The hhgregg at Simon Property Group’s Arundel Marketplace in Hanover, Md., is surrounded by quality retail neighbors, including Michael’s and PetsMart. They make good company, faring relatively well in a rapidly changing business. That particular hhgregg, however, is on another list of stores, one that is less illustrious. It is one of the 88 store locations that the electronics retailer plans to close as part of a companywide turnaround effort.
Four days after announcing its plans to scale back its store count, hhgregg filed for Chapter 11 bankruptcy protection to resolve about $80 million in debt. For hhgregg, the recent developments are a reversal from its bid since 2009 to expand from a husband and wife company mostly associated with Indiana into a recognizable national brand.
After closing stores that it feels are less profitable, hhgregg will be left with 132 locations.
“The markets we will remain in are the right ones for our customers and our business model,” Robert J. Riesbeck, hhgregg's president and CEO, said in a statement. “Our team is dedicated to moving forward and being a profitable 132-store, multi-regional chain where we will continue to be a dominant force in appliances, electronics and home furnishings.”
Industry experts expected this turn of events, saying that the company’s current problems are mostly attributable to fierce competition from peers, as well as a growing consumer reliance on online shopping to find the best pricing. Of course, it didn’t help that hhgregg did not create compelling reasons for consumers to buy its washing machines and televisions, as opposed to buying from any other electronics retailer.
“It wasn’t a surprise,” says Robert Gamzeh, managing director at Triple Net Investment Group, a commercial real estate services firm headquartered in Falls Church, Va. “They have been struggling with what’s been happening—sales via the Internet and competition from other brick-and-mortar operators.”
Assembling a national chain
In August 2008 hhgregg celebrated a milestone in the opening of its 100th store in Mishawaka, Ind. The event also marked the doubling of its store count from the previous four years, and occurred in a year when it increased its store presence to its ninth state.
By the end of 2015, hhgregg had peaked at around 227 stores in 20 states. By that time, it had also created an e-commerce portal. It achieved a 21.5 percent increase in same-store sales in its second fiscal quarter of 2015.
At first, hhgregg’s real estate expansion strategy seemed to make sense. It acquired locations from other electronics retailers who were struggling amidst a recession and the near collapse of the nation’s financial system.
Yet there was an underlying issue that went unaddressed, according to Gamzeh. As hhgregg expanded, it did not effectively distinguish itself from other companies selling consumer electronics and home appliances—a critical mistake at a time when online bargain shopping began to erase brand loyalty among cost-conscious consumers.
“They originally were a small family-owned business,” says Jan Kniffen, CEO of J. Rogers Kniffen Worldwide Enterprises, an equity research and financial and management consulting
firm specializing in retail. “They had the strategy that worked with them, of personal service with the small base of stores. Then they went public, and they decided they had to be something they were not in the past—they needed to grow.”
Forgiving their debts
One aspect of hhgregg’s debt is pegged to its commercial real estate properties, many of which are net leased and are pegged to CMBS loans. In terms of the sale of properties, hhgregg locations price between $2 million and $5 million, with a cap rate of between 6 percent and 7 percent, according to Triple Net Investment Group.
On the debt side, credit rating agencies believe that of the hhgregg properties that are slated to close, no more than 18 related loans in about 10 CMBS transactions would be adversely affected by the announced closures, according to reports from both Moody’s Investors Service and Morningstar Credit Ratings.
At press time hhgregg had one stalking horse bidder and was said to be taking additional bids until April 21. Yet even if the company attracts a buyer and emerges from its debt reorganization plan with a fresh start, it will still face daunting industry problems, Kniffen says. He estimates that by 2030 50 percent of all retail sales, excluding those at bars and restaurants, would be conducted online. Today that e-commerce figure stands at 15 percent, and in 2009 it was 2.5 percent.
“That’s how fast it is going,” Kniffen says. “This is an industry problem, and not just an electronics problem.”