Herb Singh presentation on hhgregg, inc. from the ValueX Vail, June 24, 2015.
[klarman]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
- 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
- CEO capable enough to run business like he has
- Good store site selection despite increase of 100 units over last 5 years
- Business model NOT broken
- CEO capable enough to run business like he has and reasonable estimate of normalized earnings
New Single Family Homes
- 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
R/S stable between 110 and 208 store, last 20 probably okay
This business landscape has not changed materially from 2009:2012
Normalized Revenue = Rev/store x 228
Normalized Revenue = 3,002M
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.
