By MIGUEL BUSTILLO
![[HHGREGG]](http://si.wsj.net/public/resources/images/MK-BB004_HHGREG_F_20100204183752.jpg)
Matt Eich/LUCEO for The Wall Street JournalMidwest retailer hhgregg is expanding eastward. A customer views flat-panel TVs in Midlothian, Va., Tuesday.
Retailer hhgregg Inc., long a Midwest consumer electronics star, is moving aggressively to capitalize on cheaper rents during the economic downturn by building a nation-wide presence to challenge much bigger rival Best Buy Co.
The Indianapolis company will open 40 to 45 stores in the Philadelphia, Washington, D.C., and Baltimore areas in coming months as part of a broader plan to expand to 600 stores this decade from 127 currently.
In some cases it is getting cut-rate rentals on locations once held by Circuit City Stores Inc., which closed last year.
Instrumental to its rapid growth has been a retail formula that focuses on hiring sales staff that work on commissions, and gives them leeway to negotiate prices with customers. A projected $1.53 billion in fiscal 2010 sales would represent a 51% gain from fiscal 2007. Still, some retail experts worry that hhgregg's pace poses a risk of overexpansion.
The retailer opened 10 new stores in Memphis, Tampa and Richmond in its fiscal third-quarter ended Dec. 31, helping boost income.
Retailer hhgregg still uses a commissioned sales staff in its stores.
Results reported Thursday include a 7.5% jump in appliance sales at stores open at least a year, the first increase in appliance sales in two years. More than a third of hhgregg's sales come from appliances, far more than most big retailers.
Despite its big ambitions, hhgregg is small. But Chief Executive Dennis May said Thursday he will disclose additional expansion forays beyond the Mid-Atlantic this summer. He declined to elaborate.
Mr. May, who started at hhgregg 11 years ago when it had just 18 stores, said the company is leasing East Coast properties in prime retail corridors for prices similar to what it was paying in the Midwest a few years ago.
"The real estate deals we are securing will help put us in a good competitive position for the next 25 years, " he said.
The fast build out is reminiscent of Best Buy's breakout move in the 1990s, when it leapfrogged Circuit City to become a major national chain.
Some analysts say the company is well poised to fill the vacancy created by Circuit City's demise for a second national consumer electronics retailer.
"The history of retailers accelerating square footage growth beyond 20% is not so good," said Brad Thomas of KeyBanc Capital Markets Inc. "But barring a major setback, this looks like the next national chain in this space, and there is a lot of market share to be gained in the Mid Atlantic because that is where Circuit City was strongest."
Still, hhgregg faces many challengers in its bid to capture that market share—not just from national powers such as Wal-Mart Stores Inc. and Sears Holdings Corp., but regional players, such as privately held PC Richard & Son, which is expanding out of its New York base. Spokesmen for Best Buy and Sears declined to comment.
Hhgregg executives believe they can stand apart from mass merchants such as Best Buy and Wal-Mart because of an old-fashioned retail formula that centers on hiring experienced salespeople who can talk customers into buying higher-priced televisions and washing machines. Most national chains, including Best Buy, have eliminated commissioned salespeople in favor of an hourly-wage workforce.
The company's commissioned sales force has a reputation for having ample leeway to cut deals with customers, which has distinguished the retailer from rivals.
"You can work with them," said Michael Rodriguez, 26 years old, who recently haggled and won a reduced price on a washer, dryer and refrigerator for his new townhome near Orlando, Fla. "We looked at the traditional options like Sears. But at hhgregg, there was also more of an ability to negotiate."
Jenny Uhlmansiek of Cincinnati said she also argued for a better price recently on a washer, dryer, microwave oven and toaster after she and her boyfriend moved into a house together.
"Going there and shopping, you kind of learn that things are negotiable," said Ms. Uhlmansiek, 28 years old, who later returned and haggled for a deal on a stereo system. "I just don't pay that tag price."
On Thursday, hhgregg posted a quarterly profit of $22.7 million, or 57 cents a share, compared to $17.1 million, or 52 cents a share, a year ago.
Still, its stock tumbled 7% to $18.94 in 4 p.m. trading Thursday on the New York Stock Exchange after warning that television sales in its current quarter would be hamstrung by a shortage of large-screen and new-technology televisions.
The shortage and additional expenses tied to the faster than anticipated openings of new Eastern stores led the company to maintain a full-year forecast calling for a between 6% and 9% sales gain despite posting a strong 20.3% revenue gain in the third quarter.
Hhgregg executives said the industry-wide problem is due to diminished inventory at TV manufacturers that are preparing to introduce new spring models. That was bad news for a category that has already been battered by price deflation.
Mr. May predicted a "tale of two halves" this calendar year, with sluggish television sales early on giving way to stronger sales later as new, 3-dimensional televisions and models configured to run Internet programming hit retail stores.
Write to Miguel Bustillo at miguel.bustillo@wsj.com
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