2nd UPDATE:Hhgregg 1Q Profit Falls 28% As Costs Increase; View Upbeat

Falling television prices and expenses tied to its push into the Mid-Atlantic region cut into Hhgregg Inc.'s (HGG) fiscal fourth-quarter profit, which fell 28%.

But the regional appliance and electronics store operator expects its ongoing expansion and improving consumer trends to fuel earnings growth in the current fiscal year. It forecast better-than-expected earnings of between $1.35 and $1.45 a share, including 40% to 45% revenue growth as the company nearly doubles its new store openings.

Analysts polled by Thomson Reuters, on average, projected a profit of $1.32 earnings and 32% sales growth to $2.02 billion.

The "largely favorable results" reflect the company's high growth mode, Barclays Capital said in a note to clients, adding the retailer saw improving trends in the current quarter.

Hhgregg shares recently increased 6.3% to $28.30. Heading into Thursday's results, the stock was up 21% this year.

Hhgregg has been growing rapidly physically in recent quarters, taking advantage of store spaces left vacant when Circuit City Stores Inc. (CCTYQ) shut its doors. It had 131 stores at the end of the quarter, compared with 110 at the end of fiscal 2009 but said it had opened 26 stores in the Mid-Atlantic and Northeast so far in the first quarter. It expects to add a total of 40 to 45 stores this year.

"Our new store development programs have been completed on time and on budget, and new store productivity remains strong," President and Chief Executive Dennis L. May said during a conference call with analysts and investors to discuss results.

Appliance sales, which generate a third of Hhgregg's sales, were only slightly boosted by government-rebate programs in the latest quarter, executives said, adding that most states where it has stores either didn't have significant programs or won't start them until the current quarter. Still, strengthening demand from replacement appliances contributed to improvement across all categories, executives said.

The retailer also continues to benefit from the popularity of flat-screen TVs and a growing offering of computers. New TV technologies rolling out this year, including 3-D television and Internet-ready sets, are expected to boost customer interest in flat-screen TVs and ultimately, strengthen average selling prices.

"We've seen sequential (sales) improvement in fiscal Q4, and we've seen that momentum carry into our fiscal Q1, and we've seen that in both our video and our appliances," May said.

For the quarter ended March 31, profit dropped to $10 million, or 25 cents a share, from $13.9 million, or 42 a share, a year earlier. Costs related to new store openings increased operating expenses by 7 cents a share in the latest quarter. Revenue climbed 14% to $417.3 million as same-store sales fell 4.8%.

Analysts were expecting earnings of 26 cents on $409 million in revenue.

Same-store sales of TV sets and other video equipment dropped 12% as average selling prices dropped but the number of units sold increased. May said shortages of some of the newest sets constrained sales in the latest period, though supply issues have eased since then.

Appliances and other products saw same-store sales grow 3.7% and 4.3%, respectively.

The shift to a greater percentage of sales from lower margin notebook computers contributed to lower rates of profitability, but additional expenses for new store rents and more warehouse and distribution operations had the biggest impact.

Gross margin fell to 30.5% from 31.7%, and operating margin fell nearly 3 percentage points to 4.2%.

For the current year, Hhgregg expects same-store sales flat to up 2% and first-half costs tied to new warehouse, distribution, management and pre-opening expenses of $9 million to $10 million. Same-store sales should be stronger in the first quarter, given recent momentum, but May said forecasting full-year sales is difficult, given the uncertain macro-economic environment and tough comparisons in the back half of the year.

-By Mary Ellen Lloyd, Dow Jones Newswires, 704-948-9145; maryellen.lloyd@dowjones.com

-By Matt Jarzemsky; Dow Jones Newswires; 212-416-2240, matthew.jarzemsky@dowjones.com

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