Conn’s, Inc. Reports Third-Quarter Fiscal 2015 Financial Results

Furniture World News Desk on 12/14/2014

Conn’s, Inc., a specialty retailer of furniture, mattresses, home appliances, consumer electronics and provider of consumer credit, announced its financial results for the third quarter ended October 31, 2014. The Company also announced a transition of its Chief Financial Officer, changes to its management structure and new initiatives by the Board of Directors to enhance oversight of the business as Conn’s continues to actively pursue its previously announced review of strategic alternatives.

Financial Results

Third-quarter fiscal 2015 significant items included (on a year-over-year basis unless noted):

• Consolidated revenues increased 19.0% to $370.1 million;
• Same store sales declined 1.0%, influenced by tighter credit underwriting standards and the lapping of marketing strategy changes that drove a 35.1% increase a year ago;
• Furniture and mattress sales increased 37.4% and appliance sales rose 24.6%;
• Entered three new markets with the opening of six Conn’s HomePlus® stores;
• Retail gross margin increased 50 basis points to 40.6%;
• Adjusted retail segment operating income increased 11.9% to $38.1 million;
• Credit segment operating income decreased $43.6 million to an operating loss of $33.2 million, driven by increased provision for bad debts;
• The percentage of the customer portfolio balance 60+ days delinquent was 10.0% as of October 31, 2014, an increase of 130 basis points from July 31, 2014; and
• Diluted loss was $0.08 per share, compared to diluted earnings of $0.66 per share in the prior year.

Theodore M. Wright, Conn’s chairman and chief executive officer commented, “In the third quarter, we drove significant growth and expanded gross margins in the retail segment, but these gains were more than offset by additional provisions for credit losses. Customer credit scores continue to deteriorate. Despite underwriting changes reducing the percentage of originations to customers with scores below 550, the proportion of customers in late stage delinquency with a score below 550 increased this year, though it has remained relatively constant since the end of the second quarter. As a result, delinquency rates have increased and losses are being realized at a faster pace than originally anticipated. We recorded additional provisions for credit losses this quarter, based on the assumption that we will not realize any improvement in these trends over the next 12 months, despite the underwriting changes and improved collections execution. Although the realization of losses associated with the credit segment is occurring at a faster pace than originally anticipated, at this time, we do not believe we will experience static loss rates that are significantly different from our previous estimates. November credit performance has provided evidence of stabilizing credit trends, with the over-sixty-day delinquency rate holding steady at 10%. The percentage of balances 31 to 60 days past due declined for the quarter and again in November 2014 to 3.3% as compared to 3.6% a year ago. We are disappointed in this quarter’s reported results, and we are committed to improving performance in the credit segment through better execution and oversight.”

He continued, “The retail segment successfully opened six new stores and delivered increased retail gross margins compared to the prior year quarter. Additionally, we had only a slight decline in same store sales, despite underwriting changes that negatively impacted same store sales by approximately 12% during the third quarter. November same store sales increased 0.5%. Television same store sales in November increased 5.5%, led by strong sales of Ultra HD televisions.”

Retail Segment Results (on a year-over-year basis unless otherwise noted)

Total retail revenues were $305.1 million for the quarter ended October 31, 2014, an increase of $47.7 million, or 18.5%. The retail revenue growth reflects the impact of the net addition of 17 stores over the past 12 months. Comparable store sales were down slightly reflecting the impact of tighter year-over-year credit segment underwriting standards, fully lapping changes in marketing strategies last year which drove a 35.1% increase in same store sales and industry headwinds in the electronics categories. Additionally, the Company’s decision to discontinue sales of lower-margin lawn equipment reduced the reported year-over-year sales increase by $2.4 million.

The following provides a summary of items influencing Conn’s product category performance during the quarter, compared to the prior-year period:

• Furniture unit sales increased 31.7% and the average selling price increased 2.0%;
• Mattress unit volume increased 24.8% and the average selling price increased 12.6%;
• Home appliances unit volume increased 17.1% with a 6.4% increase in average selling price. Laundry sales increased 30.2%, refrigeration sales increased 26.0%, cooking sales increased 21.4% and air conditioning sales declined 27.3%;
• Television sales increased 3.4% in total and declined 10.5% on a same store basis. Gaming hardware sales increased more than 400%;
• Computer sales increased 16.1% and tablet sales declined 47.0%; and
• Other sales declined 14.7% due to the exit of the lawn equipment category.

Retail gross margin was 40.6% for the quarter ended October 31, 2014, an increase of 50 basis points from the prior-year period. The year-over-year increase in retail gross margin is attributable to the significant growth in higher-margin furniture and mattress sales. Furniture and mattress sales contributed 31.2% of the total product sales and 43.3% of the total product gross profit in the current period. For the third quarter of fiscal 2015, home appliance accounted for 26.6% of total product gross profit, consumer electronics generated 21.4% of total product gross profit and home office contributed 5.7% of total product gross profit.


In connection with the opening of eight stores in the third and fourth quarters of fiscal 2015, the Company incurred $3.9 million in unlevered SG&A expenses during the quarter. This compares with $2.5 million of similar expenses in the prior-year period.

Credit Segment Results (on a year-over-year basis unless otherwise noted)

Credit revenues increased 21.6% to $64.9 million. The credit revenue growth was attributable to the increase in the average receivable portfolio balance outstanding. The customer portfolio balance equaled $1.25 billion at October 31, 2014, rising 32.7%, or $308.7 million from the prior year. The portfolio interest and fee income yield on an annualized basis was 16.9% for the third quarter, down 90 basis points from the same period last year reflecting a higher provision for uncollectable interest.

Provision for bad debts for the three months ended October 31, 2014 was $72.0 million, an increase of $49.4 million from the same prior-year period. The year-over-year increase was impacted by the following:

• A 36.4% increase in the average receivable portfolio balance resulting from new store openings and same store growth over the past 12 months;
• A 12.3% increase in the balances originated during the quarter compared to the prior year;
• An increase of 150 basis points in the percentage of customer accounts receivable balances greater than 60 days delinquent to 10.0% at October 31, 2014. Delinquency increased year-over-year across credit quality levels, customer groups, product categories, geographic regions and years of origination. Despite tighter underwriting and better collections execution, deterioration in the customer’s ability to resolve delinquency continued throughout the quarter and the expectations for charge-offs over the next 12 months were adjusted to fully reflect this trend;
• Higher expected charge-offs over the next twelve-month period as losses are occurring at a faster pace than previously anticipated, due to the continued deterioration in the customer’s ability to resolve delinquency;
• The decision to pursue collection of past and future charged-off accounts internally rather than selling charged off accounts to a third party. This change resulted in $7.6 million in additional provision as recoveries are expected to occur over an extended time period, which results in a reduction in expected cash recoveries over the next twelve months; and
• The balance of customer receivables accounted for as troubled debt restructurings increased to $73.4 million, or 5.9% of the total portfolio balance, driving $4.1 million of the increase in provision for bad debts.

Additional information on the credit portfolio and its performance may be found in the table included within this press release and in the Company’s Quarterly Report on Form 10-Q for the quarter ended October 31, 2014, to be filed with the Securities and Exchange Commission.

Net Income Results

For the quarter ended October 31, 2014, Conn’s reported a net loss of $0.08 per diluted share, which included net pretax charges and credits of $0.4 million associated with facility closures and legal and professional fees related to the Company’s exploration of strategic alternatives and a class action lawsuit. This compares to $0.66 per diluted share for the prior-year quarter, which included a pretax charge of $2.8 million, or $0.08 per diluted share, associated with facility closures.

Store Update

Conn’s opened six HomePlus® stores in three new markets during the third quarter. These new stores are located in Lubbock, Texas; Denver, Colorado (2); Greenville, South Carolina; Tucson, Arizona; and Charlotte, North Carolina. The Company closed three stores in Texas and remodeled or relocated four other stores during the third quarter. In November, Conn’s opened two additional stores in Fort Collins and Colorado Springs, Colorado. With new store openings and the remodeling or relocation of existing stores, 77 of the Company’s 91 stores were operating in the Conn’s HomePlus® format at November 30, 2014. The Company plans to open 15 to 18 new stores and close two stores in fiscal 2016.

Capital and Liquidity

As of October 31, 2014, the Company had $450.5 million of borrowings outstanding under its asset-based credit facility. The Company had $335.3 million of immediately available borrowing capacity, with an additional $93.1 million that could become available upon increases in eligible inventory and customer receivable balances under the borrowing base.

Management Change

Conn’s today announced the departure of Brian Taylor, the Company’s Chief Financial Officer. Effective immediately, the Company has appointed Mark Haley as Interim Chief Financial Officer. Prior to joining Conn’s as Vice President and Chief Accounting Officer in October 2014, Mr. Haley was Vice President and Chief Accounting Officer at Coldwater Creek, Inc. for four years. He previously served as Senior Director, Financial Reporting at Supervalu, Inc. for three years and spent 16 years with Deloitte in Assurance Services. The Company has engaged an executive search firm to identify qualified candidates for the permanent Chief Financial Officer position. The search process will include both internal and external candidates.

“On behalf of Conn’s Board of Directors, I would like to thank Brian for his valuable contributions to Conn’s growth over the last several years and wish him the best in his future endeavors. Brian’s commitment and effort were essential to the expansion of the Company. Given Mark’s relevant industry and leadership experience, I have the utmost confidence in his ability to assume the responsibilities of CFO during the search for a permanent successor,” Mr. Wright said.

Additional Oversight

Conn’s also announced several new initiatives by its Board of Directors that are intended to enhance oversight of the business at a time when the senior management team is contending with a combination of rapid portfolio growth and a more difficult credit collection environment. Although the Company’s retail operations have performed well, with successful new store openings and product margin expansion, the performance of the Company’s credit operations has been disappointing several times over the last twelve months. Additionally, the Company recognizes that its credit operations forecasting has not been acceptably accurate.

To help address these challenges, the Board of Directors has established a Credit Risk and Compliance Committee. The Board of Directors members on this committee will be responsible for reviewing credit risks, underwriting strategy and credit compliance activities. The committee will direct and supervise an independent evaluation of underwriting standards to validate underwriting processes and results. A Board of Directors-directed evaluation of collections operations by two independent third-party advisors has already been completed. These reviews identified no significant deficiencies in operations effectiveness but did identify opportunities for improvement, particularly in collections cost efficiency.

Additionally, the Board of Directors has approved two new positions to augment its management team. The Board of Directors has initiated a search for a President, who will report directly to the Company’s Chairman and Chief Executive Officer. The Company is seeking candidates for this position with demonstrated senior leadership capabilities in large, complex retail and/or consumer credit organizations. The Board of Directors has also initiated a search for a Chief Risk Officer, who will report to the Company’s Chief Operating Officer and provide periodic reporting to the Credit Risk and Compliance Committee of the Board of Directors. The Board of Directors is taking these actions in response to the growing scale and complexity of the Company’s credit business, along with increasing industry-wide regulatory scrutiny.

Strategic Alternatives

In October 2014, the Company announced that its Board of Directors authorized management to explore a full range of strategic alternatives for the Company to potentially enhance value for stockholders. The Company has engaged an independent financial advisor to assist in this process and is actively engaged in preliminary discussions with multiple parties about a range of potential strategic alternatives.

No timetable has been set for the completion of the process.

Conn's does not expect to comment further or update the market with any further information on the process unless and until its Board of Directors has approved a specific transaction or otherwise deems disclosure appropriate or necessary. There can be no assurance that this strategic alternatives review will result in the Company changing its current business plan, pursuing a particular transaction or completing any such transaction.

Outlook and Guidance

With the ongoing review of strategic alternatives and the oversight initiatives being undertaken by the Company, the Company has decided to withdraw its earnings guidance for fiscal 2015 and is not currently providing earnings guidance with respect to fiscal 2016.

The following are the Company’s expectations for its business for the fourth quarter:

• Same stores sales flat to up 3%;
• Retail gross margin between 39.0% and 40.0%;
• Opening of 2 new stores during the quarter; and
• Closure of 1 store during the quarter.

Beginning with December results, the Company will release, shortly after the end of the month, same store sales and greater than 60 days delinquency performance. The Company believes this will provide investors with timely, relevant information about business trends and expects to continue this practice until the Company experiences more stability in its results.

About Conn’s, Inc.:  Conn’s is a specialty retailer currently operating 91 retail locations in Arizona, Colorado, Louisiana, Mississippi, Nevada, New Mexico, North Carolina, Oklahoma, South Carolina, Tennessee and Texas. The Company’s primary product categories include:

• Furniture and mattress, including furniture and related accessories for the living room, dining room and bedroom, as well as both traditional and specialty mattresses;
• Home appliance, including refrigerators, freezers, washers, dryers, dishwashers and ranges;
• Consumer electronics, including LCD, LED, 3-D, Ultra HD and plasma televisions, Blu-ray players, home theater and video game products, digital cameras and portable audio equipment; and
• Home office, including computers, tablets, printers and accessories.

Additionally, Conn’s offers a variety of products on a seasonal basis. Unlike many of its competitors, Conn’s provides flexible in-house credit options for its customers in addition to third-party financing programs and third-party rent-to-own payment plans.