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h.h. gregg: sizing up the Sears opportunity
Disclaimer
Caption Management, LLC (“Caption”) is the investment manager for the private investment fund Caption
Partners, LP. These opinions and views are those of Caption only, and not of any of our affiliates or of third
parties. These views are subject to change without notice at any time subsequent to the date of issue.
Nothing herein is intended to constitute investment advice to any third party. Caption has an economic
interest in the price movement of h.h. gregg. We may from time to time have positions (long or short) in the
securities of h.h. gregg or derivatives thereof, and may make purchases and sales of such securities and
derivatives at any time. While the information presented herein is believed to be reliable, no representation or
warranty is made concerning the accuracy of any data presented.
These materials shall not constitute an offer to sell or the solicitation of an offer to buy any interests in
Caption. Such an offer to sell or solicitation of an offer to buy interests may only be made pursuant to a
definitive subscription agreement between Caption and an investor.
2
Executive summary
3
Section 1: Background
• The U.S. appliance market is growing while Sears Holdings Corp. (NASDAQ: SHLD), the largest appliance
retailer, is struggling, closing stores, and losing market share
• h.h. gregg has underperformed because of its exposure to the declining consumer electronics industry and
in response has shifted its business towards selling more appliances
Section 2: Our pitch
• Investing in h.h. gregg is the best way to get exposure to the decline of Sears
• Consensus estimates for h.h. gregg are too low and in the event that Sears closings accelerate, estimates
are way too low
Section 3: Suggestions to management
• h.h. gregg should aggressively take advantage of this market share opportunity by resuming unit growth,
accelerating share repurchases, and optimizing its capital structure
h.h. gregg’s (NYSE: HGG) stock price is undervalued by the market. This analysis outlines the case for why
there is significant upside to consensus earnings estimates. We conclude with some suggestions that we
believe would best position h.h. gregg for the future while maximizing shareholder value
4
Section 1: Background
U.S. appliance market overview
5
• Goldman Sachs estimates the U.S. appliance market grew 4% in 2013 and expects 4% growth in 2014.1
Whirlpool, the largest appliance manufacturer, projects 5-7% growth in U.S. appliance shipments in 2014 2
• Sears is the largest appliance retailer, with 29% of the market in 2013, down from 40% in 2003. Sears
managed to stabilize its market share from 2007 to 2012 before continuing to lose 3% in 20133
• Lowe’s, Home Depot, and Best Buy have benefited from Sears’ loss of market share, with most of their
gains coming before 2008
• Sears and h.h. gregg are more exposed to the appliance market than Lowe’s, Home Depot, and Best Buy
U.S. appliance market exposure (data from 2013)4,5 U.S. appliance market share3,5
SHLD
SHOSHGG
LOW
BBY
HD
0%
25%
50%
75%
2003 2008 2013
1. Goldman Sachs research note published on Jan 17, 2014 – “Secular challenges loom, new challenges emerge; down to Neutral” 2. WHR Q4 FY 2013 8-K on January 30, 2014 3. http://online.wsj.com/news/articles/SB10001424127887323665504579028371672070930 Note: Sears market share in WSJ includes both SHLD and SHOS stores 4. Credit Suisse research note published on Jan 15, 2014 – “Best Buy: Still Our Best Buy” 5. Recent 10-K’s and 10-Q’s for SHOS, HGG, SHLD, LOW, BBY, and HD; Caption estimates
0%
10%
20%
30%
40%
50%
60%
70%
SHOS HGG SHLD LOW BBY HD
Ap
pli
an
ce
s s
ale
s a
s %
of
tota
l sa
les
Sears: background
6
• There are two separate, public companies that use the Sears name in the U.S.: Sears Holdings (SHLD) and
Sears Hometown and Outlet Stores (SHOS). SHOS was spun out of SHLD in October 2012
• Of Sears’ 29% U.S. market share in 2013, approximately 5% was held by SHOS and the rest by SHLD. As
of November 2, 2013, there were 1,239 SHOS stores and 785 Sears Full-line domestic stores that sold
appliances
• Sears is typically an anchor tenant in a suburban indoor mall. SHOS locations are much smaller, more
spread around the country, and usually target rural populations
Laguna Hills Mall – Laguna Hills, CA
Source: SHOS 10-K for FY 2012; SHOS 10-Q’s for Q1 2013, Q2 2013, Q3 2013; SHLD 10-Q for Q3 2013; http://online.wsj.com/news/articles/SB10001424127887323665504579028371672070930; http://m.simon.com/assets/mobile/mallmap/4665.gif
Sears: background
7
• Sears’ domestic EBITDA turned negative in FY
2013 – as did that of Kmart, also owned by SHLD.
Many believe SHLD’s value lies in real estate
(88.5M sq. ft. owned, 137.3M sq. ft. leased) and
other assets, including Sears Auto Center, Lands
End, Kenmore, and Craftsman
• The few sell-side analysts who cover SHLD are
negative:
– Credit Suisse: “The bulls continue to point to
the underlying asset values, but we end again
as we normally do with this question. If the
assets have so much value, why does SHLD
continue to operate given it is losing about
$1.2 billion per year through operations?”
– ISI: “SHLD would have a good incentive to file
for bankruptcy to break leases and attempt to
restructure the asset base.”
Select SHLD financial highlights
1. Same store sales (SSS) Source: SHLD 10-K’s for FY 2012, FY 2011; SHLD 10-Q’s for Q1 2013, Q2 2013, Q3 2013; Credit Suisse research note published on Jan 13, 2014 – “This Is Getting Serious; SHLD Running Out of Options”; ISI research note published on Nov 21, 2013 – “Transformations of This Scale are Challenging” Note: Historical Sears domestic SSS and EBITDA adjusted for SHOS spinoff
(USD in millions)
FY ending January FY 2011 FY 2012 FY 2013E
Sears domestic SSS1-3.0% -1.4% -4.3%
Sears domestic EBITDA -77 263 -140
SHLD operating cash flow -275 -303 -1,200
SHLD free cash flow -707 -681 -1,500
Sears: background
8
• SHLD has struggled in large part because of its
lack of investment in its stores. Even though SHLD
stores are the oldest among its competitors, SHLD
spends dramatically less than its competitors to
maintain its stores
• According to ISI, SHLD spends about $1.50/sq. ft.
in capital expenditures (capex) but needs to
spend $6-8/sq. ft. to maintain market share
• SHLD has responded to its decreases in traffic by
closing stores and plans to continue with more
closings
– “The consensus about decreased store traffic also
highlights another decision that has steered our work:
we very often need less space to serve our members
better and we may need fewer locations as well… And
quite a few, including us, are now reducing their
overall number of locations… There’s obviously no
single right size for any retailer. Other companies show
that it is possible to serve the American public
effectively and have a large and profitable business
with a smaller store base.” – Eddie Lampert, Sears
Chairman and CEO
Source: ISI research note published on Nov 21, 2013 – “Transformations of This Scale are Challenging”; http://blog.searsholdings.com/eddie-lampert/are-the-new-ideas-about-how-retail-is-changing-really-new/; HGG 10-K for FY 2013, HGG 10-Q’s for Q2 2014, Q2 2013; SHLD 10-K for FY 2012, SHLD 10-Q’s for Q3 2013, Q3 2012; LOW 10-K for FY 2012, LOW 10-Q’s for Q3 2013, Q3 2012; BBY 8-K for FY 2012, BBY 10-Q’s for Q3 2013, Q3 2012; HD 10-K for FY 2012, HD 10-Q’s for Q3 2013, Q3 2012
$0.0
$2.0
$4.0
$6.0
$8.0
$10.0
$12.0
BBY HD HGG LOW SHLD
Ca
pe
x /
sq
. ft
.
Capex / sq. ft. (trailing 12 months)
Source: AggData; Google Maps Engine Pro
Sears: store closings
9
• As SHLD struggled, the company increased the rate of store closings in 2011
• SHLD has closed 89 Sears Full-line stores since November 2011, reducing its total Full-line
unit count to 779 as of January 30, 2014
Sears Full-line closings from Nov-2011 through Jan-2014
The Sears Effect on competitors
10
• We consider three scenarios for a domestic appliance store sharing a market with Sears:
1. All Sears Full-line stores stay open and continue to have negative same store sales1
2. Sears closes some but not all Full-line stores in the market and the remaining stores
continue to have negative SSS1
3. Sears closes all Full-line stores in the market
• In the table below, we model The Sears Effect on appliance retailers competing with Sears.
We assume Sears’ market share losses will be distributed among its competitors proportional
to their existing share
Estimates for an appliance business directly competing with Sears
1. We assume an annual 5% decline in Sears Full-line same store appliance sales 2. Sears Full-line represents 24% market share and will lose ~1.2% market share with -5% SSS which represents a ~1.5% annual sales boost to each competitor 3. We assume ¼ of Sears stores close in each market. This reduces the effect of Sears’ -5% SSS to a ~1% annual sales boost to each competitor. A loss of ¼ of
Sears stores will result in a loss of ~6% market share which represents a one-time ~8% boost to each competitor 4. If all Sears Full-line stores close and 24% of market share goes away, each competitor will get a one-time ~31.5% boost to sales Source: Caption estimates; Goldman Sachs research note published on Jan 17, 2014 – “Secular challenges loom, new challenges emerge; down to Neutral”; Credit Suisse research note published on Jan 15, 2014 – “Best Buy: Still Our Best Buy”
Scenario 1 Scenario 2 Scenario 3
All Sears stores stay open Some Sears stores close All Sears stores close
Effect of Sears negative SSS 1.5% annual 2 1% annual 3 n/a
Effect of Sears closings n/a 8% 3 31.5% 4
Appliance market growth 4% annual 4% annual 4% annual
Total appliance sales growth 5.5% annual 8% + 5% annual 31.5% + 4% annual
h.h. gregg: background
• Operates as a specialty retailer of
appliances, consumer electronics,
computers, wireless products, and home
goods
• Has 228 stores in the eastern half of the
U.S., 60% of locations less than 5 years old,
strategically clustered in metropolitan areas
around centralized distribution centers
• Has been negatively impacted by the
commoditization of the consumer
electronics industry and the shift to online
commerce in that space
• Is shifting its focus to big ticket home goods
that consumers are reluctant to purchase
online – goods that often require advice,
credit, delivery and installation
11
HGG average unit volume (AUV) by category
Home products
Computing & wireless
Consumer electronics
Appliances
Source: HGG 10-Q’s for Q1 2013, Q2 2013, Q3 2013, Q4 2013, Q1 2014, Q2 2014, Q3 2014; Bloomberg consensus estimates as of January 30, 2014; Caption estimates
$0.0
$2.0
$4.0
$6.0
$8.0
$10.0
$12.0
$14.0
FY 2012 FY 2014E
AU
V (
$M
)
FY ending March 31st
h.h. gregg: background
12
• HGG had its IPO in 2007 and a secondary offering in 2009. The cash was used to open new
stores and to retire debt
• Once the company was debt-free, management began repurchasing shares
• At the end of calendar year 2012, the company decided to temporarily slow store openings
and focus on stabilizing the business before returning to growth mode
Summary of HGG’s use of cash Current ownership
1. Fully diluted shares outstanding (FDSO) Source: HGG 10-K’s for FY 2013, FY 2012, FY 2011; HGG 10-Q’s for Q1 2014, Q2 2014, Q3 2014; Bloomberg consensus estimates as of January 30, 2014; Caption estimates
Freeman Splogi & Co.
(private equity)46%
Management
11%
Float
43%
(USD in millions)
FY ending March 31st FY 2011 FY 2012 FY 2013 FY 2014E
Pay off debt $87.4 $0.0 $0.0 $0.0
Capex 59.9 83.1 54.0 27.0
Repurchase shares 0.0 47.6 48.2 50.0
Total $147.3 $130.7 $102.2 $77.0
Ending store count 173 208 228 228
Ending FDSO1 (M) 40.3 37.0 32.5 29.3
h.h. gregg: consensus estimates
13
• Wall Street analysts expect growth in
appliances to roughly offset declines in
consumer electronics
• Consensus estimates anticipate roughly flat
gross and operating margins
• 18 sell-side firms cover the stock with 2
buy, 14 hold, and 2 sell ratings
HGG consensus estimates
Source: Bloomberg consensus estimates as of January 30, 2014 – adjusted for stale estimates
FY ending March 31st FY 2014E FY 2015E FY 2016E
Same store sales (SSS) -6.3% -2.5% 0.0%
Store locations 228 233 238
Revenue ($M) $2,355 $2,290 $2,350
Gross margin 28.7% 28.7% 28.7%
Operating margin 0.9% 1.2% 1.2%
EPS $0.35 $0.50 $0.52
14
Section 2: Our pitch
Market opportunity: Sears’ decline is not priced into
HGG
15
• HGG is the best way to bet on a declining Sears, given HGG’s outsized exposure to
the appliance market and given that it competes with Sears at nearly all of its
locations
• HGG management understands the opportunities presented by Sears’ decline. Asked on
January 14, 2014, what it would be like if Sears exited his markets, CEO Dennis May said, “It
wouldn’t be icing on the cake, it would be a new cake.”
• The following slides provide a few examples of how h.h. gregg stores are positioned in close
proximity to Sears Full-line stores. Even though Sears has closed 10% of its domestic Full-line
stores since 2011, there is still a Sears near almost 100% of h.h. gregg locations
Source: AggData; http://www.hhgregg.com/store-locations; Caption estimates
Today Without Sears
Sears Full-line vs h.h. gregg in the Carolinas
16 Source: AggData; Google Maps Engine Pro; http://www.hhgregg.com/store-locations; http://www.gastongazette.com/news/business/sears-closing-cleveland-county-mall-store-1.258429; http://www.thestate.com/2014/01/09/3198579/shop-around-sears-to-close-harbison.html; http://chronicle.augusta.com/news/business/2014-01-22/aiken-malls-sears-store-close;
Sears Full-line vs h.h. gregg in Atlanta
17 Source: AggData; Google Maps Engine Pro; http://www.hhgregg.com/store-locations
Sears Full-line vs h.h. gregg in Chicago
18 Source: AggData; Google Maps Engine Pro; http://www.hhgregg.com/store-locations; http://www.chicagotribune.com/business/breaking/chi-sears-close-loop-flagship-20140121,0,6152367.story
Sears Full-line vs h.h. gregg in Baltimore/Washington
19 Source: AggData; Google Maps Engine Pro; http://www.hhgregg.com/store-locations; http://www.washingtonpost.com/business/capitalbusiness/sears-to-close-landover-store-in-march/2014/01/06/f9b80d3a-7722-11e3-af7f-13bf0e9965f6_story.html
Sears Full-line vs h.h. gregg in Cincinnati/Columbus
20 Source: AggData; Google Maps Engine Pro; http://www.hhgregg.com/store-locations
Sears Full-line vs h.h. gregg in Philadelphia
21 Source: AggData; Google Maps Engine Pro; http://www.hhgregg.com/store-locations
Sears Full-line vs h.h. gregg in Orlando/Tampa
22 Source: AggData; Google Maps Engine Pro; http://www.hhgregg.com/store-locations
Market opportunity: HGG relies less on consumer
electronics
23
• We believe investors still think of HGG as an electronics store where you can buy appliances.
In reality HGG is becoming an appliance store where you can buy electronics
• In our Scenario 1 (from slide 10) where Sears keeps stores open but continues to donate
market share, HGG will generate 53% of its revenue and 61% of its profits from
appliances in FY 2016, while consumer electronics will account for 31% of revenue and 22%
of profits
HGG revenue by segment – FY 2012 HGG revenue by segment – Scenario 1 FY 2016E
Source: HGG 10-K’s for FY 2013, FY 2012, FY 2011; HGG 10-Q’s for Q1 2014, Q2 2014, Q3 2014; Caption estimates
Appliances
37%
Consumer
electronics
52%
Computing
and wireless
9%
Home products
2%
Appliances
53%
Consumer electronics
31%
Computing
and wireless
10%
Home products
6%
Market opportunity: Sears will continue losing market
share
24
• We believe The Sears Effect is just starting.
Sears has lost only about 1% of
market share in appliances since 2008
• SHLD has another 24% of market share to
potentially lose
• Sears stores are old and poorly maintained.
SHLD is prioritizing conserving cash rather
than improving the shopping experience
• Credit Suisse estimates SHLD will lose 8%
of total appliance market share in 2014
• Although LOW, HD, and BBY will capture a
larger dollar amount of the Sears market
share loss, HGG is more exposed to
appliances and will see a much larger
impact to its bottom line
Sears appliance market share
?
Source: http://online.wsj.com/news/articles/SB10001424127887323665504579028371672070930; Credit Suisse research note published on Jan 15, 2014 – “Best Buy: Still Our Best Buy”
0%
5%
10%
15%
20%
25%
30%
35%
2008 2009 2010 2011 2012 2013 2014
Se
ars
ap
pli
an
ce
ma
rke
t sh
are
Market opportunity: consensus is underestimating
The Sears Effect on HGG
25
• We model HGG’s revenue for the following 3 scenarios:
1. All Sears Full-line stores stay open and continue to have negative same store sales1
2. Sears closes some but not all Full-line stores in every market and the remaining stores
continue to have negative SSS1
3. Sears closes all Full-line stores
• We assume the other major players in the market – LOW, HD, BBY, SHOS – also pick up
market share proportional to their existing share
HGG scenario analysis
1. We assume an annual 5% decline in Sears Full-line same store appliance sales 2. 11% represents two years of an annual 5.5% increase in appliance sales as outlined in slide 10 3. 18% represents two years of an annual 5% increase and a one-time 8% increase in appliance sales as outlined in slide 10 4. 40% represents two years of an annual 4% increase and a one-time 31.5% increase in appliance sales as outlined in slide 10 Source: Bloomberg consensus estimates as of January 30, 2014; Caption estimates
(USD in millions) Consensus Scenario 1 Scenario 2 Scenario 3
FY Ending March 31st FY 2014E FY 2016E FY 2016E FY 2016E FY 2016E
2-Year SSS
Appliances 8% 11% 2 18% 3 40% 4
Consumer electronics -20% -20% -20% -20%
Computing and wireless -4% -4% -4% -4%
Home products 45% 45% 45% 45%
Total 2-Year SSS -2% -1% 2% 13%
Number of stores 228 238 238 238 238
Revenue 2,355.2 2,350.3 2,384.2 2,463.2 2,711.6
Market opportunity: gross margins should increase as
revenue mix improves
26
• As HGG’s revenue shifts from consumer
electronics to appliances and other home
products, we expect gross margins to
increase
• Obvious question: Why have HGG gross
margins been almost flat the last three
years if this revenue shift is already
occurring?
• Our thinking: The company does not
disclose its segment margins, but we know
gross margins in consumer electronics have
been under significant pressure. Consumer
electronics margin declines have been offset
by the positive impacts of the revenue mix
shift towards appliances. As consumer
electronics become an even smaller part of
the overall business, we expect to see gross
margins improve
Estimated gross margins by segment
FY 2012 FY 2016E – Scenario 1
Source: HGG 10-K’s for FY 2013, FY 2012, FY 2011; HGG 10-Q’s for Q1 2014, Q2 2014, Q3 2014; Caption estimates
15%
20%
25%
30%
35%
40%
45%
Appliances Consumerelectronics
Computingand wireless
Homeproducts
HGGTotal
Gro
ss m
arg
in
Market opportunity: consensus estimates do not
reflect the potential upside from Sears’ decline
27
• We believe HGG can meaningfully beat consensus estimates, especially if Sears closings
accelerate
• In the table below we calculate the effect on HGG’s earnings for each of the 3 Sears scenarios
from slide 25
HGG scenario analysis
1. Assumes current rate of $48M per year share repurchases at $9.00 stock price Source: Bloomberg consensus estimates as of January 30, 2014; Caption estimates
(USD in millions) Consensus Scenario 1 Scenario 2 Scenario 3
FY Ending March 31st FY 2014E FY 2016E FY 2016E FY 2016E FY 2016E
Revenue 2,355.2 2,350.3 2,384.2 2,463.2 2,711.6
Gross profit 674.8 674.5 701.2 728.3 813.3
Gross margin 28.7% 28.7% 29.4% 29.6% 30.0%
SG&A 490.0 485.0 488.8 497.6 528.8
Advertising 121.5 118.0 118.0 118.0 118.0
D&A 43.0 43.5 43.5 43.5 43.5
Operating profit 20.3 28.0 51.0 69.2 123.0
Operating margin 0.9% 1.2% 2.1% 2.8% 4.5%
Interest 2.5 2.5 2.5 2.5 2.5
Taxes 7.0 10.1 19.2 26.4 47.6
Net income 10.8 15.5 29.3 40.4 72.9
FDSO 30.6 30.0 23.9 1 23.9 1 23.9 1
EPS $0.35 $0.52 $1.23 $1.69 $3.05
Quotes from CEO Dennis May
28
• “I also want to add, as we all know the marketplace is changing, the number one retailer out there – there
[are] things going on and we expect to really go out there and take advantage of that.” 1
• “We're going to be placing even greater emphasis on [appliances] moving forward, because it leverages our
home delivery capabilities, it leverages our sales force, it leverages credit. And we've got some great
investments we're going to be making in the upcoming year. Look for the company to allocate even more
advertising dollars around this business, shifting those from consumer electronics.” 2
• “We carry over 500 appliances in an h.h. gregg store. To put that in perspective, our average competitor is
between 200 and 220 appliances. So we have all the brands, all the assortments. We back that up with a
best-in-class sales force, an outstanding delivery and installation experience.” 2
1. Q3 FY 2014 earnings conference call on January 30, 2014 2. ICR Xchange on January 14, 2014 Source: http://files.shareholder.com/downloads/GREGG/2923553004x0x700302/2E90AF46-0584-4F3F-9180-B25EE8DDD86A/hh_September_Investor_Deck_9-5-13.pdf
29
Section 3: Suggestions to management
Suggestion #1 to HGG: resume unit growth
30
• Target new and existing markets for unit
growth where Sears has outsized market
share. New market possibilities include:
Long Island, Buffalo, Boston, Detroit,
Minneapolis and Kansas City
• The largest market share gains will likely
come in the next five years, according to
our analysis. Since it takes 6-18 months to
open a new unit, management needs to be
proactive in order to be well positioned for
market shifts
• We believe management should resume
opening 20-30 units per year. This will
increase capex from approximately $27
million in FY 2014 to $50 million per year
Source: HGG 10-K for FY 2013; AggData; http://www.hhgregg.com/store-locations; Google Maps Engine Pro
h.h. gregg and Sears Full-line store overlap
1. Straight-line average store count over the year and assumes new store productivity is 100% 2. Assumes repurchase rate of $70 million shares per year at $9.00 stock price 3. Caption’s target next twelve months multiple 4. 11% WACC according to Bloomberg as of January 30, 2014 discounted 1 year so that NTM multiple can be applied to FY 2016 figures Source: HGG 10-K’s for FY 2013, FY 2012, FY 2011; HGG 10-Q’s for Q1 2014, Q2 2014, Q3 2014; Bloomberg consensus estimates as of Jan 30, 2014; Caption estimates
Suggestion #2 to HGG: accelerate share repurchases
31
• We believe there is a significant disconnect between h.h. gregg’s share price and its future earnings
potential. Management should take advantage of the opportunity to aggressively repurchase shares at
current prices
• Instead of spending roughly $50 million annually on share repurchases, we believe management should
increase the rate of repurchases to $70 million per year for FY 2015 and FY 2016
HGG valuation analysis after 25 annual store openings, $70 million annual share repurchases, and $75 million debt
(USD in millions) Consensus Scenario 1 Scenario 2 Scenario 3
FY Ending March 31st FY 2014E FY 2016E FY 2016E FY 2016E FY 2016E
Number of stores1228 238 266 266 266
Revenue 2,355.2 2,350.3 2,664.7 2,753.0 3,030.6
Operating profit 20.3 28.0 51.1 71.5 131.6
Operating margin 0.9% 1.2% 1.9% 2.6% 4.3%
Net income 10.8 15.5 28.5 40.8 77.2
FDSO 30.6 30.0 19.1 2 19.1 2 19.1 2
EPS $0.35 $0.52 $1.49 $2.14 $4.04
FY 2016 P/E multiple313.0x 13.0x 13.0x
Discount rate411% 11% 11%
Implied stock price $17.25 $24.72 $46.76
Premium to 01/30/14 price of $9.00 69.5% 152.4% 397.3%
Suggestion #3 to HGG: optimize capital structure
32
• In order to support unit growth while continuing
to repurchase shares, we believe it’s reasonable
to add debt
• We don’t believe the company should be opposed
to using its low-interest asset-backed credit
facility
• Adding debt through the asset-backed revolver
that h.h. gregg already has in place has an after-
tax effective interest rate of 2%
• Borrowing at 2% to support unit growth
and share repurchases will increase
shareholder value
1. Revolver limit as of December 31, 2013 2. Assume 1 million shares per year issued as stock comp and 29.3 million ending shares for FY 2014 Source: HGG 10-Q for Q3 2014; Caption estimates
Cash flow analysis
Effective cost of issuing debt using revolver
Revolver use comparison
(USD in millions) Undrawn Drawn
Undrawn revolver $224.4 1 $149.4
Undrawn revolver rate 0.375% 0.375%
Drawn revolver $0.0 $75.0
Drawn revolver rate 3.75% 3.75%
Revolver cost $0.8 $3.4
Tax rate 39.5% 39.5%
After tax cost of debt $0.5 (a) $2.0 (b)
Effective cost of debt (b-a) $1.5
Effective interest rate 2.0%
(USD in millions)FY Ending March 31st FY 2015E FY 2016E
Operating cash flow $70 $80
Capex -$50 -$50
Share repurchases -$70 -$70
Incremental debt $35 $40
Change in cash -$15 $0
Beginning cash $35 $20
Ending cash $20 $20
Two-year result:
Store count increase 22%
Share count decrease2 46%
Annual after-tax interest increase $1.5
Our conclusion
33
• Investing in HGG is the best way to get exposure to the decline of Sears
• There is large upside to consensus same store sales, gross margins, and earnings estimates
• If Sears closings accelerate, the benefit to h.h. gregg will be massive
• Management should increase shareholder value by:
– Strategic unit growth
– Aggressive share repurchases
– Optimizing capital structure
Contact information
34
Caption Partners
125 Maiden Lane
New York, NY 10038
(347) 797-5101
Jason Strasser
(347) 797-5103
William Cooper
(347) 797-5104