We are initiating coverage of hhgregg Inc. (HGG) with a Hold rating and six-month target price of $10. hhgregg recently reported fiscal quarter earnings per share that were $0.02 below consensus estimates. The miss was due to weaker-than-expected gross margins. Still, the management maintained its fiscal year sales guidance of growth between 19% and 21% and EPS guidance of $1.13-$1.20.
We think hhgregg's strong store model and growth strategy should deliver solid earnings growth over the long term. However, we believe the company's near-term results are at risk because of the macro headwinds negatively affecting most retailers.
The company's stores typically generate positive cash flow within three months of opening and provide a cash payback in less than three years. During fiscal 2007 and 2008, its stores averaged net sales of $14.9 million and contributed to 5.0% operating margin.
HGG shares trade at just 8.4x our fiscal 2009 earnings estimate and 7.5x our fiscal 2010 earnings estimate. This valuation assumes the company's growth prospects, at least for the near term, will be limited because of the macro headwinds negatively affecting all retailers.
We think that valuation offers buyers some downside protection in the event that company's results do not meet the market's expectations. However, we would not recommend buying the stock. Our target price is $10, or about 9x our fiscal 2009 EPS estimate.
Read the full analyst report on HGG
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