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Conn's, Inc. Reports Fourth Quarter Fiscal Year 2018 Financial Results

Achieves Full-Year Profitability

Record Yield and Lower Charge-Offs Drive Highest Credit Spread in Three Years

60+ Delinquency Rate Declines 80 Basis Points Y-O-Y; Second Consecutive Quarter of Y-O-Y Decline

Strong Retail Operating Margin Supported by Record Retail Gross Margin

Platform Built to Support Compelling Retail Growth Opportunity

THE WOODLANDS, Texas, April 05, 2018 (GLOBE NEWSWIRE) -- Conn's, Inc. (CONN), a specialty retailer of furniture and mattresses, home appliances, consumer electronics and home office products, and provider of consumer credit, today announced its financial results for the quarter ended January 31, 2018.

“Conn’s fiscal year 2018 financial results demonstrate the successful execution of the Company’s turnaround strategies and, as expected, a return to full-year profitability.  Credit segment performance improved throughout the fiscal year as a result of higher finance charges, stronger portfolio fundamentals, controlled expenses, and lower borrowing costs.  Conn’s retail segment ended the year with record retail gross margins.  I am encouraged by the platform we have created and the positive momentum underway at Conn’s,” stated Norm Miller, Conn’s Chairman and Chief Executive Officer.

For the fourth quarter of fiscal year 2018, Conn’s credit spread of 560 basis points was the highest level in the past three years driven by both year-over-year improvement in interest income and fee yield and year-over-year reduction in the percentage of bad debt charge-offs.  Credit quality has improved as the Company's 60+ delinquency rate declined year-over-year for the second consecutive quarter.  Originations continue to benefit from higher yields and enhanced underwriting, and Conn’s credit segment is on a clear path towards even better financial performance as the portfolio seasons.

“Conn's unmatched value proposition, combining a differentiated credit offering and compelling retail experience, provides the Company with a significant opportunity to profitably grow retail sales and become a national retailer.  As we look to fiscal year 2019, we will leverage the successful platform we have built to continue improving our credit spread, while dedicating more of our focus to driving retail growth,” concluded Mr. Miller.

Fourth Quarter Results

For the fourth quarter of fiscal year 2018, net income was $3.2 million or $0.10 per diluted share compared to a net loss for the fourth quarter of fiscal year 2017 of $0.1 million or $0.00 per diluted share.  On a non-GAAP basis, adjusted net income for the fourth quarter of fiscal year 2018 was $17.9 million or $0.56 per diluted share, which excludes the impact of the Tax Cut and Jobs Act (the "Tax Act"), costs associated with a facility relocation, and contingency reserves related to legal matters.  This compares to adjusted net income for the fourth quarter of fiscal year 2017 of $1.5 million or $0.05 per diluted share, which excludes credits from legal and professional fees associated with securities-related litigation, an adjustment to our indirect tax audit reserve, executive management transition costs and certain non-recurring discrete tax items.

Retail Segment Fourth Quarter Results

Total retail revenues were $334.5 million for the fourth quarter of fiscal year 2018 compared to $356.2 million for the fourth quarter of fiscal year 2017, a decrease of $21.7 million.  The 6.1% decrease in retail revenue was primarily driven by a decrease in same store sales of 8.0%, partially offset by new store growth.  Sales for the three months ended January 31, 2018 were impacted negatively by the transition of our lease-to-own partner and general consumer softness along the Mexico border.  For the fourth quarter of fiscal year 2018, retail segment operating income was $48.6 million.  On a non-GAAP basis, adjusted retail segment operating income was $50.8 million which excludes costs associated with a facility closure and contingency reserves related to legal matters.

The following table presents net sales and changes in net sales by category:

               
  Three Months Ended January 31,           Same Store
(dollars in thousands) 2018   % of Total   2017   % of Total   Change   % Change   % Change
Furniture and mattress $ 106,967     32.0 %   $ 111,289     31.3 %   $ (4,322 )   (3.9 )%   (5.3 )%
Home appliance 84,494     25.3     83,723     23.5     771     0.9     (0.1 )
Consumer electronics 81,966     24.5     96,415     27.1     (14,449 )   (15.0 )   (16.7 )
Home office 25,385     7.6     25,483     7.2     (98 )   (0.4 )   (1.3 )
Other 4,321     1.3     5,018     1.4     (697 )   (13.9 )   (14.8 )
Product sales 303,133     90.7     321,928     90.5     (18,795 )   (5.8 )   (7.2 )
Repair service agreement commissions 27,680     8.2     30,766     8.6     (3,086 )   (10.0 )   (13.9 )
Service revenues 3,648     1.1     3,203     0.9     445     13.9      
Total net sales $ 334,461     100.0 %   $ 355,897     100.0 %   $ (21,436 )   (6.0 )%   (8.0 )%
                                               

The following provides a summary of the items impacting the performance of our product categories during the fourth quarter of fiscal year 2018, compared to the fourth quarter of fiscal year 2017:

  • Furniture unit volume decreased 11.0%, partially offset by a 9.4% increase in average selling price;
  • Mattress unit volume decreased 18.6%, partially offset by a 6.3% increase in average selling price;
  • Home appliance unit volume decreased 0.3%, partially offset by a 0.1% increase in average selling price;
  • Consumer electronic unit volume decreased 17.1%, partially offset by a 0.5% increase in average selling price; and
  • Home office unit volume decreased 8.1%, partially offset by a 7.4% increase in average selling price.


Credit Segment Fourth Quarter Results

Credit revenues were $85.9 million for the fourth quarter of fiscal year 2018 compared to $76.6 million for the fourth quarter of fiscal year 2017.  The 12.1% increase in credit revenue was primarily the result of increased originations of our higher-yielding direct loan product, which contributed to the increase in the portfolio yield rate to 20.5% from 16.5%, partially offset by the impact of a 2.6% decline in the average balance of the customer receivables portfolio.  Credit revenues for the fourth quarter of fiscal year 2018 also reflect a decline in insurance income primarily due to a decrease in retrospective commissions as a result of higher claim volumes related to Hurricane Harvey.  The total customer portfolio balance was $1.5 billion at January 31, 2018, compared to $1.6 billion at January 31, 2017, a decrease of 1.8%.

Provision for bad debts was $54.7 million for the fourth quarter of fiscal year 2018 compared to $72.1 million for the fourth quarter of fiscal year 2017, a decrease of $17.4 million.  The most significant reasons for the decrease in the provision for bad debts for the three months ended January 31, 2018 compared to the three months ended January 31, 2017 were:

  1. improvements in the credit quality of the portfolio for the three months ended January 31, 2018 compared to the three months ended January 31, 2017, resulting in a decrease in our estimated non-TDR loss rate;
  2. lower net charge-offs for the three months ended January 31, 2018 compared to the three months ended January 31, 2017;

    partially offset by:

  3. higher growth in the customer receivables portfolio balance for the three months ended January 31, 2018 compared to the three months ended January 31, 2017; and
  4. an increase in TDR balances in the three months ended January 31, 2018 compared to the three months ended January 31, 2017.

Additional information on the credit portfolio and its performance may be found in the Customer Receivable Portfolio Statistics table included within this press release and in the Company's Form 10-K for the year ended January 31, 2018, to be filed with the Securities and Exchange Commission.

Store Update

The Company has opened two new Conn's HomePlus® stores in Texas during the first quarter of fiscal year 2019, bringing the total store count to 118 in 14 states.  During fiscal year 2019, the Company plans to open between five and nine new stores in existing states to leverage current infrastructure. 

Liquidity and Capital Resources

As of January 31, 2018, the Company had $207.6 million of immediately available borrowing capacity under its $750 million revolving credit facility, with an additional $462.6 million that may become available upon increases in eligible inventory and customer receivable balances under the borrowing base.  The Company also had $9.3 million of unrestricted cash available for use.

Outlook and Guidance

The following are the Company's expectations for the business for the first quarter of fiscal year 2019:

  • Change in same store sales down 3% to 5%;
  • Retail gross margin between 38.5% and 39.0% of total net retail sales;
  • Selling, general and administrative expenses between 31.5% and 33.0% of total revenues;
  • Provision for bad debts between $43.0 million and $47.0 million;
  • Finance charges and other revenues between $81.0 million and $85.0 million; and
  • Interest expense between $17.5 million and $18.5 million.


Conference Call Information

The Company will host a conference call on April 5, 2018, at 10 a.m. CT / 11 a.m. ET, to discuss its fourth quarter fiscal year 2018 financial results.  Participants can join the call by dialing 877-754-5302 or 678-894-3020.  The conference call will also be broadcast simultaneously via webcast on a listen-only basis.  A link to the earnings release, webcast and fourth quarter fiscal year 2018 conference call presentation will be available at ir.conns.com.

Replay of the telephonic call can be accessed through April 12, 2018 by dialing 855-859-2056 or 404-537-3406 and Conference ID:  4981108.

About Conn's, Inc.

Conn's is a specialty retailer currently operating 118 retail locations in Alabama, Arizona, Colorado, Georgia, Louisiana, Mississippi, Nevada, New Mexico, North Carolina, Oklahoma, South Carolina, Tennessee, Texas and Virginia.  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 LED, OLED, QLED, 4K Ultra HD, and smart televisions, Blu-ray players, home theater and portable audio equipment; and
  • Home office, including computers, 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 lease-to-own payment plans.

This press release contains forward-looking statements within the meaning of the federal securities laws, including but not limited to, the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties.  Such forward-looking statements include information concerning our future financial performance, business strategy, plans, goals and objectives. Statements containing the words "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "project," "should," “predict,” “will,” “potential,” or the negative of such terms or other similar expressions are generally forward-looking in nature and not historical facts.  Such forward-looking statements are based on our current expectations.  We can give no assurance that such statements will prove to be correct, and actual results may differ materially.  A wide variety of potential risks, uncertainties, and other factors could materially affect our ability to achieve the results either expressed or implied by our forward-looking statements including, but not limited to: general economic conditions impacting our customers or potential customers; our ability to execute periodic securitizations of future originated customer loans on favorable terms; our ability to continue existing customer financing programs or to offer new customer financing programs; changes in the delinquency status of our credit portfolio; unfavorable developments in ongoing litigation; increased regulatory oversight; higher than anticipated net charge-offs in the credit portfolio; the success of our planned opening of new stores; technological and market developments and sales trends for our major product offerings; our ability to manage effectively the selection of our major product offerings; our ability to protect against cyber-attacks or data security breaches and to protect the integrity and security of individually identifiable data of our customers and employees; our ability to fund our operations, capital expenditures, debt repayment and expansion from cash flows from operations, borrowings from our revolving credit facility, and proceeds from accessing debt or equity markets; and other risks detailed in Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended January 31, 2018 and other reports filed with the SEC.  If one or more of these or other risks or uncertainties materialize (or the consequences of such a development changes), or should our underlying assumptions prove incorrect, actual outcomes may vary materially from those reflected in our forward-looking statements.  You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this press release.  We disclaim any intention or obligation to update publicly or revise such statements, whether as a result of new information, future events or otherwise, or to provide periodic updates or guidance.  All forward-looking statements attributable to us, or to persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements.

CONN-G

S.M. Berger & Company
Andrew Berger (216) 464-6400



 
CONN'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(dollars in thousands, except per share amounts)
       
  Three Months Ended
January 31,
  Year Ended
January 31,
  2018   2017   2018   2017
Revenues:              
Total net sales $ 334,461     $ 355,897     $ 1,191,967     $ 1,314,471  
Finance charges and other revenues 85,925     76,908     324,064     282,377  
Total revenues 420,386     432,805     1,516,031     1,596,848  
Costs and expenses:              
Cost of goods sold 200,497     217,373     720,344     823,082  
Selling, general and administrative expense 117,889     113,346     450,413     460,896  
Provision for bad debts 54,984     72,316     216,875     242,294  
Charges and credits 2,175     1,070     13,331     6,478  
Total costs and expenses 272,318     404,105     1,400,963     1,532,750  
Operating income 44,841     28,700     115,068     64,098  
Interest expense 18,018     25,111     80,160     98,615  
Loss on extinguishment of debt 367         3,274      
Income (loss) before income taxes 26,456     3,589     31,634     (34,517 )
Provision (benefit) for income taxes 23,255     3,663     25,171     (8,955 )
Net income (loss) $ 3,201     $ (74 )   $ 6,463     $ (25,562 )
Income (loss) per share:              
Basic $ 0.10     $ 0.00     $ 0.21     $ (0.83 )
Diluted $ 0.10     $ 0.00     $ 0.20     $ (0.83 )
Weighted average common shares outstanding:              
Basic 31,403,543     30,882,509     31,192,439     30,776,479  
Diluted 32,232,220     30,882,509     31,777,823     30,776,479  
                       




 
CONN'S, INC. AND SUBSIDIARIES
CONDENSED RETAIL SEGMENT FINANCIAL INFORMATION
(unaudited)
(dollars in thousands)
       
  Three Months Ended
January 31,
  Year Ended
January 31,
  2018   2017   2018   2017
Revenues:              
Product sales $ 303,133     $ 321,928     $ 1,077,874     $ 1,186,197  
Repair service agreement commissions 27,680     30,766     100,383     113,615  
Service revenues 3,648     3,203     13,710     14,659  
Total net sales 334,461     355,897     1,191,967     1,314,471  
Other revenues 74     301     341     1,569  
Total revenues 334,535     356,198     1,192,308     1,316,040  
Costs and expenses:              
Cost of goods sold 200,497     217,373     720,344     823,082  
Selling, general and administrative expense 83,035     81,480     316,325     326,078  
Provision for bad debts 245     179     829     990  
Charges and credits 2,175     1,070     13,331     6,478  
Total costs and expenses 285,952     300,102     1,050,829     1,156,628  
Operating income $ 48,583     $ 56,096     $ 141,479     $ 159,412  
Retail gross margin 40.1 %   38.9 %   39.6 %   37.4 %
Selling, general and administrative expense as percent of revenues 24.8 %   22.9 %   26.5 %   24.8 %
Operating margin 14.5 %   15.7 %   11.9 %   12.1 %
Store count:              
Beginning of period 116     113     113     103  
Opened         3     10  
End of period 116     113     116     113  
                       




 
CONN'S, INC. AND SUBSIDIARIES
CONDENSED CREDIT SEGMENT FINANCIAL INFORMATION
(unaudited)
(dollars in thousands)
       
  Three Months Ended
January 31,
  Year Ended
January 31,
  2018   2017   2018   2017
Revenues:              
Finance charges and other revenues $ 85,851     $ 76,607     $ 323,723     $ 280,808  
Costs and expenses:              
Selling, general and administrative expense 34,854     31,866     134,088     134,818  
Provision for bad debts 54,739     72,137     216,046     241,304  
Total costs and expenses 89,593     104,003     350,134     376,122  
Operating loss (3,742 )   (27,396 )   (26,411 )   (95,314 )
Interest expense 18,018     25,111     80,160     98,615  
Loss on extinguishment of debt 367         3,274      
Loss before income taxes $ (22,127 )   $ (52,507 )   $ (109,845 )   $ (193,929 )
Selling, general and administrative expense as percent of revenues 40.6 %   41.6 %   41.4 %   48.0 %
Selling, general and administrative expense as percent of average total customer portfolio balance (annualized) 9.2 %   8.2 %   8.9 %   8.7 %
Operating margin (4.4 )%   (35.8 )%   (8.2 )%   (33.9 )%
                       




 
CONN'S, INC. AND SUBSIDIARIES
CUSTOMER RECEIVABLE PORTFOLIO STATISTICS
(unaudited)
 
  January 31,
  2018   2017
Weighted average credit score of outstanding balances (1) 591     589  
Average outstanding customer balance $ 2,443     $ 2,376  
Balances 60+ days past due as a percentage of total customer portfolio balance(2) 9.9 %   10.7 %
Re-aged balance as a percentage of total customer portfolio balance(2)(3) 24.3 %   16.1 %
Account balances re-aged more than six months (in thousands) $ 76,165     $ 73,903  
Allowance for bad debts as a percentage of total customer portfolio balance 13.3 %   13.5 %
Percent of total customer portfolio balance represented by no-interest option receivables 21.2 %   27.1 %
           


  Three Months Ended
January 31,
  Year Ended
January 31,
  2018   2017   2018   2017
Total applications processed 369,522     362,487     1,278,809     1,337,850  
Weighted average origination credit score of sales financed (1) 611     607     610     609  
Percent of total applications approved and utilized 28.2 %   32.7 %   30.4 %   34.5 %
Average down payment 2.7 %   2.6 %   3.0 %   3.2 %
Average income of credit customer at origination $ 45,200     $ 43,100     $ 43,400     $ 41,900  
Percent of retail sales paid for by:              
In-house financing, including down payment received 69.3 %   68.8 %   71.0 %   72.0 %
Third-party financing 16.7 %   16.5 %   16.1 %   15.7 %
Third-party lease-to-own option 6.5 %   9.3 %   5.9 %   6.3 %
  92.5 %   94.6 %   93.0 %   94.0 %
                       

(1) Credit scores exclude non-scored accounts.

(2) Accounts that become delinquent after being re-aged are included in both the delinquency and re-aged amounts.

(3) The re-aged balance as a percentage of total customer portfolio as of January 31, 2018 includes $62.0 million, or 4.1%, in first time re-ages related to customers affected by Hurricane Harvey within FEMA-designated disaster areas.



 
CONN'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands)
   
  January 31,
  2018   2017
Assets      
Current Assets:      
Cash and cash equivalents $ 9,286     $ 23,566  
Restricted cash 86,872     110,698  
Customer accounts receivable, net of allowances 636,825     702,162  
Other accounts receivable 71,186     69,286  
Inventories 211,894     164,856  
Income taxes recoverable 32,362     2,150  
Prepaid expenses and other current assets 31,592     14,955  
Total current assets 1,080,017     1,087,673  
Long-term portion of customer accounts receivable, net of allowances 650,608     615,904  
Property and equipment, net 143,152     159,202  
Deferred income taxes 21,565     71,442  
Other assets 5,457     6,913  
Total assets $ 1,900,799     $ 1,941,134  
Liabilities and Stockholders' Equity      
Current liabilities:      
Current maturities of capital lease obligations $ 907     $ 849  
Accounts payable 71,617     101,612  
Accrued expenses 66,173     39,781  
Other current liabilities 25,414     25,139  
Total current liabilities 164,111     167,381  
Deferred rent 87,003     87,957  
Long-term debt and capital lease obligations 1,090,105     1,144,393  
Other long-term liabilities 24,512     23,613  
Total liabilities 1,365,731     1,423,344  
Stockholders' equity 535,068     517,790  
Total liabilities and stockholders' equity $ 1,900,799     $ 1,941,134  
               




 
CONN'S, INC. AND SUBSIDIARIES
NON-GAAP RECONCILIATIONS
(unaudited)
(dollars in thousands)

RETAIL SEGMENT OPERATING INCOME, AS ADJUSTED
 
  Three Months Ended
January 31,
  Year Ended
January 31,
  2018   2017   2018   2017
Retail segment operating income, as reported $ 48,583     $ 56,096     $ 141,479     $ 159,412  
Adjustments:              
Store and facility closure and relocation costs 1,032     135     2,381     1,089  
Legal and professional fees and related reserves associated with the exploration of strategic alternatives, securities-related litigation and other legal matters 1,143     (646 )   1,177     101  
Indirect tax audit reserve     1,434     2,595     1,434  
Executive management transition costs             234  
Impairment from disposal     6         1,986  
Employee severance     141     1,317     1,634  
Write-off of capitalized software costs         5,861      
Retail segment operating income, as adjusted $ 50,758     $ 57,166     $ 154,810     $ 165,890  
Retail segment total revenues $ 334,535     $ 356,198     $ 1,192,308     $ 1,316,040  
Retail segment operating margin:              
As reported 14.5 %   15.7 %   11.9 %   12.1 %
As adjusted 15.2 %   16.0 %   13.0 %   12.6 %
                       


 
NET INCOME (LOSS), AS ADJUSTED, AND DILUTED INCOME (LOSS) PER SHARE, AS ADJUSTED
       
  Three Months Ended
January 31,
  Year Ended
January 31,
  2018   2017   2018   2017
Net income (loss), as reported $ 3,201     $ (74 )   $ 6,463     $ (25,562 )
Adjustments:              
Changes in estimates             13,168  
Store and facility closure and relocation costs 1,032     135     2,381     1,089  
Legal and professional fees and related reserves associated with the exploration of strategic alternatives, securities related litigation and other legal matters 1,143     (646 )   1,177     101  
Indirect tax audit reserve     1,434     2,595     1,434  
Executive management transition costs             234  
Impairment from disposal     6         1,986  
Employee severance     141     1,317     1,634  
Write-off of capitalized software costs         5,861      
Impact of Tax Act 13,068         13,068      
Discrete tax item     932         932  
Loss on extinguishment of debt 367         3,274      
Tax impact of adjustments (894 )   (387 )   (5,986 )   (1,678 )
Net income (loss), as adjusted $ 17,917     $ 1,541     $ 30,150     $ (6,662 )
Weighted average common shares outstanding - Diluted 32,232,220     30,882,509     31,777,823     30,776,479  
Income (loss) per share:              
As reported $ 0.10     $ 0.00     $ 0.20     $ (0.83 )
As adjusted $ 0.56     $ 0.05     $ 0.95     $ (0.22 )
                               

Basis for presentation of non-GAAP disclosures:

To supplement the condensed consolidated financial statements, which are prepared and presented in accordance with accounting principles generally accepted in the United States of America ("GAAP"), the Company also provides the following non-GAAP financial measures: retail segment adjusted operating income, retail segment adjusted operating margin, adjusted net income (loss), and adjusted income (loss) per diluted share.  These non-GAAP financial measures are not meant to be considered as a substitute for, or superior to, comparable GAAP measures and should be considered in addition to results presented in accordance with GAAP.  They are intended to provide additional insight into our operations and the factors and trends affecting the business.  Management believes these non-GAAP financial measures are useful to financial statement readers because (1) they allow for greater transparency with respect to key metrics we use in our financial and operational decision making, and (2) they are used by some of our institutional investors and the analyst community to help them analyze our operating results.