hhgregg (HGGG) Risk Analysis

Our performance is highly dependent on attracting and retaining qualified employees, including our senior management team and other key employees. A key element of our competitive strategy is to provide product expertise to our customers through our extensively trained, commissioned sales associates, which, we believe, results in more of our customers purchasing higher-margin, feature-rich products. The turnover rate in the retail industry is relatively high, and there is an ongoing need to recruit and train new employees. If we are unable to attract and retain qualified personnel as needed in the future, our level of customer service may decline, which may decrease our net sales and profitability. Other factors that impact our ability to maintain sufficient levels of qualified employees in all areas of the business include, but are not limited to, the Company's reputation, employee morale, the current macroeconomic environment, competition from other employers and our ability to offer adequate compensation packages. Adverse changes in health care costs could also adversely impact our ability to achieve our operational and financial goals and to offer attractive benefit programs to our employees. Our ability to control labor costs, which may impact our ability to hire and retain qualified personnel, is subject to numerous external factors, including prevailing wage rates, the impact of legislation or regulations governing healthcare benefits or labor relations. If our labor and/or benefit costs increase, we may not be able to hire or maintain qualified personnel to the extent necessary to execute our competitive strategy, which could adversely affect our results of operations.

As part of our continuing efforts to improve operating efficiencies and reduce operating costs, we have implemented numerous cost cutting initiatives. We plan to continue to implement additional cost cutting initiatives in fiscal 2017 and beyond. If we are unable to achieve, or have any unexpected delays in achieving, the anticipated cost savings and benefits associated with these initiatives, our results of operations and cash flow may be adversely affected. Additionally, certain elements of our cost structure are largely fixed in nature. The negative impact of consumer spending on our sales results makes it more challenging for us to maintain or increase our operating income. The competitiveness in our industry and increasing price transparency means that the focus on achieving efficient operations is greater than ever. Failure to manage our labor and benefit rates, advertising and marketing expenses, operating leases, other store expenses or indirect spending could materially adversely affect our profitability.

The retail industry for major home appliances, consumer electronics and home furniture is intensely competitive. We compete with many other local, regional, and national retailers, e-commerce retailers and certain of our vendors who offer products directly to consumers. Price is of primary importance to customers and price transparency and comparability continues to increase, particularly as a result of digital technology. Some online-only businesses have lower operating costs than us and are not required to collect and remit sales taxes in all U.S. states, which can negatively impact the ability of multi-channel retailers to be price competitive on a tax-included basis. The ability of consumers to compare prices on a real-time basis puts additional pressure on us to maintain competitive prices to attract customers. Also, some of our competitors have greater financial resources than us and may be able to offer lower prices than us for a sustained period of time. Our competitors may use a number of different strategies to compete against us, including lower pricing, more aggressive advertising and marketing, enhanced product and service offerings, extension of credit to customers on terms more favorable than we make available, innovative store formats, including store within a store, improved retail sales methods, enhanced customer service experiences, online product offerings and expansion into markets where we currently operate. The retail industry continues to experience a trend towards an increase in sales initiated online and using mobile applications. Customer expectations about the methods by which they purchase and receive products or services are becoming more demanding. Customers are increasingly using technology and mobile devices to rapidly compare products and prices, determine real-time product availability and purchase products which changes the way we interact with them. We must continually anticipate and adapt to these changes in the purchasing process. Our website, hhgregg.com, is a sales channel for our products, and is also a method of making product information available to customers that impacts our in-store sales. In addition to hhgregg.com, we have multiple affiliated websites and mobile apps through which we seek to inform, cross-sell and otherwise interact with our customers. Our website is a significant component of our advertising strategy. In order to promote our products and services, allow our customers to complete credit applications in the privacy of their homes and drive traffic to our stores, we must effectively create, design, publish and distribute content over the internet. There can be no assurance that we will be able to design and publish web content with a high level of effectiveness or grow our e-commerce business in a profitable manner. Because our business strategy is based on offering superior levels of customer service and a full range of services to complement the products we offer, our cost structure is higher than some of our competitors, and this, in conjunction with price transparency, puts pressure on our margins.

Our products must appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to change. Our ability to maintain and increase net sales depends to a large extent on the periodic introduction and availability of new products and technologies. Our success depends upon our ability to anticipate and respond in a timely manner to trends in consumer preferences relating to major household appliances and consumer electronics such as OLED and Ultra HD 4K televisions as well as alternative options for delivery of those products quickly and at a low-cost to consumers. Significant deviations from the anticipated consumer preferences for the products we sell or related services we provide could result in lost net sales and lower margins due to the need to mark down excess inventory. If we are unable to effectively introduce and sell new products to our customers, our business and results of operations could be adversely affected. Conversely, if we fail to anticipate or react to consumer demand for our products, we may experience inventory shortages, which would result in lost sales and could negatively affect our customer goodwill, our brand image and our profitability. We believe that a focus on customer service fosters the development of our brand recognition and reputation. If we are unable to maintain our high level of customer service, our brand recognition, reputation, business and results of operations could be adversely affected. Additionally, the increasing usage of web-based social media means that consumer feedback and other information about our Company are shared with a broad audience in a manner that is easily accessible and rapidly disseminated. The impact of such feedback could negatively affect our brand perception and recognition, and as a result could result in declines in customer loyalty, lower employee retention and productivity, vendor relationship issues and other factors, all of which could materially and adversely affect our business and results of operations.

The use and handling of personally identifiable data by us, our employees, our business associates and third parties is regulated at the state, federal and international levels. We are also contractually obligated to comply with certain industry standards regarding payment card information. Increasing costs associated with information security, such as increased investment in technology, the costs of compliance and costs resulting from consumer fraud, could cause our business and results of operations to suffer materially. Additionally, the success of our online operations depends upon the secure transmission of customer and other confidential information over public networks, including the use of cashless payments. While we take significant steps to protect this information, lapses in our controls or the intentional or negligent actions of employees, business associates or third parties may undermine our security measures. As a result, unauthorized parties may obtain access to our data systems and misappropriate customer and other confidential data. There can be no assurance that advances in computer capabilities, new discoveries in the field of cryptography or other developments will prevent the compromise of our customer transaction processing capabilities and customer personal data. Furthermore, because the methods used to obtain unauthorized access change frequently and may not be immediately detected, we may be unable to anticipate these methods or promptly implement preventative measures. There is no guarantee that the procedures that we have implemented to protect against unauthorized access to secured data are adequate to safeguard against all data security breaches. Any such compromise of our security or the security of information residing with our business associates or third parties could have a material adverse affect on our reputation and may expose us to material costs, penalties, compensation claims, lost sales, fines and lawsuits. In addition, any compromise of our data security may materially increase the costs we incur to protect against such breaches and could subject us to additional legal risk.

Our ability to operate our business from day to day largely depends on the efficient operation of our information technology infrastructure and management information systems. We use our management information systems to conduct our operations and for critical corporate and business planning functions, including store operations, sales management, merchandising, marketing, supply chain and inventory management, financial reporting and accounting, delivery and other customer services and various administrative functions. Our systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches, catastrophic events such as fires, tornadoes and hurricanes, and usage errors by our employees. Operating legacy systems subjects us to inherent costs and risks associated with maintaining, upgrading and replacing these systems and retaining sufficiently skilled personnel to maintain and operate the systems, demands on management time, and other risks and costs. Any failure that is not covered by our disaster recovery plan could cause an interruption in our operations and adversely affect our results of operations. In addition, we utilize complex information technology platforms to operate our websites and mobile applications. Disruptions to these services, such as those caused by unforeseen traffic levels or other technical difficulties, could cause us to forgo material revenues and adversely affect our reputation with consumers. Performance issues with these customer-facing technology systems, including temporary outages caused by distributed denial of service or other cyber-attacks, or a complete failure of one or more of them without a disaster recovery plan that can be quickly implemented could quickly destroy the positive benefits they provide to our business and negatively affect our customers' perceptions of hhgregg as a reliable online vendor and source of information about appliances, consumer electronics, furniture and other home products and services, which could negatively affect our results of operations.

Our statutory, regulatory and legal environment exposes us to complex compliance and litigation risks that could materially adversely affect our operations and financial results. The most significant compliance and litigation risks we face are: - The difficulty of complying with sometimes conflicting statutes and regulations in local, state and national jurisdictions;- The impact of proposed, new or changing statutes and regulations, including, but not limited to, corporate governance matters, environmental, financial reform, Health Insurance Portability and Accountability Act, health care reform, labor reform, Payment Card Industry compliance and/or other as yet unknown legislation that could affect how we operate and execute our strategies as well as alter our expense structure;- The impact of changes in tax laws (or interpretations thereof by courts and taxing authorities) and accounting standards;- The impact of litigation trends, including class action lawsuits involving consumers and stockholders, and labor and employment matters; and - Changes in trade regulations, currency fluctuations, economic or political instability, natural disasters, public health emergencies and other factors beyond our control may increase the cost of items we purchase or create shortages of these items, which in turn could have a material adverse effect on our cost of goods, or may force us to increase prices, thereby adversely impacting net sales and profitability. Adapting to regulatory changes and defending against lawsuits and other proceedings may involve significant expense and divert management's attention and resources from other matters, which could adversely affect our results of operations.

In general, our sales depend on discretionary spending by our customers. General economic factors and other conditions that may affect our business include periods of slow economic growth or recession, political factors including uncertainty in social or fiscal policy, an overly anti-business climate or sentiment, volatility and/or lack of liquidity from time to time in U.S. and world financial markets and the consequent reduced availability and/or higher cost of borrowing to us and our customers, slower rates of growth in real disposable personal income, sustained high rates of unemployment, high consumer debt levels, increasing fuel and energy costs, inflation or deflation of commodity prices, natural disasters and acts of terrorism and developments in the war against terrorism. Additionally, any of these circumstances concentrated in the region of the U.S. in which we operate could have a material adverse effect on our net sales and results of operations. General economic conditions and discretionary spending are beyond our control and are affected by, among other things: - consumer confidence in the economy;- unemployment trends;- consumer debt levels;- consumer credit availability;- the housing and home improvement markets;- gasoline and fuel prices;- interest rates and inflation;- slower rates of growth in real disposable personal income;- natural disasters;- national and international geopolitical concerns;- tax rates and tax policy; and - other matters that influence consumer confidence and spending. Volatility in financial markets may cause some of the above factors to change with an even greater degree of frequency and magnitude. The above factors could result in slowdown in the economy or an uncertain economic outlook, which could have a material adverse effect on our business and results of operations. Other conditions that may impact our results of operations include disruptions in the availability of content such as sporting events or other televised content. Such disruptions may influence the demand for hardware that our customers purchase to access such content, which would have an adverse effect on our results of operations.