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Conns Misses on Q4 Earnings; Stock Up 5.6% on Sales Beat - Analyst Blog

Zacks Equity Research

Conns Inc. CONN ended fiscal 2015 on a mixed note with dismal earnings and better-than-expected revenues.

The company’s fourth-quarter fiscal 2015 adjusted earnings slumped 37.8% year over year to 46 cents per share, falling short of the Zacks Consensus Estimate of 63 cents by a wide margin. Including one-time items, earnings plunged 44% year over year to 42 cents a share.
 


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Per analysts, the company’s results had to bear the brunt of port labor disruptions at the West coast and adverse weather.
 
However, consolidated revenues of this Zacks Rank #3 (Hold) company advanced 18.2% year over year to $426.7 million, beating the Zacks Consensus Estimate of $420 million. Revenues were primarily driven by store openings and comparable store sales (comps) growth. Shares of the company jumped 5.6% following the results.

The company has two operating segments, namely Retail and Credit. The performances of these two segments in the fourth quarter are discussed below.

Segment Discussion

Conns offers consumer durable products in the United States under the Retail segment, which includes home appliances, furniture and mattresses, home office as well as consumer electronics. The segment’s total revenue for the reported quarter rose 16.4% to $351.7 million, backed by the opening of 11 net new stores and a 1.3% improvement in comps.

Comps for the quarter were impacted by tougher year-over-year underwriting standards at the credit segment and unfavorable industry trends witnessed at the home office category.

Retail gross margin for the quarter contracted 110 basis points (bps) to 39.5%, on account of unfavorable shift in various vendor permits, coupled with warehousing expenses associated with store openings in new markets.

Further, adjusted operating income at the segment descended about 7% to $45.7 million, mainly owing to escalated advertising expenses.

Revenues from the company's Credit segment surged 27.1% year over year to $75.1 million in the quarter, mainly backed by higher average receivable portfolio balance outstanding. The customer portfolio balance increased 27.9% year over year to $1.4 billion. Further, the portfolio interest and fee income yield on an annualized basis remained flat year over year at 18.2%.

During the quarter, the company’s provision for bad debts increased by $20 million to $58.1 million. The rise came due to a 30.7% increase in average receivable portfolio balance, a 23% 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.

The increase in provision of bad debts led the operating loss at the credit segment to expand to $11.3 million, from $1.8 million in the same period a year ago.

Conns witnessed a rise in delinquency rate (percentage of customer portfolio balance over 60 days), of 90 bps to 9.7% as of Jan 31, 2015.

Fiscal 2015: A Glimpse

For fiscal 2015, Conns’ earnings came in at $1.59 per share, down 37.4% year over year. Also, earnings lagged the Zacks Consensus Estimate of $1.84 per share. Consolidated revenues for the fiscal surged 24.4% to $1,485.2 million, benefiting from additional stores and an 8% jump in comps. Revenues also surpassed the Zacks Consensus Estimate of $1,479 million.

Liquidity Position

Borrowings outstanding under Conns’ asset-based loan facility as of Jan 31, 2015 were $529.2 million, while it has an immediately available borrowing capacity of $302.2 million. Furthermore, the company may avail an additional credit facility of $48.6 million if its inventory and customer receivables increase to a certain level.

Conns’ cash and cash equivalents stood at $12.2 million as of Jan 31, 2015, while total shareholders’ equity stood at $653.7 million.

Store Update

Conns opened two HomePlus stores during the quarter. Further, the company closed and relocated one store each over the same period, taking the company’s total store count to 90 as of Jan 31, 2015.

The company expects to open 15–16 stores, and shutter two in fiscal 2016.

Other Announcements & Conclusion

Conns’ board had authorized its management to properly explore, analyze and look for ways to improve shareholder value in Oct 2014. These actions could include the complete sales of business, slowing down the pace of store openings, or segregation of the company’s retail and credit segments.

After considering various options including the aforementioned ones, management stated that it has been granted the authorization for selling all or part of its loan portfolio, or refinancing of the same. However, nothing has been finalized yet and the company may or may not pursue this action. Conns decided to hold any further comments in this regard for the time being.

Also, Conns is in the process of looking for personnel to fill its additional senior leadership positions.

Further, on account of disappointing sales and product margins along with greater charge offs from video game products, digital cameras and certain tablets in fiscal 2015, the company decided to discontinue the sale of these products from fiscal 2016.

Guidance

In the light of these announcements and the current scenario, the company envisions comps to be in the range of flat to up low-single digits in fiscal 2016. Retail gross margin for the fiscal is expected in the band of 40%–41%.

For the first quarter of fiscal 2016, Conns anticipates percentage of bad debt charge-offs (net of recoveries) to average outstanding balance in the range of 12.5%–13.5%. Interest income and fee yield are expected to be in the range of 17%–17.5% in the quarter.  

Stocks to Consider

Better-ranked stocks in the retail sector include Ross Stores Inc. ROST, The Kroger Co. KR and Whole Foods Market, Inc. WFM, each carrying a Zacks Rank #2 (Buy).
 


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