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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
 
 
FORM 10-Q
 
 
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2012
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from          to         
Commission file number 001-33600
 
 
 

  
hhgregg, Inc.
(Exact name of registrant as specified in its charter)
 
 
 
 
 
 
Delaware
 
20-8819207
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
4151 East 96th Street
Indianapolis, IN
 
46240
(Address of principal executive offices)
 
(Zip Code)
(317) 848-8710
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
 
 
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
¨
Accelerated Filer
ý
 
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    ý  No
The number of shares of hhgregg, Inc.’s common stock outstanding as of January 28, 2013 was 33,365,188.



HHGREGG, INC. AND SUBSIDIARIES
Report on Form 10-Q
For the Quarter Ended December 31, 2012
 
 
 
Page
 
 
Part I. Financial Information
 
 
 
 
Item 1.
Condensed Consolidated Financial Statements (unaudited):
 
 
 
 
 
Condensed Consolidated Statements of Income for the Three and Nine Months Ended December 31, 2012 and 2011
 
 
 
 
Condensed Consolidated Balance Sheets as of December 31, 2012 and March 31, 2012
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2012 and 2011
 
 
 
 
Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months Ended December 31, 2012
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
Part II. Other Information
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 



Part I.
Financial Information
ITEM 1.
Condensed Consolidated Financial Statements
HHGREGG, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
December 31,
2012
 
December 31,
2011
 
December 31,
2012
 
December 31,
2011
 
(In thousands, except share and per share data)
Net sales
$
799,635

 
$
829,546

 
$
1,877,127

 
$
1,879,603

Cost of goods sold
581,450

 
603,640

 
1,338,136

 
1,346,705

Gross profit
218,185

 
225,906

 
538,991

 
532,898

Selling, general and administrative expenses
139,303

 
140,609

 
383,871

 
371,529

Net advertising expense
38,715

 
39,488

 
98,085

 
90,148

Depreciation and amortization expense
10,416

 
8,765

 
29,673

 
24,236

Asset impairment charges
504

 

 
504

 

Income from operations
29,247

 
37,044

 
26,858

 
46,985

Other expense (income):
 
 
 
 
 
 
 
Interest expense
704

 
881

 
1,692

 
1,964

Interest income
(3
)
 
(1
)
 
(8
)
 
(5
)
Total other expense
701

 
880

 
1,684

 
1,959

Income before income taxes
28,546

 
36,164

 
25,174

 
45,026

Income tax expense
11,157

 
13,686

 
9,726

 
17,283

Net income
$
17,389

 
$
22,478

 
$
15,448

 
$
27,743

Net income per share
 
 
 
 
 
 
 
Basic
$
0.51

 
$
0.60

 
$
0.44

 
$
0.73

Diluted
$
0.51

 
$
0.60

 
$
0.44

 
$
0.72

Weighted average shares outstanding-basic
33,934,383

 
37,154,446

 
35,099,660

 
38,167,304

Weighted average shares outstanding-diluted
33,985,113

 
37,603,767

 
35,168,497

 
38,522,707

See accompanying notes to condensed consolidated financial statements.


3


HHGREGG, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
 
 
December 31,
2012
 
March 31,
2012
 
(In thousands, except share data)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
15,522

 
$
59,244

Accounts receivable—trade, less allowances of $25 as of December 31, 2012 and March 31, 2012
20,674

 
19,467

Accounts receivable—other
30,510

 
18,630

Merchandise inventories, net
438,378

 
282,409

Prepaid expenses and other current assets
5,083

 
5,562

Income tax receivable
1,114

 

Deferred income taxes
10,371

 
9,639

Total current assets
521,652

 
394,951

Net property and equipment
224,026

 
204,273

Deferred financing costs, net
2,158

 
2,656

Deferred income taxes
34,663

 
38,970

Other assets
1,173

 
1,934

Total long-term assets
262,020

 
247,833

Total assets
$
783,672

 
$
642,784

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
223,427

 
$
122,596

Customer deposits
40,271

 
28,993

Accrued liabilities
71,110

 
43,735

Income tax payable
3,616

 
4,358

Total current liabilities
338,424

 
199,682

Long-term liabilities:
 
 
 
Deferred rent
79,438

 
71,304

Other long-term liabilities
12,276

 
12,278

Total long-term liabilities
91,714

 
83,582

Total liabilities
430,138

 
283,264

Stockholders’ equity:
 
 
 
Preferred stock, par value $.0001; 10,000,000 shares authorized; no shares issued and outstanding as of December 31, 2012 and March 31, 2012, respectively

 

Common stock, par value $.0001; 150,000,000 shares authorized; 40,611,411 and 40,066,005 shares issued; and 33,338,522 and 36,351,716 outstanding as of December 31, 2012 and March 31, 2012, respectively
4

 
4

Additional paid-in capital
286,412

 
277,846

Retained earnings
144,729

 
129,281

Common stock held in treasury at cost, 7,272,889 and 3,714,289 shares as of December 31, 2012 and March 31, 2012, respectively
(77,611
)
 
(47,570
)
 
353,534

 
359,561

Note receivable for common stock

 
(41
)
Total stockholders’ equity
353,534

 
359,520

Total liabilities and stockholders’ equity
$
783,672

 
$
642,784

See accompanying notes to condensed consolidated financial statements.


4


HHGREGG, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
 
Nine Months Ended
 
December 31,
2012
 
December 31,
2011
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
15,448

 
$
27,743

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
29,673

 
24,236

Amortization of deferred financing costs
498

 
498

Stock-based compensation
3,882

 
4,541

Excess tax benefits from stock based compensation
(585
)
 
(419
)
Gain on sales of property and equipment
(216
)
 
(195
)
Deferred income taxes
3,575

 
9,608

Asset impairment charges
504

 

Tenant allowances received from landlords
8,424

 
17,097

Changes in operating assets and liabilities:
 
 
 
Accounts receivable—trade
(1,207
)
 
(22,696
)
Accounts receivable—other
(8,071
)
 
(8,277
)
Merchandise inventories
(155,969
)
 
(203,893
)
Income tax receivable
(1,356
)
 

Prepaid expenses and other assets
1,240

 
5,626

Accounts payable
84,699

 
94,207

Customer deposits
11,278

 
10,443

Accrued liabilities
27,375

 
23,979

Deferred rent
(4,099
)
 
(1,719
)
Other long-term liabilities
198

 
323

Net cash provided by (used in) operating activities
15,291

 
(18,898
)
Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(50,291
)
 
(74,996
)
Proceeds from sales of property and equipment
34

 
4

Net cash used in investing activities
(50,257
)
 
(74,992
)
Cash flows from financing activities:
 
 
 
Purchases of treasury stock
(30,041
)
 
(35,000
)
Proceeds from exercise of stock options
4,184

 
1,880

Excess tax benefits from stock-based compensation
585

 
419

Net increase in bank overdrafts
12,153

 
31,091

Net borrowings on line of credit

 
28,145

Net borrowings on inventory financing facility
4,322

 

Payment of financing costs

 
(88
)
Payments received on notes receivable-related parties
41

 

Net cash (used in) provided by financing activities
(8,756
)
 
26,447

Net decrease in cash and cash equivalents
(43,722
)
 
(67,443
)
Cash and cash equivalents
 
 
 
Beginning of period
59,244

 
72,794

End of period
$
15,522

 
$
5,351

Supplemental disclosure of cash flow information:
 
 
 
Interest paid
$
226

 
$
445

Income taxes paid
$
7,509

 
$
5,542

Capital expenditures included in accounts payable
$
873

 
$
1,013

See accompanying notes to condensed consolidated financial statements.

5


HHGREGG, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders’ Equity
Nine Months Ended December 31, 2012
(Dollars in thousands)
 
 
Common Shares
 
Preferred
Stock
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Note Receivable
For Common
Stock
 
Common Stock
Held in
Treasury
 
Total
Stockholders’
Equity
Balance at March 31, 2012
36,351,716

 
$

 
$
4

 
$
277,846

 
$
129,281

 
$
(41
)
 
$
(47,570
)
 
$
359,520

Net income
 
 
 
 
 
 
 
 
15,448

 
 
 
 
 
15,448

Payments received on notes receivable for issuance of common stock

 

 

 

 

 
41

 

 
41

Exercise of stock options and vesting of RSUs
545,406

 

 

 
4,184

 

 

 

 
4,184

Stock compensation expense

 

 

 
3,882

 

 

 

 
3,882

Excess tax benefit from stock-based compensation, net

 

 

 
500

 

 

 

 
500

Repurchase of common stock
(3,558,600
)
 

 

 

 

 

 
(30,041
)
 
(30,041
)
Balance at December 31, 2012
33,338,522

 
$

 
$
4

 
$
286,412

 
$
144,729

 
$

 
$
(77,611
)
 
$
353,534

See accompanying notes to condensed consolidated financial statements.


6


HHGREGG, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1)
Summary of Significant Accounting Policies
Description of Business
hhgregg, Inc. (the “Company” or “hhgregg”) is a specialty retailer of home appliances, televisions, computers, consumer electronics, home entertainment furniture, mattresses, fitness equipment and related services operating under the name hhgregg. As of December 31, 2012, the Company had 228 stores located in Alabama, Delaware, Florida, Georgia, Illinois, Indiana, Kentucky, Louisiana, Maryland, Mississippi, Missouri, New Jersey, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia, West Virginia, and Wisconsin. The Company operates in one reportable segment.
Interim Financial Information
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). In the opinion of the Company’s management, these unaudited condensed consolidated financial statements reflect all necessary adjustments, which are of a normal recurring nature, for a fair presentation of such data. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such SEC rules and regulations. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements of hhgregg and the notes thereto for the fiscal year ended March 31, 2012, included in the Company’s Annual Report on Form 10-K filed with the SEC on May 23, 2012.
The Company included amounts due to a third party financing company for use under an inventory financing facility, entered into during the first quarter of fiscal 2013, within accounts payable in the condensed consolidated balance sheet. The amounts due under the facility are not collateralized by the inventory purchased. Borrowings and payments on the inventory financing facility are classified as financing activities in the condensed consolidated statements of cash flows.
The consolidated results of operations, financial position and cash flows for interim periods are not necessarily indicative of those to be expected for a full year. The Company has made a number of estimates and assumptions relating to the assets and liabilities and the reporting of sales and expenses to prepare these unaudited condensed consolidated financial statements in conformity with GAAP. Actual results could differ from those estimates.
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of hhgregg and its wholly-owned subsidiary, Gregg Appliances, Inc. (“Gregg Appliances”). Gregg Appliances has a wholly-owned subsidiary, HHG Distributing LLC (“HHG Distributing”), which has no assets or operations.
 
(2)
Fair Value Measurements
The carrying amounts of cash and cash equivalents, accounts receivable—trade, accounts receivable—other, accounts payable and customer deposits approximate fair value because of the short maturity of these instruments. Any outstanding amount on the Company’s line of credit approximates fair value as the interest rate is market based.

Non-recurring Fair Value Measurements
The Company has property and equipment that are measured at fair value on a non-recurring basis when impairment indicators are present.  The assets are adjusted to fair value only when the carrying values exceed the fair values.  The categorization of the framework used to price the assets is considered a Level 3, due to the subjective nature of the unobservable inputs used to determine the fair value. Property and equipment fair values were derived using a discounted cash flow model to estimate the present value of net cash flows that the asset or asset group was expected to generate. The key inputs to the discounted cash flow model generally included our forecasts of net cash generated from revenue, expenses and other significant cash outflows, such as certain capital expenditures, as well as an appropriate discount rate. For the quarter ended December 31, 2012, the Company had one store whose profit contributions were significantly lower than the chain average due to decreased sales. This decrease in profit triggered the need for an impairment analysis to be performed in accordance with guidance on impairment of long-lived assets. The estimated undiscounted future cash flows generated by the store was less than its carrying amount, therefore the carrying amount of the assets related to this store were reduced to fair value.
    

7


The following table summarizes the fair value remeasurements recorded during the three and nine months ended December 31, 2012 (in millions):

 
Three and Nine Months Ended
 
December 31, 2012

Carrying value (pre-asset impairment)
$
0.9

Asset impairment loss (included in income from operations)
0.5

Remaining net carrying value
$
0.4


There was no asset impairment loss recognized for the three and nine months ended December 31, 2011.

(3)
Property and Equipment
Property and equipment consisted of the following at December 31, 2012 and March 31, 2012 (in thousands):
 
 
December 31,
2012
 
March 31,
2012
Machinery and equipment
$
25,181

 
$
23,340

Office furniture and equipment
174,030

 
146,924

Vehicles
2,269

 
2,286

Signs
18,946

 
16,969

Leasehold improvements
172,252

 
146,983

Construction in progress
4,001

 
11,429

 
396,679

 
347,931

Less accumulated depreciation and amortization
(172,653
)
 
(143,658
)
Net property and equipment
$
224,026

 
$
204,273

 
(4)
Net Income per Share
Net income per basic share is calculated based on the weighted-average number of outstanding common shares. Net income per diluted share is calculated based on the weighted-average number of outstanding common shares plus the effect of potential dilutive common shares. When the Company reports net income, the calculation of net income per diluted share excludes shares underlying outstanding stock options with exercise prices that exceed the average market price of the Company’s common stock for the period and certain options and restricted stock units with unrecognized compensation cost, as the effect would be antidilutive. Potential dilutive common shares are composed of shares of common stock issuable upon the exercise of stock options and restricted stock units. The following table presents net income per basic and diluted share for the three and nine months ended December 31, 2012 and 2011 (in thousands, except share and per share amounts):
 
 
Three Months Ended
 
Nine Months Ended
 
December 31,
2012
 
December 31,
2011
 
December 31,
2012
 
December 31,
2011
Net income (A)
$
17,389

 
$
22,478

 
$
15,448

 
$
27,743

Weighted average outstanding shares of common stock (B)
33,934,383

 
37,154,446

 
35,099,660

 
38,167,304

Dilutive effect of employee stock options and restricted stock units
50,730

 
449,321

 
68,837

 
355,403

Common stock and potential dilutive common shares (C)
33,985,113

 
37,603,767

 
35,168,497

 
38,522,707

Net income per share:
 
 
 
 
 
 
 
Basic (A/B)
$
0.51

 
$
0.60

 
$
0.44

 
$
0.73

Diluted (A/C)
$
0.51

 
$
0.60

 
$
0.44

 
$
0.72


8


Antidilutive shares not included in the net income per diluted share calculation for the three and nine months ended December 31, 2012 were 3,663,282. Antidilutive shares not included in the net income per diluted share calculation for the three and nine months ended December 31, 2011 were 2,113,159 and 2,556,725, respectively.

(5)
Inventories
Net merchandise inventories consisted of the following at December 31, 2012 and March 31, 2012 (in thousands):
 
 
December 31, 2012
 
March 31, 2012
Video
$
182,257

 
$
102,703

Appliances
138,612

 
88,191

Computing and mobile phones
49,866

 
41,615

Other
67,643

 
49,900

Net merchandise inventory
$
438,378

 
$
282,409

 
(6)
Debt
A summary of debt at December 31, 2012 and March 31, 2012 is as follows (in thousands):
 
 
December 31, 2012
 
March 31, 2012
Revolving Credit Facility
$

 
$

The capacity for borrowings under the Company’s Revolving Credit Facility is $300 million, subject to borrowing base availability. The facility expires on March 29, 2016.
Interest on borrowings (other than Eurodollar rate borrowings) is payable monthly at a fluctuating rate based on the bank’s prime rate or LIBOR plus an applicable margin. Interest on Eurodollar rate borrowings is payable on the last day of each “interest period” applicable to such borrowing or on the three month anniversary of the beginning of such “interest period” for interest periods greater than three months. The unused line rate is determined based on the amount of the daily average of the outstanding borrowings for the immediately preceding calendar quarter period (the “Daily Average”). For a Daily Average greater than or equal to 50% of the defined borrowing base, the unused line rate is 0.375%. For a Daily Average less than 50% of the defined borrowing base, the unused line rate is 0.50%. The Revolving Credit Facility is guaranteed by Gregg Appliances’ wholly-owned subsidiary, HHG Distributing, which has no assets or operations. The guarantee is full and unconditional and Gregg Appliances has no other subsidiaries.
Pursuant to the Revolving Credit Facility, the borrowing base is equal to the sum of (i) the lesser of (a) 90% of the net orderly liquidation value of all eligible inventory of Gregg Appliances or (b) 75% of the net book value of such eligible inventory and (ii) 90% of all commercial and credit card receivables of Gregg Appliances, in each case subject to customary reserves and eligibility criteria.
Under the Revolving Credit Facility, Gregg Appliances is not required to comply with any financial maintenance covenant unless “excess availability” is less than the greater of (i) 10.0% of the lesser of (A) the defined borrowing base or (B) the defined maximum credit or (ii) $20.0 million during the continuance of which event Gregg Appliances is subject to compliance with a fixed charge coverage ratio of 1.0 to 1.0.
Pursuant to the Revolving Credit Facility, if Gregg Appliances has “excess availability” of less than 12.5% of the lesser of (A) the defined borrowing base or (B) the defined maximum credit, it may, in certain circumstances more specifically described in the Revolving Credit Facility, become subject to cash dominion control.
The Revolving Credit Facility places limitations on the ability of Gregg Appliances to, among other things, incur debt, create other liens on its assets, make investments, sell assets, pay dividends, undertake transactions with affiliates, enter into merger transactions, enter into unrelated businesses, open collateral locations outside of the United States, or enter into consignment assignments or floor plan financing arrangements. The Revolving Credit Facility also contains various customary representations and warranties, financial and collateral reporting requirements and other affirmative and negative covenants. Gregg Appliances was in compliance with the restrictions and covenants in the Revolving Credit Facility at December 31, 2012.

9


As of December 31, 2012 and March 31, 2012, Gregg Appliances had no borrowings outstanding under the Revolving Credit Facility. As of December 31, 2012, Gregg Appliances had $4.9 million of letters of credit outstanding, which expire through December 31, 2013. As of March 31, 2012, Gregg Appliances had $5.2 million of letters of credit outstanding which expired by December 31, 2012. The total borrowing availability under the Revolving Credit Facility was $281.4 million and $175.0 million as of December 31, 2012 and March 31, 2012, respectively. The interest rate based on the bank’s prime rate as of December 31, 2012 and March 31, 2012 was 4.25%.
 
(7)
Stock-based Compensation
Stock Options
The following table summarizes the activity under the Company’s Stock Option Plans for the nine months ended December 31, 2012:
 
 
Number of Options
Outstanding
 
Weighted Average
Exercise Price
per Share
Outstanding at March 31, 2012
3,673,862

 
$
15.40

Granted
734,500

 
10.85

Exercised
(545,406
)
 
7.67

Canceled
(171,992
)
 
13.36

Expired
(209,337
)
 
15.22

Outstanding at December 31, 2012
3,481,627

 
$
15.76

During the nine months ended December 31, 2012, the Company granted options for 734,500 shares of common stock under the 2007 Equity Incentive Plan to certain employees and directors of the Company. The options vest in equal amounts over a three-year period beginning on the first anniversary of the date of grant and expire 7 years from the date of the grant. The fair value of each option grant is estimated on the date of grant and is amortized on a straight-line basis over the vesting period.
The weighted-average estimated fair value of options granted to employees and directors under the 2007 Equity Incentive Plan was $5.38 during the nine months ended December 31, 2012, using the Black-Scholes model with the following weighted average assumptions:
 
Risk-free interest rate
0.62% - 0.66

Dividend yield

Expected volatility
61.9
%
Expected life of the options (years)
4.5

Forfeitures
5.00
%

Time Vested Restricted Stock Units
During the nine months ended December 31, 2012, the Company granted 93,900 time vested restricted stock units (“RSUs”) under the 2007 Equity Incentive Plan to certain employees and directors of the Company. The time vested RSUs vest three years from the date of grant. Upon vesting, the outstanding number of time vested RSUs will be converted into shares of common stock. Time vested RSUs are forfeited if they have not vested before the employment of the participant terminates for any reason other than death or total permanent disability or certain other circumstances as described in such participant’s RSU agreement. Upon death or disability, the participant is entitled to receive a portion of the award based upon the period of time lapsed between the date of grant of the time vested RSU and the termination of employment. The fair value of time vested RSU awards is based on the Company’s stock price at the close of the market on the date of grant. The weighted average grant date fair value for the time vested RSUs issued during the nine months ended December 31, 2012 was $10.86.

10


The following table summarizes time vested RSU vesting activity for the nine months ended December 31, 2012:
 
Nonvested RSU’s
Shares
 
Weighted
Average
Grant-Date
Fair Value
Nonvested at March 31, 2012
72,900

 
$
14.17

Granted
93,900

 
10.86

Vested

 

Forfeited
(7,000
)
 
10.86

Nonvested at December 31, 2012
159,800

 
$
12.37

Performance-Based Restricted Stock Units
The Company awarded performance-based RSUs to certain officers of the Company during the nine months ended December 31, 2012. Under these awards, a number of performance-based RSUs will be granted to each participant based upon the attainment of the applicable bonus targets as approved by the Company’s Compensation Committee. Performance-based RSUs are earned shortly after the end of the performance measurement period and vest three years after grant date. If a participant is not employed by the Company on the date the performance-based RSUs vest, the performance-based RSUs are forfeited, except in the case of death or total permanent disability or certain other circumstances as described in such participant’s RSU agreement. Upon death or disability, the participant is entitled to receive a portion of the award based upon the period of time lapsed between the date of grant of the performance-based RSU and the termination of employment if the applicable performance target was achieved. Additionally, to the extent performance conditions are not met, performance-based RSUs are forfeited.
During the nine months ended December 31, 2012, the Company granted 92,820 performance-based RSUs, 6,300 of which have been forfeited as of December 31, 2012. The fair value of performance-based RSUs is based on the Company’s stock price at the close of the market on the date of grant and the probability that the established bonus targets will be achieved. The weighted average grant date fair value for the performance-based RSUs outstanding for the nine months ended December 31, 2012 was $10.86.

(8)
Stockholders’ Equity
The Company filed a universal shelf registration statement which was declared effective on July 14, 2009, registering $200 million principal amount of its securities, which may be sold by hhgregg under such registration statement at any time. Each of Gregg Appliances and HHG Distributing were additional registrants to the shelf registration statement because each may guaranty any debt securities that are issued by hhgregg under the shelf registration statement. Gregg Appliances and HHG Distributing are exempt from reporting under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), pursuant to Rule 12h-5 under the Exchange Act as: (i) hhgregg has no independent assets or operations; (ii) any guarantees of the subsidiary guarantors of debt securities issued under the shelf registration statement are full and unconditional and joint and several; and (iii) there are no subsidiaries of hhgregg other than Gregg Appliances and HHG Distributing.
 
(9) Share Repurchase Program
On May 24, 2012, the Company’s Board of Directors authorized a new share repurchase program ( the “May 2012 Program”) allowing the Company to repurchase up to $50 million of its common stock. The share repurchase program allows the Company to purchase its common stock on the open market or in privately negotiated transactions in accordance with applicable laws and regulations, and expires on May 23, 2013. The previous share repurchase program expired on May 19, 2012.

11


The following table shows the number and cost of shares repurchased during the nine months ended December 31, 2012 and 2011, respectively ($ in thousands):
 
 
Nine Months Ended
 
December 31, 2012
 
December 31, 2011
May 2012 Program
 
 
 
Number of shares repurchased
3,558,600

 

Cost of shares repurchased
$
30,041

 
$

May 2011 Program
 
 
 
Number of shares repurchased

 
2,714,289

Cost of shares repurchased
$

 
$
35,000

As of December 31, 2012, the Company had $20.0 million remaining under the May 2012 Program. The repurchased shares are classified as treasury stock within stockholders’ equity in the accompanying condensed consolidated balance sheets.


12


ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in five sections:
Overview
Critical Accounting Polices
Results of Operations
Liquidity and Capital Resources
Contractual Obligations
Our MD&A should be read in conjunction with the unaudited condensed consolidated financial statements and accompanying notes contained herein and the Consolidated Financial Statements for the fiscal year ended March 31, 2012, included in our latest Annual Report on Form 10-K, as filed with the SEC on May 23, 2012.
Overview
hhgregg, Inc. is a specialty retailer of home appliances, televisions, computers, consumer electronics, home entertainment furniture, mattresses, fitness equipment and related services operating under the name hhgregg. As of December 31, 2012, we operated 228 stores in Alabama, Delaware, Florida, Georgia, Illinois, Indiana, Kentucky, Louisiana, Maryland, Mississippi, Missouri, New Jersey, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia, West Virginia, and Wisconsin. References to fiscal years in this report relate to the respective 12 month period ended March 31. Our 2013 fiscal year is the 12 month period ending on March 31, 2013.
Throughout our MD&A, we refer to comparable store sales. Comparable store sales is comprised of net sales at stores in operation for at least 14 full months, including remodeled and relocated stores, as well as net sales for our e-commerce site. The method of calculating comparable store sales varies across the retail industry, and our method of calculating comparable store sales may not be the same as other retailers’ methods.
This overview section is divided into four sub-sections discussing our operating strategy and performance, store development strategy, business strategy and core philosophies and seasonality.
Operating Strategy and Performance. We focus the majority of our floor space, advertising expense and distribution infrastructure on the marketing, delivery and installation of a wide selection of premium video and appliance products. We display nearly 100 models of flat panel televisions and 350 major appliances in our stores with a broad assortment of models in the middle- to upper-end of product price ranges. Video and appliance sales comprised 74% and 76% of our net sales mix for the three months ended December 31, 2012 and 2011 and 78% and 79% of our net sales mix for the nine months ended December 31, 2012 and 2011, respectively.
We strive to differentiate ourselves through our customer purchase experience starting with a highly-trained, consultative commissioned sales force which educates our customers on the features and benefits of our products, followed by rapid product delivery and installation, and ending with post-sales support services. We carefully monitor our competition to ensure that our prices are competitive in the market place. Our experience has been that informed customers often choose to buy a more heavily-featured product once they understand the applicability and benefits of its features. Heavily-featured products typically carry higher average selling prices and higher margins than less-featured, entry-level price point products.
For fiscal 2013, we have implemented several initiatives designed to better position our business to drive additional traffic and increase sales. The first initiative is to continue to grow our appliance market share, which we expect to be our largest product category for fiscal 2013, ensuring that we are the “must shop” appliance retailer. Through the third fiscal quarter we have experienced six consecutive quarters of appliances comparable store sales increases. We expect to build off of this momentum through various efforts. First, we expect to drive improved close rates through changes in our in store operating model, thus driving market share gains. Next, we expect to increase our marketing effectiveness in the appliance category by increasing the focus on appliance specific marketing messaging. Additionally, we will continue to invest in enhancements to our delivery and installation capabilities and process. Finally, we will begin to supplement our appliance sales with additional, complimentary product offerings such as small appliances.

13



Our second initiative for fiscal 2013 is to stabilize profitability of the video category. As the video industry continues to be pressured by lower demand, we will continue to refine our product mix to focus on larger screen sizes.
Our third initiative for fiscal 2013 is to continue to develop our computing and mobile phone category. We will continue to enhance our offerings of computers, tablets, smart phones and peripherals, and promote them using new product displays. We also plan to continue to refine our services to ensure that customers are able to utilize the interconnectivity of their connected devices.
Our fourth initiative for fiscal 2013 is to increase the functionality of our e-commerce site. During fiscal 2012, we launched the new hhgregg.com website, which provided an updated look and feel, in addition to significant functionality enhancements. During fiscal 2013, we will continue to add new functionality, including shipping from stores, interaction of store associates with online shoppers through email functionality, and implementing an online financing application for online purchases. We will continue to refine our processes to make our multi-channel experience even better. Each rollout is expected to add greater site functionality, enhance inventory productivity, and subsequently improve the customer experience.
Our final initiative for fiscal 2013 is to improve our store productivity. The video industry has experienced top line and gross margin pressure, creating a challenge for store productivity. In an effort to balance the effect of the video category on our store productivity, we expanded the entertainment furniture and home fitness product categories chain-wide during the third quarter. We will continue to test product offerings that will further leverage in-home delivery, our knowledgeable sales force, and our private label credit card financing. We expect to make nearly one million in-home customer deliveries in the current fiscal year, thus finding new products which leverage in-home delivery is key. We also know that customers trust hhgregg to assist in selecting big box products, thus we believe these products will complement our business well by driving productivity of our sales force. We expect these product offerings to help build a product and service offering that is defensible against web-only retailers and national discounters. Finally, we will look for products that require financing and leverage the use of our private label credit card as approximately one-third of our business utilizes this form of payment.
Store Development Strategy. Over the past several years, we have adhered closely to a development strategy of adding stores to metropolitan markets in clusters to achieve rapid market share penetration and more efficiently leverage our distribution network, advertising and regional management costs. Our expansion plans include looking for new markets where we believe there is significant underlying demand for stores, typically in areas that have historically demonstrated above-average economic growth, strong household incomes and growth in new housing starts and/or remodeling activity. Our markets typically include most or all of our major competitors. We plan to continue to follow our approach of building store density in each major market and distribution area, which in the past has helped us to improve our market share and realize operating efficiencies.
Our near term expectations will be to significantly slow our store growth and shift the balance of our focus to sales and profit productivity in our existing store base. We plan to focus our energy and investments on enhancing our store productivity within our existing markets through growth in both new and existing businesses, as well as increasing our focus on large deliverable home products, along with growing our competencies with our e-commerce platform.
During the past nine months, we opened 20 new stores in line with our new store development schedule. Of the new store openings this fiscal year, 17 were opened in new markets or markets entered into last fiscal year, including Champaign and Chicago, Illinois; New Orleans, Louisiana; St. Louis, Missouri; Pittsburgh, Pennsylvania; and Green Bay and Milwaukee, Wisconsin.
Business Strategy and Core Philosophies. Our business strategy is focused around offering our customers a superior customer purchase experience. From the time the customers walk in the door, they experience a well-designed, customer-friendly store. Our stores are brightly lit and have clearly distinguished departments that allow our customers to find what they are looking for. We greet and assist our customers with our highly-trained consultative sales force, who educate the customers about the different product features.
We believe our products are rich in features and innovations and are ever-changing. We believe that customers find it helpful to have someone explain the features and benefits of a product as this assistance allows them the opportunity to buy the product that most closely matches their needs. We follow up on the customer purchase experience by offering same-day delivery on many of our products and in-home installation service.

14


While we believe many of our product offerings are considered essential items by our customers, other products and certain features are viewed as discretionary purchases. As a result, our results of operations are susceptible to a challenging macro-economic environment. Factors such as changes in consumer confidence, unemployment, consumer credit availability and the condition of the housing market have negatively impacted our core product categories and added volatility to our overall business. As consumers show a more cautious approach to purchases of discretionary items, customer traffic and spending patterns continue to be difficult to predict. By providing a knowledgeable consultative sales force, delivery capabilities, credit offerings and expanded product offerings, we believe we offer our customers a differentiated value proposition.
The consumer electronics industry depends on new product innovations to drive sales and profitability. Innovative, heavily-featured products are typically introduced at relatively high price points. Over time, price points are gradually reduced to drive consumption. Accordingly, there has been consistent price compression in flat panel televisions for equivalent screen sizes over the past few years. As new technology has not kept demand constant, the industry has seen falling demand, gross margin rates, and average selling price declines. Over the past few months, we have proactively shifted our sales mix of televisions towards larger screen sizes with higher profit margins, which has resulted in lost market share in the video category, as we shifted our focus away from smaller screen size televisions. In future quarters, we will continue to try and find a more favorable mix of product offerings in the video category in order to maximize profit margins without significant loss of market share.
Other consumer electronics categories have also experienced demand pressure. In many cases cameras, camcorders, mp3 players, and GPS devices have been replaced by the use of smart phones. As such, we continue to shift our product mix away from these categories and more into the computing and mobile phone category. In our fiscal third quarter, we rolled out an expanded offering of tablet and hand held consumer products.
In addition to testing new products in existing categories, we have also expanded into new product categories that fit our core competencies, including home entertainment furniture and fitness equipment. We will continue to refine our assortment in these categories as we learn more about their success in our stores.
We also are testing additional credit offerings for our consumers. As over one-third of our sales today are done on the hhgregg private label credit card, we want to be able to expand our consumer base to allow new consumers to shop our stores. We expect to add supplemental credit programs that offer additional credit offerings to our consumers. We expect these programs will be non-recourse to the Company through the use of third party solutions, similar to our current third party credit offering.
Retail appliance sales are highly correlated to the housing industry and housing turnover. As more people purchase existing homes in the market, appliance sales tend to trend upward. Conversely, when demand in the housing market declines, appliance sales traffic is also negatively impacted. The appliance industry has benefited greatly from increased innovation in energy efficient products. While these energy efficient products typically carry a higher average selling price than traditional products, they save the consumer significant dollars in annual energy savings. Average unit selling prices of major appliances are not expected to change dramatically in the foreseeable future.
Seasonality. Our business is seasonal, with a higher portion of net sales and operating profit realized during the quarter that ends December 31 due to the overall demand for consumer electronics during the holiday shopping season. Appliance revenue is impacted by seasonal weather patterns, but is less seasonal than our electronics business and helps to offset the seasonality of our overall business.

Critical Accounting Policies
We describe our critical accounting policies and estimates in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the fiscal year ended March 31, 2012 in our latest Annual Report on Form 10-K filed with the SEC on May 23, 2012. There have been no significant changes in our critical accounting policies and estimates since the end of fiscal 2012.


15


Results of Operations
Operating Performance. The following table presents selected unaudited condensed consolidated financial data (in thousands, except share amounts, per share amounts, and store count data):
 
 
Three Months Ended
 
Nine Months Ended
  
December 31,
 
December 31,
(unaudited)
2012
 
2011
 
2012
 
2011
Net sales
$
799,635

 
$
829,546

 
$
1,877,127

 
$
1,879,603

Net sales % (decrease) increase
(3.6
)%
 
26.9
%
 
(0.1
)%
 
19.7
 %
Comparable store sales % (decrease) increase (1)
(9.7
)%
 
3.9
%
 
(8.3
)%
 
(1.2
)%
Gross profit as a % of net sales
27.3
 %
 
27.2
%
 
28.7
 %
 
28.4
 %
SG&A as a % of net sales
17.4
 %
 
17.0
%
 
20.4
 %
 
19.8
 %
Net advertising expense as a % of net sales
4.8
 %
 
4.8
%
 
5.2
 %
 
4.8
 %
Depreciation and amortization expense as a % of net sales
1.3
 %
 
1.1
%
 
1.6
 %
 
1.3
 %
Income from operations as a % of net sales
3.7
 %
 
4.5
%
 
1.4
 %
 
2.5
 %
Net interest expense as a % of net sales
0.1
 %
 
0.1
%
 
0.1
 %
 
0.1
 %
Net income
$
17,389

 
$
22,478

 
$
15,448

 
$
27,743

Net income per diluted share
$
0.51

 
$
0.60

 
$
0.44

 
$
0.72

Weighted average shares outstanding—diluted
33,985,113

 
37,603,767

 
35,168,497

 
38,522,707

Number of stores open at the end of period
228

 
208

 
 
 
 
 
(1) 
Comprised of net sales at stores in operation for at least 14 full months, including remodeled and relocated stores, as well as net sales for our e-commerce site.
Net income was $17.4 million for the three months ended December 31, 2012, or $0.51 per diluted share, compared with net income of $22.5 million, or $0.60 per diluted share, for the comparable prior year period. For the nine months ended December 31, 2012, net income was $15.4 million, or $0.44 per diluted share, compared with net income of $27.7 million, or $0.72 per diluted share for the comparable prior year period. The decrease in net income for the three month period was the result of a comparable store sales decrease of 9.7% and an increase in SG&A expense as a percentage of net sales, partially offset by the accretive impact of the net addition of 20 stores during the past 12 months and an increase in gross profit as a percentage of net sales. The decrease in net income for the nine month period was the result of a comparable store sales decrease of 8.3%, an increase in net advertising expense as a percentage of net sales and an increase in SG&A expense as a percentage of net sales, partially offset by the accretive impact of the net addition of 20 stores during the past 12 months and an increase in gross profit as a percentage of net sales.
Net sales for the three months ended December 31, 2012 decreased 3.6% to $799.6 million from $829.5 million in the comparable prior year period. The decrease in net sales for the three month period was the result of a comparable store sales decrease of 9.7%, partially offset by the net addition of 20 stores during the past 12 months. Net sales for the nine months ended December 31, 2012 decreased 0.1% to $1.877 billion from $1.880 billion in the comparable prior year period. The decrease in net sales for the nine month period was attributable to a comparable store sales decrease of 8.3%, partially offset by the net addition of 20 stores during the past 12 months.

16


Net sales mix and comparable store sales percentage changes by product category for the three and nine months ended December 31, 2012 and 2011 were as follows:
 
 
Net Sales Mix Summary
 
Comparable Store Sales Summary
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
 
2012
 
2011
Appliances
35
%
 
30
%
 
42
%
 
36
%
 
6.1
 %
 
6.8
 %
 
4.4
 %
 
0.9
 %
Video
39
%
 
46
%
 
36
%
 
43
%
 
(24.6
)%
 
(4.8
)%
 
(21.7
)%
 
(8.1
)%
Computing and mobile phones (1)
14
%
 
11
%
 
11
%
 
9
%
 
16.2
 %
 
91.4
 %
 
13.7
 %
 
61.1
 %
Other (2)
12
%
 
13
%
 
11
%
 
12
%
 
(15.2
)%
 
(7.1
)%
 
(16.7
)%
 
(8.3
)%
Total
100
%
 
100
%
 
100
%
 
100
%
 
(9.7
)%
 
3.9
 %
 
(8.3
)%
 
(1.2
)%
 
(1) 
Primarily consists of computers, mobile phones and tablets.
(2) 
Primarily consists of accessories, audio, fitness equipment, furniture, mattresses and personal electronics.
The decrease in comparable store sales for the three months ended December 31, 2012 was driven primarily by a decrease in net sales in the video and other categories, partially offset by an increase in net sales in the appliance and computing and mobile phones categories. The video category comparable store sales decline was driven by a double digit decrease in unit demand partially offset by a single digit increase in average selling prices, largely resulting from our strategy of offering fewer entry level models. The decrease in comparable store sales for the other category was primarily a result of double digit comparable store sales decreases in cameras, camcorders, small electronics and mattresses, partially offset by sales from the furniture and fitness equipment categories. The appliance category increase in comparable store sales was driven by an increase in both the average selling price and units sold. The growth in the computing and mobile phones category was led by increased demand for tablets, partially offset by a decline in mobile phones.
Three Months Ended December 31, 2012 Compared to Three Months Ended December 31, 2011
Gross profit margin, expressed as gross profit as a percentage of net sales, increased slightly for the three months ended December 31, 2012 to 27.3% from 27.2% for the comparable prior year period. The increase was largely due to increases in gross profit margin rates in the appliance and video categories, partially offset by decreases in gross profit margin rates in the computing and mobile phone and other categories. The appliance category was favorably impacted by a continued mix shift to higher efficiency products which generate higher gross margin rates. The increase in the video category gross margin rate was largely due to a favorable mix of larger LED model screen sizes, which generate higher gross margin rates than smaller screen LCD models. The computing and mobile phone category gross margin rate decrease was due to a decline in the gross margin rate of mobile phones, while the other category gross margin rate was pressured by declines in the gross margin rate of accessories.
SG&A expense, as a percentage of net sales, increased 47 basis points for the three months ended December 31, 2012 compared to the prior year period. The increase in SG&A as a percentage of net sales was largely a result of increases in occupancy costs as a percentage of net sales due to the deleveraging effect of the net sales decline in addition to an increase in home delivery expenses as a percentage of net sales due to a higher sales mix of deliverable product. This increase was partially offset by decreases in other SG&A accounts as a result of cost control measures.
Net advertising expense, as a percentage of net sales, increased 8 basis points during the three months ended December 31, 2012 compared to the prior year period. While the Company reduced its gross advertising spend from the prior year, the slight increase as a percentage of net sales was driven largely by the deleveraging effect of the net sales decline.
Depreciation expense, as a percentage of net sales, increased 25 basis points for the three months ended December 31, 2012 compared to the prior year period. The increase as a percentage of net sales was primarily due the capital spend associated with the 20 new stores opened during the past 12 months and the deleveraging effect of the net sales decline.
Our effective income tax rate for the three months ended December 31, 2012 increased to 39.1% from 37.8% in the comparable prior year period. The increase in the effective income tax rate is primarily the result of federal income tax credits recognized in fiscal 2012 under the Hiring Incentives to Restore Employment Act of 2010. These credits are no longer available in fiscal 2013.

17


Nine Months Ended December 31, 2012 Compared to Nine Months Ended December 31, 2011
Gross profit margin, expressed as gross profit as a percentage of net sales, increased approximately 36 basis points for the nine months ended December 31, 2012 to 28.7% from 28.4% for the comparable prior year period. The increase was primarily due to an increase in gross profit margin in the appliances, video and other categories, partially offset by a decline in the computing and mobile phones category. The appliance category was favorably impacted by a continued mix shift to higher efficiency products which generate higher gross margin rates. The increase in the video category gross margin rate was largely due to a favorable mix of larger LED model screen sizes, which generate higher gross margin rates than smaller screen LCD models. The computing and mobile phone category gross margin rate decrease was due to a decline in the gross margin rate of mobile phones, while the other category gross margin rate was pressured by declines in the gross margin rate of accessories.
SG&A expense, as a percentage of net sales, increased approximately 68 basis points for the nine months ended December 31, 2012, compared to the prior year period. The increase in SG&A as a percentage of net sales was largely a result of increases in occupancy costs as a percentage of net sales due to the deleveraging effect of the comparable store sales decline, increases in employee wage and benefit expenses due to increased health insurance costs, and an increase in home delivery expenses as a percentage of net sales due to a higher sales mix of deliverable product. This increase was partially offset by slight decreases in other SG&A accounts as a result of cost control measures.
Net advertising expense, as a percentage of net sales, increased approximately 43 basis points during the nine months ended December 31, 2012, compared to the prior year period. The increase as a percentage of net sales was driven largely by the sales deleverage of our comparable store sales decline.
Depreciation expense, as a percentage of net sales, increased 29 basis points for the nine months ended December 31, 2012 compared to the prior year period. The increase as a percentage of net sales was primarily due the capital spend associated with the 20 net new stores opened during the past 12 months and the deleveraging effect of the comparable store sales decline.
Our effective income tax rate for the nine months ended December 31, 2012 increased to 38.6% from 38.4% in the comparable prior year period. The increase in the effective income tax rate for the nine month period is primarily the result of federal income tax credits recognized in fiscal 2012 under the Hiring Incentives to Restore Employment Act of 2010.  These credits are no longer available in fiscal 2013.  This was partially offset by a charge to reduce deferred tax assets which increased the income tax expense recognized in the prior year period.  The reduction in the deferred state income tax rate in the comparable prior year period was the result of a scheduled reduction in Indiana's corporate income tax rate beginning July 1, 2012.
Liquidity and Capital Resources
The following table presents a summary on a consolidated basis of our net cash (used in) provided by operating, investing and financing activities (dollars are in thousands):
 
 
December 31,
2012
 
December 31,
2011
Net cash provided by (used in) operating activities
$
15,291

 
$
(18,898
)
Net cash used in investing activities
(50,257
)
 
(74,992
)
Net cash (used in) provided by financing activities
(8,756
)
 
26,447

Our liquidity requirements arise primarily from our need to fund working capital requirements and capital expenditures. We make capital expenditures principally to fund our expansion strategy, which includes, among other things, investments in new stores and new distribution facilities, remodeling and relocation of existing stores, as well as information technology and other infrastructure-related projects that support our expansion.
We opened 20 new stores during fiscal 2013. In addition, we plan to continue to invest in our infrastructure, including management information systems and distribution capabilities, as well as incur capital remodeling and improvement costs. We expect capital expenditures, net of sale and leaseback proceeds and tenant allowances from landlords, for fiscal 2013 store openings and relocations to be approximately $45.0 million. Capital expenditures for fiscal 2013 will be funded through cash and cash equivalents, borrowings under our Revolving Credit Facility and tenant allowances from landlords.

18


Cash Provided by (Used in) Operating Activities. Net cash provided by (used in) operating activities primarily consists of net income as adjusted for increases or decreases in working capital and non-cash charges such as depreciation, asset impairment, deferred taxes and stock compensation expense. Cash provided by (used in) operating activities was $15.3 million and $(18.9) million for the nine months ended December 31, 2012 and 2011, respectively. The increase in cash provided by operating activities is primarily due to a decrease in our net investment in merchandise inventories (merchandise inventories less accounts payable) and the net change in our other current operating assets and liabilities, offset by the decrease in cash received from landlords for tenant allowances due to opening less stores in the current period compared to the prior period. The net change in other current operating assets and liabilities was primarily a result of differences in timing of customer sales and vendor payments.
Cash Used In Investing Activities. Net cash used in investing activities was $50.3 million and $75.0 million for the nine months ended December 31, 2012 and 2011, respectively. The decrease in cash used in investing activities is due to less purchases of property and equipment associated with the opening of new stores. In the nine months ended December 31, 2012, we opened 20 new stores compared to 42 stores in the nine months ended December 31, 2011.
Cash (Used In) Provided by Financing Activities. Net cash (used in) provided by financing activities was ($8.8) million for the nine months ended December 31, 2012 compared to $26.4 million for the nine months ended December 31, 2011. The decrease is due to a decrease in funds provided by net borrowings on our line of credit of $28.1 million, a decrease in funds provided by bank overdrafts of $18.9 million, offset by a decrease in funds used for treasury stock repurchases of $5.0 million, and net borrowings on an inventory financing facility entered into during the current year of $4.3 million.
Revolving Credit Facility. The capacity for borrowings under the Company’s Revolving Credit Facility is $300 million, subject to borrowing base availability. The facility expires on March 29, 2016.
Interest on borrowings (other than Eurodollar rate borrowings) is payable monthly at a fluctuating rate based on the bank’s prime rate or LIBOR plus an applicable margin. Interest on Eurodollar rate borrowings is payable on the last day of each “interest period” applicable to such borrowing or on the three month anniversary of the beginning of such “interest period” for interest periods greater than three months. The unused line rate is determined based on the amount of the daily average of the outstanding borrowings for the immediately preceding calendar quarter period (the “Daily Average”). For a Daily Average greater than or equal to 50% of the defined borrowing base, the unused line rate is 0.375%. For a Daily Average less than 50% of the defined borrowing base, the unused line rate is 0.50%. The Revolving Credit Facility is guaranteed by Gregg Appliances’ wholly-owned subsidiary, HHG Distributing, which has no assets or operations. The guarantee is full and unconditional and Gregg Appliances has no other subsidiaries.
Pursuant to the Revolving Credit Facility, the borrowing base is equal to the sum of (i) the lesser of (a) 90% of the net orderly liquidation value of all eligible inventory of Gregg Appliances or (b) 75% of the net book value of such eligible inventory and (ii) 90% of all commercial and credit card receivables of Gregg Appliances, in each case subject to customary reserves and eligibility criteria.
Under the Revolving Credit Facility, Gregg Appliances is not required to comply with any financial maintenance covenant unless “excess availability” is less than the greater of (i) 10.0% of the lesser of (A) the defined borrowing base or (B) the defined maximum credit or (ii) $20.0 million during the continuance of which event Gregg Appliances is subject to compliance with a fixed charge coverage ratio of 1.0 to 1.0.
Pursuant to the Revolving Credit Facility, if Gregg Appliances has “excess availability” of less than 12.5% of the lesser of (A) the defined borrowing base or (B) the defined maximum credit, it may, in certain circumstances more specifically described in the Revolving Credit Facility, become subject to cash dominion control.
The Revolving Credit Facility places limitations on the ability of Gregg Appliances to, among other things, incur debt, create other liens on its assets, make investments, sell assets, pay dividends, undertake transactions with affiliates, enter into merger transactions, enter into unrelated businesses, open collateral locations outside of the United States, or enter into consignment assignments or floor plan financing arrangements. The Revolving Credit Facility also contains various customary representations and warranties, financial and collateral reporting requirements and other affirmative and negative covenants. Gregg Appliances was in compliance with the restrictions and covenants in the Revolving Credit Facility at December 31, 2012.

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As of December 31, 2012 and March 31, 2012, Gregg Appliances had no borrowings outstanding under the Revolving Credit Facility. As of December 31, 2012, Gregg Appliances had $4.9 million of letters of credit outstanding which expire through December 31, 2013. As of March 31, 2012, Gregg Appliances had $5.2 million of letters of credit outstanding which expired by December 31, 2012. The total borrowing availability under the Revolving Credit Facility was $281.4 million and $175.0 million, as of December 31, 2012 and March 31, 2012, respectively. The interest rate based on the bank’s prime rate as of December 31, 2012 and March 31, 2012 was 4.25%.
Long Term Liquidity. Anticipated cash flows from operations and funds available from our Revolving Credit Facility, together with cash on hand, should provide sufficient funds to finance our operations for the foreseeable future. As a normal part of our business, we consider opportunities to refinance our existing indebtedness, based on market conditions. Although we may refinance all or part of our existing indebtedness in the future, there can be no assurances that we will do so. Changes in our operating plans, lower than anticipated sales, increased expenses, acquisitions or other events may require us to seek additional debt or equity financing. There can be no guarantee that financing will be available on acceptable terms or at all. Additional debt financing, if available, could impose additional cash payment obligations, additional covenants and operating restrictions.
Contractual Obligations
There have been no significant changes in our contractual obligations since the end of fiscal 2012. See our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the fiscal year ended March 31, 2012 in our latest Annual Report on Form 10-K filed with the SEC on May 23, 2012 and our Quarterly Report on Form 10-Q filed with the SEC on August 2, 2012 for additional information regarding our contractual obligations.


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Forward-Looking Statements
Some of the statements in this document constitute “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our business’ or our industry’s actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by any forward-looking statements. Such statements include, in particular, statements about our plans, strategies, prospects, changes, outlook and trends in our business and the markets in which we operate; customer preferences; the impact of our marketing efforts, including our appliance category; the impact of competition on prices; refinements to our product mix and to customer services; the impact of big box product offerings; efforts to increase the use of our private label credit card and supplemental credit programs; how we entice discretionary purchases; shifts in product mix of consumer electronics and entertainment furniture and fitness equipment; investments in our delivery and installation capabilities; the success of our general initiatives and initiatives in our video category and strategies to offset declines in that category; increases in our appliance category market share; changes in our store operating model to improve close rates and drive market share; variations and enhancements of our product offerings, including complimentary product offerings; roll out and timing of our expanded offering of tablets and hand held consumer products; updates and refinements to our multi-channel experience, including our e-commerce site and timing; the number of in-house deliveries; the impact of our initiatives to drive sales; our store development strategy; our expansion plans into new markets; steps to enhance store productivity in existing markets; the impact in our customer purchase experience; predictions around customer spending patterns; factors impacting our gross profit rate; impact of consumer demand and pricing pressures on certain products; outlook for sales of major appliances, including price changes; the seasonality of our business; our income tax rate; plans to refinance our indebtedness or seek additional financing; plans regarding new store openings and investment in our infrastructure; the impact of litigation; and our expected capital expenditures found under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “could,” “would,” “should,” “expect,” “plan,” “anticipate,” “intend,” “tends,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of those terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially because of market conditions in our industry or other factors. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our latest Annual Report on Form 10-K filed with the SEC on May 23, 2012 and the Risk Factors set forth in our Annual Report on Form 10-K filed with the SEC on May 23, 2012 and in our Quarterly Report on Form 10-Q filed with the SEC on November 2, 2012. The forward-looking statements are made as of the date of this document and we assume no obligation to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements.


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ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk
In addition to the risks inherent in our operations, we are exposed to certain market risks, including interest rate risk.
As of December 31, 2012, our debt was comprised of our Revolving Credit Facility. Interest on borrowings under our Revolving Credit Facility is payable monthly at a fluctuating rate based on the bank’s prime, LIBOR, or Eurodollar rates plus an applicable margin. As of December 31, 2012, we had no outstanding borrowings on our Revolving Credit Facility.
 
ITEM 4.
Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer), as appropriate to allow timely decisions regarding required disclosure. We have established a Disclosure Committee, consisting of certain members of management, to assist in this evaluation. Our Disclosure Committee meets on a quarterly basis and more often if necessary.
Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act), as of December 31, 2012. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2012, our disclosure controls and procedures were effective.
Changes in Internal Control over Financial Reporting
During the fiscal quarter ended December 31, 2012, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Part II.
Other Information
ITEM 1.
Legal Proceedings
We are engaged in various legal proceedings in the ordinary course of business and have certain unresolved claims pending. The ultimate liability, if any, for the aggregate amounts claimed cannot be determined at this time. However, management believes, based on the examination of these matters and experiences to date, that the ultimate liability, if any, in excess of amounts already provided for in the unaudited condensed consolidated financial statements is not likely to have a material effect on our consolidated financial position, results of operations or cash flows.
 
ITEM 1A.
Risk Factors
There have been no material changes to the risk factors set forth in the section entitled “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on May 23, 2012, except for the risk factor described on Form 10-Q filed with the SEC on November 2, 2012. The risks disclosed in our Annual Report on Form10-K and Quarterly Report on Form 10-Q are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and operating results.
 
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth the information with respect to repurchases of our common stock for the three months ended December 31, 2012 (in thousands, except share and per share amounts):
 
Period
Total Number of
Shares Purchased
 
Average Price Paid
Per Share
 
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs (1)
 
Approximate
Maximum Dollar Value
of Shares that May Yet
Be  Purchased Under
the Plans or Programs
(1)
October 1, 2012 to October 31, 2012

 

 

 
30,550

November 1, 2012 to November 30, 2012
1,284,089

 
8.25

 
1,284,089

 
19,959

December 1, 2012 to December 31, 2012

 

 

 
19,959

Total
1,284,089

 
8.25

 
1,284,089

 
19,959

 
(1)
All of the above repurchases were made on the open market at prevailing market rates plus related expenses under our May 2012 Program, which authorized the repurchase of up to $50 million of our common stock. The May 2012 Program was authorized by our Board of Directors on May 24, 2012 and expires on May 23, 2013.


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ITEM 6.
Exhibits
 
 
 
 
31.1
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
31.2
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
32.1**
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
32.2**
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
 
101
The following materials from hhgregg, Inc.’s Form 10-Q for the quarterly period ended December 31, 2012, formatted in an XBRL Interactive Data File: (i) Condensed Consolidated Statements of Income-unaudited; (ii) Condensed Consolidated Balance Sheets-unaudited; (iii) Condensed Consolidated Statements of Cash Flows-unaudited; (iv) Condensed Consolidated Statement of Stockholders’ Equity-unaudited; and (v) Notes to Condensed Consolidated Financial Statements-unaudited.*
 
*
Users of the XBRL-related information in Exhibit 101 of this Quarterly Report on Form 10-Q are advised, in accordance with Regulation S-T Rule 406T, that this Interactive Data File is deemed not filed or as a part of a registration statement for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise not subject to liability under these sections. The financial information contained in the XBRL-related documents is unaudited and not reviewed.
**
This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (15 U.S.C. 78r), or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference in any filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
HHGREGG, INC.
 
 
 
 
By:
/s/ Jeremy J. Aguilar
 
 
Jeremy J. Aguilar
Chief Financial Officer
(Principal Financial Officer)
 
Dated: January 31, 2013

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