Another Disaster in Consumer Electronics Retail (HGG, BBY)

Just last week, Best Buy Co. Inc. (NYSE: BBY) reported total sales were down 0.4% and same-store sales were down 1.4%. Best Buy’s problem came primarily from its international division, but that was not hhgregg’s problem, because the company has no international stores.

The big issue for hhgregg was a 24.6% drop in TV sales. The company’s CEO said:

Declining industry demand for flat screen televisions along with broadened distribution of large-screen televisions negatively impacted overall store traffic and video category sales. During the quarter, we placed less emphasis on lower-end promotional televisions to bolster gross margin rates, which led to an increase in video category and total company gross margin rates.

Essentially what hhgregg decided to do was cede the low-end TV market to big-box retailers like Wal-Mart Stores Inc. (NYSE: WMT), Target Corp. (NYSE: TGT) and Costco Wholesale Corp. (NASDAQ: COST). That was clearly a costly decision.

hhgregg estimates adjusted earnings per share (EPS) of $0.52 for the third quarter, compared with a consensus estimate of $0.59. Total sales are now estimated at $799.6 million, far below the consensus estimate of $845.3 million.

The company now estimates that full fiscal year 2013 adjusted EPS will total $0.70 to $0.80, down from previous guidance of $0.90 to $1.05. The consensus estimate had been $0.93. Same-store sales are forecast to fall by 7.5% to 8.5% compared with previous guidance for a decline of 45 to 6%. Total sales are now forecast to be flat to up 1% compared with a previous estimate for growth of 3% to 6%.

Two interesting points here. First, the emphasis on TVs at last week’s Consumer Electronics Show was no accident. The level of high-definition TV penetration demands a new standard, and the Ultra HD (4K) answers that call. Second, if hhgregg wants to remain viable, it will have to shift its emphasis to other products, which the company says it will do:

For the fourth fiscal quarter, we expect to continue to drive comparable store sales increases and market share gains in the appliance and computing and mobile phone categories. However, we anticipate that the industry wide declines in the video category will continue.

hhgregg’s shares are inactive in premarket trading this morning, having closed at $7.89 on Friday, in a 52-week range of $5.84 to $13.12. The company’s shares are lightly traded, about 290,000 a day on average, so today’s report will not move the stock much.

But Best Buy’s shares are down 1.3% in premarket trading this morning, at $14.02 in a 52-week range of $11.20 to $27.95. Best Buy still remains a good bet for a takeover by founder Richard Schulze. No matter how poorly the sector performs, that takeover possibility trumps everything else.