Hhgregg, in Chapter 11, Signs ‘Term Sheet’ to Sell ‘Substantially All’ Its Assets

Hhgregg signed a “term sheet with an anonymous party” to buy hhgregg’s assets, the company said in a Monday news release announcing the Chapter 11 filing. The sale will enable hhgregg to emerge from Chapter 11 within 60 days “debt free with significant improvement in liquidity for the future stability of the business,” it said. Senior hhgregg management gave it a “valiant effort over the past 12 months" to keep the company afloat, said CEO Robert Riesbeck in a statement. Management thinks “pursuing a restructuring through Chapter 11 is the best path forward to ensure hhgregg's long-term success,” he said.

Declining retail traffic, the inability to keep pace with “fast-changing trends,” expensive and “burdensome” commercial leases and the “proliferation” of online shopping were among the “challenges that sent hhgregg hurtling toward Chapter 11," Kovacs said. After a “disappointing” holiday selling season, hhgregg “continued to experience tightening liquidity,” he said. Same-store sales in hhgregg’s holiday quarter fell 22 percent on competitive CE pressures and a problematic distribution center (see 1701260012).

The cash shortage was “exacerbated” when Synchrony Bank, which runs hhgregg’s private-label credit card program, began requiring the retailer to post $17 million in letters of credit as collateral on future payments to the bank for running the credit card program, Kovacs said. Under the program, hhgregg pays Synchrony “a per-transaction fee to assume each receivable, and the associated risk,” he said. Hhgregg posted the first $3 million letter of credit on the Feb. 17 due date, and that reduced the retailer’s cash “availability” under its credit facility, he said. It has yet to post the remaining $14 million in letters of credit it owes the bank, he said.

Hhgregg owes about $20 million in unsecured “trade debt” and $145 million to landlords “for past-due rent and lease obligations,” said Kovacs. Senior hhgregg management is “intent on exhausting all potential avenues to sustained profitability,” he said. Its “primary goals” are renegotiating burdensome leases, preserving “beneficial trade terms with vendors” and “focusing operations” to allow hhgregg to “retain loyal customers, attract new customers, and generate steady profits at performing locations and on-line as their business model evolves,” he said.

Without a “full supply of inventory,” hhgregg would be “extremely disadvantaged in a highly competitive market segment and would suffer swift attrition in customer patronage, which would be difficult, if not impossible, to restore,” it said in a Monday motion (in Pacer) seeking court permission to pay up to $8 million it owes to “critical vendors.” The $8 million “cap” is hhgregg’s “best estimate” of the pre-Chapter 11 claims “that should be paid immediately to ensure a continued supply of critical goods and services,” the motion said.

In return for paying the $8 million in critical vendor claims, hhgregg will use “commercially reasonable efforts” to require the vendors to “provide favorable trade terms in line with historical practices” for the delivery of “essential goods and services” for as long as the Chapter 11 proceeding takes to complete, the motion said. Hhgregg seeks court authority to “condition” the payments on getting the vendors to sign written agreements spelling out favorable “credit limits, pricing, timing of payments, availability, and other terms,” it said. The motion didn't identify the vendors hhgregg deems as critical.

Retailers we canvassed for reaction at the ProSource Summit in Orlando seemed caught off guard by the hhgregg's Chapter 11 filing, though all knew the chain was in difficult financial shape and were aware of hhgregg's announcement last week closing 40 percent of its physical store base (see 1703020053). "It was just a matter of time," said Ricky Marks, president, Audio Video Specialties in Charlotte, of hhgregg's bankruptcy filing. "I understand they did most of their business in mattresses. In our market, Best Buy gets most of that business." Marks doesn't expect hhgregg's bankruptcy to have much impact on his business, since builders make up 75 percent of his company's sales and custom the rest, he said.

Hhgregg's bankruptcy filing was "a surprise to me," said Phil Miller, president, Classic Stereo and Video in Fort Wayne, Indiana. Miller was aware of the store closings hhgregg announced last week, he said. "They’re a big name in Indy." Hhgregg's bankruptcy "doesn't mean they’ll go away," he said. "I saw a store of theirs in Naples, [Florida], recently and it wasn't crowded at all. The majority of their business is appliances, but this will probably help us a little." He sees the Chapter 11 filing as a reflection of the difficulties retailers face from e-commerce, he said.

Retail chains with financial issues such as hhgregg and Mattress Firm typify "a history lesson in what happens when a regional tries to go national," said Jim Ristow, CEO of the Associated Volume Buyers group, in his Tuesday speech at the Orlando gathering. AVB is the umbrella group for ProSource. "Hhgregg last week announced 88 store closings," Ristow said. "They were going to contract to become regional. That's 40 percent of their stores. Last night late, hhgregg announced they were going to file. We don't know what that exactly means." Ristow sees a big opportunity in hhgregg's demise and the financial troubles of other retailers, including Sears, he said. AVB estimates a $6 billion appliance business will be "up for grabs" as a result, he said.