Hhgregg expands aggressively on bargain leases

Electronics chain opens six stores in Baltimore area in move some call risky

May 09, 2010|By Andrea K. Walker, The Baltimore Sun

Electronics chain hhgregg had been content to methodically grow from its Midwest roots until the recession hit — and then the retailer became more aggressive than ever.

While other retail chains were toppling all around it, Indianapolis-based hhgregg turned economic malaise into opportunity and began scooping up bargain leases. It opened about two dozen stores during the past year, with plans to open as many as 45 more new stores in the coming year.

The company's red-and-white banner is now part of the retail landscape in the Baltimore area, where it celebrated the grand opening of six stores last week. It also recently opened a distribution center of more than 400,000 square feet in Brandywine.

Hhgregg's entree is one of several bright spots in the Baltimore-area retail market. Kohl's Department Stores also opened new locations in Middle River and Annapolis in March, and Eastpoint Mall underwent a major renovation this year with new anchor stores DSW Shoe Warehouse and Burlington Coat Factory. The Maryland Retailers Association, a trade group, has tracked a slow improvement in sales since November.

"They bring competition to the area, which is usually always good for the customer," shopper Richard Rosales said of hhgregg as he visited the new Catonsville store.

But a more widespread turnaround for retailers won't come until employment rebounds, so that people have the money to spend, according to the state trade group. Despite higher vacancies — and lower rental rates — entire shopping centers remain empty or nearly vacant in Columbia, Towson and other areas.

In fact, hhgregg's expansion from mostly small and midsize cities into larger, more competitive areas, including Washington, is one that many analysts call risky as the retail sector remains volatile and unpredictable.

Consumer spending has risen in recent months and shoppers headed back to the stores in March, resulting in a robust 8.7 percent sales increase compared with a year ago, according to research firm Retail Metrics. But those shoppers stayed home in April, resulting in a small 0.8 percent sales gain, the worst month since last fall.

Executives with hhgregg said the recession that led to the demise of some retailers such as Circuit City created opportunities it could not pass up — mainly by opening up valuable real estate space. Hhgregg recently raised $53.5 million in a stock offering.

"The market opened up, and we were able to get a lot of quality real estate and open up a larger number of stores than we otherwise would have," said Dennis May, hhgregg's chief executive, who was in town for the grand opening of the store in Hanover.

Landlords desperate to fill empty spaces have lowered rents and are offering perks such as lump sums to cover build-out costs, said David Fick, an analyst with Stifel Nicolaus. Hhgregg is moving into several old Circuit City stores, its competitor that went out of business two years ago, leaving 700 buildings and hundreds of thousands of square feet open.

Retail vacancies in the Baltimore market were 7.1 percent in the first quarter of this year, up from 6 percent a year ago and 4.7 percent the year before that. Meanwhile, rents have fallen to $19.05 per square foot in the quarter, compared with $19.58 a year ago, according to research firm Reis.

Analysts said hhgregg was able to negotiate rents in more expensive areas such as Baltimore, Philadelphia and Washington at about the same rate it pays in cheaper areas such as Indianapolis and Cleveland. Nationally, rents averaged $16.62 per square-foot in the first quarter, according to Reis.

It's not uncommon for retailers to step in where other companies failed. Forever 21 recently moved to an anchor spot left dormant at White Marsh Mall by department store Boscov's. Kohl's expanded during the economic downturn, moving into spaces left by West Coast department store chain Mervyn's. Jos. A. Bank ramped up its expansion efforts this year, hoping to get good deals on real estate.

And smaller, independent businesses that might have been hard pressed to be able to open in a popular shopping center two years ago now have a chance, retail experts said.

But companies that expand aggressively aren't always successful. Boscov's discovered that, after it jumped at the chance to move into the sought-after Baltimore market when Hecht's department stores were phased out as part of Macy's acquisition of Hecht's parent May Department Stores Inc.

A year after Boscov's expansion, the recession hit and sales plummeted. The Pennsylvania-based company eventually closed three stores it opened at Baltimore-area malls.

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