Conns Falls 40.6% on Q3 Loss and Sales Miss, CFO Exits

Shares of Conns Inc. (CONN) slumped 40.6% after the company posted yet another quarter of dismal results along with the exit of its Chief Financial Officer (CFO).

Struggling with the persistent issues in its credit segment, the company posted a loss of 8 cents per share in the third quarter of fiscal 2015 comparing unfavorably with earnings of 66 cents recorded in the prior-year quarter and the Zacks Consensus Estimate of 68 cents. The decline resulted from higher delinquent debt rates that weighed on the company’s profits despite an outstanding performance delivered by the retail division.

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Consolidated revenues for the quarter advanced 19% year over year to $370.1 million, primarily driven by solid performance at the company’s retail segment and the new store model. However, it missed the Zacks Consensus Estimate of $383 million.

The company has two operating segments, namely Retail and Credit. The third-quarter performances of these two segments are discussed below.

Segment Discussion

Under the Retail segment, Conns offers consumer durable products in the United States, including home appliances, furniture and mattresses, home office as well as consumer electronics. The segment’s total revenue for the quarter rose 18.5% to $304.6 million from $257 million in the comparable year-ago quarter, primarily aided by the opening of 6 new stores.

Comparable-store sales (comps) for the quarter slipped marginally as a result of tougher year-over-year underwriting standards at the credit segment. Also, sales at the retail segment were impacted by the discontinuation of lawn equipment sales with low margins.

Retail gross margin for the quarter improved 50 basis points (bps) to 40.6%, primarily driven by solid sales performance of the higher-margin furniture and mattress category as well as gross product margin expansion in each of the company’s key product categories.

Also, during the quarter, the company incurred $3.9 million toward unlevered selling, general and administrative (SG&A) expenses related to the opening of 8 stores in the third and fourth quarters of fiscal 2015.

Revenues from the company's credit segment grew 21.6% year over year to $64.9 million, mainly backed by higher average receivable portfolio balance outstanding. The customer portfolio balance increased 32.7% to $1.3 billion from the prior-year figure. Further, for the quarter, the portfolio interest and fee income yield on an annualized basis fell 90 bps to 16.9%

During the quarter, the company’s provision for bad debts increased $49.4 million to $72 million. The rise came on the back of a 36.4% increase in average receivable portfolio balance, a 12.3% rise in balances originated in the quarter, rise in delinquencies and higher anticipated charge-offs over the next one year as losses are being realized at a greater-than-expected rate.

Conns witnessed a rise in delinquency rate (percentage of customer portfolio balance over 60 days), of 130 bps to 10% as of Oct 31, 2014.

Liquidity Position

Borrowing outstanding under the company’s asset-based loan facility as of Oct 31, 2014 was $450.5 million, while it has an immediately available borrowing capacity of $335.3 million. Furthermore, the company may avail an additional credit facility of $93.1 million if its inventory and customer receivables increase to a certain level.

Conns’ cash and cash equivalents stood at $5.8 million as of Oct 31, 2014, while total shareholders’ equity stood at $636.7 million.

Store Update

Conns opened six new HomePlus stores during the quarter, and introduced two stores in November. Further, the company closed 3 and renovated/relocated 4 stores during the third quarter, taking the company’s HomePlus store count to 77 as of Nov 30, 2014. Going forward, Conns plans to open 15–18 and close 2 stores in fiscal 2016.

Other Announcements & Conclusion

During the quarter, Conns’ retail segment delivered excellent results on the back of solid store openings. However, overall results continued to be hit by the disappointing credit segment performance. Despite tight underwriting standards, consumers failed to resolve delinquency issues and hence, the company is realizing losses before expected. Consequently, provision for credit losses recorded this quarter was wider on the assumption that this trend is likely to continue.

In order to battle these challenges, management created a Credit Risk and Compliance Committee. Directors of this committee are expected to take charge of underwriting strategies, reviewing credit risks and credit compliance actions. The committee will oversee and direct an independent evaluation of underwriting standards with the goal of authorizing underwriting procedures and results. The company is in the process of building its management team for this committee.

Apart from this, Conns’ board authorized its management to properly explore, analyze and look for ways to improve shareholder value. With all these efforts underway, Conns expects to improve its performance in the future.

Also, concurrent to its earnings announcement, the company declared the exit of its CFO, Brian Taylor, who will be replaced by Mark Haley working as Interim CFO.

Guidance

Considering the present scenario and the ongoing strategic initiatives and alternatives, Conns withdrew its earnings guidance for fiscal 2015 and prefers to remain mute on the same for fiscal 2016, for the time being.

However, it issued the following guidance for the fourth quarter of fiscal 2015. The company envisions comps to range from flat to a positive 3%. Retail gross margin is expected in the band of 39%–40%. Moreover, the company expects to open two stores, and close one store in the quarter.

Other Stocks to Consider

Currently, Conns carries a Zacks Rank #3 (Hold). Better-ranked retail stocks include Rite Aid Corporation (RAD), Bebe Stores, Inc. (BEBE), each with a Zacks Rank #1 (Strong Buy) and Best Buy Co., Inc. (BBY), with a Zacks Rank #2 (Buy).

Read the Full Research Report on RAD
Read the Full Research Report on BBY
Read the Full Research Report on BEBE
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