Conn’s, Inc.
, a specialty retailer of consumer electronics, home appliances, furniture, mattresses, computers and lawn and garden products, announced its operating results for the quarter ended July 31, 2011.
Significant items for the quarter include:
Adjusted diluted earnings per share of $0.17 for the second quarter of fiscal 2012, excluding the impact of the term loan payoff and store closings, as compared to adjusted diluted earnings per share of $0.06 for the same period in the prior fiscal year, on a higher number of shares outstanding in the current year period;
Total revenues were $184.4 million, down 13.5% from the same period in the prior fiscal year, on a same store sales decline of 12.8%;
Retail segment retail gross margin increased 320 basis points to 28.9%;
Retail segment adjusted operating income increased to $3.1 million for the quarter, as compared to $2.2 million for the same quarter in the prior fiscal year;
Credit segment operating income increased to $13.0 million for the quarter, as compared to $7.3 million for the same quarter in the prior fiscal year;
Credit segment 60+ day delinquency percentage declined to 6.1%;
The Company recorded a pretax charge of $11.1 million related to the repayment of its $100 million term loan, and a pretax charge of $3.7 million for costs related to the closing of three stores during the quarter, resulting in a reported net loss of $3.4 million, or $0.11 per diluted share outstanding; and
The Company initiated earnings guidance for the current fiscal year of adjusted diluted earnings per share of $0.65 to $0.75.
"We are pleased with our progress on improving margins and reducing our cost of capital," commented Theodore Wright, the Company’s Chairman. "While softer industry conditions resulted in sales slightly below our expectations, the changes made to date position us to drive improved profitability."
Retail Segment Results
The change in the retail segment’s total revenues was comprised of a product sales decrease of 16.1%, a repair service agreement commission decrease of 5.2% and a service revenue decrease of 8.9%, as compared to the same quarter in the prior fiscal year. The decrease in sales during the quarter was driven largely by declines in the consumer electronics, home appliances and home office categories, which were partially offset by an increase in furniture and mattress sales.
The retail segment’s retail gross margin increased to 28.9% in the current year quarter, up from 25.7% in the same quarter of the prior year. The increase in the retail gross margin was driven by an increase in higher-margin furniture and mattress sales as a percent of total product sales, improved gross margins in the consumer electronics, home appliances and home office categories and increased sales penetration of repair service agreements.
During the quarter, the Company completed the closure of three stores and the lease expired on one additional store, bringing the total number of stores ceasing operations during the current fiscal year to five. As a result of the closure of the three stores with unexpired leases, the Company recorded a $3.7 million charge during the second quarter as its estimate of the future lease cost to be incurred. The actual cost could vary depending on the Company’s ability to sublease the locations or negotiate a buy-out of the remaining lease terms, and the timing of any such transactions.
Credit Segment Results
The credit segment’s results, as compared to the same quarter in the prior year, were impacted by:
- Continued declines in the total portfolio balance and delinquency levels, resulting in lower interest earnings and reduced servicing costs;
- A change in the Company’s charge-off policy to require all accounts 210 or more days past due to be charged off at month end. This change resulted in a $4.4 million increase in net charge-offs for the quarter, but had no significant impact on earnings as these charge-offs had been previously provided for in the Company’s bad debt reserves; and
- Repayment of the Company’s term loan, which resulted in an $11.1 million charge related to the payment of the prepayment premium and write-off of unamortized original issue discount and deferred financing fees.
The key credit portfolio performance metrics of the credit segment for the quarter included:
- Net charge-offs for the second fiscal quarter of 2012 totaled $11.6 million, including $4.4 million related to the change in the charge-off policy, as compared to $9.3 million for the same period in the prior fiscal year, an improvement of $2.1 million, excluding the impact of the charge-off policy change;
- A 90 basis point improvement in the 60-209 day delinquency rate since January 31, 2011, to 6.1% at July 31, 2011. The 60-209 day delinquency rate was 7.5% at July 31, 2010;
- A 260 basis point improvement in the percentage of the portfolio reaged to 17.2% at July 31, 2011, from 19.8% at January 31, 2011. The percentage of the portfolio reaged at July 31, 2010, was 19.2%; and
- The average monthly payment rate (amount collected from customers as a percentage of the portfolio balance) increased for the sixth consecutive quarter, versus the same quarter in the prior year, to 5.45% for the quarter ended July 31, 2011, from 5.20% for the quarter ended July 31, 2010.
More information on the credit portfolio and its performance may be found in the table included with this press release and in the Company’s Form 10-Q to be filed with the Securities and Exchange Commission.
The Company reported a net loss of $3.4 million, or a diluted loss per share of $0.11 for the second quarter of fiscal 2012, compared to net income of $1.6 million, or diluted earnings per share of $0.06, for the second quarter of fiscal 2011. Adjusted net income and adjusted diluted earnings per share, adjusted for the costs related to store closings and the loss from the early extinguishment of debt, were $5.5 million, or adjusted diluted earnings per share of $0.17, for the second quarter of fiscal 2012.
Capital and Liquidity
During the second quarter of fiscal 2012, the Company completed an expansion and extension of its asset-based loan facility, increasing the total commitment to $430 million and extending the maturity date to July 2015. Additionally, the Company entered into an $8 million real estate loan, using three of its owned store locations as collateral. With the proceeds of these financing facilities, the Company repaid the entire balance of its $100 million term loan during the quarter. The Company estimates, based on its current debt balance and current market rates, the above transactions will benefit diluted earnings per share by approximately $0.27 on an annual basis.
As of July 31, 2011, there was $291.0 million, excluding $1.8 million of letters of credit, outstanding under the asset-based loan facility. As of July 31, 2011, the Company had $72.8 million of immediately available borrowing capacity, and an additional $64.4 million that could become available upon increases in eligible inventory and customer receivable balances under the borrowing base.
Outlook and Guidance
The Company initiated earnings guidance, for the fiscal year ending January 31, 2012, of adjusted diluted earnings per share of $0.65 to $0.75. The following factors were considered in developing the guidance:
- Same stores sales are expected to be flat for the last two quarters of the fiscal year, with the third quarter expected to be positive and fourth quarter expected to be slightly negative;
- Retail segment retail gross margin is expected to be between 27.0% and 29.0% during the last two quarters, with the fourth quarter margin expected to be lower than the third quarter due to typical holiday selling season product mix;
- The credit portfolio balance is expected to decline slightly during the third quarter, before growing slightly in the fourth quarter;
- The provision for bad debts is expected to be between 3.3% and 3.7%, on an annualized basis, of the average portfolio balance outstanding during each of the last two quarters;
- Selling, general and administrative expense, as a percent of revenues, is expected to be similar to prior year levels; and
- Adjusted diluted earnings per share excludes charges related to the Company’s refinancing completed during the second quarter and costs related to completed and future store closings.
The Company has begun its planning and preparation to open five to seven new locations during fiscal year 2013, all of which are expected to be in new markets.
About Conn's:The Company is a specialty retailer currently operating 71 retail locations in Texas, Louisiana and Oklahoma: with 23 stores in the Houston area, 18 in the Dallas/Fort Worth Metroplex, eight in San Antonio, three in Austin, five in Southeast Texas, one in Corpus Christi, four in South Texas, six in Louisiana and three in Oklahoma. The Company’s primary product categories include:
- Home appliances, including refrigerators, freezers, washers, dryers, dishwashers and ranges;
- Consumer electronics, including LCD, LED, 3-D, plasma and DLP televisions, camcorders, digital cameras, Blu-ray and DVD players, video game equipment, portable audio, MP3 players, and home theater products;
- Furniture and mattresses, including furniture for the living room, dining room, bedroom and related accessories, and mattresses; and
- Home office, including desktop, notebook, netbook and tablet computers, printers and computer accessories.
Additionally, the Company offers a variety of products on a seasonal basis, including lawn and garden equipment, and continues to introduce additional product categories for the home to help respond to its customers' product needs and to increase same store sales. Unlike many of its competitors, the Company provides flexible in-house credit options for its customers, in addition to third-party financing programs and third-party rent-to-own payment plans. In the last three years, the Company financed, on average, approximately 60% of its retail sales under its in-house financing plan.