#1) We felt that management could be doing certain things differently. We wanted to create this presentation so we could engage with them.

#2) There is a decent amount of research out there on HGG but none of it really attempted to quantify the Sears effect.

So 70% of appliance purchases are made when something breaks. People generally want to buy something quick and they need someone to show up and install it. They also sometimes need credit to make the purchase and a sales person to help them find the best appliance. For these reasons, it is more protected from Amazon then something like TVs or iPads. Thus far, hardly any appliance market share is online. Similar to the mattress and furniture industry.

And yes, there are other appliance retailers on the maps we showed. The point was not to say that h.h. gregg was the only place to buy appliances outside of Sears. The point was just to give people the visualization that there is literally a Sears right down the street from almost every h.h. gregg. We don't think people really understood that.

Why do you think being an appliance store first and foremost is critical to gaining the most market share in the appliance market? That seems to be your main underlying hypothesis in your presentation and here and you never discuss why you make this assumption. There's no "where it could go wrong" section basically is what I'm saying.

I also think you should develop more the " Sears has struggled because they haven't invested enough in their stores".

Hey Jason, as I said in text, great presentation and analysis here. One minor question about the play here which involves to Gregg Throgmartin. Obviously you know what all of his roles have been within the company, and thus realize he plays (played) a large part into your strategy for growth/store expansion management. I'm not sure when this was created, but given he has just resigned, at least publicly, 6 days ago, does that affect your analysis and overall bullish outlook at all? Also curious to know why he directly or indirectly sold over $10m worth of shares during the end of august and beginning of september right before the stock lost half its value, and again how that plays into your analysis. Again really great read but I just spent a couple hours doing my own research (which could have been done in 15 min if I still had bloomberg sigh.)

EDIT: Also how long term of a play do you expect this to be or do you intend on not estimating an exit point at this time?

Here's the way we think about it. According to industry projections, the retail appliance market is going to grow 2-3% from increased units and 1% from increased pricing. That's what is being priced into HGG estimates. Sears, although it has struggled, is still 30% of the appliance market and is right next to basically every HGG. We dont know how much business will go to HGG, but we think Sears closing is a major catalyst and is not priced into the stock. We think HGG will get another 1% boost to their appliance comp if Sears stores stay open and continue to comp negative. We think they could get a much much larger boost if Sears closing accelerate.

I have nothing special to say about Sears and I don't know exactly where those customers are going to shop. But to us it seems like a lot of upside you don't have to pay for.

I would also like to point out that the start to 2014 has had absolutely horrible weather and everyone expects some ugly numbers out of retailers in Q1, including HGG. But as the weather warms up, HGG should have an easier time putting up some numbers, especially because last summer was not very hot and the air conditioning business really struggled last year.

Don't want to speculate on what exactly is going on. But basically his great grandfather started the company in 1955 and his dad was the CEO before passing away a few years ago. The original family has been less and less involved and I believe this is the first time none of the original family is on the board. Don't think Gregg leaving means much.

I'd be concerned that HGG's quarterly earnings and revenue (YOY) are down in the most recent quarter by 71% and 11.60%. The revenue really concerns me, do they have more stores in 4qtr 2013 than same quarter 2012?

Compare that to Lowes that reports a 26% earnings and 7.3% revenue increase and Home Depot's is similar. Now, there not in the same business exactly, but I'm worried Lowe's and Home Depot will be a main competitor for appliance buyers. Both have more and larger stores and are in a better business than HGG. They generate more traffic than HGG and they are usually located very close to each other so someone looking for appliances can see both stores inventory quickly.

If Sears is already failing why are HGG's numbers for the most recent quarter so disappointing?

Knowing nothing about HH Gregg, I thought the report was a good read and the maps really drove home the point that they are in a good position to benefit from failures of Sears.

But it makes me worry that I have to resort to RaineTech posts to find out that their #2 just resigned under some bad weather. It makes me wonder if I'm reading a sales-pitch and little more. It would also be useful to include a publication date on the report itself. I see that it was uploaded to Scribd a day after #2 resigned.

I trust that Jason's intentions are pure with his response that he doesn't believe it will have a major impact going forward for the business. From an investment perspective it looks to be a bit tricky. I like that there is over 50% short interest from its current share float, which could create a nice short squeeze be it near term or long term. Wall street in general tends to be shrugging off the bad weather and pricing it in to reduced expectations from consumer businesses.

In response to their revenue decline, after some research earlier it was almost entirely because hh gregg decided not to compete in the aggressive promotional consumer electronic side of the business during the holiday shopping season. This is in large part what has allowed them to maintain profitability while other companies all went to war cannibalizing each other.

I've been researching the idea all day and think I may take a small long position and utilize protective puts as a small hedge depending on where everything is priced on tuesday.

Hi Jason,

Thanks for writing the report.

I failed to see a compelling reason why Gregg will benefit greatly from Sears dying, mainly because I see no clear strategy on how you will acquire new customers. People don't just suddenly go to Gregg just because they hate Sears. As noted in the report, there are tons of players in the appliance market.

Also, I used to believe that it's difficult for the internet to disrupt the appliance market. However, I recently purchased a new fridge and I no longer hold the same view. My shopping process was:

1. I'm looking for a type of fridge (freezeless).

2. I went to Home Depot / Lowes. They don't carry it and suggested I go online. I checked out Amazon and Sears.com for more models and ultimately bought a model from Home Depot.

3. I didn't need to check out the fridge. The main reason was the fridge I chose had amazing reviews compare to other fridges. I think as the population becomes more tech savvy and more comfortable shopping online, they will buy appliances online.

This is one of the reasons why I think Sears *might* survive, especially with Lampert going all-out with his online strategy.

Another factor that worries me is in a turnaround situation, you need a complete stud. I don't know enough about Dennis May to know if he is that guy. I can't find much info on him.

Full disclosure: I used to trade SHLD and no longer own any shares. I might initiate a position on SHLD in the future. I'm currently long SHOS and might change my position in the future.

Why do you believe this to be a turnaround situation? While most consumer electronics/appliance retail outlets have struggled and experienced huge losses and reduced revenue growth over the past few years, this company has in fact increased revenue and remained profitable. This isn't a "turnaround story" it's a growth opportunity story.

dc_publius,

Of course this is a sales pitch rather than an unbiased assessment. He hasn't tried to hide that.

I used the wrong word. I should've used the word transformation.

New customers will find Sears' competitors organically when more stores close. Moreover, Jason poses that hgg carries more products and spends more on capex, making them a threat for Sears.

I also fail to see why you would need a complete stud while this situation does not present any new challenges?

This is really dumb imo. Sears is done. Stick-a-fork-in-it done. Their customer base doesn't use the internet to shop. They are doing less than half of what they need to do in sales on a sales/sq foot basis to be profitable. They own a massive real estate portfolio that can put a glut on the market for big boxes that will take years and possibly a decade+ to clear.

You need to look at your biases. Your background makes it seem like there's always an out... but in this situation (and many others) the river came a long while back.

I agree that new customers will find Sears' competitors organically when more stores close. My concern is there's no clear strategy on how to acquire these customers. Sure, some might stop by because Gregg is down the street. Do we know if there's a Lowes/Home Depot/Walmart down the street as well?

I gotta be honest with you, the last time I walked into a home depot I didn't see any consumer appliances in any range of sight. The first thing I've seen walking in there are basic consumer staples like light bulbs, cleaning sprays and etc. to the left, and to the right a ****load of grills (and it was winter time no less, so not like they were targeting based on weather as grills would typically be sold in spring/summer.) I just don't think when people think home depot they're thinking "that's where I'll buy my new high tech laundry machine." I think they're just thinking about all the parts and supplies they'll need to remodel a den or to mow and maintain their grass more efficiently.

EDIT: I could be wrong and way off base, just speaking from personal experience here.

I think the point is that competition with HD and Lowes is irrelevant. His thesis is that if SHLD's market share is divided equitably amongst their competitors, HGG is the only one that will experience a significant revenue boost. HD BBY and LOW won't benefit from the uptick since appliances are a very small % of the business.

That's the point of the maps, isn't it? When sears closes and HH Gregg is 1 mile down the road, they're in the best position to capitalize on the Sears closing.

Although this sort of reasoning makes me want to see another map that includes HD/BBY/LOW in addition to Sears/HHGregg.

The maps were interesting but I think the analysts estimates were much more relevant. The estimates are only pricing in the expected growth in the appliance market. Sears is very likely done for, in which case all of their competitors will have some amount of increased sales in appliances. HD BBY and LOW appliance revs are too small a % of total revs so Sears closing won't really help them at all.

+1, also i think the point of the much discussed "map" portion of the presentation was to emphasize how there would be some amount of organic new customer acquisition should SHLD continue to lose customers / close stores.

to be honest, after reading the presentation i was primarily thinking about how SHLD is in deep trouble, it didn't leave me excited about HGG in any meaningful way. that might be the point though and maybe is part of why the market is wrong about HGG.

in general i enjoy these types of writeups and am glad OP posted it here. i hope there will be more in the future. i took a small long position.

random anecdote: one of my friends works at SHLD (non management) and has been telling me for a while now how bad it is there. speaking only for the people that do his job function, he says the employees there are either very young and didn't know better when they took a job there or are towards the end of their careers and have no realistic chance of finding a better employment opportunity. all of the good employees he knows have left.

I'm from the UK and have never heard of hh gregg or Sears before reading this presentation.

Are hh greg that much better operationally than Sears?

Perhaps Sears poor performance relative to the market has been due to their specific locations having unobvious disadvantages. Therefore, if hh greg were to take over those locations would they really make a better go at it? Think of it this way, they will likely recruit the same sales / labour force (they'll be out of work with appliance sales experience), they'll use the same local infrastructure / distribution, face the same local family run business as competitors and be targeting the same customers that Sears failed to monetize effectively.

I asked the same thing. Without knowing the exact breakdown of current Sears customers it seems impossible to determine which competitor they will choose, hencec assuming all competitors will benefit according to their current market share seems fair. Also, Jason wrote that a new ad campaign is starting, which implies that HGG is targeting these appliances consumers (which we don't know about the other competitors).

If every Sears has a HD/BBY/LOW next door in the same strip mall, then people will just go to HD/BBY/LOW instead of HH Gregg.

The "appliance pie" will not be divided up equally by competitors. In each local scenario, one or two stores will be the biggest beneficiaries. This is why I would like to see a map that shows not just HH Gregg/Sears, but also any other alternatives that may become the primary go-to place for appliances, leaving HH Gregg in relative obscurity 2 miles down the road.

couple things.

the basis of your pitch is really higher margins in appliances than electronics. On slide 27 you have 2014 to 2016 scenario 1, revenues increase by 1.5% but ebit increases by 150%. you get there by having all the margins move in the right direction for you. seems unrealistic, so id go talk to management (which im sure you already have) and make sure I absolutely got that right.

other important thing is to examine shareholder base, how friendly are they, what are their motivations ect. PE firm selling out their stake over time?

Also you should talk to my buddy greg in nyc, said you guys know each other. He covers retail and hes a genius at this stuff.