Management's Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, is designed to provide a reader of our financial statements with a narrative from the perspective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in six sections:

• Overview

• Critical Accounting Policies

• Results of Operations

• Liquidity and Capital Resources

• Recently Issued Accounting Standards

• Outlook

Our MD&A should be read in conjunction with the Consolidated Financial Statements for the fiscal year ended March 31, 2008, included in our latest Annual Report on Form 10-K, as filed with the SEC on June 3, 2008, as well as our subsequent reports on Form 8-K and other publicly available information.

Overview

hhgregg, Inc. ("We" or "Us") is a specialty retailer of consumer electronics, home appliances, mattresses and related services operating under the names hhgreggTM and Fine LinesTM. As of December 31, 2008, we operated 108 stores in Alabama, Florida, Georgia, Indiana, Kentucky, North Carolina, Ohio, South Carolina and Tennessee.

This overview section is divided into five sub-sections discussing our operating strategy and performance, store development strategy, industry and economic factors, material trends and uncertainties and seasonality.

Operating Strategy and Performance. We focus the majority of our floor space, advertising expense and distribution infrastructure on the marketing, delivery and installation of a wide selection of premium video and appliance products. We display over 100 models of flat panel televisions and 400 major appliances in our stores with an especially broad assortment of models in the middle- to upper-end of product price ranges. Video and appliance net sales comprised 82% of our net sales mix for the three months ended December 31, 2008 and 2007 and 85% of our net sales mix for the nine months ended December 31, 2008 and 2007.

We strive to differentiate ourselves through our customer purchase experience starting with a highly-trained, consultative commissioned sales force which educates our customers on the features and benefits of our products, followed by rapid product delivery and installation, and ending with helpful post-sales support services. We carefully monitor our competition to ensure that our prices are competitive in the market place. Our experience has been that informed customers often choose to buy a more heavily-featured product once they understand the applicability and benefits of its features. Heavily-featured products typically carry higher average selling prices and higher margins than less-featured, entry-level price point products.

We focus on leveraging our semi-fixed expenditures in advertising, distribution and regional management through closely managing our inventory, working capital and store development expenditures. Our inventory has averaged 7.0 turns per year over the past three fiscal years. Our working capital, expressed as a percentage of sales, has averaged 1.8% over the past three fiscal years. Our net capital expenditures, expressed as a percentage of sales, have averaged 2.1% over the past three fiscal years. These factors, combined with our strong store-level profitability, have contributed to the generation of significant free cash flow over the past three fiscal years. This has enabled us to de-leverage our balance sheet and internally fund our store growth.

Store Development Strategy. Over the past several years, we have adhered closely to a development strategy of adding stores to metropolitan markets in clusters to achieve rapid market share penetration and more efficiently leverage our distribution network, advertising and regional management costs. Our expansion plans include looking for new markets where we believe there is significant underlying demand for stores, typically in areas that demonstrate above-average economic growth, strong household incomes and growth in new housing starts and/or remodeling activity. Our markets typically include most or all of our major competitors. We plan to continue to follow our approach of building store density in each major market and distribution area, which in the past has helped us to improve our market share and realize operating efficiencies.

During the past twelve months, we opened a net total of 23 new stores of which 17 were located in new markets. The new markets included Greensboro, North Carolina; Charleston, South Carolina; Tampa, Florida; Jacksonville, Florida and Orlando, Florida. During the past twelve months, we also opened a new regional distribution center in Jacksonville, Florida, and a third central distribution center in Davenport, Florida to support our growth plans.

Industry and Economic Factors. Over the past several years, the consumer electronics and home appliance industries have experienced attractive growth rates driven by product innovations and introductions particularly in the premium segment that we target.

Despite an industry-wide slowdown in wholesale unit shipments of appliances (discussed in more depth below in Material Trends and Uncertainties), our average selling prices for major appliances have continued to increase this fiscal year as they have for the last three fiscal years due to demand for higher-price point, high-efficiency appliances including front-load laundry and refrigeration. This trend has historically added stability to our sales performance relative to our consumer electronics-focused competitors. Given recent and planned pricing changes by major appliance vendors, the trend in average unit selling prices of major appliances is not expected to change dramatically for the foreseeable future.

The consumer electronics industry depends on new products and larger television screen sizes to drive sales and profitability. Our highly-trained and consultative sales force, which can effectively educate the consumer on the benefits of innovative technology, coupled with our strong delivery and installation competencies enable us to sell a more heavily-featured mix of large, flat screen video product than many of our competitors. As a result, the average unit selling price of the video products we carry and the quantity we sell have risen in each of the last three fiscal years. During the quarter ended December 31, 2008, we experienced a significant contraction in average selling prices primarily due to an industry-wide excess supply of inventory. It is not clear whether our historical trend of increasing average selling prices of video products will resume in the foreseeable future.

Material Trends and Uncertainties. The innovation in certain consumer electronic product categories, such as DVD players, camcorders and audio products, has not been sufficient to maintain average selling prices. These mature products have become commoditized and have experienced price declines and reduced margins. As certain of our products become commodities, we focus on selling the next generation of these affected products, carefully managing the depth and breadth of commoditized products that we offer and introducing all-together new product lines that are complementary to our existing product mix.

There has been price compression in flat panel televisions for equivalent screen sizes over the past few years. As with similar product life cycles for console televisions, VHS recorders and large-screen projection televisions, we have responded to this risk by shifting our sales mix to focus on newer, higher-margin items such as 1080p and 120Hz technologies (two technological developments that enhance display quality), larger screen sizes and, in certain circumstances, increasing our unit sales at a rate greater than the decline in product prices. As mentioned above, it is not clear whether our historical trend of increasing average selling prices of video products will resume in the foreseeable future.

The Association of Home Appliance Manufacturers ("AHAM") attributed an 8.9% decline in year-over-year, major appliance unit shipments for the twelve months ended December 31, 2008 to the downturn in the housing market and the sub-prime mortgage crisis. We have, as in past housing downturns, attempted to tailor our appliance category assortment toward middle- to upper-price point appliances which have, in our experience, been less impacted by these downturns. For the nine months ended December 31, 2008, we continued to execute our strategy and grow our major appliance market share as we recorded flat net sales in our appliance category while AHAM reported that unit shipments of major appliances declined 8.7% during that same period.

Substantial market volatility stemming from recent turmoil in the financial and credit markets, high profile financial institution failures, growing unemployment and weak prospects for improvement in these conditions for the foreseeable future have contributed to economic uncertainty. We believe that this economic uncertainty contributed to a significant drop in customer traffic since the last two weeks in September of this year. It is difficult to gauge how long this economic uncertainty will persist and impact our customer traffic.

Seasonality. Our business is seasonal, with a higher portion of net sales and operating profit realized during the quarter that ends December 31 due to the overall demand for consumer electronics during the holiday shopping season. Appliance revenue is impacted by seasonal weather patterns but is less seasonal than our electronics business and helps to offset the seasonality of our overall business.

Critical Accounting Policies

We describe our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended March 31, 2008 in our latest Annual Report on Form 10-K filed with the SEC on June 3, 2008. There have been no significant changes in our critical accounting policies and estimates since the end of fiscal 2008.

Results of Operations

Operating Performance. The following table presents selected condensed
consolidated financial data (dollars in thousands, except per share amounts):



                                               Three Months Ended                        Nine Months Ended
                                        December 31,         December 31,        December 31,         December 31,
(unaudited)                                 2008                 2007                2008                 2007
Net sales                              $      416,106       $      390,416      $    1,031,823       $      932,472
Net sales % increase                              6.6 %               16.5 %              10.7 %               20.2 %
Comparable store sales %
(decrease)/increase (1)                         (13.2 )%               3.0 %              (8.9 )%               6.3 %
Gross profit as % of net sales                   31.4 %               30.5 %              31.0 %               30.8 %
SG&A as % of net sales                           18.7 %               18.1 %              20.8 %               20.2 %
Net advertising expense as a % of
net sales                                         4.3 %                4.3 %               4.8 %                4.3 %
Depreciation and amortization
expense as a % of net sales                       0.9 %                0.8 %               1.2 %                1.0 %
Income from operations as a % of
net sales                                         7.4 %                7.2 %               4.2 %                5.3 %
Net interest expense as a % of net
sales                                             0.5 %                0.7 %               0.6 %                0.9 %
Loss related to early
extinguishment of debt as a % of
net sales                                          -  %                 -  %                -  %                2.3 %
Net income                             $       17,120       $       15,102      $       22,622       $       11,083
Net income per diluted share           $         0.52       $         0.45      $         0.69       $         0.35
Number of stores open at the end of
period                                            108                   85

(1) Comprised of net sales at stores in operation for at least 14 full months, including remodeled and relocated stores, as well as net sales for our e-commerce site.

Net sales for the three months ended December 31, 2008 increased 6.6% over net sales for the comparable prior year period to $416.1 million. Net sales for the nine months ended December 31, 2008 increased 10.7% to $1.03 billion compared to $932.5 million for the comparable prior year period. The increase in sales for the three and nine months ended December 31, 2008 was primarily attributable to the net addition of 23 stores during the past 12 months partially offset by a 13.2% and 8.9% decrease in comparable store sales, respectively.

Net sales mix and comparable store sales percentage changes by product category for the three and nine months ended December 31, 2008 and 2007 were as follows:

                                                    Net Sales Mix Summary                            Comparable Store Sales Summary
                                        Three Months Ended          Nine Months Ended         Three Months Ended          Nine Months Ended
                                           December 31,               December 31,               December 31,                December 31,
                                        2008           2007        2008          2007         2008            2007         2008          2007
Video                                       54 %           51 %        48 %          45 %       (6.9 )%         2.2 %        (2.1 )%      5.4 %
Appliances                                  28 %           31 %        37 %          40 %      (21.9 )%        (0.7 )%      (15.6 )%      3.9 %
Other (1)                                   18 %           18 %        15 %          15 %      (14.6 )%        13.3 %       (10.5 )%     17.5 %

Total                                      100 %          100 %       100 %         100 %      (13.2 )%         3.0 %        (8.9 )%      6.3 %

(1) Primarily consists of audio, personal electronics, mattresses, notebook computers and furniture and accessories.

Our 13.2% and 8.9% comparable store sales decreases for the three and nine months ended December 31, 2008, respectively, were driven by double-digit comparable store unit sales declines of major appliance products, particularly at entry-level and lower mid-price points. High efficiency front-load laundry and refrigeration experienced comparable store unit sales decreases during the third quarter, albeit significantly better than the appliance category average, while the higher average selling prices for these items contributed to slightly higher average selling prices for the appliances category in total. The comparable store sales decrease for the three-month period in the video category was primarily driven by the compression in average selling prices of flat panel televisions slightly outpacing double-digit comparable store sales unit increases. The comparable store sales decrease in the other product category was primarily due to decreased sales of mattresses and personal electronics.

Net income was $17.1 million, or $0.52 per diluted share, for the three months ended December 31, 2008, compared to net income of $15.1 million, or $0.45 per diluted share, for the comparable prior year period. Net income for the nine months ended December 31, 2008 was $22.6 million, or $0.69 per diluted share, compared to net income of $11.1 million, or $0.35 per diluted share, for the nine months ended December 31, 2007, which included a pre-tax loss on the early extinguishment of debt of $21.7 million, or $0.41 net loss per diluted share. The increase in our third quarter earnings primarily reflected an improvement in our gross profit margins which more than offset the effect of a 13.2% comparable store sales decrease coupled with investments in distribution and management infrastructure to support our new store growth in Florida.

Three Months Ended December 31, 2008 Compared to Three Months Ended December 31, 2007

Gross profit margin, expressed as gross profit as a percentage of net sales, improved 90 basis points for the three months ended December 31, 2008 compared with the prior year period. The appliance gross profit margins exceeded the consolidated gross profit margins, but the appliance category accounted for approximately three percentage points less of the consolidated net sales relative to the comparable prior year period, thereby negatively impacting the consolidated gross profit margin. Buying opportunities in the video category, attributable in large part to supply imbalances, had a distinct positive impact on the consolidated gross profit margin rate compared with the prior year period. Small changes within the other product category's net sales composition had a modest positive impact on the consolidated gross profit margin when compared with last year.

SG&A expense, as a percentage of net sales, increased 62 basis points when compared to the prior year. The increases were primarily due to growth investments, totaling 30 basis points, largely comprised of new store pre-opening expenses associated with six new stores, as well as distribution and management infrastructure investments in Florida. These growth investments and the effect of our comparable store sales decline were partially offset by effective cost controls over general and administrative expense including a reduction in bonus expense.

Net advertising expense, as a percentage of net sales, decreased three basis points compared to the comparable prior year period. This was achieved despite the effect of our comparable store sales decline.

Depreciation and amortization expense, as a percentage of net sales, increased primarily due to growth investments in new stores and related infrastructure support.

Other expense decreased $0.7 million compared to the comparable prior year period, reflecting a decrease in net interest expense attributable to our debt refinancing in July 2007.

Income tax expense increased to $11.6 million for the three months ended December 31, 2008 compared to $10.3 million for the comparable prior year period. This increase was primarily the result of an increase in income before income taxes in the current year compared to the comparable prior year period. Our effective income tax rate for the three months ended December 31, 2008 was consistent with our effective income tax rate for the comparable prior year period.

Nine Months Ended December 31, 2008 Compared to Nine Months Ended December 31, 2007

Gross profit margin, expressed as gross profit as a percentage of net sales, increased 20 basis points for the nine months ended December 31, 2008 versus the comparable prior year period. The appliance gross profit margins exceeded the consolidated gross profit margins, but the appliance category accounted for approximately three percentage points less of the consolidated net sales relative to the comparable year period, thereby negatively impacting the consolidated gross profit margin. Improvement in the video category's gross profit margin contributed to modest improvements in the consolidated gross profit margin as compared with the prior year-to-date period due to attractive buying opportunities during the third quarter arising from supply imbalances. A slight shift in sales mix within the other product category had a modest negative impact on the consolidated gross profit margin compared to the prior year.

SG&A expense, as a percentage of net sales, increased 59 basis points compared to the comparable prior year period. The increase was primarily due to growth investments, totaling 55 basis points, largely comprised of new store pre-opening expenses associated with 18 new stores, as well as the opening of a new central distribution center and creation of a divisional management team designed to support over 30 stores in central and northern Florida. These growth investments and the effect of our comparable store sales decline were partially offset by effective cost controls over general and administrative expense and a reduction in bonus expense.

Net advertising expense, as a percentage of net sales, increased 45 basis points when compared with the comparable prior year period. The increase was largely driven by the effect of our comparable store sales decline, coupled with the heavy advertising spend associated with the launch of new markets in Florida.

Depreciation and amortization expense, as a percentage of net sales, increased primarily due to growth investments in new stores and related infrastructure support.

Other expense decreased $24.7 million compared to the comparable prior year period. This decrease was largely due to a $21.7 million loss on early extinguishment of debt in the prior year period and a decrease of $3.0 million in net interest expense primarily arising from our debt refinancing completed in July 2007.

Income tax expense increased to $15.3 million for the nine months ended December 31, 2008 compared to $7.5 million for the comparable prior year period. This increase was primarily the result of an increase in income before income taxes in the current year compared to the comparable prior year period. Our effective income tax rate for the nine months ended December 31, 2008 was consistent with our effective income tax rate for the comparable prior year period.

Liquidity and Capital Resources

The following table presents a summary on a consolidated basis of our net cash
(used in) provided by operating, investing and financing activities (dollars are
in thousands):



                                                        Nine Months Ended
                                                 December 31,       December 31,
                                                     2008               2007
    Net cash provided by operating activities   $        1,119     $        2,907
    Net cash used in investing activities              (20,606 )          (21,597 )
    Net cash provided by financing activities           19,302             20,509

Our liquidity requirements arise primarily from our need to fund working capital requirements and capital expenditures.

Capital Expenditures. We make capital expenditures principally to fund our expansion strategy, which includes, among other things, investments in new stores and new distribution facilities, remodeling and relocation of existing stores, as well as information technology and other infrastructure-related projects that support our expansion. Gross capital expenditures were $29.1 million and $25.4 million for the nine months ended December 31, 2008 and 2007, respectively. The increase in gross capital expenditures during the nine months ended December 31, 2008 was primarily attributable to a greater number of store openings during the current year period. We opened 18 new stores during the nine months ended December 31, 2008 compared to eight stores in the prior year period. We plan to open two additional stores during the fiscal year ending March 31, 2009. In addition, we plan to continue to invest in our infrastructure, including our management information systems and distribution capabilities, as well as incur capital remodeling and improvement costs. We expect capital expenditures, net of anticipated sale and leaseback proceeds, to range between $24 million and $26 million for fiscal 2009.

Cash Provided by Operating Activities. Cash provided by operating activities primarily consists of net income as adjusted for increases or decreases in working capital and non-cash depreciation and amortization. Cash provided by operating activities was $1.1 million and $2.9 million for the nine months ended December 31, 2008 and 2007, respectively. The decrease in cash provided by operating activities for the nine months ended December 31, 2008 compared to the prior year period was primarily the result of a decline in inventory productivity which in turn reduced our accounts payable leverage, expressed as accounts payable divided by inventories. This reduction in our accounts payable leverage resulted in the increase of borrowings on our line of credit. This decrease was partially offset by an increase in net income for the nine months ended December 31, 2008 compared to the prior year period.

Cash Used in Investing Activities. Cash used in investing activities was $20.6 million and $21.6 million for the nine months ended December 31, 2008 and 2007, respectively. The cash used in investing activities for the nine months ended December 31, 2008 decreased from the comparable prior year period due to an increase in proceeds for sale leaseback transactions, partially offset by increased capital expenditures associated with new store openings.

Cash Provided by Financing Activities. Cash provided by financing activities was $19.3 million and $20.5 million for the nine months ended December 31, 2008 and 2007, respectively. The change for the nine months ended December 31, 2008 as compared to the comparable prior year period is primarily attributable to the increase of borrowings on the line of credit as noted above offset by a decrease in bank overdrafts. In addition, the prior year period included proceeds for issuance of common stock and proceeds for issuance of the term loan offset by payments related to early extinguishment of debt and transaction costs for stock issuance.

Senior Secured Term Loan. On July 25, 2007, Gregg Appliances, Inc. ("Gregg Appliances") entered into a senior credit agreement (the "Term B Facility") with a bank group obtaining a $100 million senior secured term loan B maturing on July 25, 2013. Interest on borrowings is payable in defined periods or quarterly, depending on our election of the bank's prime rate or LIBOR plus an applicable margin, currently 200 basis points.

The loans under the Term B Facility were originally scheduled to be repaid in consecutive quarterly installments of $250,000 each with a balloon payment at maturity, but as Gregg Appliances made an optional $10 million prepayment during fiscal 2008, the remaining scheduled quarterly principal installments are reduced to $227,099 each with a balloon payment at maturity. In accordance with the Term B Facility, the next principal payment is due on June 30, 2009. In addition, Gregg Appliances is also required to prepay the outstanding loans, subject to certain exceptions, with annual excess cash flow and certain other proceeds (as defined in the Term B Facility). As of December 31, 2008, $89.25 million of term loans were outstanding.

The Term B Facility contains customary representations and warranties and customary affirmative and negative covenants, including, among other things, restrictions on incurrence of additional debt, liens, dividends and other restricted payments, asset sales, investments, mergers and acquisitions and affiliate transactions. The only financial covenant included in the Term B Facility is a maximum leverage ratio. Events of default under the Term B Facility include, among others, nonpayment of principal or interest, covenant defaults, material breaches of representations and warranties, bankruptcy and insolvency events, cross defaults and a change of control. Gregg Appliances was . . .