1 Retail Stock to Ditch in 2015
On the surface, this company seems like an investment that is almost too good to be true. Trading for just nine times free cash flow, the retailer increased revenue by 63% between 2009 and 2011 -- impressive for almost any organization. And during 2013, the stock doubled!
But heading into 2015, I think investors absolutely must avoidshares of electronics retailer hhgregg . Let's discuss why below.
An hhgregg location in Mayfield Heights, Ohio. Photo: Nicholas Eckhart, via Flickr.
That revenue growth wasn't so greatComing out of the Great Recession, hhgregg was one of the faster growers among electronics retailers. As peers such as Circuit City were shutting their doors, hhgregg was rapidly expanding its store base. It did so by taking an approach I like to call "cluster-bombing" -- opening up several locations within one market at the same time.
The problem? That 63% jump in revenue I mentioned was largely due to an expanding base of stores, rather than the strength of hhgregg's business. For proof, just look at comparable-store sales, or comps, which measures how locations that have been around for more than one year compare to years past.
Where'd That Growth Come From? Not Comps! |Create infographics
As you can see, hhgregg's comps have been negative every year since 2010. This is a huge red flag for investors, and the company has not recently shown any signs of changing this trend.
Why any solution will ultimately kill the companyWith revenue now having fallen for several yearsand comps negative, hhgregg management has had no other choice than to cut overhead costs. That technique enabled the company to stay profitable until 2014.
If we compare the third quarter of 2012 to the company's most recent quarter, spending for selling, general, and administrative operations, or SG&A, has been slashed by about 16%. In the short term, that stops the company's bleeding, as it keepsmore of the revenue it brings in.
But the whole appeal of hhgregg was that its customer service was top-notch, filling a niche that Best Buy once held before it ran into its own problems. With management so drastically cutting spending in SG&A, that single point of prestige is now lost -- leading one to wonder why they'd ever go to hhgregg in the first place.
The elephant in the roomOf course, hhgregg isn't alone in facing these problems. RadioShack is on the brink of bankruptcy, Conn's has seen its shares tumble 80% so far this year, and Best Buy has primarily remained afloat by focusing on its e-commerce platform.
Unsurprisingly, the success ofAmazon.com has dramatically led to the demise of these companies. With the e-commerce king's better prices and unmatched customer service, there's simply no way for these brick-and-mortar electronics plays to compete.
The future of retail -- especially electronics retail -- is here, and I predict hhgregg's woes will only compound in 2015.
The article 1 Retail Stock to Ditch in 2015 originally appeared on Fool.com.
Brian Stoffel owns shares of Amazon.com. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. 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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