Conn's stock collapses on new credit problems

September 2, 2014 11:04 AM

Furniture and electronics seller Conn’s (CONN) was having one of the largest single-day drops in its trading history Tuesday after lowering its forecast and issuing unsettling commentary about the financing operation that makes up almost one-fifth of its overall revenue.

So far, Conn’s was recording its third-worst day ever, sinking 30.1% to $31.33 on volume that was more than 10 times that of a normal day. Including this plunge, the retailer has had two of its three biggest declines this year. The ugliest occurred in February, at 42.9%, also after Conn’s disappointed investors with a credit update that derailed its profit views. While the shares often move significantly after quarterly reports, the latest disaster leaves the stock 60% below where it closed last year.

Conn’s produced three brilliant years before 2014, with the stock surging an average of 156.7% annually. However, the three years before that looked more like this one, with an average decline of 30.9% each year from 2008 through 2010.

This session, credit concerns had investors fleeing. Conn’s said 8.7% of its customer financing balance as of July 31 was more than 60 days late, up from 8% April 30. By the end of August, it had worsened to 9.2%. Now, the company expects its full-year provision for bad debts to be between 11% and 12% of its average portfolio balance, whereas previously it put the estimated provision at 8% to 10%. The balance was $1.18 billion on the last day of July.

Higher bad-debt costs, which in the second quarter accounted for 12.4% of total expenses, deduct from earnings. Because of the debt woes, Conn’s, based in The Woodlands, Texas, expects earnings of $2.80 to $3 a share this year, before charges. That’s the second time guidance has been reduced, having been initially issued last December at $3.80 to $4 before being taken down to $3.40 to $3.70, partly because of increased delinquencies. Analysts recently were at $3.54, according to FactSet.

For the second quarter, the credit and lending side weighed on Conn’s results, and adjusted earnings of 50 cents a share fell from 52 cents a year earlier, and badly missed the Wall Street consensus of 75 cents. Total sales of $353 million were slightly short of expectations, though same-store sales, up 11.7%, were a bright spot, surpassing the forecast. Still, that wasn’t nearly enough to compete with the bad news.

Conn’s said “delinquency unexpectedly deteriorated across all credit quality levels, customer groups, product categories, geographic regions and years of origination,” adding that it’s made some changes “to tighten underwriting.”

The company’s credit revenue was over $64 million in the second quarter, about 18% of total revenue.

View Comments (2)

Recommended for You