Conn's Beats EPS, Raises Guidance

Zacks

Conn’s Inc. (CONN) posted adjusted earnings per share of 35 cents in the first quarter of fiscal 2013, beating the Zacks Consensus Estimate of 33 cents and the year-ago earnings of 14 cents per share.

The improvement in earnings was buoyed by higher sales, efficient cost containment effort and lower interest expense.

Inside the Headline Numbers

In the first quarter, the seller of home appliances and consumer electronics grew 4.6% year over year in revenues to $200.9 million which slightly lagged the Zacks Consensus Estimate of $202.0 million. The quarter’s revenue comprised net sales increase of 6.2% to $166.9 million, and a decrease of 2.9% in finance and other charges to $33.9 million.

Same store sales increased 17.8% during the first quarter. The upside was driven by higher average selling prices, increased furniture and mattress offering, and retention of a portion of the unit volume from closed stores. However, closure of 11 stores in fiscal 2012 provided a partial offset to the growth.

Retail gross margin was 33.7% in the quarter, up 320 basis points year over year. Favorable shift in product mix, especially in the furniture and mattress categories, helped drive retail gross margin in the quarter. In the aforesaid category, the company witnessed significant sales and margin growth which was higher than the growth in the other categories.

Financial Aspects

Conn’s ended the year with cash and cash equivalents of $6.7 million, long-term debt of $194.4 million and stockholder equity of $368.9 million.

Guidance

The company raised its diluted earnings per share guidance for fiscal 2013 to $1.30-$1.40 from the earlier projected range of $1.20-$1.30. Growth in same stores sales are expected at mid- to high-single digits. The company also plans to open as many as five to seven new stores.

Our Take

We remain optimistic on Conn’s due to a set of bullish features including strong same-store sales momentum, share gain in the challenging appliance market, strategic association with suppliers, margin improvement, closure of underperforming units and an increase in its credit portfolio balance.

The raise in earnings per share guidance for 2013 also bears evidence to the company’s strong fundamentals. Going ahead, Conn’s expects to report further improvement in margins from the furniture and mattresses category following the completion of a restructuring in furniture sourcing.

However, Conn’s faces intense competition bigger industry players like Best Buy Co. Inc. (BBY) and RadioShack Corp. (RSH). Further, same-store sales which are in a good shape currently will likely see a difficult comparison over the next few months.

Conn’s currently retains a Zacks #1 Rank, which translates into a short-term Strong Buy rating. We also maintain our long-term Outperform recommendation on the stock.

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