Why I Think Investors Should Avoid hhgregg

When I was a child, I talked like a child, I thought like a child, I reasoned like a child... and I still never considered buying anything from hhgregg . Apparently I'm not the only one, as the company's quarterly earnings came in well below expectations. Comparable sales, net sales, and earnings per share were all down.

As a result, the stock fell 12% by midday on Tuesday, giving up about a month's worth of gains. Up until the announcement, hhgregg shares had been having a pretty stellar year. The stock is still up over 90% year to date, and 38% over the last 12 months. Clearly, someone sees potential in hhgregg, but that someone is not me -- also, if you ask me, that someone is probably wrong.

The sales make the man
As I mentioned above, hhgregg failed on just about every level. It all started with a 9.8% drop in comparable sales over the last quarter, which helped pull yearly comparable sales down 8.7%. Despite the company's seeming inability to manage its current lineup of stores, hhgregg has added 20 new locations over the year.

The company pointed out that appliance sales showed strength, with comparable sales rising 5.2% over the quarter. Unfortunately, this was offset by a 25% drop in comparable sales for video, which made up over a third of hhgregg's total revenue.

The shift in sales is similar to what Best Buy has seen, but Best Buy has managed the fall better -- somehow. Comparable sales at Best Buy fell 2.8% over its last quarter, with the biggest falls coming in consumer electronics and entertainment. But Best Buy has managed to focus on its strengths, and appliances and services both had 7% gains last quarter. Mobile is the company's clear strength, and comparable sales grew 12%.

Is there a plan for recovery?
Best Buy is by no means a golden child, and the newest earnings release pushed shares down 5%, but at least Best Buy seems to have a vague plan. hhgregg spent cash that it didn't have last year. The company's on-hand cash dropped almost $11 million over the year.

In fiscal 2014, hhgregg is going to open five new stores, move a half-dozen more, and try to spend more of its advertising dollars focusing on its appliance division. That's not quite enough focus on growing sales for me. Other divisions seem destined for more comparable-sales declines, and even a big push in appliances isn't going to make up the difference.

The only real plan that I can see from the company's earnings call is that it wants to get more service revenue through the door. The Geek Squad has been good for Best Buy, and the company has rolled it out into some Target locations. If hhgregg can start to make a name for itself as a service provider, it might be able to bump sales a bit.

I don't have much faith in the long-term plan at hhgregg, and there's nothing on the table that looks exciting to me either. While I'm not going to advocate jumping into Best Buy instead, if you're forced to choose, I'd go with the Big Blue Box.

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The article Why I Think Investors Should Avoid hhgregg originally appeared on Fool.com.

Fool contributor Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends hhgregg. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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