element'selement’s relative retail price. The Company frequently offers sales incentives that entitle customers to receive a reduction in the price of a product or service by submitting a claim for a refund or rebate. When certain purchase requirements are met, the customer is eligible to receive a hhgregg rebate gift card that may be redeemed on future purchases at hhgregg stores. Rebate gift cards expire either six or twelve months from the date of issuance. The Company defers revenue at the time an eligible transaction occurs, based on the percentage of gift cards that are projected to be redeemed which includes an estimate of breakage and the relative fair value of the gift cards. The Company recognizes revenue when: (i) a gift card is redeemed by the customer, or (ii) a rebate gift card expires. The Company does not yet have historical redemption patterns on the rebate gift cards, therefore, no estimate can be made for breakage (i.e. when redemption becomes remote). At March 31, 2013, deferredDeferred revenue related to the rebate gift cards included within accrued liabilities within our Consolidated Balance Sheets was $3.4 million and $5.2 million. There was at no deferred revenue as of March 31, 2012.2014 and 2013, respectively.
The Company offers a private-label credit card agreement through a lending institution for the issuance of promotional financing bearing the hhgregg brand name. Under the agreement, the lending institution manages and directly extends credit to the customers. Cardholders who choose a private-label credit card can receive zero-interest promotional financing on qualifying purchases. The banks arebank is the sole owner of the accounts receivable generated under the programsprogram and absorbabsorbs losses associated with non-payment by the cardholders and fraudulent usage of the accounts. Accordingly, we do not hold any consumer receivables related to these programs. We pay financing fees to the lending institution and these fees are variable based on certain factors such as the London Interbank Offered Rate (“LIBOR”) and types of promotional financing offers.
Cost of goods sold is defined as the cost of gross inventory sold, including any handling charges, in-bound freight expenses and physical inventory losses, less the recognized portion of certain vendor allowances. Because the Company does not include costs related to its store distribution facilities, including depreciation expense, in cost of goods sold, the Company’s gross profit may not be comparable to that of other retailers that include these costs in cost of goods sold and in the calculation of gross profit.
| |
| (o) | Selling, General and Administrative Expenses |
Selling, general and administrative expenses includes wages, rent, taxes (other than income taxes), insurance, utilities, delivery costs, distribution costs, service expense, repairs and maintenance of stores and equipment, store opening costs, stock-based compensation and other general administrative expenses.
Shipping and handling costs and expenses of $105.9111.3 million, $102.9105.9 million, and $84.3102.9 million for fiscal 20132014, 20122013 and 20112012, respectively, were included in selling, general, and administrative expenses. Included in these costs were home delivery expenses of$59.8 million, $55.9 million, $51.0 million, and $40.951.0 million for the years ended March 31, 20132014, 20122013, and 20112012, respectively.
The Company receives funds from its vendors for various programs including volume purchase rebates, marketing support, markdowns, margin protection, training and sales incentives. Vendor allowances provided as a reimbursement of specific, incremental and identifiable costs incurred to promote a vendor’s products are included as an expense reduction when the cost is incurred. All other vendor allowances are initially deferred and recorded as a reduction of merchandise inventories. The deferred amounts are then included as a reduction of cost of goods sold when the related product is sold.
Advertising costs are expensed as incurred, with the exception of television production costs which are expensed the first time the advertisement is aired. These amounts have been reduced by vendor allowances under cooperative advertising which totaled $43.137.0 million, $44.443.1 million, and $40.644.4 million for the years ended March 31, 20132014, 20122013 and 20112012, respectively.
Store opening costs, other than capital expenditures, are expensed as incurred and recorded in selling, general and administrative expenses.
The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company is subject to U.S. federal and certain state and local income taxes. The Company’s income tax returns, like those of most companies, are periodically audited by federal and state tax authorities. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. At any one time, multiple tax years are subject to audit by the various tax authorities. In evaluating the exposures associated with the Company’s various tax filing positions, the Company records a liability for more likely than not exposures. A number of years may elapse before a particular matter, for which the Company has established a liability, is
audited and fully resolved or clarified. The Company adjusts its liability for unrecognized tax benefits and income tax provision in the period in which an uncertain tax position is effectively settled, the statute of limitations expires for the relevant taxing authority to examine the tax position or when more information becomes available.
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that all or some portion of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which temporary differences are expected to reverse, the Company believes it is more likely than not that it will realize the benefits of these deductible differences.
The Company collects certain taxes from their customers at the time of sale and remits the collected taxes to government authorities. These taxes are excluded from net sales and cost of goods sold in the Company’s consolidated statements of income.
| |
| (t) | Stock-Based Compensation |
The Company records all stock-based compensation, including grants of employee stock options and restricted stock units, using the fair value-based method. Refer to note 87 for additional information regarding the Company’s stock-based compensation.
Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred.
| |
(v) | Recently Issued Accounting Pronouncements |
Comprehensive Income — In June 2011, the FASB issued new guidance on the presentation of comprehensive income. Specifically, the new guidance requires an entity to present components of net income and other comprehensive income in one
continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The new guidance eliminated the previous option to report other comprehensive income and its components in the statement of changes in equity. While the new guidance changed the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. Accordingly, we adopted the new guidance on April 1, 2012, and have presented total comprehensive income in the Consolidated Statements of Comprehensive Income.
| |
| (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 Recurring Basis
The fair value hierarchy requires the use of observable market data when available. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability. The underlying investments within the Company’s deferred compensation plan for company-owned life insurance, recorded within Other long-term assets, totaled $0.7 million as of March 31, 2014 and consist of equity index funds and fixed income assets, which are considered Level 2 in the hierarchy described above. The Company had no assets or liabilities that were measured at fair value on a recurring basis as of March 31, 2013 or 20122013.
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. The assets are adjusted to fair value only when the carrying values exceed the fair values. The categorization of the framework used to price the assets is considered a Level 3, due to the subjective nature of the unobservable inputs used to determine the fair value. Property and equipment fair values were derived using a discounted cash flow model to estimate the present value of net cash flows that the asset or asset group was expected to generate. The key inputs to the discounted cash flow model generally included our forecasts of net cash generated from revenue, expenses and other significant cash outflows, such as certain capital expenditures, as well as an appropriate discount rate. For During fiscal 2014,
the twelve months ended December 31, 2012,Company recorded an asset impairment charge as a result of entering into a lease modification to downsize a store. In conjunction with the downsize, the Company determined that certain of the assets in use would be abandoned at the time construction to downsize begins, and as a result determined this to be a triggering event for an impairment analysis to be performed in accordance with guidance on impairment of long-lived assets. The estimated undiscounted future cash flows generated by the store was less than its carrying amount, therefore the carrying amount of the assets related to this store were reduced to fair value. In addition, the Company recorded an asset impairment charge during fiscal 2014 as a result of idling certain store fixtures. The Company determined this to be a triggering event for an impairment analysis to be performed, and the carrying amount of the assets were reduced to fair value. During fiscal 2013, the Company had one store and in fiscal 2012, the Company had two stores, whose profit contributions were significantly lower than the chain average due to decreased sales. This decrease in profit triggered the need for an impairment analysis to be performed in accordance with guidance on impairment of long-lived assets. The estimated undiscounted future cash flows generated by the store was less than its carrying amount, therefore the carrying amount of the assets related to this store were reduced to fair value.
The following table summarizes the fair value remeasurements recorded during the years ended March 31, 2014, 2013, and 2012 (in millions):
| | | | | 2013 | | 2012 | | 2011 | | 2014 | | 2013 | | 2012 |
| Carrying value (pre-asset impairment) | | $ | 0.9 |
| | $ | 2.1 |
| | $ | 0.2 |
| | $ | 1.0 |
| | $ | 0.9 |
| | $ | 2.1 |
|
| Asset impairment loss (included in income from operations) | | 0.5 |
| | 0.8 |
| | 0.1 |
| | 0.6 |
| | 0.5 |
| | 0.8 |
|
| Remaining net carrying value | | $ | 0.4 |
| | $ | 1.3 |
| | $ | 0.1 |
| | $ | 0.4 |
| | $ | 0.4 |
| | $ | 1.3 |
|
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.
| |
(3) | Derivative Instruments and Hedging Activities |
In October 2009 the Company entered into an interest rate swap agreement to manage its exposure on $75 million of its Term B Facility effective October 2009 with an original expiration date of October 2011. This interest rate swap arrangement was terminated on March 29, 2011 in connection with the repayment of our Term B Facility.
Changes in the fair value of interest rate swaps designated as hedging instruments that effectively offset the variability of cash flows associated with variable rate, long-term debt obligations are reported in accumulated other comprehensive income (loss). These amounts subsequently are reclassified into interest expense as a yield adjustment of the hedged interest payments in the same period in which the related interest affects earnings.
During the year ended March 31, 2011, the hedge was considered effective and a net unrealized gain of $0.5 million was recorded in other comprehensive income. Upon termination of the hedge on March 29, 2011, the remaining balance in other comprehensive loss was written off and was included in loss related to early extinguishment of debt in the Company’s consolidated statements of income.
| |
(4)(3) | Net Income per Share |
Net income per basic share is calculated based on the weighted-average number of outstanding common shares. Net income per diluted share is calculated based on the weighted-average number of outstanding common shares plus the effect of potential dilutive common shares. When the Company reports net income, the calculation of net income per diluted share excludes shares underlying outstanding stock options 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 restricted stock units. The following table presents net income per basic and diluted share for the years ended March 31, 20132014, 20122013 and 20112012 (in thousands, except share and per share amounts):
| | | | 2013 | | 2012 | | 2011 | 2014 | | 2013 | | 2012 |
| Net income (A) | $ | 25,369 |
| | $ | 81,373 |
| | $ | 48,208 |
| $ | 228 |
| | $ | 25,369 |
| | $ | 81,373 |
|
| Weighted average outstanding shares of common stock (B) | 34,430,641 |
| | 37,749,354 |
| | 39,394,708 |
| 30,209,928 |
| | 34,430,641 |
| | 37,749,354 |
|
| Dilutive effect of employee stock options and restricted stock units | 66,147 |
| | 330,331 |
| | 973,515 |
| 474,061 |
| | 66,147 |
| | 330,331 |
|
| Common stock and potential dilutive common shares (C) | 34,496,788 |
| | 38,079,685 |
| | 40,368,223 |
| 30,683,989 |
| | 34,496,788 |
| | 38,079,685 |
|
| Net income per share: | | | | | | | | | | |
| Basic (A/B) | $ | 0.74 |
| | $ | 2.16 |
| | $ | 1.22 |
| $ | 0.01 |
| | $ | 0.74 |
| | $ | 2.16 |
|
| Diluted (A/C) | $ | 0.74 |
| | $ | 2.14 |
| | $ | 1.19 |
| $ | 0.01 |
| | $ | 0.74 |
| | $ | 2.14 |
|
Antidilutive shares not included in the net income per diluted share calculation for the years ended March 31, 20132014, 20122013 and 20112012 were 3,529,2491,225,819, 2,660,1973,529,249 and 797,5002,660,197, respectively.
Net merchandise inventories consisted of the following at March 31, 20132014 and 20122013 (in thousands):
|
| | | | | | | |
| | 2013 | | 2012 |
| Appliances | $ | 120,972 |
| | $ | 102,703 |
|
| Video | 90,441 |
| | 88,191 |
|
| Computing and mobile phones | 45,964 |
| | 41,615 |
|
| Other | 58,185 |
| | 49,900 |
|
| Net merchandise inventory | $ | 315,562 |
| | $ | 282,409 |
|
|
| | | | | | | |
| | 2014 | | 2013 |
| Appliances | $ | 134,053 |
| | $ | 120,972 |
|
| Consumer electronics | 108,193 |
| | 90,441 |
|
| Computing and wireless | 36,039 |
| | 45,964 |
|
| Home products | 20,257 |
| | 58,185 |
|
| Net merchandise inventory | $ | 298,542 |
| | $ | 315,562 |
|
A summary of debt at March 31, 20132014 and 20122013 is as follows (in thousands):
|
| | | | | | | |
| | 2013 | | 2012 |
| Revolving Credit Facility | $ | — |
| | $ | — |
|
|
| | | | | | | |
| | 2014 | | 2013 |
| Line of credit | $ | — |
| | $ | — |
|
Senior Secured Term LoanAmended Facility
On July 25, 2007,29, 2013, Gregg Appliances entered into a senior credit agreement (the “Term B Facility”) with a bank group obtaining $100 million senior secured term loan B maturing on July 25, 2013. On March 29, 2011, Gregg Appliances repaid the Term B Facility loan balance in full using excess cash. In connection with this repayment, we recorded a pre-tax loss relatedAmendment No. 1 to the early extinguishment of debt of $1.8Amended and Restated Loan and Security Agreement (the “Amended Facility”) to increase the maximum credit available to $400 million, which was primarily due to the write off of capitalized debt issuance costs and the termination of an interest rate swap arrangement.
Revolving Credit Facility
The capacity for borrowings under the Company’s Revolving Credit Facility is $300 from $300 million,, subject to borrowing base availability.availability, and extend the term of the facility to expire on July 29, 2018. The facility expireswas set to expire on March 29, 2016.
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.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 unused line rate 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 0.375%0.25%. For a Daily Average less than 50% of the defined borrowing base, the unused line rate is 0.50%0.375%. The Revolving CreditAmended 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.
Pursuant to the Revolving CreditAmended Facility, the borrowing base is equal to the sum of (i) the lesser of (a) 90% of the net orderly liquidation valueamount of allthe eligible inventory of Gregg Appliances or (b)commercial accounts, (ii) 75% of the net book valueamount of such eligible inventory and (ii) 90% of all commercial and credit card receivables of Gregg Appliances in each case subject to customary reserves and eligibility criteria.(iii) 90% of the net recovery percentage multiplied by the value of eligible inventory consistent with the most recent appraisal of such eligible inventory.
Under the Revolving CreditAmended Facility, Gregg Appliances is not required to comply with any financial maintenance covenant unless “excess availability” is 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 is subject to compliance with a fixed charge coverage ratio of 1.0 to 1.0.
Pursuant to the Revolving CreditAmended Facility, if Gregg Appliances has “excess availability” of less than 12.5% 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 Revolving CreditAmended Facility, become subject to cash dominion control.
The Revolving CreditAmended 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 Revolving CreditAmended 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 inof the Revolving CreditAmended Facility at March 31, 20132014.
As of March 31, 20132014 and 20122013, Gregg Appliances had no borrowings outstanding under the Revolving CreditAmended Facility. As of March 31, 2014, Gregg Appliances had $5.3 million of letters of credit outstanding, which expire through December 31, 2014. As of March 31, 2013, Gregg Appliances had $4.9 million of letters of credit outstanding which expire through December 31, 2013. As of March 31, 2012, Gregg Appliances had $5.2 million of letters of credit outstanding which expired by December 31, 20122013. The total borrowing availability under the Revolving CreditAmended Facility was $189.8169.5 million and $175.0189.8 million as of March 31, 20132014 and 20122013, respectively. The interest rate based on the bank’s prime rate was 3.75% and 4.25% as of March 31, 20132014 and 20122013 was 4.25%., respectively.
Income tax (benefit) expense for the years ended March 31, 20132014, 2012 and 2011 consisted of the following (in thousands):
|
| | | | | | | | | | | | |
| | | 2013 | | 2012 | | 2011 |
| Current: | | | | | | |
| Federal | | $ | 6,448 |
| | $ | 12,428 |
| | $ | 14,715 |
|
| State | | 2,008 |
| | 3,982 |
| | 4,695 |
|
| Total current | | 8,456 |
| | 16,410 |
| | 19,410 |
|
| Deferred: | | | | | | |
| Federal | | 7,163 |
| | 8,960 |
| | 11,384 |
|
| State | | 436 |
| | 422 |
| | 228 |
|
| Total deferred | | 7,599 |
| | 9,382 |
| | 11,612 |
|
| Total expense | | $ | 16,055 |
| | $ | 25,792 |
| | $ | 31,022 |
|
Deferred income taxes at March 31, 2013 and 2012 consisted of the following (in thousands):
|
| | | | | | | | |
| | | 2013 | | 2012 |
| Deferred tax assets: | | | | |
| Goodwill for tax purposes | | $ | 45,038 |
| | $ | 51,629 |
|
| Accrued expenses | | 11,086 |
| | 10,456 |
|
| Long-term deferred compensation | | 2,145 |
| | 2,219 |
|
| Inventories | | 3,259 |
| | 2,995 |
|
| Stock-compensation expense | | 8,114 |
| | 6,261 |
|
| Other | | 2,165 |
| | 2,007 |
|
| Credit carryforwards | | 286 |
| | 2,691 |
|
| Total deferred tax assets | | 72,093 |
| | 78,258 |
|
| Deferred tax liabilities: | | | | |
| Property and equipment | | 29,958 |
| | 28,667 |
|
| Other | | 1,125 |
| | 982 |
|
| Total deferred tax liabilities | | 31,083 |
| | 29,649 |
|
| Net deferred tax assets | | $ | 41,010 |
| | $ | 48,609 |
|
|
| | | | | | | | | | | | |
| | | 2014 | | 2013 | | 2012 |
| Current: | | | | | | |
| Federal | | $ | 1,528 |
| | $ | 6,448 |
| | $ | 12,428 |
|
| State | | (246 | ) | | 2,008 |
| | 3,982 |
|
| Total current | | 1,282 |
| | 8,456 |
| | 16,410 |
|
| Deferred: | | | | | | |
| Federal | | (1,618 | ) | | 7,163 |
| | 8,960 |
|
| State | | 330 |
| | 436 |
| | 422 |
|
| Total deferred | | (1,288 | ) | | 7,599 |
| | 9,382 |
|
| Total (benefit) expense | | $ | (6 | ) | | $ | 16,055 |
| | $ | 25,792 |
|
AtDeferred income taxes at March 31, 20132014 and 2012, the Company had no net operating loss carryforwards for federal or state income tax purposes and the Company had no liability for unrecognized tax benefits. At March 31, 2012, the Company had an alternative minimum tax credit carryforward of $2.4 million2013 which was fully utilized inconsisted of the current fiscal year.following (in thousands):
|
| | | | | | | | |
| | | 2014 | | 2013 |
| Deferred tax assets: | | | | |
| Goodwill for tax purposes | | $ | 38,447 |
| | $ | 45,038 |
|
| Accrued expenses | | 11,618 |
| | 11,086 |
|
| Long-term deferred compensation | | 2,344 |
| | 2,145 |
|
| Inventories | | 3,083 |
| | 3,259 |
|
| Stock-compensation expense | | 7,960 |
| | 8,114 |
|
| Other | | 3,856 |
| | 2,165 |
|
| Credit carryforwards | | 239 |
| | 286 |
|
| Net operating loss carryforward | | 193 |
| | — |
|
| Total deferred tax assets | | 67,740 |
| | 72,093 |
|
| Deferred tax liabilities: | | | | |
| Property and equipment | | 25,180 |
| | 29,958 |
|
| Other | | 1,158 |
| | 1,125 |
|
| Total deferred tax liabilities | | 26,338 |
| | 31,083 |
|
| Net deferred tax assets | | $ | 41,402 |
| | $ | 41,010 |
|
The Company recognizes interest and penalties in income tax expense in its consolidated statements of income. At March 31, 20132014 and 20122013, the Company had no accrued interest and penalties.
The Company files a consolidated U.S. federal income tax return, as well as income tax returns in various states. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before fiscal 2010.2011.
The (benefit) expense (benefit) for income taxes differs from the amount of income tax determined by applying the U.S. federal income tax rate of 35% to income before income taxes due to the following (in thousands):
| | | | | 2013 | | 2012 | | 2011 | | 2014 | | 2013 | | 2012 |
| Computed “expected” tax expense | | $ | 14,498 |
| | $ | 37,508 |
| | $ | 27,730 |
| | $ | 78 |
| | $ | 14,498 |
| | $ | 37,508 |
|
| State income tax expense, net of federal income tax benefit | | 1,516 |
| | 2,901 |
| | 3,200 |
| | 49 |
| | 1,516 |
| | 2,901 |
|
| Non-taxable Life Insurance Proceeds | | — |
| | (14,000 | ) | | — |
| | — |
| | — |
| | (14,000 | ) |
| Other | | 41 |
| | (617 | ) | | 92 |
| | (133 | ) | | 41 |
| | (617 | ) |
| | | $ | 16,055 |
| | $ | 25,792 |
| | $ | 31,022 |
| | $ | (6 | ) | | $ | 16,055 |
| | $ | 25,792 |
|
| |
(8)(7) | Stock-based Compensation |
Stock Options
The Company maintains stock-based compensation plans which allow for the issuance of non-qualified stock options and restricted stock to officers, other key employees and members of the Board of Directors. On April 12, 2007, the Company’s Board of Directors approved the adoption of the hhgregg, Inc. 2007 Equity Incentive Plan (“Equity Incentive Plan”). The Equity Incentive Plan provides for the grant of nonqualified stock options, incentive stock options, stock appreciation rights, awards of restricted stock, awards of restricted stock units, awards of performance units, and stock grants. On June 23, 2010, an amendment (the “Amendment”) to the Equity Incentive Plan was adopted by the Company’s Board of Directors that increased the number of shares of common stock reserved for issuance under the Equity Incentive Plan from 3,000,000 to 6,000,000. The Amendment was ratified and approved by the Company’s stockholders at the annual meeting of stockholders on August 3, 2010. If an option expires, is terminated or canceled without having been exercised or repurchased by the Company, or common stock is used to exercise an option, the terminated portion of the option or the common stock used to exercise the option will become available for future grants under the Equity Incentive Plan unless the plan is terminated. The term of the Company’s Equity Incentive Plan commenced on the date of approval by the Company’s Board of Directors and continues until the tenth anniversary of the approval by the Company’s Board of Directors. The Company’s Equity Incentive Plan is administered by the Company’s Compensation Committee. Prior to the Equity Incentive Plan being adopted, the Company utilized the Gregg Appliances, Inc. 2005 Stock Option Plan ("(“Stock Option Plan"Plan”). The Stock Option Plan provided for the grant of incentive stock options and nonqualified stock options to the Company’s officers, directors, consultants, and key employees.
On April 2, 2013, the Company’s Board of Directors approved a one-time voluntary stock option exchange program (the “Offer”), as amended on April 17, 2013. On April 2, 2013, the Company commenced the Offer, which allowed employees to surrender all outstanding and unexercised stock options, whether vested or unvested, that were granted subsequent to July 18, 2007 (the “Eligible Options”), in a one-for-one exchange for new options (the “New Options”). Under the Offer, employees who chose to participate would receive New Options with an exercise price per share equal to the greater of (a) $10.00 or (b) the closing price of the Company’s Common Stock as reported on the New York Stock Exchange on the New Option grant date. Additionally, the Offer did not allow partial tenders of any one particular option grant, however employees could choose to exchange some but not all Eligible Option grants held by any optionee. Options granted prior to July 19, 2007 were not eligible for exchange.
The Offer expired on April 30, 2013. Pursuant to the Offer, a total of 58 eligible participants tendered, and the Company accepted for cancellation, options to purchase an aggregate of 898,665 shares of the Company’s common stock. The eligible stock options that were accepted for cancellation represented approximately 31% of the options eligible for participation in the Exchange Offer. Pursuant to the terms and conditions of the Amended Exchange Offer, on May 1, 2013, the Company issued 898,665 New Options in exchange for the tendered stock options. The Company will recognize the incremental expense resulting from this exchange, aggregating $1.4 million, over the three-year vesting period, in accordance with the Exchange Offer.
During the years ended March 31, 20132014, 20122013 and 20112012 the Company granted options for 795,0001,820,805, 813,400795,000, and 805,000813,400 shares of common stock under the 2007 Equity Incentive Plan to certain employees and directors of the Company. The options vest in equal amounts over a three-year period beginning on the first anniversary of the date of grant and expire 7 years from the date of the grant. The fair value of each option grant is estimated on the date of grant and is amortized on a straight-line basis over the vesting period.
The weighted-average estimated fair value of options granted to employees and directors under the 2007 Equity Incentive Plan was $5.347.08, $6.065.34, and $11.106.06 during the 12 months ended March 31, 20132014, 20122013 and 20112012, respectively, using the Black-Scholes model with the following weighted average assumptions:
| | | | 2013 | | 2012 | | 2011 | 2014 | | 2013 | | 2012 |
| Risk-free interest rate | 0.56% - 0.69 |
| | 1.3 | % | | 1.9 | % | 0.06% - 1.53 |
| | 0.56% - 0.69 |
| | 1.3 | % |
| Dividend yield | — |
| | — |
| | — |
| — |
| | — |
| | — |
|
| Expected volatility | 61.9 | % | | 52.2 | % | | 45.5 | % | 63.0 | % | | 61.9 | % | | 52.2 | % |
| Expected life of the options (years) | 4.5 |
| | 4.5 |
| | 4.5 |
| 4.5 |
| | 4.5 |
| | 4.5 |
|
The following table summarizes the activity under the Company’s Stock Option Plans for the twelve months ended March 31, 2013:
|
| | | | | | | | | | | | |
| | Number of Options Outstanding | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life | | Aggregate Intrinsic Value (in thousands) |
| Outstanding at March 31, 2012 | 3,673,862 |
| | $ | 15.40 |
| | | | |
| Granted | 795,000 |
| | 10.77 |
| | | | |
| Exercised | (574,738 | ) | | 7.58 |
| | | | |
| Canceled | (222,323 | ) | | 13.32 |
| | | | |
| Expired | (349,339 | ) | | 15.03 |
| | | | |
| Outstanding at March 31, 2013 | 3,322,462 |
| | $ | 15.81 |
| | 4.07 | | $ | 400 |
|
| Vested or expected to vest at March 31, 2013 | 3,269,156 |
| | $ | 15.88 |
| | 4.04 | | $ | 386 |
|
| Exercisable at March 31, 2013 | 1,991,918 |
| | $ | 16.73 |
| | 3.05 | | $ | 189 |
|
The following table summarizes stock option vesting activity during the fiscal year ended March 31, 20132014:
|
| | | | | | | |
| Nonvested shares | | Shares | | Weighted Average Grant-Date Fair Value |
| Nonvested at March 31, 2012 | | 1,420,850 |
| | $ | 7.75 |
|
| Granted during fiscal 2013 | | 795,000 |
| | 5.34 |
|
| Vested during fiscal 2013 | | (662,983 | ) | | 8.01 |
|
| Canceled during fiscal 2013 | | (222,323 | ) | | 5.81 |
|
| Nonvested at March 31, 2013 | | 1,330,544 |
| | $ | 6.47 |
|
|
| | | | | | | | | | | | |
| | Number of Options Outstanding | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life | | Aggregate Intrinsic Value (in thousands) |
| Outstanding at March 31, 2013 | 3,322,462 |
| | $ | 15.81 |
| | | | |
| Granted | 1,820,805 |
| | 13.97 |
| | | | |
| Exercised | (480,647 | ) | | 12.10 |
| | | | |
| Canceled | (1,403,410 | ) | | 19.58 |
| | | | |
| Expired | (27,002 | ) | | 23.53 |
| | | | |
| Outstanding at March 31, 2014 | 3,232,208 |
| | $ | 13.61 |
| | 4.43 | | $ | 30 |
|
| Vested or expected to vest at March 31, 2014 | 3,096,686 |
| | $ | 13.61 |
| | 4.36 | | $ | 29 |
|
| Exercisable at March 31, 2014 | 1,274,575 |
| | $ | 14.08 |
| | 2.38 | | $ | 6 |
|
During fiscal 20132014, 20122013 and 20112012, $4.2 million ($2.5 million net of tax), $5.2 million ($3.1 million net of tax), and $5.7 million ($3.4 million net of tax) and $5.2 million ($3.1 million net of tax), respectively, was charged to expense related to the stock option plans. The total intrinsic value of options exercised during the years ended March 31, 20132014, 20122013 and 20112012 was $1.62.6 million, $2.51.6 million and $39.02.5 million, respectively. Total unrecognized stock option compensation cost (adjusted for forfeitures) at March 31, 20132014 was $4.86.2 million and is expected to be recognized over a weighted average period of 1.71.9 years. Net cash proceeds from the exercise of stock options were $4.45.8 million, $2.54.4 million and $5.02.5 million in fiscal 20132014, 20122013 and 20112012, respectively. The total grant date fair value of stock options vested during the years ended March 31, 20132014, 20122013 and 20112012 was $5.32.6 million, $5.45.3 million and $3.55.4 million, respectively.
Time Vested Restricted Stock Units
During the twelve monthsyears ended March 31, 2014, 2013, and 2012 the Company granted 93,90030,595, 93,900 and 81,300 time vested restricted stock units (“RSUs”) under the 2007 Equity Incentive Plan to certain employees and directors of the Company. The time vested RSUs vest three years from the date of grant. Upon vesting, the outstanding number of time vested RSUs will be converted into shares of common stock. Time vested RSUs are forfeited if they have not vested before the employment of the participant 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 time vested RSU and the termination of employment. The fair value of time vested 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 time vested RSUs issued during the twelve monthsfiscal year ended March 31, 20132014 was $10.8614.38. Total unrecognized compensation cost for the time vested RSUs (adjusted for forfeitures) at March 31, 20132014 was $1.10.7 million and is expected to be recognized over a weighted average period of 1.761.40 years.
The following table summarizes time vested RSU vesting activity for the twelve monthsfiscal year ended March 31, 20132014:
|
| | | | | | | | | | | | |
| Nonvested RSU’s | Shares | | Weighted Average Grant-Date Fair Value | | Weighted Average Remaining Contractual Life | | Aggregate Intrinsic Value (in thousands) |
| Nonvested at March 31, 2012 | 72,900 |
| | $ | 14.17 |
| | | | |
| Granted | 93,900 |
| | 10.86 |
| | | | |
| Vested | — |
| | — |
| | | | |
| Forfeited | (11,200 | ) | | 11.28 |
| | | | |
| Nonvested at March 31, 2013 | 155,600 |
| | $ | 12.38 |
| | 1.76 | | $ | — |
|
Performance-Based Restricted Stock Units
The Company awarded performance-based RSUs to certain officers of the Company during the twelve months ended March 31, 2013. Under these awards, a number of performance-based RSUs will be granted to each participant based upon the attainment of the applicable bonus targets as approved by the Company’s Compensation Committee. Performance-based RSUs are earned shortly after the end of the performance measurement period and vest three years after grant date. If a participant is not employed by the Company on the date the performance-based RSUs vest, the performance-based RSUs are forfeited, except in the case of 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 performance-based RSU and the termination of employment if the applicable performance target was achieved. Additionally, to the extent performance conditions are not met, performance-based RSUs are forfeited.
During the twelve months ended March 31, 2013, the Company granted 92,820 performance-based RSUs, 6,300 of which have been forfeited as of March 31, 2013. The fair value of performance-based RSUs is based on the Company’s stock price at the close of the market on the date of grant and the probability that the established bonus targets will be achieved. The weighted average grant date fair value for the performance-based RSUs outstanding for the twelve months ended March 31, 2013 was $10.86. |
| | | | | | | | | | | | |
| Nonvested RSU’s | Shares | | Weighted Average Grant-Date Fair Value | | Weighted Average Remaining Contractual Life | | Aggregate Intrinsic Value (in thousands) |
| Nonvested at March 31, 2013 | 155,600 |
| | $ | 12.38 |
| | | | |
| Granted | 30,595 |
| | 14.38 |
| | | | |
| Vested | — |
| | — |
| | | | |
| Forfeited | (42,692 | ) | | 12.68 |
| | | | |
| Nonvested at March 31, 2014 | 143,503 |
| | $ | 12.72 |
| | 1.40 | | $ | — |
|
The composition of net rent expense for all operating leases, including leases of property and equipment, was as follows for the years ended March 31, 20132014, 20122013 and 20112012 (in thousands):
| | | | | 2013 | | 2012 | | 2011 | | 2014 | | 2013 | | 2012 |
| Minimum rentals | | $ | 83,373 |
| | $ | 76,497 |
| | $ | 64,597 |
| | $ | 91,174 |
| | $ | 89,407 |
| | $ | 82,615 |
|
| Minimum rentals with related parties | | 6,034 |
| | 6,118 |
| | 6,095 |
| |
| Contingent rentals | | 74 |
| | 147 |
| | 116 |
| | 52 |
| | 74 |
| | 147 |
|
| Total rent expense | | $ | 89,481 |
| | $ | 82,762 |
| | $ | 70,808 |
| | $ | 91,226 |
| | $ | 89,481 |
| | $ | 82,762 |
|
Future minimum required rental payments for noncancelable operating leases, with terms of one year or more, consist of the following as of March 31, 20132014 (in thousands):
| | | | Rental Payments | Rental Payments |
| Payable in fiscal year: | | |
| 2014 | $ | 87,022 |
| |
| 2015 | 88,590 |
| $ | 87,425 |
|
| 2016 | 85,555 |
| 84,302 |
|
| 2017 | 81,895 |
| 80,922 |
|
| 2018 | 79,106 |
| 76,475 |
|
| 2019 | | 71,904 |
|
| Thereafter | 302,082 |
| 160,592 |
|
| | | |
| Total required payments | $ | 724,250 |
| $ | 561,620 |
|
| | | |
Total minimum rental lease payments have not been reduced by minimum sublease rent income of approximately $1.1 million due under future noncancelable subleases.
| |
(10) | Related Party Transactions |
The Company also has several leases with the former Executive Chairman and Director of the Company and members of his immediate family for its headquarters and certain stores. See note 9 for discussion of minimum rentals with related parties.
| |
(11)(9) | Employee Benefit Plans |
The Company sponsors a 401(k) retirement savings plan ("Plan"(“Plan”) covering all employees who have attained the age of 21 and have worked at least 1000 hours within a 12-month period. Plan participants may elect to contribute 1% to 12% of their compensation to the Plan, subject to IRS limitations. The Company provides a discretionary matching contribution up to 7% of each participant’s compensation, with total Company expense, including payment of administrative fees, aggregating approximately $0.90.6 million, $0.70.9 million, and $0.40.7 million for the years ended March 31, 20132014, 20122013, and 20112012, respectively.
During the fiscal year ended March 31, 2014, the Company established a non-qualified deferred compensation plan for highly compensated employees whose contributions are limited under the qualified defined contribution plan. Amounts contributed and deferred under the deferred compensation plans are credited or charged with the performance of investment options offered under the plans and elected by the participants. In the event of bankruptcy, the assets of these plans are available to satisfy the claims of general creditors. The liability for compensation deferred under the the plan was $0.7 million at March 31, 2014 and is included in “Other long-term liabilities”. Total expense recorded under the plan was $0.1 million for fiscal year 2014.
The Company has ananother unfunded, non-qualified deferred compensation plan for members of executive management.management which was frozen during the current year. Benefits accrue to individual participants annually based on a predetermined formula, as defined, which considers operating results of the Company and the participant’s base salary. Vesting of benefits is attained upon reaching 55 years of age or 10 years of continuous service, measurement of which is retroactive to the participant’s most recent start date. Annual interest is credited to participant accounts at an interest rate determined at the sole discretion of the Company. Benefits will be paid to individual participants upon the later of terminating employment with the Company or the participant attaining the age of 55. The Company recorded $0.2 million in expense related to this plan for the years ended March 31, 2014, 2013 and 2012, representing interest earned, but did not contribute additional amounts as the Company did not achieve the predetermined operating results target. The Company recorded approximately $0.9 million in expenses relatedtarget prior to thisthe date which the plan for the year ended March 31, 2011.was frozen. Amounts accrued in other long-term liabilities at March 31, 20132014 and 20122013 were as follows:$5.3M and $5.4M.
|
| | | | | | | | |
| | | 2013 | | 2012 |
| Beginning accrual | | $ | 5,618 |
| | $ | 6,054 |
|
| Annual benefit accrual | | — |
| | — |
|
| Credited annual interest | | 150 |
| | 151 |
|
| Payments to vested participants | | (223 | ) | | (456 | ) |
| Plan forfeitures | | (114 | ) | | (131 | ) |
| Ending accrual | | $ | 5,431 |
| | $ | 5,618 |
|
| |
(12)(10) | Legal Proceedings |
The Company is engaged in various legal proceedings in the ordinary course of business and has certain unresolved claims pending. The ultimate liability or range of loss, 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 consolidated financial statements is not likely to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.
| |
(13)(11) | Interim Financial Results (Unaudited) |
The following table sets forth certain unaudited quarterly information for each of the eight fiscal quarters for the years ended March 31, 20132014 and 20122013 (in thousands, except net (loss) income per share data). In management’s opinion, this unaudited quarterly information has been prepared on a consistent basis with the audited financial statements and includes all necessary adjustments, consisting only of normal recurring adjustments that management considers necessary for a fair presentation of the unaudited quarterly results when read in conjunction with the consolidated financial statements.
| | | | | For the Year Ended March 31, 2013 | | For the Year Ended March 31, 2014 |
| | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Net sales | | $ | 489,856 |
| | $ | 587,636 |
| | $ | 799,635 |
| | $ | 597,632 |
| | $ | 524,922 |
| | $ | 568,315 |
| | $ | 707,053 |
| | $ | 538,280 |
|
| Cost of goods sold | | 343,197 |
| | 413,489 |
| | 581,450 |
| | 419,037 |
| | 370,157 |
| | 400,365 |
| | 517,773 |
| | 385,736 |
|
| Gross profit | | 146,659 |
| | 174,147 |
| | 218,185 |
| | 178,595 |
| | 154,765 |
| | 167,950 |
| | 189,280 |
| | 152,544 |
|
| Selling, general and administrative expenses | | 118,773 |
| | 125,794 |
| | 139,303 |
| | 123,885 |
| | 119,309 |
| | 120,389 |
| | 132,360 |
| | 121,892 |
|
| Net advertising expense | | 27,616 |
| | 31,754 |
| | 38,715 |
| | 27,348 |
| | 25,896 |
| | 30,539 |
| | 36,964 |
| | 30,780 |
|
| Depreciation and amortization expense | | 9,414 |
| | 9,843 |
| | 10,416 |
| | 10,462 |
| | 11,038 |
| | 10,406 |
| | 10,785 |
| | 10,891 |
|
| Asset impairment charge | | — |
| | — |
| | 504 |
| | — |
| | — |
| | — |
| | 310 |
| | 303 |
|
| (Loss) income from operations | | (9,144 | ) | | 6,756 |
| | 29,247 |
| | 16,900 |
| | (1,478 | ) | | 6,616 |
| | 8,861 |
| | (11,322 | ) |
| Other expense (income): | | | | | | | | | | | | | | | | |
| Interest expense | | 478 |
| | 510 |
| | 704 |
| | 652 |
| | 604 |
| | 557 |
| | 695 |
| | 609 |
|
| Interest income | | (2 | ) | | (3 | ) | | (3 | ) | | (1 | ) | | (5 | ) | | (2 | ) | | (2 | ) | | (1 | ) |
| Total other expense | | 476 |
| | 507 |
| | 701 |
| | 651 |
| | 599 |
| | 555 |
| | 693 |
| | 608 |
|
| (Loss) income before income taxes | | (9,620 | ) | | 6,249 |
| | 28,546 |
| | 16,249 |
| | (2,077 | ) | | 6,061 |
| | 8,168 |
| | (11,930 | ) |
| Income tax (benefit) expense | | (3,920 | ) | | 2,489 |
| | 11,157 |
| | 6,329 |
| | (817 | ) | | 2,382 |
| | 3,120 |
| | (4,691 | ) |
| Net (loss) income | | $ | (5,700 | ) | | $ | 3,760 |
| | $ | 17,389 |
| | $ | 9,920 |
| | $ | (1,260 | ) | | $ | 3,679 |
| | $ | 5,048 |
| | $ | (7,239 | ) |
| Net (loss) income per share | | | | | | | | | | | | | | | | |
| Basic | | $ | (0.16 | ) | | $ | 0.11 |
| | $ | 0.51 |
| | $ | 0.31 |
| | $ | (0.04 | ) | | $ | 0.12 |
| | $ | 0.17 |
| | $ | (0.25 | ) |
| Diluted | | $ | (0.16 | ) | | $ | 0.11 |
| | $ | 0.51 |
| | $ | 0.31 |
| | $ | (0.04 | ) | | $ | 0.12 |
| | $ | 0.17 |
| | $ | (0.25 | ) |
| | | | | For the Year Ended March 31, 2012 | | For the Year Ended March 31, 2013 |
| | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter |
| Net sales | | $ | 431,455 |
| | $ | 618,603 |
| | $ | 829,546 |
| | $ | 613,788 |
| | $ | 489,856 |
| | $ | 587,636 |
| | $ | 799,635 |
| | $ | 597,632 |
|
| Cost of goods sold | | 301,141 |
| | 441,924 |
| | 603,640 |
| | 426,299 |
| | 343,197 |
| | 413,489 |
| | 581,450 |
| | 419,037 |
|
| Gross profit | | 130,314 |
| | 176,679 |
| | 225,906 |
| | 187,489 |
| | 146,659 |
| | 174,147 |
| | 218,185 |
| | 178,595 |
|
| Selling, general and administrative expenses | | 103,244 |
| | 127,676 |
| | 140,609 |
| | 127,071 |
| | 118,773 |
| | 125,794 |
| | 139,303 |
| | 123,885 |
|
| Net advertising expense | | 20,195 |
| | 30,466 |
| | 39,488 |
| | 27,274 |
| | 27,616 |
| | 31,754 |
| | 38,715 |
| | 27,348 |
|
| Depreciation and amortization expense | | 7,287 |
| | 8,184 |
| | 8,765 |
| | 9,516 |
| | 9,414 |
| | 9,843 |
| | 10,416 |
| | 10,462 |
|
| Life insurance proceeds | | — |
| | — |
| | — |
| | (40,000 | ) | |
| Asset impairment charge | | — |
| | — |
| | — |
| | 813 |
| | — |
| | — |
| | 504 |
| | — |
|
| (Loss) income from operations | | (412 | ) | | 10,353 |
| | 37,044 |
| | 62,815 |
| | (9,144 | ) | | 6,756 |
| | 29,247 |
| | 16,900 |
|
| Other expense (income): | | | | | | | | | | | | | | | | |
| Interest expense | | 512 |
| | 571 |
| | 881 |
| | 694 |
| | 478 |
| | 510 |
| | 704 |
| | 652 |
|
| Interest income | | (4 | ) | | — |
| | (1 | ) | | (18 | ) | | (2 | ) | | (3 | ) | | (3 | ) | | (1 | ) |
| Total other expense | | 508 |
| | 571 |
| | 880 |
| | 676 |
| | 476 |
| | 507 |
| | 701 |
| | 651 |
|
| (Loss) income before income taxes | | (920 | ) | | 9,782 |
| | 36,164 |
| | 62,139 |
| | (9,620 | ) | | 6,249 |
| | 28,546 |
| | 16,249 |
|
| Income (benefit) tax expense | | (159 | ) | | 3,756 |
| | 13,686 |
| | 8,509 |
| | (3,920 | ) | | 2,489 |
| | 11,157 |
| | 6,329 |
|
| Net (loss) income | | $ | (761 | ) | | $ | 6,026 |
| | $ | 22,478 |
| | $ | 53,630 |
| | $ | (5,700 | ) | | $ | 3,760 |
| | $ | 17,389 |
| | $ | 9,920 |
|
| Net (loss) income per share | | | | | | | | | | | | | | | | |
| Basic | | $ | (0.02 | ) | | $ | 0.16 |
| | $ | 0.60 |
| | $ | 1.46 |
| | $ | (0.16 | ) | | $ | 0.11 |
| | $ | 0.51 |
| | $ | 0.31 |
|
| Diluted | | $ | (0.02 | ) | | $ | 0.16 |
| | $ | 0.60 |
| | $ | 1.45 |
| | $ | (0.16 | ) | | $ | 0.11 |
| | $ | 0.51 |
| | $ | 0.31 |
|
(14) Share Repurchase Program
| |
| (12) | Stock Repurchase Program |
On May 24, 201216, 2013, the Company’s Board of Directors authorized a new sharestock repurchase program (the “May 20122013 Program”) allowing the Company to repurchase up to $50 million of its common stock. The sharestock repurchase program allows the Company to purchase its common stock on the open market or in privately negotiated transactions in accordance with applicable laws and regulations, and expires on May 23, 201322, 2014. The previous sharestock repurchase program expired on May 19, 2012.21, 2013.
The following table shows the number and cost of shares repurchased during the twelve months ended March 31, 20132014 and 20122013, respectively ($ in thousands):
| | | | Years Ended | Years Ended |
| | March 31, 2013 | | March 31, 2012 | March 31, 2014 | | March 31, 2013 |
| May 2013 Program | | | | |
| Number of shares repurchased | | 3,488,882 |
| | — |
|
| Cost of shares repurchased | | $ | 49,145 |
| | $ | — |
|
| May 2012 Program | | | | | | |
| Number of shares repurchased | 5,458,001 |
| | — |
| — |
| | 5,458,001 |
|
| Cost of shares repurchased | $ | 48,232 |
| | $ | — |
| $ | — |
| | $ | 48,232 |
|
| May 2011 Program | | | | |
| Number of shares repurchased | — |
| | 3,714,289 |
| |
| Cost of shares repurchased | $ | — |
| | $ | 47,570 |
| |
As of March 31, 20132014, the Company had $1.80.9 million remaining under the May 2013 Program. The repurchased shares are classified as treasury stock within stockholders’ equity in the accompanying consolidated balance sheets.
| |
(15)(13) | Life Insurance Proceeds |
During the fiscal year ended March 31, 2012, the Company received $40.0 million in proceeds on a key man life insurance policy that was held on our Executive Chairman of the Board, who passed away on January 22, 2012. The proceeds were non-taxable and are recorded in income from operations in the accompanying consolidated statements of income for fiscal 2012.
| |
(16)(14) | Subsequent Events |
On April 2, 2013, the Company's Board of Directors approved a one-time voluntary stock option exchange program (the "Offer") as amended on April 17, 2013. On April 2, 2013, the Company commenced the Offer, which allowed employees to surrender all outstanding and unexercised stock options, whether vested or unvested, that were granted subsequent to July 18, 2007, (the “Eligible Options”) in a one-for-one exchange for new options (the “New Options”). Under the Offer, employees who chose to participate would receive New Options with an exercise price per share equal to the greater of (a) $10.00 or (b) the closing price of the Company's Common Stock as reported on the New York Stock Exchange on the new option grant date. Additionally, the Offer did not allow partial tenders of any option grant, however employees could choose to exchange some but not all Eligible Option Grants held by any optionee. Options granted prior to July 19, 2007 were not eligible for exchange.
The Exchange Offer expired on April 30, 2013. Pursuant to the Exchange Offer, a total of 58 eligible participants tendered and the Company accepted for cancellation, options to purchase an aggregate of 898,665 shares of the Company's common stock. The eligible stock options that were accepted for cancellation represented approximately 31% of the options eligible for participation in the Exchange Offer. Pursuant to the terms and conditions of the Amended Exchange Offer, on May 1, 2013, the Company issued 898,665 stock options in exchange for the tendered stock options. The Company will recognize the incremental expense resulting from this exchange, aggregating $1.3 million, over the three-year vesting period in accordance with the Exchange Offer.
On May 16, 2013,14, 2014, the Company’s Board of Directors authorized a sharenew stock repurchase program allowing it to repurchase up to $50$40 million of its common stock, which becomes effective on May 22, 2013.20, 2014. The sharestock repurchase program allows the Company to purchase its common stock on the open market or in privately negotiated transactions in accordance with applicable laws and regulations, and expires on May 22, 2014.
20, 2015 unless shortened or extended by the Company’s Board of Directors.
|
| |
| ITEM 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
|
| |
| ITEM 9A. | Controls and Procedures |
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), as appropriate to allow timely decisions regarding required disclosure. We have established a Disclosure Committee, consisting of certain members of management, to assist in this evaluation. Our Disclosure Committee meets on a quarterly basis and more often if necessary.
Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act), as of March 31, 20132014. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 20132014, our disclosure controls and procedures were effective.
Management’s Report on Internal Control over Financial Reporting
Management’s report on our internal control over financial reporting is included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Attestation Report onof Independent Registered Public Accounting Firm
The report of KPMG LLP, our independent registered public accounting firm, on the effectiveness of our internal control over financial reporting is included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
During the fiscal quarter ended March 31, 20132014, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
|
| |
| ITEM 9B. | Other Information |
None.
PART III.
|
| |
| ITEM 10. | Directors, Executive Officers and Corporate Governance. |
See the information set forth in the sections entitled “Proposal No. 1 — Election of Directors,” “Corporate Governance Matters and Committees of the Board,” “Report of the Audit Committee of the Board of Directors,” “Nominees for Election to our Board,” “Section 16(a) Beneficial Ownership Reporting Compliance,” and “Non-Director Named Officers” in our proxy statement for the 20132014 annual meeting of stockholders to be filed with the SEC within 120 days after the end of the fiscal year ended March 31, 20132014 (the “2013“2014 Proxy Statement”), which is incorporated herein by reference.
|
| |
| ITEM 11. | Executive Compensation. |
See information set forth under the captions “Compensation Committee Report,” “Compensation Discussion and Analysis,” “Employment Agreements” and “Executive Compensation” in the 20132014 Proxy Statement which is incorporated herein by reference.
|
| |
| ITEM 12. | Security Ownership of Certain Beneficial Owners and management and Related Stockholder Matters. |
See the information set forth in the sections entitled “Security Ownership of Certain Beneficial Owners and Management” and “Securities Authorized for Issuance Under Equity Compensation Plans” in the 20132014 Proxy Statement, which is incorporated herein by reference.
For information required by Item 201(d) of Regulation S-K, please refer to Item 5 under Part II of this Annual Report on Form 10-K.
|
| |
| ITEM 13. | Certain Relationships and Related Transactions, and Director Independence. |
See the information provided under the captions “Proposal No. 1 - Election of Directors,” “Corporate Governance Matters and Committees of the Board of Directors” and “Certain Relationships and Related Party Transactions” in the 20132014 Proxy Statement, which is incorporated herein by reference.
|
| |
| ITEM 14. | Principal Accounting Fees and Services. |
See the information provided under the caption “Proposal No. 2 - Ratification of Appointment of our Independent Registered Public Accountants” in the 20132014 Proxy Statement, which is incorporated herein by reference.
|
| | |
| PART IV. |
| | | |
| Item 15. | | Exhibits, Financial Statement Schedules |
|
| | |
| | | Financial Statements |
| | | |
| (a)(1) | | The Consolidated Financial Statements of hhgregg and subsidiaries are incorporated under Item 8 of this Form 10-K. |
| | |
| (a)(2) | | Financial Statements and Schedules |
| | |
| | | Schedules have been omitted because they are not applicable, are not required or the information required to be set forth therein is included in the Consolidated Financial Statements and Notes thereto. |
| | |
| (a)(3) | | Exhibits |
| | |
Exhibit Number | | Description of Document |
| | |
3.1 (1) | | Certificate of Incorporation of the Company. |
| | |
3.2 (1) | | Bylaws of the Company. |
| | |
4.1 (2) | | Specimen Stock Certificate for shares of common stock of the Company. |
| | |
4.2 (1) | | Registration Rights Agreement, dated April 12, 2007, by and among FS Equity Partners V, L.P., FS Affiliates V, L.P., California State Teachers'Teachers’ System, A.S.F. Co. Investment Partners II, L.P., the Jerry W. Throgmartin 2007 Grantor Retained Annuity Trust, Jerry W. Throgmartin, Gregg William Throgmartin, Dennis L. May and the Company. |
| | |
10.3 (1) + | | Employment Agreement, dated October 19, 2004, between Gregg Appliances, Inc. and Dennis L. May. |
| | |
10.4 (1) + | | Gregg Appliances, Inc. Nonqualified Deferred Compensation Plan, dated April 1, 2000. |
| | |
10.5 (1) + | | Amendment No. 1 to Gregg Appliances, Inc. Nonqualified Deferred Compensation Plan, dated December 26, 2004. |
| | |
10.6 (1) | | Non-Standardized Adoption Agreement of Gregg Appliances, Inc. dated January 29, 2005. |
| | |
10.9 (1) + | | Gregg Appliances Inc. 2005 Stock Option Plan, dated March 8, 2005. |
| | |
10.10 (1) + | | Amendment No. 1 to Gregg Appliances, Inc. 2005 Stock Option Plan, dated April 12, 2007. |
| | |
10.11 (1) + | | hhgregg, Inc. Equity Incentive Plan. |
| | |
10.15 (11)(10) | | Amended and Restated Indemnity Agreement. |
| | |
10.16 (3) + | | Form of hhgregg, Inc. 2007 Equity Incentive Plan Option Award. |
| | |
10.17 (3) +
| | Employment Agreement, dated June 1, 2008, between Gregg Appliances Inc. and Michael D. Stout. |
| |
10.18 (3) +
| | Employment Agreement, dated June 1, 2008, between Gregg Appliances Inc. and Stephen R. Nelson. |
| |
10.19 (3) + | | Employment Agreement, dated June 1, 2008, between Gregg Appliances Inc. and Charles B. Young. |
| | |
10.20 (3)+ | | Employment Agreement, dated June 1, 2008, between Gregg Appliances Inc. and Gregg W. Throgmartin. |
|
| | |
Exhibit Number | | Description of Document |
| |
10.21 (3) +
| | Employment Agreement, dated June 1, 2008, between Gregg Appliances Inc. and Jeffrey J. McClintic. |
| |
10.22 (3) +
| | Employment Agreement, dated June 1, 2008, between Gregg Appliances Inc. and Michael G. Larimer. |
| | |
10.24 (4) + | | Amendment No. 1 to the Employment Agreement, dated December 30, 2008, between Gregg Appliances and Dennis L. May. |
| | |
10.25 (5) | | Stock Subscription Agreement, dated July 15, 2009, among Gregg Appliances, Inc. and the Subscriber as defined therein. |
| | |
10.27 (6) + | | Amendment No. 2 to the Employment Agreement, dated August 12, 2009, between Gregg Appliances, Inc. and Dennis L. May. |
| | |
10.2810.29 (7)+
| | Employment Agreement, dated September 4, 2009, between Gregg Appliances, Inc. and Jeremy J. Aguilar. |
| |
10.29 (8)
| | Amended and Restated Loan and Security Agreement, dated March 29, 2011, among Gregg Appliances, Inc., HHG Distributing, LLC, Wells Fargo Bank, National Association, as administrative agent and collateral agent, Wells Fargo Capital Finance, LLC and J.P. Morgan Securities LLC, as joint lead arrangers and joint bookrunners, J.P. Morgan Chase Bank, N.A., as syndication agent, KeyBank National Association, Regions Bank and Suntrust Bank, as co-documentation agents and the lenders party thereto.* |
| | |
10.30 (9)(8) | | Amendment No. 1 to Trademark Collateral Assignment and Security Agreement, dated March 29, 2011, between Gregg Appliances and Wells Fargo Bank, National Association. |
| | |
10.31 (10)(9) + | | Employment Agreement, dated September 13, 2011, between Gregg Appliances, Inc. and Trent Taylor. |
| | |
10.32 (10) +
| | Employment Agreement, dated February 15, 2012, between Gregg Appliances, Inc. and Douglas T. Moore. |
| |
10.33 (12)(11) + | | Employment Agreement, dated March 4, 2013, between Gregg Appliances, Inc. and Jeffery G. Haines. |
| | | |
10.34 (12) | | Amendment No. 1 to the Amended and Restated Loan and Security Agreement, dated July 29, 2013, among Gregg Appliances, Inc., HHG Distributing, LLC, Wells Fargo Bank, National Association, as administrative agent and collateral agent, Wells Fargo Capital Finance, LLC and J.P. Morgan Securities LLC, as joint lead arrangers and joint bookrunners, J.P. Morgan Chase Bank, N.A., as syndication agent, KeyBank National Association, Regions Bank and Suntrust Bank co-documentation agents and the lenders party thereto. |
| | |
10.35 (13) + | | Employment Agreement, dated December 9, 2013, between Gregg Appliances, Inc. and Julie C. Lyle. |
| | |
10.36 (14) + | | Employment Agreement, dated May 20, 2013, between Gregg Appliances, Inc. and Andrew S. Giesler. |
| | |
| 10.37 + | | Employment Agreement, dated May 5, 2014, between Gregg Appliances, Inc. and Troy H. Risch |
| | |
14.1 (1) | | Finance Code of Ethics. |
| | |
21.1(1) | | List of our Subsidiaries. |
| | |
| 23.1 | | Consent of KPMG LLP, Independent Registered Public Accounting Firm. |
| | |
| 31.1 | | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| 31.2 | | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| 32.1 ++ | | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
| 32.2 ++ | | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
| | |
Exhibit Number | | Description of Document |
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| **101 | | The following materials from hhgregg, Inc.’s Annual Report on Form 10-K for the fiscal year ended March 31, 2013,2014, formatted in XBRL (eXtensible Business Reporting Language): (1) Consolidated Statements of Income for fiscal years ended March 31, 2014, 2013 and 2012, and 2011, (2) Consolidated Statements of Comprehensive Income for fiscal years ended March 31, 2013, 2012, and 2011, (3)Consolidated Balance Sheets as of March 31, 2014 and 2013, and 2012, (4)(3) Consolidated Statements of Stockholders’ Equity for fiscal years ended March 31, 2014, 2013 and 2012, and 2011, (5)(4) Consolidated Statements of Cash Flows for fiscal years ended March 31, 2014, 2013 and 2012 and 2011 and (6)(5) Notes to Consolidated Financial Statements. |
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| (1) | Incorporated by reference from the Company’s Registration Statement on Form S-1 (Reg. No. 333-142181) filed with the SEC on April 18, 2007. |
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| (2) | Incorporated by reference from Amendment No. 2 to the Company’s Registration Statement on Form S-1 (Reg. No. 333-142181) filed with the SEC on June 29, 2007. |
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| (3) | Incorporated by reference from the Company’s Annual Report on Form 10-K filed with the SEC on June 3, 2008. |
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| (4) | Incorporated by reference from the Company’s Quarterly Report on Form 10-Q filed with the SEC on February 5, 2009. |
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| (5) | Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on July 16, 2009. |
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| (6) | Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on August 18, 2009. |
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| (7) | Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on September 9, 2009.April 1, 2011. |
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| (8) | Incorporated by reference from the Company’s CurrentAnnual Report on Form 8-K10-K filed with the SEC on April 1,May 26, 2011. |
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| (9) | Incorporated by reference from the Company’s Annual Report on Form 10-K filed with the SEC on May 26, 2011.23, 2012. |
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| (10) | Incorporated by reference from the Company's Annual Report on Form 1-K filed with the SEC on May 23, 2012. |
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(11) | Incorporated by reference from the Company'sCompany’s Quarterly Report on Form 10-Q filed with the SEC on November 2, 2012. |
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(12)(11) | Incorporated by reference from the Company'sCompany’s Current Report on Form 8-K filed with the SEC on March 4, 2013. |
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| (12) | Incorporated by reference from the Company’s Quarterly Report on Form 10-Q filed with the SEC on August 1, 2013. |
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| (13) | Incorporated by reference from the Company’s Current Report on Form 8-K filed with the SEC on December 11, 2013. |
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| (14) | Incorporated by reference from the Company’s Quarterly Report on Form 10-Q filed with the SEC on January 30, 2014. |
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| * | Confidential treatment requested for certain confidential portions of this exhibit. These confidential portions have been omitted from this exhibit and filed separately with the Securities and Exchange Commission. |
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| ** | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement of prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
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| + | Indicates management contract or compensation plan or arrangement. |
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| ++ | This exhibit shall not be deemed "filed"“filed” for purposes of Section 18 as the Securities and Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any filings. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| HHGREGG, INC. | |
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| By: | /s/ DENNIS L. MAY | |
| | Dennis L. May President and Chief Executive Officer (Principal Executive Officer) | |
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| By: | /s/ JEREMY J. AGUILARANDREW S. GIESLER | |
| | Jeremy J. AguilarAndrew S. Giesler
Interim Chief Financial Officer (Principal Financial and Accounting Officer) | |
Dated: May 20, 20132014
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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| Signature | | Title | | Date |
| /s/ DENNIS L. MAY | | President and Chief Executive Officer (Principal Executive Officer) | | May 20, 20132014 |
| Dennis L. May | | | |
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/s/ JEREMY J. AGUILARANDREW S. GIESLER | | Interim Chief Financial Officer (Principal Financial and Accounting Officer) | | May 20, 20132014 |
Jeremy J. AguilarAndrew S. Giesler | | | |
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| /s/ GREGORY M. BETTINELLI | | Director | | May 20, 2014 |
| Gregory M. Bettinelli | | | | |
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| /s/ LAWRENCE P. CASTELLANI | | Director | | May 20, 20132014 |
| Lawrence P. Castellani | | | | |
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| /s/ BENJAMIN D. GEIGER | | Director | | May 20, 20132014 |
| Benjamin D. Geiger | | | | |
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| /s/ CATHERINE A. LANGHAM | | Director | | May 20, 20132014 |
| Catherine A. Langham | | | | |
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| /s/ JOHN M. ROTH | | Director | | May 20, 20132014 |
| John M. Roth | | | | |
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/s/ CHARLES P. RULLMAN | | Director | | May 20, 2013 |
Charles P. Rullman | | | | |
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| /s/ MICHAEL L. SMITH | | Chairman of the Board and Director | | May 20, 20132014 |
| Michael L. Smith | | | | |
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| /s/ PETER M. STARRETT | | Director | | May 20, 20132014 |
| Peter M. Starrett | | | | |
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/s/ GREGG W. THROGMARTIN | | Director | | May 20, 2013 |
Gregg W. Throgmartin | | | | |
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| /s/ KATHLEEN C. TIERNEY | | Director | | May 20, 20132014 |
| Kathleen C. Tierney | | | | |
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| /s/ DARELL E. ZINK | | Director | | May 20, 20132014 |
| Darell E. Zink | | | | |
