The retail sector has been flying. Overall, many retail related companies have gained appreciation so far this year. hhgregg, Inc. (NYSE:HGG) has rallied 142% YTD, but I believe the company has run its course, and it is time to look somewhere else.
Is this the time to commit fresh cash to h.h.gregg?
hhgregg, Inc. (NYSE:HGG) is a specialty retailer of consumer electronics, home appliances and related services. From a valuation standing, the company trades with a price-to-earnings ratio of 22.8, compared to the industry’s average of 71.9. Further, its price-to-book ratio is 1.5, while industry’s average is 4.7. Its net sales declined 2.6% to $597 million. Moreover, comparable stores sales declined by 9.8%. Lastly, net income declined from $1.45 per share to $0.31 per share.
The company is trying to mitigate the decline in sales by opening new stores, but its comparable store sales have decreased to an alarming point. However, the new stores metric has declined, as only one store has been inaugurated in the past six months.
Lastly, the company is not in the position to initiate a share repurchase program because its free cash flow is declining. On a year-over-year basis, its free cash flow shrunk 60% from $34 million to $12 million for the first quarter.
I fear the aggressive growth that hhgregg, Inc. (NYSE:HGG) showed before has dimmed, and it is time to take the profits of the table. Hence, I do not recommend a long position in this company.
A major retailer…
Best Buy Co., Inc. (NYSE:BBY) is another major retailer with presence worldwide. The company trades with a negative P/E, and its revenues have declined for the three months ending in April, from $11.6 billion to $9.38 billion, QoQ. Also, the company swung to a net loss of $81 million from a net income of $158 million. Its cash from operations declined from an inflow of $379 million to an outflow of $5 million. Its free cash flow also declined from an inflow of $238 million to an outflow of $179 million.
What’s more is that net income has been steadily decreasing since 2008, and the future does not seem clear for Best Buy Co., Inc. (NYSE:BBY). Free cash flow for the trailing twelve months declined by $2 billion, ending in $564 million. Its dividend payment may be in jeopardy.
Microsoft Corporation (NASDAQ:MSFT) intents to open mini-stores inside Best Buy Co., Inc. (NYSE:BBY) stores through a partnership; a similar project as the one between Samsung and Best Buy Co., Inc. (NYSE:BBY). However, I believe Best Buy’s benefits will not be significant.
Microsoft Corporation (NASDAQ:MSFT)’s sales have been declining over the last quarters. Currently, its revenue declined by 10% to $17.4 billion for the three months ending in March 2013, compared to the same period a year ago. Fewer customers are migrating towards new operating systems and new Office versions as they do not offer substantially new features. Windows 8 was not received as expected. Although revenues from the Windows division posted an increase of 23% compared to last year, the comparison is ambiguous.
In March 2012, there was no operating system released, so for me it is like comparing Apple Inc. (NASDAQ:AAPL)’s to oranges. A better comparison would be between the third quarter of 2010 and the third quarter of 2013. At these dates, Win7 and Win8 had been available to customers for the same period of time. In the third quarter of 2010, the Window division revenues increased to 28% from the previous year. This suggests that Windows 7 had better perception than Windows 8.
Further, recent numbers from StarCounter, which measures OS market share by counting Internet users, reported that only 4% of the global PC usage had Win8 as OS between January and March of 2013. At the same point in 2010, Win7 was used by 11% of the global PC usage. These numbers may suggest that Windows 8 may not have had the expected customer reception.
On the positive side, Microsoft Corporation (NASDAQ:MSFT) should have increasing revenues due to the launch of the Xbox One.
What would be the impact of low software sales from Microsoft on Best Buy?
Going back to Best Buy Co., Inc. (NYSE:BBY), I believe that Best Buy’s benefits will be minimal from Microsoft Corporation (NASDAQ:MSFT) opening mini-stores inside its stores. On the other hand, I believe that the partnership with Samsung may be of great benefit to Best Buy. Its Galaxy phones directly compete against the Apple Inc. (NASDAQ:AAPL)’s iPhone. Its tablets took some market share from the iPad, and its laptops are another option to Hewlett-Packard Company (NYSE:HPQ)’s and Dell Inc. (NASDAQ:DELL)’s. Revenues from the Samsung mini-store should help Best Buy Co., Inc. (NYSE:BBY) in the long run.
However, overall, the investment prospectus of Best Buy does not seem ideal for growth portfolios at this point, and I would recommend avoiding this stock.
The final message
I believe investors must take their profits from hhgregg, Inc. (NYSE:HGG) and Best Buy Co., Inc. (NYSE:BBY) and look elsewhere. I agree the momentum in these companies is huge at the moment, but its financials do not look appealing.
hhgregg, Inc. (NYSE:HGG)’s sales are declining, and the retailer is trying to lessen the impact by opening new stores. However, the strategy has not worked lately, and only one new store was open in the last six months. Also, its same-store sales are declining way beyond the company’s guidance for 2013. A lower-revised guidance will send the stock south, and investors should not be there when that moment occurs.
Best Buy is trying to expand its revenues by forming alliances with Samsung and Microsoft. Although I believe that Samsung may prove to be an excellent companion, I have my doubts regarding Microsoft Corporation (NASDAQ:MSFT).
The software giant has not been able to capitalize revenues from its software section, and it is relying heavily in the launch of the Xbox One. For this reason, I do not believe that Best Buy Co., Inc. (NYSE:BBY) will benefit by opening Microsoft mini-stores significantly. In brief, investors should steer away from these two retailers for the time being.
Robinson Roacho has no position in any stocks mentioned. The Motley Fool recommends hhgregg, Inc. (NYSE:HGG) (NYSE:HGG). The Motley Fool owns shares of Microsoft Corporation (NASDAQ:MSFT).
The article Steer Away From These Companies Before It’s Too Late originally appeared on Fool.com.
Robinson is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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