U.S. Markets close in 6 hrs 28 mins

Edited Transcript of CONN earnings conference call or presentation 31-May-19 3:00pm GMT

Q1 2020 Conn's Inc Earnings Call

BEAUMONT Jun 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Conn's Inc earnings conference call or presentation Friday, May 31, 2019 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Lee A. Wright

Conn's, Inc. - Executive VP & COO

* Norman L. Miller

Conn's, Inc. - President, CEO, President & COO of Retail and Chairman of the Board

================================================================================

Conference Call Participants

================================================================================

* Bradley Bingham Thomas

KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst

* Brian William Nagel

Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst

* John Allen Baugh

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Nels Richard Nelson

Stephens Inc., Research Division - MD

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, and thank you for holding. Welcome to Conn's Inc. conference call to discuss earnings for the fiscal quarter ended April 30, 2019. My name is Sherry, and I'll be your operator today. (Operator Instructions). As a reminder, this conference call is being recorded.

The company's earnings release dated May 31, 2019, was distributed before market opened this morning and can be accessed via the company's Investor Relations website at ir.conns.com.

During today's call, management will discuss, among other financial performance measures, adjusted EBITDA, adjusted net income and adjusted earnings per diluted share. Please refer to the company's earnings release that was issued today for a reconciliation of these non-GAAP measures to the most comparable GAAP measures.

I must remind you, some of the statements made in this call are forward-looking statements within the meaning of the federal securities laws. These forward-looking statements represent the company's present expectations or beliefs concerning future events. The company cautions that such statements are necessarily based on certain assumptions which are subject to risks and uncertainties, which could cause actual results to differ materially from those indicated today.

Your speakers today are Norm Miller, the company's CEO; and Lee Wright, the company's COO.

I would now like to turn the conference call over to Mr. Miller. Please go ahead sir.

--------------------------------------------------------------------------------

Norman L. Miller, Conn's, Inc. - President, CEO, President & COO of Retail and Chairman of the Board [2]

--------------------------------------------------------------------------------

Good morning, and welcome to Conn's First Quarter of Fiscal Year 2020 Earnings Conference Call. I'll begin the call with an overview, and then Lee will complete our prepared remarks with additional comments on the financial results.

Fiscal year 2020 is off to a strong start as record first quarter retail gross margin, combined with the best credit segment performance we have achieved in 5 years, drove a 54% year-over-year increase in first quarter earnings per diluted share. While we are disappointed by first quarter retail sales, the significant year-over-year improvement in overall net income demonstrates the power of our business model. As we focus on growing retail revenues, we believe we have a significant opportunity to expand profitably for many years to come, and I'm encouraged by the direction we are heading.

Given the company's strong financial position, our commitment to generating shareholder value and our confidence in the future, I'm pleased to announce that our Board of Directors has approved a $75 million stock repurchase plan.

I'm also very pleased with this morning's announcement on the enhancements to our leadership team. To review this morning's press release: Lee Wright has been promoted to the new role of Chief Operating Officer, Rodney Lastinger is joining Conn's as our new President of Retail, George Bchara has been promoted to Chief Financial Officer and Ryan Nelson has been promoted to Chief Accounting Officer.

Since I joined Conn's as CEO 4 years ago, you have continually heard me talk about the importance of leadership and the need to enhance our recruiting, retention and development capabilities. Today's announcement demonstrates the significant progress we have made across these 3 critical areas and follow the September 2018 promotion of John Davis to President of Credit and Collections.

Lee, J.D. and George were early members of our new leadership team and they played critical roles in our financial and operational turnaround and made significant contributions to build the leading platform that is in place today.

It's also important for us to attract proven leaders from outside of our organization. Rodney is joining Conn's as President of Retail after a successful 18-year career at Target Corporation. Most recently, Rodney served as Senior Vice President of Stores and was responsible for managing the Southern U.S. region of Target, which comprised of over $21 billion in sales, 85,000 team members and 565 stores. The team looks forward to working with Rodney as his experience managing a large retail operation will help us capitalize on our significant growth opportunity.

We are well positioned to create sustainable value for shareholders, and we have assembled a proven, experienced and motivated leadership team to take the company to the next level.

So with this introduction, let's look at our first quarter results in more detail, starting with our credit business.

First quarter credit results were excellent. Our credit spread for the first quarter was 980 basis points, representing the highest spread in 5 years as a result of our net yield of 22.1% and the net charge-off rate of 12.3%. As our credit performance continues to improve, we are focused on maintaining appropriate underwriting standards, and we will not increase credit risk to drive retail sales.

In addition, we are proactively managing underwriting at our new stores to control credit performance. First payment default rates at our new stores continue to be 20% better than the company average.

Overall, portfolio performance has benefited from stable underwriting, a healthy economic environment for our core customer and the enhancements we have made in our collection and recovery efforts.

As a result, the 60-plus day delinquency rate was 8.7%, representing a 40 basis point improvement from the same period last fiscal year. The improvement in the 60-plus day delinquency rate accelerated from the 20 basis point year-over-year decline the company experienced in the fourth quarter.

Improving our recovery process has also been a strategic focus as higher cash recoveries result in lower net charge-offs and reduced loss rates on our allowance for bad debt. For the first quarter of fiscal year 2020, we collected $6.5 million of recoveries, an 18% increase from the same period last year and more than we collected in all of fiscal year 2017. We have built a strong recovery platform, and we are on track to collect annual recoveries exceeding $20 million this fiscal year.

First quarter credit results demonstrate that we can operate a roughly breakeven credit business with approximately 1,000 basis points of credit spread. The net loss before taxes of the credit segment, which includes interest expense, was only $1.4 million in the first quarter and in line with our breakeven goal. In addition, credit segment profitability increased by $14.3 million over the prior year period and improved $45.5 million versus the first quarter of fiscal year 2017.

We remain focused on maintaining a stable credit business, and I'm confident in our ability to manage risk going forward, especially as our retail growth accelerates. With a solid credit platform in place, we are focusing more of our efforts on creating a best-in-class omni-channel retail business.

So let's review the drivers of our retail segment and the strategies we are pursuing to grow revenues.

First quarter retail sales were lower, primarily due to the benefit Hurricane Harvey rebuilding efforts had in the first quarter of last fiscal year. We expect this trend to continue through the second quarter of this fiscal year, with the potential for some residual impact in the back half of the fiscal year due to pull-forward of the replacement cycle in the Harvey markets. Unfortunately, first quarter retail sales in both Harvey and non-Harvey markets were weaker than expected. We believe this was primarily due to an higher-than-anticipated mix of online-sourced credit applicants, who typically have a lower approved and utilized rate; a disruptive transition to our new e-commerce platform; and the delay in tax refunds, which we believe impacted sales by reducing discretionary buying power across many of our markets.

We actively monitor our application volume as it is an important metric for our retail business due to our unique in-house credit offering. In fiscal year 2019, over 700,000 applications or 56% of all credit applications were completed through our website. In the first quarter, the mix of applications originated online grew faster than expected, which resulted in a 325 basis point decline in the approval rate from the same quarter last fiscal year and negatively impacted sales.

Online applicants have lower approval rates because they historically demonstrate higher credit risk compared to customers that apply within our stores. As a result, we are very cautious towards online applicants, and we will not increase credit risk to drive quarterly retail sales.

Also affecting first quarter retail sales was the transition to our new online platform, which took place in late March. The initial implementation impacted the customer experience on conns.com, increased page load times and interrupted our online application process. These online platform implementation issues and delayed tax refunds caused lower overall applications than expected. Application volume has increased over 9% month-to-date in May compared to a decline of over 2% in the first quarter of fiscal year 2020.

While we are disappointed by the effect that this had on first quarter sales, the implementation of the new website was a critical milestone in our long-term e-commerce strategy.

With our trend of higher online applications and desire to create a seamless experience for customers, we have been creating an end-to-end online solution regardless of the applicant's financing needs.

I'm extremely excited to announce that our core customer can now transact with us entirely online using our in-house credit offering as a result of our enhanced and secured website, advanced IT infrastructure and proprietary underwriting capabilities.

For nearly 60 years, Conn's has been in the credit business, and the launch of our e-commerce channel is a significant milestone in the 129-year history of our company.

Our analytics team has spent the past year refining our underwriting strategies to ensure that these sales fit within our risk tolerance and maintain our 1,000 basis point target credit spread. With the majority of applicants already online, we have a great opportunity to grow sales in this channel, while now providing an omni-channel experience for our customers.

In addition, our existing logistics infrastructure, warehouse locations and last-mile delivery capabilities are fully scalable as we already offer next-day delivery across our 14-state store network.

To highlight the magnitude of our opportunity, e-commerce sales represented less than $3 million last fiscal year and were only completed with our highest credit-quality customers through a personal credit card or Synchrony card. For the month of May alone, online sales were approximately $1 million. This was achieved without fully marketing or promoting this channel, and sales in May are already approximately 1/3 of last fiscal year's total e-commerce sales.

Over the past year, we have also talked about investments we are making in our retail platform, which include both the focus on higher margin and better best products, enhancing our merchandising strategy and improving our retail execution.

I'm pleased to report we made progress on all 3 fronts during the first quarter. Last year's expansion into gaming demonstrates our success rolling out new categories that resonate with our customers. These efforts drive traffic and support our retail gross margin expectation, while achieving strong credit results in what was historically a riskier category. We are using this positive experience we had in gaming as the basis for our overall category expansion strategy, which includes our recently launched test in cellphones, our upcoming test in flooring and our continued test and expansion of smart home products.

We also remain focused on newness within our categories, and during fiscal year 2020, we are executing large-scale transitions of products across all categories. This includes enhancing our appliance assortment, adding additional gaming PCs and Chromebooks to our home office collection, refreshing most of our mattress offerings and continuing to update our furniture assortment with on-trend styles and colors.

Our value-added product strategy, which is supported by our affordable credit offerings, continues to resonate with our customers.

Our product strategy is also benefiting retail gross margin, which increased 40 basis points from the first quarter of last fiscal year to a first quarter record of 40.0%. We believe an annual retail gross margin above 40% is sustainable as we continue to benefit from our better best product strategy.

In addition to our merchandising enhancements, we continue to make significant improvements in our retail execution. For example, our penetration rate of lease-to-own sales was 8.4% for the first quarter, up from 7.5% in the prior fiscal year quarter.

As you can see, we have a solid retail foundation in place, and we are now starting to expand our marketing efforts to drive traffic of our core target customer to both our website and into our stores. This includes a new marketing campaign, refreshing the Conn's HomePlus brand, new and unique promotions and intensifying our media efforts, both on- and off-line. As the tenure of our Chief Marketing Officer and his team grows, we are excited about the many opportunities we have to expand our reach as well as connect with and empower our customers.

During the first quarter of fiscal year 2020, we opened 4 new stores, including stores in Texas, Louisiana and Alabama. We also opened another new store in Texas this month. New store revenues and credit performance continue to be in line with our expectations, which provides us with increasing confidence in our retail expansion plan.

With our enhanced credit model in place, new stores are ramping at a slower rate compared to the company's growth phase in fiscal years 2013 to 2016 as we closely control credit risk.

We expect sales of new stores to mature to our company average over time, which will contribute to same-store sales growth as these stores increase the amount of recurring customers and enter the comp base.

In the current year, we now expect to open between 14 and 15 new stores in existing states, which will all be in our new store layouts featuring an enhanced customer experience and a more efficient sales process. With only 128 stores in 14 states, we have significant and long-term opportunity to expand our store base.

While retail sales have started out slower than desired, we are excited about the opportunities we have to produce consistent retail growth in the future. First quarter results demonstrate the strength of our business model and the positive evolution of our company. We continue to believe our retail model and credit platform can consistently support total annual retail sales growth of 8% to 10%, and I'm excited about the opportunities we have in fiscal year 2020 and beyond.

With this, let me turn the call over to Lee.

--------------------------------------------------------------------------------

Lee A. Wright, Conn's, Inc. - Executive VP & COO [3]

--------------------------------------------------------------------------------

Thanks, Norm. Consolidated revenues were $353.5 million in the first quarter of fiscal year 2020, a 1.4% decrease from $358.4 million for the same period last fiscal year. GAAP net income improved 53.2% to $19.5 million or $0.60 per diluted share for the first quarter of fiscal year 2020 compared to $12.7 million or $0.39 per diluted share for the prior fiscal year quarter.

On a non-GAAP basis, adjusting for certain charges and credits and loss from extinguishment of debt, net income for the first quarter of fiscal year 2020 was $0.58 per diluted share compared to $0.40 per diluted share for the same period last fiscal year.

Adjusted EBITDA was $50.4 million or 14.3% of total revenue for the first quarter of fiscal year 2020 compared to $42.9 million or 12% of total revenue for the same period last fiscal year. Reconciliations of GAAP to non-GAAP financial results are available on our first quarter press release that was issued this morning.

First quarter of fiscal year 2020 retail revenues were $262.2 million, a decrease of 4.9% from the same quarter last fiscal year. We achieved record first quarter retail gross margin of 40%. The 40 basis point year-over-year improvement in retail gross margin was a result of the continued benefit of our better best product strategy, which is enabled by our strong credit platform. An increase in retrospective commission on our warranty sales due to lower exchanges also helped first quarter retail gross margin.

Regarding the ongoing trade negotiations and tariffs, we are actively monitoring the current and potential impacts. Our merchandising team has been proactively working with our suppliers to diversify production outside China since the specter of tariffs arose last year. We have made substantial progress in doing so, with our primary focus on furniture. The actions already taken or in progress will lessen the impact of tariffs while product cost for items remaining in China will increase and result in higher average retail prices if the 25% tariff continues for a prolonged period.

Retail SG&A expense was $79.6 million, an increase of approximately $1.9 million for the same quarter in the prior fiscal year, while retail SG&A expense as a percentage of revenue deleveraged 220 basis points to 30.4%, primarily due to the decline in revenues and increased cost for new stores.

We plan to open 14 to 15 new stores this fiscal year compared to 7 stores last fiscal year. We typically start incurring costs associated with new stores approximately 6 months ahead of opening, and there will be additional expenses incurred throughout the fiscal year as we prepare to open these locations.

We remain focused on strategies to control SG&A expenses. However, to ensure our ability to successfully manage future growth, we will continue make investments to our platform, which includes expanding our store base, opening a new Houston distribution center and implementing state-of-the-art ERP and loan management systems.

Finance charges and other revenues for the credit segment were a first quarter record of $91.3 million for the first quarter of fiscal year 2020, up 10.5% from the same period last fiscal year. The increase versus the first quarter of fiscal year 2019 was primarily due to a yield of 22.1%, an increase of 130 basis points from the same period last fiscal year.

During the quarter, we also began to recognize retrospective insurance income following a period of higher claims and no retrospective insurance income as a result of Hurricane Harvey. First quarter net annualized charge-offs as a percent of the average outstanding balance were 12.3%, a 20 basis point increase over the prior fiscal year period.

Provision for bad debts in the credit segment was $39.9 million for the first quarter of fiscal year 2020, a decrease of $4 million from the same period last fiscal year, primarily due to a strong portfolio performance. The allowance for bad debt and uncollectible interest as a percent of the total portfolio was 13.5% at April 30, 2019, which was down approximately 20 basis points from the prior fiscal year period.

As Norm mentioned, for the first quarter of fiscal 2020, we collected $6.5 million of recoveries, an 18.3% increase from the same period last year.

SG&A expense in the credit segment for the first quarter increased 3.1% versus the same quarter last fiscal year, and on an annualized basis as a percentage of the average customer portfolio balance was 9.8% compared to 9.9%. The increase in credit SG&A expense primarily reflects the continued investments we are making in our recovery efforts and in increasing compensation costs.

Interest expense for the first quarter was $14.5 million, which declined 13.8% from the same period last fiscal year as a result of continued year-over-year deleveraging and reductions in our all-in cost of funds.

For the first quarter, annualized interest expense as a percentage of average portfolio balance was 3.7% compared to 4.5% for the same period last fiscal year.

Average net debt as a percentage of average portfolio balance was 60.5% compared to 67.3% for the same period last fiscal year.

Last month, we closed a new ABS transaction with an all-in cost of funds of 5.26%, which was the lowest all-in cost of funds we have achieved since re-entering the ABS market in 2015. ABS notes currently outstanding include all classes of our 2019 A and 2018 A notes and the B and C classes of our 2017 B note. We currently expect to complete one additional ABS transaction during the current fiscal year.

I'm very pleased with the improvements we continue to make in our capital position. The Board's decision to approve a $75 million stock repurchase program reflects Conn's strong balance sheet and diverse funding sources. In addition, we expect to fund the anticipated growth in our portfolio as a result of new store openings and same-store sales growth through internally generated funds and our existing capital sources.

Before opening the call up for questions, I want to reveal a couple of housekeeping items.

First, we expect our annual effective tax rate to be between 25% and 27% for the full 2020 fiscal year. Second, we adopted the new lease accounting standard this quarter, resulting in an increase in lease-related assets of $223 million and an increase in lease-related liabilities of $216.8 million. The difference between the lease-related assets and liabilities was recorded as an adjustment to retained earnings as of February 1, 2019. Please see our 10-Q for the period ending April 30, 2019, which will be filed later today, for additional information on our adoption of the new lease accounting standard.

With this overview, Norm and I are happy to take your questions. Operator, please open the call up to questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question is from Brad Thomas with KeyBanc Capital Markets.

--------------------------------------------------------------------------------

Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [2]

--------------------------------------------------------------------------------

Wanted to ask about same-store sales and then ask about gross margins. Starting first just with same-store sales. You addressed that obviously in the prepared remarks, but any ability to give us some more color around maybe what degree the website changeover and maybe some increased applications with the new website had on your same-store sales in 1Q?

--------------------------------------------------------------------------------

Norman L. Miller, Conn's, Inc. - President, CEO, President & COO of Retail and Chairman of the Board [3]

--------------------------------------------------------------------------------

Sure, Brad. Well, when you look at -- obviously, we're disappointed with the sales momentum in the first quarter and really driven by -- the same-store sales, really driven by 3 things. The first was the transition that I talked about in the prepared comments, both our e-commerce site and the website, Magento 2, did occur at the end of March. And that, coupled with the credit quality of the traffic to our website, our estimation is a combination of those 2 items has cost us about 400 basis points of the same-store sales. We saw that, as we mentioned, again, with total number of applications being down for the quarter. And then the third piece being the delay in the tax refunds with the government shutdown. We estimate that cost us about 150 basis points in specifically discretionary spending. When you see the breakout, you will see appliances are actually positive from the same-store sales standpoint, but the furniture and mattress and electronic, some of the discretionary products were actually down.

--------------------------------------------------------------------------------

Lee A. Wright, Conn's, Inc. - Executive VP & COO [4]

--------------------------------------------------------------------------------

Yes, in non-Harvey is what we're really talking about here, Brad.

--------------------------------------------------------------------------------

Norman L. Miller, Conn's, Inc. - President, CEO, President & COO of Retail and Chairman of the Board [5]

--------------------------------------------------------------------------------

Yes. I'm bridging towards non-Harvey. I'm sorry.

--------------------------------------------------------------------------------

Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [6]

--------------------------------------------------------------------------------

Got you. Right. Because that appliance category overall was the strongest category you reported, including Harvey. Right. Right. Okay. And so just thinking about 2Q and the guidance for comps to be in the 0 to 4% range, you are against the tougher comparison. I guess you're implying that you believe these items are really specific to 1Q and as they get behind you that you should get back towards the trajectory you thought you'd be on the quarter. I guess, any other color around how to think about your expectations for 2Q comps?

--------------------------------------------------------------------------------

Norman L. Miller, Conn's, Inc. - President, CEO, President & COO of Retail and Chairman of the Board [7]

--------------------------------------------------------------------------------

Yes. Sure, Brad. Well, a couple of things going on. First, from a Harvey standpoint, we still will see an impact, we believe, in the second quarter with Harvey. We're seeing that. But we are seeing an improvement, or that gap reducing from the Harvey to the non-Harvey markets. That gap, between even the fourth quarter and the first quarter, improved by about 700 basis points. And we expect, although it will still be down in the non-Harvey -- or in the Harvey, we guided from 7% to 11%. That's obviously an improvement from where we were. And then with the other items that I had mentioned, clearly, the tax refund, and we think we're past the website issues shown by the May applications being significantly up from our trend in the first quarter. That's how we get to the same-store sales guidance that we provided in the earnings release.

--------------------------------------------------------------------------------

Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [8]

--------------------------------------------------------------------------------

Got you. And just to be clear, what date do you feel like the website was working properly in the way you wanted it to?

--------------------------------------------------------------------------------

Norman L. Miller, Conn's, Inc. - President, CEO, President & COO of Retail and Chairman of the Board [9]

--------------------------------------------------------------------------------

Well, it happened in mid-March is when we made the transition, and it was -- we felt impact through the latter part of March. It wasn't until latter part of April that we started to really get back on track of where our expectations were coming out of the website. Having said that, I will say, Brad, that we've been working on the website transition and the investment on the e-commerce side for -- I mean, we haven't advertised it or publicized it very significantly, but from both an infrastructure standpoint with the website itself as well as an investment from an e-commerce standpoint, over the past 12 to 18 months, we knew that our customers were migrating more and more to at least shopping online, that we had to significantly improve that shopping experience, whether the customer actually transacted online, which they could not do with Conn's with our financing up until this past quarter. But even if they shopped on the website prior to making a decision whether to come into our store or not, we knew that we had to make significant investments. And as I said, we have been working on that, both infrastructure-wise since last spring. So a year ago. And if you look at from an e-commerce resource standpoint, when I joined the company 4 years ago, we had one person from a resource standpoint dedicated with e-commerce. As of a couple years ago, we had 4 people. Today, we have 12 people, and we'll have 20-plus people here before the end of the year. And we think it's a material sales driver, number one, people being able to transact. And May's performance, when we're in the very, very early innings, I think represent a material shift, as $1 million in sales approximately in May versus $3 million for the entire last year represent that. So -- but even for those not transacting, the shopping experience overall is going to be much better, and we think will impact those customers' ability before they come into our stores to be better prepared and hopefully, encourage them to shop in our stores if they decide not to do it online.

--------------------------------------------------------------------------------

Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [10]

--------------------------------------------------------------------------------

That's very helpful. And if I could squeeze in a follow-up kind of question just around gross margin. I'll just ask one question here. You've all done a great job driving higher gross margins in recent years and obviously, 1Q a record high. It looks like your guidance for 2Q is for gross margin to come down. How are you thinking about the puts and takes on gross margins going forward?

--------------------------------------------------------------------------------

Lee A. Wright, Conn's, Inc. - Executive VP & COO [11]

--------------------------------------------------------------------------------

Brad, it's Lee. So Q2, as we said, obviously, when you look at the compare versus last year, we're guiding down. As you remember, with the tariffs that were applied last year, we had done some purchases forward, and we got the benefit of the immediate price increase, although our cost of goods were obviously at the old price. So we got a onetime benefit in Q2, so you're seeing that. As Norm talked about on the call, we still feel really good about the 40% and above for retail gross margin for the entire year, and we're sticking with that. So continue to feel good.

--------------------------------------------------------------------------------

Norman L. Miller, Conn's, Inc. - President, CEO, President & COO of Retail and Chairman of the Board [12]

--------------------------------------------------------------------------------

If you back that out, Brad, it's basically flat year-over-year. If you back that onetime benefit we got last second quarter.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

Our next question is from Brian Nagel with Oppenheimer & Co.

--------------------------------------------------------------------------------

Brian William Nagel, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [14]

--------------------------------------------------------------------------------

Lee, congratulations on the new responsibilities.

--------------------------------------------------------------------------------

Lee A. Wright, Conn's, Inc. - Executive VP & COO [15]

--------------------------------------------------------------------------------

Thanks, Brian.

--------------------------------------------------------------------------------

Brian William Nagel, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [16]

--------------------------------------------------------------------------------

So my first question, I guess, I think, is more for Norm. A bit bigger picture related to sales. Clearly, your credit business is working very, very well right now. And frankly, having followed your company now for a while, it seems as though credit may be tracking now better than you initially articulated a while ago when you joined the company, when we started talking about where credit could go. This question I have, and you mentioned in your prepared comments, at least a few times, not compromising credit to drive sales. But the question is, how do you know or what's the thought process behind not loosening credit a bit from these very, very good levels to potentially drive better sales?

--------------------------------------------------------------------------------

Norman L. Miller, Conn's, Inc. - President, CEO, President & COO of Retail and Chairman of the Board [17]

--------------------------------------------------------------------------------

That's a great question, Brian. And it's one we talk about regularly within the company. And what I would guide you to, Brian, is that 1,000 basis points of spread. And as we mentioned in the prepared comments, we're basically there at 980 basis points, which has brought the credit business, as I talked about 4 years ago, that when we got to that point, the business would be approximately breakeven, which is, in essence, where we are with the credit business. So as we are there and maintain there and potentially even get better from there, that gives us opportunities that we will absolutely take advantage of to take some increased risk from an underwriting and a credit standpoint to help us from a sales standpoint. Clearly, it's painful in the short run, Brian, I understand that, and for investors as we manage the credit business the way we are. But to me, we're not managing the business for a quarterly basis, I'm certainly not. It's on the long-term strength and health of the company. And as we start adding stores and the things we're putting in place, very confident with where we're going from the same-store sales standpoint, and from the total sales standpoint with the retail investments that we've made. And I do believe we will have opportunities from an increased risk standpoint with the credit business and still maintain that 1,000 basis points of spread as we continue because we're not at our peak with the credit business. We still have more opportunities with recoveries. The team continues to perform better, both from the front-end underwriting and the back-end collection, which only provides more opportunities -- will provide more opportunities for us from a sales standpoint. And when you couple that with the investments we made from a retail standpoint with -- both from the people standpoint and the new stores standpoint, my confidence level on the retail business in sales has never been stronger since I've been here over the 4 years.

--------------------------------------------------------------------------------

Brian William Nagel, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [18]

--------------------------------------------------------------------------------

Okay. I get it. That's a very good -- very solid detail here. The second question I have -- again, I think this may be somewhat of a follow-up to Brad's question before. But you called out here the headwind in Q1, the advancements you made in online, both from a credit application and from a sales perspective. And I guess what I'm not totally clear yet is, should we think about this shift, assuming that some of your customers now will be interacting with Conn's more online, customers that historically may be interacting with the store are now online, will that shift lead to a structural change in approvals? Or is it something that you're tweaking through as the shift occurs?

--------------------------------------------------------------------------------

Norman L. Miller, Conn's, Inc. - President, CEO, President & COO of Retail and Chairman of the Board [19]

--------------------------------------------------------------------------------

Yes. What I'd say is a couple of things are happening, Brian. First, part of the reason, as I mentioned in response to Brad, that we started this process well over 15 months ago, realizing that we needed to dramatically up our game, both with the infrastructure of the website and from a resource from the website standpoint was that we saw -- it was actually about 18 months ago, 24 months ago, we saw a transition of the number of web applications we were getting versus retail applications crossed over. And what I mean by that is, 18 months ago or so -- 24 months -- between 18 and 24 months ago, we saw more web applications than retail applications. The customers were actually filling the application out before they were coming into the store. And prior to that, retail applications always were higher than web applications. So our customers, even though they couldn't transact 2 years ago, they were going online, they were shopping before they went to our stores at a greater and greater level. They were filling out the web -- the qualification and the application online and bringing it into the store. And they just showed, as consumers everywhere are showing, a desire to do shopping online even before they come into a bricks-and-mortar. And when you couple that with the fact that with the investment from the credit business with J.D. and the team and the underwriting team and the data analytics, we knew we were getting closer to the ability to be able to underwrite without ever seeing a customer in our store. And In our 60-year history, this first quarter, that's the first time that we've ever been able to do that. And that's what drove a significant part of the increase of -- from a couple hundred thousand in sales in the month of May prior year to $1 million plus, was the ability to do Conn's financing with those customers not having to come into our stores. So that investment and that effort over the past year and upgrading the website from every aspect is -- actually, came live, as I mentioned, in the middle part of March, and we had some growing pains as we went through that, but we think we've weathered based on May results and what we're seeing application-wise. We still have lots of room for improvement to build on the website, but we have the platform in place now to be able to really -- as I said, we're in the early innings, but to take it to the next level.

--------------------------------------------------------------------------------

Lee A. Wright, Conn's, Inc. - Executive VP & COO [20]

--------------------------------------------------------------------------------

Brian, it's Lee. Just to add to that, I mean, as you know with your background, being the true omni-channel retailer is such a critical step for us, and so exciting with our last-mile logistics already in place and what we have to offer the customer. We don't need to make all those additional investments to become that omni-channel retailer. So we're extremely excited, as Norm said earlier, and we just can't wait to continue to take advantage of this opportunity.

--------------------------------------------------------------------------------

Brian William Nagel, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [21]

--------------------------------------------------------------------------------

Got it. And then just one final quick one, I guess, more for Lee. On the buyback, it's a, I mean, relatively large buyback versus your market cap. How should we think about the pace of that? Is it more of a -- you think more steady repurchases, more opportunistic?

--------------------------------------------------------------------------------

Lee A. Wright, Conn's, Inc. - Executive VP & COO [22]

--------------------------------------------------------------------------------

Yes. No. It's a great question, Brian. Look, we're obviously going to be opportunistic as we see it. It is a large number relative to our market cap. But I think it really is a testament to our capital position, where we stand, the liquidity that we have, our access to capital and our belief in the business and what the true value is. So we want to make sure we made that statement to the market.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

Our next question is from Rick Nelson with Stephens Inc.

--------------------------------------------------------------------------------

Nels Richard Nelson, Stephens Inc., Research Division - MD [24]

--------------------------------------------------------------------------------

So you talked about May e-commerce sales of $1 million-plus, big growth there. Can you speak to May overall same-store sales, what you're seeing?

--------------------------------------------------------------------------------

Norman L. Miller, Conn's, Inc. - President, CEO, President & COO of Retail and Chairman of the Board [25]

--------------------------------------------------------------------------------

What I would tell you, Rick, is with the guidance that we gave, we're -- we feel good about the guidance we've given based on -- that's partly why we gave the guidance we gave, based on where May -- and you can see that the quarter performance is an improvement from our first quarter performance.

--------------------------------------------------------------------------------

Nels Richard Nelson, Stephens Inc., Research Division - MD [26]

--------------------------------------------------------------------------------

Got it. So you're tracking in that 0 to minus 4% range. You got a few stores now that have a full year under the belt. If you could speak to how those stores are performing, especially relative to the model that was in your PowerPoint.

--------------------------------------------------------------------------------

Lee A. Wright, Conn's, Inc. - Executive VP & COO [27]

--------------------------------------------------------------------------------

Rick, it's Lee. We're very pleased with how our stores have been performing and what they're doing. So again, that's what gives us the confidence. As we said, our original range used to be 12 to 15. We're to now going to do 14 to 15, as we've talked about before. We have that much confidence, and we really anticipate doing more the next year. So very much in line with what we have in the PowerPoint.

--------------------------------------------------------------------------------

Nels Richard Nelson, Stephens Inc., Research Division - MD [28]

--------------------------------------------------------------------------------

And competitive landscape, are you seeing any changes there? And if they're not shopping at Conn's, where are these credit-needy customers shopping for your products?

--------------------------------------------------------------------------------

Norman L. Miller, Conn's, Inc. - President, CEO, President & COO of Retail and Chairman of the Board [29]

--------------------------------------------------------------------------------

Well, obviously, it's fairly well publicized that a large electronics retailer announced that they had started a partnership with Progressive in the past several months. So we are seeing that continue, the lease-to-own options from a virtual standpoint in major retailers. So -- but with our core customer, our core Conn's financing customer that qualifies above -- that is above that threshold from a lease-to-own standpoint, we're not seeing anything different from a competitive standpoint than we have been seeing. There could be some impact on the folks that don't qualify for our financing, for the Conn's financing in our stores with that competition for the lease-to-own that's within our stores as well. But if they are aware of the fact that our financing model provides a much lower average cost and monthly payment for that Conn's financing customer than a lease-to-own option would provide them, we feel very good about where we fit competitively versus anybody else who's out there.

--------------------------------------------------------------------------------

Nels Richard Nelson, Stephens Inc., Research Division - MD [30]

--------------------------------------------------------------------------------

And finally, e-commerce. If you could speak to the economics of those sales compared to the in-store sales and the credit performance, if you're seeing any differences and delinquencies or loss rates for those e-comm customers.

--------------------------------------------------------------------------------

Norman L. Miller, Conn's, Inc. - President, CEO, President & COO of Retail and Chairman of the Board [31]

--------------------------------------------------------------------------------

I'll start with that part first, Rick, because we are very conscious of the fact that from a credit quality standpoint, online customers inherently have a higher credit risk than customers that come in the store. So we underwrite appropriately for those customers as a result of that. But what I will say is, at least out of the gate, we're seeing out of that $1 million dollars in May, the largest category significantly is appliances, which is our best credit-quality category of any of the categories. And initially out of the gate and it's early, so you can't draw any conclusions, but very pleased with what we're seeing with first payments and the initial appearance out of it and confident, frankly -- very confident with where we're at it from an underwriting standpoint that we'll be able to manage it within the 1,000 basis points of spread that we've targeted for the overall credit business.

--------------------------------------------------------------------------------

Nels Richard Nelson, Stephens Inc., Research Division - MD [32]

--------------------------------------------------------------------------------

And the profitability of e-comm compared to the stores, is there cost take-out? I know you're a commission shop in stores.

--------------------------------------------------------------------------------

Norman L. Miller, Conn's, Inc. - President, CEO, President & COO of Retail and Chairman of the Board [33]

--------------------------------------------------------------------------------

Yes. Definitely, all things being equal, and it depends on what the cost of the acquisition of the customer is. That would be the only thing that would be -- that could potentially impact it. But from just a pure cost standpoint, it is more profitable to interact with that customer online as (sic) [than] it is in the store because you're not paying a commission and there is some -- obviously, you don't have the bricks-and-mortar cost at the same level and it is inherently more profitable, everything else being equal.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

Our next question is from John Baugh with Stifel.

--------------------------------------------------------------------------------

John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [35]

--------------------------------------------------------------------------------

Congrats on the credit metrics and the elevation in title there, Lee.

--------------------------------------------------------------------------------

Lee A. Wright, Conn's, Inc. - Executive VP & COO [36]

--------------------------------------------------------------------------------

Thanks, John. Appreciate it.

--------------------------------------------------------------------------------

John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [37]

--------------------------------------------------------------------------------

First and foremost, what -- on these web applicants, are any of these existing customers? Or what's the mix versus the people that come into the store?

--------------------------------------------------------------------------------

Norman L. Miller, Conn's, Inc. - President, CEO, President & COO of Retail and Chairman of the Board [38]

--------------------------------------------------------------------------------

Yes. Some of them are existing customers. We haven't published what that mix is between new and existing, but there are a material number of new customers involved within that have not shopped with us before.

--------------------------------------------------------------------------------

John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [39]

--------------------------------------------------------------------------------

Okay. And then could you remind us, because year 1 is so much lower on the new store than it used to be, what the ramp year 2 versus year 1 and what the expectation is there?

--------------------------------------------------------------------------------

Lee A. Wright, Conn's, Inc. - Executive VP & COO [40]

--------------------------------------------------------------------------------

John, it's Lee. So obviously, in a store in a newer market for us, it's going to be a larger ramp where our brand name isn't as well known. So we've talked anywhere in, call it, 20 percentage ramp in year 2 for those newer stores. But then stores in existing markets where we already have stores and a brand name out there, we'll get much closer to the average, the company average from the get-go. So it will be a slower ramp at that point.

--------------------------------------------------------------------------------

John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [41]

--------------------------------------------------------------------------------

And I would assume in that existing markets, whatever you pick up in that year 2, you might -- there might be some headwind from the cannibalization even in year 2, so it's kind of a wash. Or is that a bad way to look at it?

--------------------------------------------------------------------------------

Lee A. Wright, Conn's, Inc. - Executive VP & COO [42]

--------------------------------------------------------------------------------

John, it's a very good point. And at this point, we haven't talked about it, again, because our new stores in existing markets aren't big enough yet. But yes, we will have cannibalization -- some cannibalization in an existing market, but most certainly and obviously, the only reason we open those new stores in the existing markets is we will grow the overall market dramatically. But there will be some cannibalization. As we get to that point, we'll make sure that we point that out, but it is a good question.

--------------------------------------------------------------------------------

Norman L. Miller, Conn's, Inc. - President, CEO, President & COO of Retail and Chairman of the Board [43]

--------------------------------------------------------------------------------

And highlight the magnitude of what that is. We used to do that 3, 4 -- 4 or 5 years ago, if you recall, John.

--------------------------------------------------------------------------------

John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [44]

--------------------------------------------------------------------------------

Yes. Is it on credit -- just trying to think about that P&L quickly. I see your in slide deck, you're still thinking gross yield could be 20 -- what, 23% to 25%. So there's some upside there. So I don't know what your expectation on losses are, but they certainly have stabilized, and then your latest ABS, your transaction interest costs are lower. So it all sort of points to the potential to actually make a profit now. I understand your comments earlier about maybe we take some of that. But for the moment, let's assume we didn't make any changes in terms of underwriting. Where do you think in a year or 2 as the loan book matures, where maybe would that credit operation go? I'm just trying to get a sense of how much money you might have to play with?

--------------------------------------------------------------------------------

Norman L. Miller, Conn's, Inc. - President, CEO, President & COO of Retail and Chairman of the Board [45]

--------------------------------------------------------------------------------

Well, I mean, if you take the midpoint of -- at the time we get to the midpoint of the 23% to 25% range, at 24% and you're seeing charge-offs in the mid-12s, 12%, 12.5%, and you do the math on that, you basically are at about 1,200 basis points or so that would give you several hundred -- a couple of hundred basis points to be able to take some increased risk and maintain the 1,000 basis points, if you just do the simple math, John. I'm sure you've done that, but I'm doing for you.

--------------------------------------------------------------------------------

John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [46]

--------------------------------------------------------------------------------

And what's -- Norm, what's your clarity on that? And I guess I'm asking almost, what's the timeline on that do you think? And when might you first, if you do go down that path, contemplate potentially loosening underwriting slightly?

--------------------------------------------------------------------------------

Norman L. Miller, Conn's, Inc. - President, CEO, President & COO of Retail and Chairman of the Board [47]

--------------------------------------------------------------------------------

First of all, we don't like to use the word loosening. We've been burned by that before in the past. We prefer to say take measured, increased risk. But look, I mean, what I would tell you, John, is at the back half of this year, I mean, we -- and we manage it just -- we share it on a macro level, but frankly, we look at that 1,000 basis points of spread geographically. We look at it as new customers, existing customers. We look at it in a variety of different cuts of it in a fairly -- from a data standpoint that will give us, certainly, probably the back half of this year and into next year, opportunities in various of those segments that keep us from a company standpoint at that 1,000 basis points overall. But we'll do it in a very targeted and specific way.

--------------------------------------------------------------------------------

John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [48]

--------------------------------------------------------------------------------

Okay. And then, Texas. You've talked in the past about some of the Hispanic concerns with Trump coming in. There was, I believe, a tweet made last night that caught some interest. We've had oil prices all over the place in Texas. Is there any granularity on what's going on with your loan book and/or your business specifically in Texas?

--------------------------------------------------------------------------------

Norman L. Miller, Conn's, Inc. - President, CEO, President & COO of Retail and Chairman of the Board [49]

--------------------------------------------------------------------------------

Nothing on the back end that we're seeing at this point, but I will tell you we monitor it closely. We do -- as I woke up this morning, we saw the tweets on the tariffs, and that certainly causes angst for me with our core customer because we have seen them, as you know, respond in the past from a reticence and a desire to pull back when they feel that anxiety and unknown of kind of what's happening. So although we have not seen that yet, we're very focused and measuring what's happening on both the front-end and the back-end with that key customer of ours.

--------------------------------------------------------------------------------

John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [50]

--------------------------------------------------------------------------------

Okay. And last question quickly, 3 letters that are kind of scary, ERP. Where are we with it? What's the schedule? Why does it not blow up on us?

--------------------------------------------------------------------------------

Lee A. Wright, Conn's, Inc. - Executive VP & COO [51]

--------------------------------------------------------------------------------

Thanks, John. I'll that one for you. Look, again, everyone can get scared of an ERP conversion. We're very confident in the testing we've done prior to it. So, look, it's been an extreme focus for a long time, and I feel very confident that it's going to go smoothly.

--------------------------------------------------------------------------------

John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [52]

--------------------------------------------------------------------------------

When is the timing on that, Lee?

--------------------------------------------------------------------------------

Lee A. Wright, Conn's, Inc. - Executive VP & COO [53]

--------------------------------------------------------------------------------

It's this quarter.

--------------------------------------------------------------------------------

Operator [54]

--------------------------------------------------------------------------------

We have reached the end of our question-and-answer session. I will now turn the call over to Norm Miller for closing remarks.

--------------------------------------------------------------------------------

Norman L. Miller, Conn's, Inc. - President, CEO, President & COO of Retail and Chairman of the Board [55]

--------------------------------------------------------------------------------

Thank you. We appreciate your interest in the company, and we look forward to sharing second quarter results with you in a few months. Have a great day.

--------------------------------------------------------------------------------

Operator [56]

--------------------------------------------------------------------------------

Thank you. This concludes today's conference. You may disconnect your lines at this time. And thank you for your participation.