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HHGREGG, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) 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, 2014, included in our latest Annual Report on Form 10-K, as filed with the SEC on May 20, 2014. Overview hhgregg is an appliance, electronics and furniture retailer that is committed to providing customers with a truly differentiated purchase experience through superior customer service, knowledgeable sales associates and the highest quality product selections. Founded in 1955, hhgregg is a multi-regional retailer with 228 brick-and-mortar stores in 20 states that also offers market-leading global and local brands at value prices nationwide via hhgregg.com. References to fiscal years in this report relate to the respective 12 month period ended March 31. Our 2015 fiscal year is the 12 month period ending on March 31, 2015. 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, 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 appliance, consumer electronics and home furniture products. We carry approximately 350 models of major appliances in stock, and a large selection of TVs, as well as, computers, consumer electronics, furniture, mattresses, and tablets. Appliance and consumer electronics sales comprised 87% and 88% of our net sales mix for the three and six months ended September 30, 2014, respectively, and 86% of our net sales mix for each of the three and six months ended September 30, 2013. 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. In recent quarters we have experienced a decline in our overall comparable store sales, primarily driven by declines in the consumer electronics and computers and tablets categories as a result of industry pressures and market share losses. The market share losses have primarily come in products that are smaller in size and easier to ship, which have increasingly seen larger portions of industry sales made online. In response to these declines, we have developed four major initiatives for fiscal 2015. These include continuing to redefine our sales mix, further differentiating our customer experience, enhancing our e-commerce capabilities and launching new customer facing technologies. We also developed a "purpose" statement, "To inspire and delight our customers with a truly differentiated purchase experience to help bring their homes to life." We believe that our fiscal 2015 initiatives support this "purpose", and that the success of these strategies will result in consumers recognizing hhgregg as a "home products" retailer. Our first initiative for fiscal 2015 is redefining our sales mix through a continued investment and focus on the appliance, and furniture categories while stabilizing the consumer electronics category. In August 2014 we attained the highest overall 11-------------------------------------------------------------------------------- Table of Contents ranking amongst appliance retailers in the J.D. Power Appliance Retailer Customer Satisfaction StudySM, and in October 2014 we attained the highest overall ranking amongst appliance retailers in the J.D. Power Appliance Retailer Website Study SM. While negative this quarter, our comparable store sales in the appliance category have consistently performed above the total chain average, and this category has proven to be the cornerstone of our business. The appliance industry continues to be more promotional as more retailers continue to attempt to capture market share. The changes in the market place are driving us to slightly modify our go to market strategies in future periods to gain market share. We will continue to test and learn with new strategies and offerings to gain market share in our markets. Late in the quarter we began offering free instant delivery on appliance purchases over $497. Historically, we offered free delivery, but through a mail in rebate. Based on offerings in the marketplace, we believe that it is necessary to offer the free instant delivery. While this will negatively impact our gross margins, we believe it is table stakes in the market to compete effectively. In addition, to continue to drive growth, we are enhancing our displays of complete kitchen solutions, providing a differentiated product assortment based on geography and demographics, more than doubling our current number of five Fine Lines locations, and enhancing our special order capabilities. Also, we will continue to place a greater emphasis on the appliances category in our branding and advertisement messages. The U.S. Census Bureau's data on New Residential Construction shows that 2014 U.S. Housing Start-Up's experienced a 9% increase for the twelve month period ended August 31, 2014 over the prior year comparable period. Additionally, according to the U.S. Department of Commerce - Bureau of Economic Analysis, personal consumption expenditures for home appliances increased 0.7% from $45.5 billion in 2013 to $45.8 billion in 2014. We expect that the appliance industry will experience increases in demand as the U.S. housing market and general economy continues to improve. While the new residential construction data indicates that the housing market has improved year over year, there is no guarantee that the improvement in the housing market will continue and will not be impacted in the future by factors such as rising interest rates. During our previous fiscal year we rolled out an expanded offering of furniture products. In the current year we are in the process of transitioning our furniture assortment by increasing the number of brands that we sell, resulting in a greater assortment of furniture merchandise at a variety of price-points, which we believe better match our customers' taste. While we do not expect to dedicate any incremental floor space to this new selection of furniture at this time, we will continue to optimize our floor space that is already dedicated to furniture. Also, as it relates to the home products category, we will no longer carry fitness products in our stores. The consumer electronics category will continue to be an important category for us during this fiscal year and beyond. During fiscal 2015, we will seek to stabilize consumer electronics sales through further investing in large screen sizes and OLED technology and an expansive selection of ultra HD/4K products. Despite the new technology and innovations in this category, we expect to continue to see negative comparable store sales within consumer electronics, driven by continued pressure in the video category. During fiscal 2015 we plan to continue to develop and enhance our credit offerings. Over the past 12 months we have continued to improve the penetration rate of our non-recourse credit offerings, including our private label credit card, secondary and "lease to own" finance offerings, by approximately 540 basis points to nearly 40%. We continue to encourage the use of the card, through unique benefits such as in store payment options, reward offers and extended financing options. Over the past two years we have grown our credit offerings, beginning with the roll out of a "lease to own" option in fiscal 2013, and the roll out of a secondary finance offering in fiscal 2014, both through third party providers and non-recourse to our business. We are continuing to modify our credit offerings to best meet the ongoing needs of our customers. We believe that continuing to enhance our credit offerings will generate greater brand loyalty, higher average sales per transaction, and increased premium service plan sales. Our second initiative for fiscal 2015 is continuing to enhance and differentiate our customer experience. hhgregg provides customers an educated sales force to assist them in making informed decisions about their purchase. We are continuing to refine our selling techniques to embrace technology, and utilize omni-channel strategies to better connect with our customer base in store. Our goal is to better serve and engage our customers by providing a truly differentiated shopping and purchase experience. Additionally, our goal will be to eliminate the types of issues that most often frustrate customers who are buying large products for their homes. We plan to establish consumers' trust in this experience through a very transparent online price comparison tool that is available inside of the store. We believe that the key to unlocking our brand potential is through a differentiated purchase experience. Our third initiative for fiscal 2015 is enhancing our e-commerce capabilities to provide our customers a truly omni-channel shopping experience. This will allow them to move seamlessly across the various mediums including store, web, mobile, social and call center. During fiscal 2015, we are investing in infrastructure upgrades, additional web-application capabilities, enhancing our mobile application and adding a greater selection to our product assortment. During fiscal 2014, we implemented an "expanded aisle" concept which tripled our product assortment online by offering many products that are not available in stores. During fiscal 2015 we plan to grow our current partner base by seeking opportunities with other vendors, and adding an in-store kiosk where our associates can assist our customers in purchasing these products. Additional enhancements include improving our nationwide delivery model, adding additional payment options for efficient checkout, and 12-------------------------------------------------------------------------------- Table of Contents making personalization updates such as profile improvements, recommendations and communication. We are pleased with the continued growth in e-commerce as we have seen nearly 62% sales growth during the fiscal year. We know that many consumers start their research online and we want to continue to make hhgregg.com an advantage for our brand. Our fourth initiative for fiscal 2015 is to launch new customer facing technologies. During the fiscal second quarter of 2015 we completed the roll out of our new point of sale system. The new system provides operational improvements, customer service improvements and a streamlined checkout process. The new point of sale system not only has new digital capabilities, but expedites the check-out process. Additionally, we implemented a new delivery tracking system during the first quarter of fiscal 2015. The goal of the system is to not only provide more efficient delivery routes, but more importantly, to provide an integrated tool that allows for communication before, during and after the delivery process. We understand that having a delivery come to a customer's house may require a customer to leave work or disrupt their schedule. With that in mind, we will be deploying a solution that allows constant communication between the delivery team and the customer. This will help ensure that we provide the customer with a seamless, on-schedule, best in class home delivery experience. 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 innovation. 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 focus our product assortment on big box items requiring in-home delivery and installation in order to utilize service offerings. We follow up on the customer purchase experience by offering delivery capabilities on many of our products and in-home installation service. 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. Retail appliance sales are 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 are negatively impacted. The appliance industry has benefited 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. For the three and six months ended September 30, 2014, we generated 53% and 55%, respectively, of total product sales from the sale of home appliances. 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 in recent years without a widely accepted innovation in technology to offset this compression. As new technology has not been sufficient to keep demand constant, the industry has seen falling demand, gross margin rate declines, and average selling price declines. For the three and six months ended September 30, 2014, we generated 34% and 33%, respectively of total product sales from the sale of consumer electronics and computers and tablets, compared to 36% and 35%, respectively, in the three and six months ended September 30, 2013. During fiscal 2014 we expanded our offerings within the home products category by adding room settings, additional mattresses and dinette sets. We will continue to refine our assortment of furniture by expanding our selection from one brand to several brands, and we plan to expand our offerings in the home products category during fiscal 2015. 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 consumer electronics business and helps to offset the seasonality of our overall business. 13-------------------------------------------------------------------------------- Table of Contents 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, 2014 in our latest Annual Report on Form 10-K filed with the SEC on May 20, 2014. There have been no significant changes in our critical accounting policies and estimates since the end of fiscal 2014. 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 Six Months Ended September 30, September 30, (unaudited) 2014 2013 2014 2013 Net sales $ 505,862 $ 568,315 $ 978,154 $ 1,093,237 Net sales % (decrease) increase (11.0 )% (3.3 )% (10.5 )% 1.5 % Comparable store sales % decrease (1) (11.4 )% (6.2 )% (10.9 )% (3.0 )% Gross profit as a % of net sales 29.1 % 29.6 % 29.4 % 29.5 % SG&A as a % of net sales 23.5 % 21.2 % 24.1 % 21.9 % Net advertising expense as a % of net sales 6.5 % 5.4 % 6.2 % 5.2 % Depreciation and amortization expense as a % of net sales 2.1 % 1.8 % 2.2 % 2.0 % (Loss) income from operations as a % of net sales (3.2 )% 1.2 % (3.1 )% 0.5 % Net interest expense as a % of net sales 0.1 % 0.1 % 0.1 % 0.1 % Net (loss) income $ (10,384 ) $ 3,679 $ (20,653 ) $ 2,419 Net (loss) income per diluted share $ (0.37 ) $ 0.12 $ (0.73 ) $ 0.08 Weighted average shares outstanding-diluted 28,394,164 31,240,325 28,419,417 31,427,112 Number of stores open at the end of period 228 228 (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 loss was $10.4 million for the three months ended September 30, 2014, or $0.37 per diluted share, compared with net income of $3.7 million, or $0.12 per diluted share, for the comparable prior year period. For the six month period ended September 30, 2014, net loss was $20.7 million, or $0.73 per diluted share, compared with net income of $2.4 million, or $0.08 per diluted share for the comparable prior year period. The decrease in net income for the three months ended September 30, 2014 was largely due to a comparable store sales decrease of 11.4%. The decrease in net income for the six month period was largely the result of a decrease in comparable store sales of 10.9%. Net sales for the three months ended September 30, 2014 decreased 11.0% to $505.9 million from $568.3 million in the comparable prior year period. The decrease in net sales for the three month period was primarily the result of a comparable store sales decrease of 11.4%. Net sales for the six months ended September 30, 2014 decreased 10.5% to $978.2 million from $1,093.2 million in the comparable prior year period. The decrease in net sales for the six month period was primarily the result of a comparable store sales decrease of 10.9%. The Company experienced a 59% and 62% increase in comparable sales on its e-commerce site for the three and six months ended September 30, 2014, respectively. 14-------------------------------------------------------------------------------- Table of Contents Net sales mix and comparable store sales percentage changes by product category for the three and six months ended September 30, 2014 and 2013 were as follows: Net Sales Mix Summary Comparable Store Sales Summary Three Months Ended September Three Months Ended 30, Six Months Ended September 30, September 30, Six Months Ended September 30, 2014 2013 2014 2013 2014 2013 2014 2013 Appliances 53 % 50 % 55 % 51 % (5.8 )% 2.6 % (3.9 )% 5.0 % Consumer electronics (1) 34 % 36 % 33 % 35 % (16.0 )% (20.4 )% (17.2 )% (18.0 )% Computers and tablets 7 % 9 % 7 % 9 % (33.7 )% (7.2 )% (31.6 )% 1.8 % Home products (2) 6 % 5 % 5 % 5 % 5.0 % 69.1 % 2.5 % 75.8 % Total 100 % 100 % 100 % 100 % (11.4 )% (6.2 )% (10.9 )% (3.0 )% (1) Primarily consists of televisions, audio, personal electronics and accessories. (2) Primarily consists of furniture and mattresses. The decrease in comparable store sales for the three months ended September 30, 2014 was driven primarily by a decrease in comparable store sales in the appliances, consumer electronics and computers and tablets categories, partially offset by an increase in the home products category. The decrease in comparable store sales within the appliance category for the three month period was driven by a decrease in units sold. The decrease in comparable stores sales for the consumer electronics category for the three month period was due primarily to a double digit decline in units sold within the video category offset slightly by an increase in average selling price, which was driven by an increase in sales of larger screen and more premium featured televisions. The decrease in comparable store sales for the computers and tablets category for the three month period was driven by a decrease in demand for computers and tablets as well as a decrease in the average selling prices for computers and tablets and the exit from the contract-based mobile phone business. The increase in comparable store sales within the home products category was driven by an increase in sales of mattresses, sofas and dinette sets. Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013 Gross profit margin, expressed as gross profit as a percentage of net sales, decreased for the three months ended September 30, 2014 to 29.1% from 29.6% for the comparable prior year period. The decrease was due to lower gross profit margin rates in all categories except the consumer electronics category, partially offset by a favorable sales mix shift to product categories with higher gross profit margin rates. During the quarter, we began offering free delivery on certain appliances at the time of sale. Historically this was provided via a mail-in-rebate. While this change had a negative impact on gross profit as a percentage of net sales for the three months ended September 30, 2014, we believe this is in line with the competitive market place. SG&A expense, as a percentage of net sales, increased 236 basis points for the three months ended September 30, 2014 compared to the prior year period. The increase in SG&A as a percentage of net sales was largely a result of a 65 basis point increase in wage and benefit expense, a 55 basis point increase in occupancy costs and increases in other SG&A accounts, largely due to the deleveraging effect of the net sales decline. Net advertising expense, as a percentage of net sales, increased 116 basis points during the three months ended September 30, 2014 compared to the prior year period. The increase as a percentage of net sales was primarily due to the deleveraging effect of the net sales decline and less vendor support due to programs being based on a percentage of sales. Depreciation expense, as a percentage of net sales, increased 31 basis points for the three months ended September 30, 2014 compared to the prior year period. The increase as a percentage of net sales was primarily due to the deleveraging effect of the net sales decline, coupled with capital expenditures placed in service. The effective income tax rate for the three months ended September 30, 2014 decreased to 37.5% from 39.3% in the comparable prior year period. The decrease in the effective income tax rate is primarily the result of a non-cash charge to income tax expense related to stock options that expired during the current quarter. Due to the pretax loss for the quarter, this charge to income tax expense reduced our overall income tax benefit recorded for the quarter and as a result, decreased our effective income tax rate. Six Months Ended September 30, 2014 Compared to Six Months Ended September 30, 2013 Gross profit margin, expressed as gross profit as a percentage of net sales, decreased for the six months ended September 30, 2014 to 29.4% from 29.5% for the comparable prior year period. The decrease was due to a decrease in gross profit margin 15-------------------------------------------------------------------------------- Table of Contents rates in all categories except the consumer electronics category, partially offset by a favorable sales mix shift to product categories with higher gross profit margin rates. During the second quarter, we began offering free delivery on certain appliances at the time of sale. Historically this was provided via a mail-in-rebate. While this change had a negative impact on gross profit as a percentage of net sales for the six months ended September 30, 2014, we believe this is in line with the competitive market place. SG&A expense, as a percentage of net sales, increased 222 basis points for the six months ended September 30, 2014 compared to the prior year period. The increase in SG&A as a percentage of net sales was largely a result of a 60 basis point increase in occupancy costs due to the deleveraging effect of the net sales decline, a 65 basis point increase in wage and benefit expense due to increased medical expense coupled with the deleveraging effect of the net sales decline and increases in other SG&A accounts due to the deleveraging effect of the net sales decline. Net advertising expense, as a percentage of net sales, increased 100 basis points during the six months ended September 30, 2014 compared to the prior year period. The increase as a percentage of net sales was primarily due to the deleveraging effect of the net sales decline and less vendor support due to programs being based on a percentage of sales. Depreciation expense, as a percentage of net sales, increased 22 basis points for the six months ended September 30, 2014 compared to the prior year period. The increase as a percentage of net sales was due to the deleveraging effect of the net sales decline. Our effective income tax rate for the six months ended September 30, 2014 decreased to 33.8% from 39.3% in the comparable prior year period. The decrease in the effective income tax rate is primarily the result of a non-cash charge to income tax expense related to stock options that expired during the six months ended September 30, 2014. Due to the pretax loss, this charge to income tax expense reduced our overall income tax benefit recorded and as a result, decreased our effective income tax rate. 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): Six Months Ended September 30, 2014 September 30, 2013 Net cash (used in) provided by operating activities $ (9,075 ) $ 30,690 Net cash used in investing activities (11,400 ) (14,032 ) Net cash provided by (used in) financing activities 12,868 (27,075 ) 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. During fiscal 2015, we plan to open one new store, relocate several stores, downsize one store, add several Fine Lines to existing stores, and move one regional distribution center. In addition, we plan to continue to invest in our infrastructure, including management information systems, e-commerce and distribution capabilities, as well as incur capital remodeling and improvement costs. Capital expenditures for fiscal 2015 will be funded through cash and cash equivalents, borrowings under our Amended Facility described below and tenant allowances from landlords. 16-------------------------------------------------------------------------------- Table of Contents Cash (Used in) Provided by Operating Activities. Net cash (used in) provided by operating activities primarily consists of net income as adjusted for increases or decreases in working capital and non-cash charges such as depreciation, deferred taxes and stock compensation expense. Cash (used in) provided by operating activities was $(9.1) million and $30.7 million for the six months ended September 30, 2014 and 2013, respectively. The increase in cash used in operating activities is primarily due to the net loss experienced in the current year compared to the net income experienced in the previous comparable 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 $11.4 million and $14.0 million for the six months ended September 30, 2014 and 2013, 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 and management's intent to reduce spending. In the six months ended September 30, 2014, we opened one new store, relocated two stores, relocated a distribution center and began construction for the Fine Lines additions described earlier in this section. In the six months ended September 30, 2013, we relocated three stores and began construction for one store relocation and one new store. Cash Provided by (Used In) Financing Activities. Net cash provided by (used in) financing activities was $12.9 million and $(27.1) million for the six months ended September 30, 2014 and 2013, respectively. The decrease in cash used in financing activities is primarily due to a decrease in funds used for treasury stock repurchases of $23.2 million, a decrease in funds provided by bank overdrafts of $11.5 million, and an increase in net borrowings on an inventory financing facility of $9.4 million, partially offset by a decrease in funds provided by the exercise of stock options of $5.1 million. Amended Facility. On July 29, 2013, Gregg Appliances, Inc. ("Gregg Appliances"), our wholly-owned subsidiary, entered into Amendment No. 1 to its Amended and Restated Loan and Security Agreement (the "Amended Facility") to increase the maximum credit available to $400 million from $300 million, subject to borrowing base availability, and extend the term of the facility to expire on July 29, 2018. 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 based on the average quarterly excess availability. 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 was 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 was 0.25%. For a Daily Average less than 50% of the defined borrowing base, the unused line rate was 0.375%. The Amended 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 Amended Facility, the borrowing base is equal to the sum of (i) 90% of all commercial accounts, (ii) 90% of all commercial and credit card receivables of Gregg Appliances and (iii) 90% of the net recovery percentage of the eligible inventory multiplied by the value of such eligible inventory consistent with the most recent appraisal of such eligible inventory, in each case subject to customary reserves and eligibility criteria. Under the Amended 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 Amended 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 Amended Facility, become subject to cash dominion control. The Amended 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 Amended 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 of the Amended Facility at September 30, 2014. As of September 30, 2014 and March 31, 2014, Gregg Appliances had no borrowings outstanding under the Amended Facility and $5.3 million of letters of credit outstanding, which expire through December 31, 2014. The total borrowing availability under the Amended Facility was $186.0 million and $169.5 million as of September 30, 2014 and March 31, 2014, respectively. The interest rate based on the bank's prime rate as of September 30, 2014 and March 31, 2014 was 3.75%. 17-------------------------------------------------------------------------------- Table of Contents Inventory Financing Facility. We have an inventory financing facility, which is a $20 million unsecured credit line that is non-interest bearing and is not collateralized with the inventory purchased. The facility includes customary covenants as well as customary events of default. Long Term Liquidity. Anticipated cash flows from operations and funds available from our Amended Facility, together with cash on hand, should provide sufficient funds to finance our operations for the next 12 months. 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 We entered into lease commitments totaling approximately $6.8 million over their respective lease terms during the six months ended September 30, 2014. There have been no other material changes in our contractual obligations during the period covered by this report. See our "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the fiscal year ended March 31, 2014 in our latest Annual Report on Form 10-K filed with the SEC on May 20, 2014 and our Quarterly Report on Form 10-Q filed with the SEC on July 31, 2014 for additional information regarding our contractual obligations. 18-------------------------------------------------------------------------------- Table of Contents Cautionary Note Regarding 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 fiscal 2015 initiatives; the impact of enhanced in store kitchen and built-in displays on appliance sales; the impact of competition on prices; refinements to our product mix and to customer services and service offerings, including in our appliance category and on our website and mobile site; expectations around the U.S. housing market and general economy; efforts to increase the use of our private label credit card and supplemental credit programs; the impact of our enhanced credit offerings and non-recourse nature of such offerings; how we entice discretionary purchases; shifts in product mix of consumer electronics and home products including, furniture, fitness equipment, and computers and tablets; investments in our delivery and installation capabilities; the success of our general initiatives and initiatives in our consumer electronics category and strategies to offset declines in that category; variations and enhancements of our product offerings; updates and refinements to our omni-channel experience, including our e-commerce site and timing and the impact of our new point of sale system; the impact of our initiatives to drive sales; our long term and near term store development and expansion strategies; steps to slow store growth and enhance store productivity in existing markets; the impact of 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; factors impacting the decrease in consumer electronics sales, gross margin rate declines, and average selling price declines for the industry, including, the steps taken by retailers in the current period to further compress prices of televisions, insufficient innovations in consumer electronics to maintain demand, and the obsolescence of certain devices which have been replaced by smart phones; the seasonality of our business; our income tax rate; plans to refinance our indebtedness or seek additional financing and ability to secure additional debt financing; plans regarding new store openings and investment in our infrastructure; the impact of litigation; and our expected capital expenditures and expected sources of funding 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 20, 2014 and the Risk Factors set forth in our Quarterly Report on Form 10-Q filed with the SEC on July 31, 2014, and our Annual Report on Form 10-K filed with the SEC on May 20, 2014. 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. 19-------------------------------------------------------------------------------- Table of Contents |