In August, Indianapolis-based electronics and appliance retailer HHGregg announced that six stores in the Midwest, five stores in Wisconsin and one store in Illinois would close. Previously, the stores had been occupied by defunct retailers Circuit City and Linens & Things. Based on the chain’s declining financial picture, more closings from the 220-store chain may come.
The store closures are likely related to poor overall financial results for the chain. HHGregg’s revenues have declined over the past few years: The company reported net losses for 2015 and 2016 and barely broke even in 2014. The pace of declining financial performance is increasing, with sales for the second quarter of 2016 down 6.6% from the prior year and annual net sales for the same period declining 8%. The chain faces increasing competition from stronger chains, including Best Buy and Amazon.
Interestingly, there is significant HHGregg exposure to CMBS loans. HHGregg is a tenant in 43 properties that are secured by CMBS conduit loans. If more HHGregg stores close, some of these CMBS loan could be at risk for default as HHGregg comprises more than 20% of the leasable space in roughly one-third of these properties. Should HHGregg close or vacate any of these stores, it is possible that the income from the remaining tenants would be insufficient to pay the CMBS mortgage, triggering a cash flow sweep (see our 12.20.16 article) or worse, a loan default.