Business

ValueX Vail 2015: Herb Singh Presentation On hhgregg, inc.

Herb Singh presentation on hhgregg, inc. from the ValueX Vail, June 24, 2015.

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Herb Singh

  • Urologist
  • Spend 10h per week looking, but find 1-2 ideas/yr worth spending more than 20 hours on
  • Long portfolio of less than 5 holdings

Disclaimer

  • I might have made a mistake so do your own homework

hhgregg, inc. - Business Background

  • 228 stores: major appliances, consumer electronics, home products
  • Rapid store expansion: 2010: 131, 2011: 173, 2012: 208, 2013-2015: 228
  • Grower turned into a turnaround sluggard with cyclical undertones

Financial Snapshot

hhgregg, inc.

  • Lowest trading price and market capitalization since company started trading in Summer 2007
  • Market Capitalization has fallen from 972M in March 2010 to 91M June 2015

What not to like

  • OI -99M TTM
  • Historic ROA most commonly about 8%
  • CCC at all time high
  • Inventory turnover at all time low
  • Big competitors: BBY, Sears, Walmart, Target, Home Depot, Lowes, Sams Club
  • Brick and Mortar business

Thesis

  • Company has over-expansion indigestion
  • Cost cutting will get company profitable: low hanging fruit
  • Low chance of bankruptcy
  • Tailwinds and catalysts exist
  • Oversold by market with very favorable risk-reward

Management

  • Dennis May has led company since 1999 (age 31) as COO then CEO, owns 4% outstanding stock ownership
  • Insider and employee alignment: ~3.3 M options vested, average strike price $12.5, ~ 4 years remaining
  • CFO bought $486k worth of shares, reported 11/4/2014 @ 4.86, base salary is $400K

Low Bankruptcy Risk

  • Management plan
    • Cut Advertising by $20M
    • Cut SGA by $50M
    • Reduce inventory by $50M -- onetime kicker to CF
    • Doable based on the how business was historically run
  • Net Current Asset Value per Share = 1.24
  • No LT debt, $400M credit facility expires 7/2018
  • Comps likely to improve because housing starts

Housing Construction returning to historical norm

Housing Starts Jump 20.2%, Building Permits Hit Seven-Year High In April - Forbes 5/19/2015

Assumptions

  1. CEO capable enough to run business like he has
  2. Good store site selection despite increase of 100 units over last 5 years
  3. Business model NOT broken
  4. CEO capable enough to run business like he has and reasonable estimate of normalized earnings

New Single Family Homes

hhgregg, inc.

  • 2014 housing starts are about 20%+ over 2010: 2012** Nationally and in Midwest
  • What pundits say about the norm - BUT I AM GOING TO IGNORE THEM

Killing Three Birds with One Stone

hhgregg, inc.

R/S stable between 110 and 208 store, last 20 probably okay

hhgregg, inc.

This business landscape has not changed materially from 2009:2012

hhgregg, inc.

Normalized Revenue = Rev/store x 228

Normalized Revenue = 3,002M

hhgregg, inc.

Catalysts

  • 2014 housing starts are about 20%+ over 2010:2012** Nationally and in Midwest
    • Pundits say we are 50% below our norm
  • 4K TVs
  • Cost cutting is low hanging fruit
  • Human capital replenishment

See full presentation below.