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Conn's Shares Fall over 30% after Terrible Earnings Report

Zacks Equity Research

The consumer durable product specialty retailer, Conn’s Inc. (CONN), yesterday delivered terrible second-quarter fiscal 2015 results and lowered its outlook for fiscal 2015, which caused its shares to plunge about 30.9% during the day’s trading session.

The company reported adjusted earnings of 50 cents per share that dipped sharply compared with the Zacks Consensus Estimate of 74 cents per share and fell 3.9% year over year. The decline resulted from higher delinquent debt rates that weighed on the company’s profits despite an outstanding performance from the retail division.

Conn's, Inc - Earnings Surprise | FindTheBest

Consolidated revenues for the quarter increased 30.4% year over year to $353.4 million, primarily driven by solid performance at the company’s retail segment and the new store model. Moreover, it surpassed the Zacks Consensus Estimate of $352.0 million.

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

Segment Discussion

Under the Retail segment, Conn’s offers consumer durable products in the United States, including home appliances, furniture and mattresses as well as consumer electronics. The segment’s total revenue for the quarter rose 28.9% to $288.3 million from $223.7 million in the comparable year-ago quarter, primarily aided by the opening of new stores and the solid comparable-store-sales performance.

Same-store sales (comps) for the quarter registered a whopping growth of 11.7%. The furniture and mattress category displayed a 30.3% increase in comps, benefiting from the company’s focus on expanding product offerings and store base. Right behind furniture and mattress were the home appliance and home office segments, recording comps growth of 19.4% and 14.2%, respectively. Meanwhile, the consumer electronics category registered comps growth of 7.8%.

Retail gross margin for the quarter improved 250 basis points (bps) to 40.8%, 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.

During the quarter, the company incurred $6.6 million toward operating expenses related to the opening of 8 stores in the second quarter. Of this expense, nearly two-thirds is accounted for in selling, general and administrative (SG&A) expenses while the remaining forms a part of cost of goods sold.

Revenues from the company's Credit segment grew 37.8% year over year to $64.3 million, mainly backed by higher average receivable portfolio balance outstanding. The customer portfolio balance increased 39.9% to $1.8 billion from the prior year.

During the quarter, the company’s provision for bad debts rose $18.3 million to $39.6 million, resulting in a 330 basis points increase in annualized provision rate to 13.9%. The rise came on the back of a 41.1% increase in average portfolio balance driven by 24.9% higher loan originations compared with last year and an unexpected rise in delinquency and future charge-offs.

Further, Conn’s witnessed a rise in delinquency rate (percentage of customer portfolio balance over 60 days), which increased to 8.7% as of Jul 31, 2014, from 8.2% a year ago and 8.0% in the previous quarter.  Moreover, the company noted that the delinquency rate (percentage of customer portfolio balance over 60 days) as of Aug 31, 2014, increased further to 9.2%.

Consequently, the Credit segment posted an operating loss of $0.2 million in the quarter recording a $7.7 million decline from the year-ago quarter.

Liquidity Position

Borrowing outstanding under the company’s asset-based loan facility as of Jul 31, 2014 was $361.2 million, while it has an immediately available borrowing capacity of $395.5 million. Furthermore, the company may avail an additional credit facility of $121.6 million if its inventory and customer receivables increase to a certain level.

On Jul 1, 2014, the company issued $250.0 million of 7.25% senior unsecured notes due 2022, which resulted in proceeds of $243.4 million. Further, the company sold and leased back three owned properties in July, bringing in net proceeds of about $19.3 million. Combined, these proceeds were used to reduce borrowings under the company’s $880 million asset-backed credit facility.

Fiscal 2015 Guidance

Disappointed by the rise in delinquency rates in the second quarter despite tightening underwriting standards and improving collections, the company lowered its earnings guidance for fiscal 2015. It now expects adjusted earnings in the range of $2.80–$3.00 per share compared with its previous forecast of $3.40–$3.70 per share. The mid-point of the company’s revised guidance for the full year assumes EPS growth of 12% and a 17% return on equity. 

Comps are anticipated to grow in the range of 5% to 10%. Retail gross margin is expected in the band of 40%–41%. Moreover, the company expects to open 18 stores, while it plans to close about 10 stores. Credit portfolio interest and fee yield will be approximately 17.5%—18%, while provision for bad debts is projected to be in the range of 11% to 12%. SG&A expenses as a percentage of sales is guided at 28.5%–29%.

Other Stocks to Consider

Currently, Conn’s carries a Zacks Rank #4 (Sell). Other stocks that are well placed in the retail space include Citi Trends Inc. (CTRN), Foot Locker Inc. (FL) and Zumiez Inc. (ZUMZ). While Citi Trends sports a Zacks Rank #1 (Strong Buy), Foot Locker and Zumiez carry a Zacks Rank #2 (Buy).

Read the Full Research Report on ZUMZ
Read the Full Research Report on FL
Read the Full Research Report on CTRN
Read the Full Research Report on CONN

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