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Conn's Upgraded to Strong Buy

Zacks Equity Research

Zacks Investment Research upgraded Conn’s Inc. (CONN) to a Zacks Rank #1 (Strong Buy) on Dec 10, as estimates have been on the rise after the company reported strong third quarter fiscal 2014 results and raised its outlook for fiscal 2014 on Dec 5.

Why the Upgrade?

Conn’s third quarter fiscal 2014 adjusted earnings of 71 cents per share were significantly higher than the year-ago quarter earnings of 38 cents and also beat the Zacks Consensus Estimate of 63 cents per share by 12.7%. In fact, in the last seven quarters, the company beat the consensus five times, missed it on one occasion and reported in line results in one quarter. The strong earnings growth was driven by higher top-line growth boosted by strong consumer demand for furniture, mattresses and computers.

Conn’s net sales also beat the Zacks Consensus Estimate of $286 million by 8.7% and climbed 50.6% year over year. Sales were driven by a gain of 53.6% in the Retail segment and a 37.8% increase in the Credit segment. Same store sales increased 35%. The company witnessed strong growth in furniture and mattress sales in the third quarter owing to company’s marketing.

Retail gross margin was 40.1% in the quarter, up 460 basis points year over year. Improved margins across all product categories, combined with growth in higher-margin furniture and mattress sales boosted retail gross margin in the quarter.

Despite higher operating expenses, adjusted operating income shot up 163% in the quarter to $34 million owing to higher sales. Operating margin improved drastically by 550 basis points to 13.2%.

Guidance Enhanced

Conn’s raised its earnings guidance for fiscal 2014 to $2.75 - $2.80 per share from the range of $2.50 - $2.65 projected earlier. Growth in same stores sales is expected in the band of 22% - 25% versus 15% - 20% guided previously. It also plans to open as many as 13 new stores for fiscal 2014, versus the prior guidance of 10-12 store openings.

Additionally, the company introduced its guidance for fiscal 2015, with earnings per share projected in the range of $3.80 - $4.00 and same store sales growth of 7% - 12%. The company expects to open 15-20 stores in fiscal 2015.

Earnings estimates have been trending higher over the past 30 days on account of its raised fiscal 2014 forecast. The Zacks Consensus Estimate increased 6.9% to $2.77 per share for fiscal 2014, while it advanced 10% to $3.93 per share for fiscal 2015 over the past 30 days.

Other Stocks to Consider

Other better-ranked stocks in the retail sector include Kirkland Inc (KIRK), Best Buy Inc. (BBY) and Haverty Furniture Companies Inc (HVT). While Kirkland holds a Zacks Rank #1, Best Buy and Haverty carry a Zacks Rank #2 (Buy).

Read the Full Research Report on BBY
Read the Full Research Report on KIRK
Read the Full Research Report on HVT
Read the Full Research Report on CONN

Zacks Investment Research