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Edited Transcript of CONN earnings conference call or presentation 26-Mar-19 3:00pm GMT

Q4 2019 Conn's Inc Earnings Call

BEAUMONT Mar 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Conn's Inc earnings conference call or presentation Tuesday, March 26, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Lee A. Wright

Conn's, Inc. - Executive VP & CFO

* Norman L. Miller

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

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Conference Call Participants

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* 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

* Kyle M. Joseph

Jefferies LLC, Research Division - Equity Analyst

* Nels Richard Nelson

Stephens Inc., Research Division - MD

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Presentation

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Operator [1]

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Good morning, and thank you for holding. Welcome to the Conn's Inc. conference call to discuss earnings for the fiscal quarter ended January 31, 2019. My name is Melissa, and I'll be your operator today. (Operator Instructions) As a reminder, this conference call is being recorded. The company's earnings release dated March 26, 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 performances measures, adjusted EBITDA, adjusted net earnings and adjusted annual credit segment operating income.

Please refer to the company's earnings release that was issued today for a reconciliation of these non-GAAP measures to their most comparable GAAP measures.

I must remind you that 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 CFO.

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

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

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Good morning, and welcome to Conn's Fourth Quarter of Fiscal Year 2019 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 2019 was a historic year for Conn's and reflects the growing momentum in our business.

Fourth quarter GAAP earnings were $29.5 million or $0.91 per diluted share, which were the best quarterly earnings we have achieved in our 129-year history.

Adjusted EBITDA for fiscal year 2019 was a record $212.8 million, a 27% increase from last fiscal year, and approximately 18% higher than our previous annual adjusted EBITDA record.

In addition, same-store sales, retail gross margin, and bad debt charge-offs all improved significantly in fiscal year 2019 compared to the prior fiscal year.

As we start the new fiscal year, our focus is on retail growth, and we expect to achieve both positive same-store sales and accelerated store growth.

Our ability to simultaneously manage retail growth and credit risk is the culmination of our business transformation, and we are embarking on the next phase of our business plan. Our strategy is to produce 8% to 10% annual retail sales growth and controlled credit performance, which drives a very powerful financial model.

We believe we can grow at this rate for many years to come, and we are extremely excited by the long-term opportunities we have in front of us to create sustainable shareholder value.

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

As we have stated on previous calls, we believe our non-Harvey market performance is the best indicator to use when analyzing our retail business during the quarters impacted by the hurricane.

I am pleased to report the same-store sales for the fourth quarter in non-Harvey markets were up 3.7%, which validates our retail growth initiatives and is in line with our long-term expectations of achieving positive low single-digit same-store sales.

Overall, same-store sales were down 1.4% for the fourth quarter, primarily due to the benefits Hurricane Harvey rebuilding efforts had in the fourth quarter of last fiscal year.

Same-store sales in Harvey markets were down 12.9% in the fourth quarter. As we mentioned in our third quarter conference call, strong November sales benefited from higher promotional activity in the large-screen TV category. This pulled demand forward and sales trends decelerated throughout the fourth quarter. In addition, we believe the government shutdown also impacted fourth quarter sales trends.

Looking at fiscal year 2019 sales, total retail sales were positive for the year ending January 31, 2019, which is the first year of positive retail sales growth in 3 years.

In addition, for fiscal year 2019, non-Harvey same-store sales were down 1%, which is close to our long-term annual same-store sales guidance.

Lease-to-own sales were 8.1% for the fourth quarter and were an annual record 7.5% for fiscal year 2019.

For the month of January, 9.2% of retail sales were financed through lease-to-own programs, reflecting the progress we are making towards our 10% lease-to-own sales goal.

Expanding our product categories is another component of our retail growth strategy. During fiscal year 2019, we successfully added gaming systems and robotic vacuums to our assortment, and I'm pleased to report these new product initiatives performed better than expected.

We also recently launched new upholstery and dining collections, and the initial reaction from our customers has been encouraging.

During fiscal year 2020, we will continue to focus on enhancing our product offering with complementary categories that align with our retail and our credit strategy. As a result, during the first half of fiscal year 2020, we will begin testing cell phones and flooring products in our stores. These large compelling and exciting categories resonate with our customers and support our strategy of adding aspirational home products that our customers can affordably finance.

We plan on launching new marketing initiatives throughout fiscal year 2020 to help promote our expanding product assortment and growing retail presence.

Our product strategy is also benefiting retail gross margin, which increased 230 basis points in the fourth quarter to a quarterly record of 42.4%.

On an annual basis, retail gross margin was a record 41.2% and was the first time we have reported annual retail gross margin over 40%. We believe our retail gross margin is sustainable as we continue to benefit from our better, best product strategy.

Looking at first quarter sales. February sales were impacted by the slow start to tax season and lower refunds during the month. While the pace of tax refunds has improved and helped March sales, we are cautious on first quarter sales due to February's slow start.

In addition, Harvey continues to impact current sales trends. We will begin lapping the impacts from Harvey rebuilding efforts in the back half of this fiscal year, which will help same-store sales.

For the first quarter of fiscal year 2020, we are guiding non-Harvey same-store sales in the range of negative 2% to positive 2% and Harvey same-store sales in the range of negative 12% to negative 8%.

During fiscal year 2019, we opened a total of 7 new stores, including stores in Texas, Virginia and Louisiana.

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 as we closely control credit risk. We expect sales in new stores to mature to our company average over time, which will provide a tailwind to same-store sales once new stores build a base of recurring customers.

From a credit standpoint, first payment default rates on originations in our new stores opened between July and December 2018 were nearly 20% lower than first payment default rates on total originations made during the same time period, highlighting our ability to prudently manage credit risk as we open new stores.

For fiscal year 2020, we plan to open 12 to 15 new stores in existing states, which will all be in our new store layout, featuring an enhanced customer experience and a more efficient sales process.

To date, in the first quarter of fiscal year 2020, we have opened a new store in Montgomery, Alabama, and a new store in New Orleans, Louisiana. We plan to open 2 more stores in New Orleans in the coming months, and we are extremely excited about our opportunity in this new market.

With 125 stores in 14 states, we have a significant and long-term opportunity to expand our store base.

In addition to our investments in new stores, we plan on opening our new Houston distribution center late this summer. Once operational, we expect the state-of-the-art facility to improve our logistics efficiencies across our largest market. As we increase new store investment, control sales of new locations, transition into our new Houston DC, and make further investments in our IT systems to support our growth, we expect that some margin degradation will temporarily occur. However, we expect to leverage these investments as we lap initial cost and grow sales.

We are excited to execute our retail growth plan and I look forward to sharing our success in the coming quarters.

Now let's take a look at our strong credit performance during the fourth quarter and fiscal year 2019.

Our credit segment achieved several milestones during fiscal year 2019, including a record annual net yield of 21.3% and a periodic charge-off rate of 12.7%, which is in line with our long-term annual loss expectation of 12% to 13%.

This performance helped drive a $32.1 million improvement in annual adjusted credit segment operating income, which ended the year at $5.7 million versus a loss of $26.4 million last fiscal year.

In fact, this was the best annual adjusted credit segment operating income Conn's has produced in 5 years.

For fiscal year 2019, Conn's credit spread increased to 860 basis points compared to 420 basis points in the prior fiscal year.

In dollar terms, our annual credit spread increased 111% to $131.1 million in fiscal year 2019 compared to $62.2 million for fiscal year 2018.

We are closing in on our 1,000 basis point annual credit spread target, which we expect to achieve this fiscal year.

For the fourth quarter, interest income and fees were a record $85.4 million and increased over 9% from the prior fiscal year period as a result of higher interest rates and better charge-off performance.

This drove a 110 basis point year-over-year improvement in our net yield, which was 21.6% for the fourth quarter of fiscal year 2019.

Higher rates of no-interest receivables and charge-offs typically occur in the fourth quarter, which happened this year and drove a 10 basis point reduction in our net yield compared to the third quarter rate.

As we have stated previously, we believe our portfolio will ultimately achieve our net yield goal of 23% to 25%, and we are confident we will produce a 1,000 basis points spread during fiscal 2020.

Recent 60-plus day delinquency trends demonstrate that we have reached credit stabilization as a result of the successful underwriting changes we implemented several years ago. As a result, we expect delinquency rates to range between 9% to 10% of the total portfolio carrying value, which will vary quarter-to-quarter based on typical seasonal trends.

Our credit results continue to demonstrate better operating performance and favorable credit trends. I am confident in the continued strength of our credit platform and our ability to manage risk going forward, especially as our retail growth accelerates.

So to conclude my prepared remarks before I turn the call over to Lee, fourth quarter and fiscal year 2019 results demonstrate the strength of our financial model and the positive evolution of our business.

We continue to believe our retail model and credit platform can consistently support total annual retail sales growth of 8% to 10%, and we believe we are well positioned to achieve this goal in fiscal year 2020.

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

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

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Thanks, Norm. Consolidated revenues were $433 million for the fourth quarter of fiscal year 2019, a 3% increase from $420.4 million for the same period last fiscal year.

GAAP net income improved significantly to a record $29.5 million or $0.91 per diluted share for the fourth quarter of fiscal year 2019 compared to $3.2 million or $0.10 per diluted share for the prior fiscal year quarter.

On a non-GAAP basis, adjusting for certain charges and credits and losses from extinguishment of debt, net income for the fourth quarter of fiscal year 2019 was $0.96 per diluted share compared to $0.56 per diluted share for the same period last fiscal year.

Adjusted EBITDA was $67.7 million or 15.6% of total revenue for the fourth quarter of fiscal year 2019 compared to $57.5 million or 13.7% of total revenue for the same period last fiscal year.

Reconciliations of GAAP to non-GAAP financial results are available on our fourth quarter press release that was issued this morning.

Fourth quarter of fiscal year 2019 retail revenues were $338.9 million, an increase of 1.3% from the same quarter last fiscal year.

We achieved record retail gross margins for the fourth quarter of fiscal year 2019 of 42.4%. The 230 basis point year-over-year improvement in retail gross margin was a result of continued benefits of our better, best product strategy, which is enabled by our strong credit platform.

Retail SG&A expense was $87 million, an increase of approximately $3.9 million from the same quarter in the prior fiscal year.

While retail SG&A expense as a percentage of revenue deleveraged 90 basis points to 25.7%, primarily due to costs for new stores and an increase of corporate overhead allocation.

As Norm previously mentioned, we plan on opening 12 to 15 new stores this 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, the company will be making investments in new stores along with continued enhancements to our business platforms to ensure our ability to successfully manage future growth.

Turning now to our credit segment. To make it easier for investors to understand our customer accounts receivable and associated credit performance, we are now presenting certain credit measures, primarily those in Note 2 of our 10-K, on a carrying value basis. A carrying value presentation reduces the value of the customer accounts receivable balance by adjusting for deferred fees and origination costs, the allowance for no-interest option credit programs and the allowance for uncollectible interest.

Our percentages and balances of accounts receivable 60 days plus past due and re-aged account receivables calculated under our previous and current methodology are available in our investor presentation, which is on our website.

References to balances and percentages of accounts receivable 60 days plus past due were re-aged on today's conference call, and going forward will be at carrying value.

Finance charges and other revenues for the credit segment were a quarterly record of $94.1 million for the fourth quarter of fiscal year 2019, up 9.6% from the same period last fiscal year. The increase versus last fiscal year was primarily due to a yield of 21.6%, an increase of 110 basis points from last fiscal year.

As expected, there continues to be no retrospective commissions as a result of higher claim volumes related to the increased-severity weather events in addition to lower interest penetration rates and rate changes.

We continue to actively monitor both our partners and overall insurance performance.

Fourth quarter net annualized charge-offs as a percent of the average outstanding balance were 12.7%, a 220 basis point improvement over the prior fiscal year. It is also important to note that fourth quarter net charge-offs declined $6.3 million or 11.2% compared to the prior fiscal year.

For the fiscal year 2019, net charge-offs were $32.8 million or 14.5% lower than last fiscal year. Our periodic charge-off rate is now in line with our long-term guidance and as a result, we are no longer providing static loss guidance for specific periods of originations. We believe we can continue to achieve a periodic loss rate between 12% and 13% as we open new stores and grow retail sales.

Provision for bad debts in the credit segment was $55.4 million for the fourth quarter of fiscal year 2019, an increase of $0.7 million from the same period last fiscal year, primarily due to growth of the portfolio.

The allowance for bad debt and uncollectible interest as a percent of the total portfolio was 13.5% at January 31, 2019, which was up 20 basis points from the prior fiscal year period.

Improving our recovery process has been a strategic focus throughout this fiscal year, as high recoveries benefit cash collections and reduce loss rates on our allowance for bad debt.

For fiscal year 2019, we collected $18.8 million of recoveries, almost doubling last fiscal year result of $10.9 million. We made progress implementing additional recovery partners during the fourth quarter, and we believe we are on track to collect annual recoveries exceeding $20 million in fiscal year 2020.

For the month of February, recoveries exceeded $2 million, which is the strongest month of recoveries we have ever achieved and reflect continued improvement.

SG&A expense in the credit segment for the fourth quarter increased 13.7% versus the same quarter last fiscal year, and on an annualized basis, as a percentage of the average customer portfolio balance, was 10.1% compared to 9.2%. The increase in credit SG&A expense primarily reflects the investments we are making to pursue our compelling recovery opportunity, an increase in compensation costs, and an increase in the corporate overhead allocation.

Interest expense for the fourth quarter was $15.2 million, which was a decrease of 15.5% from the same period last fiscal year as a result of continued year-over-year deleveraging and reductions in all-in cost of funds.

For the fourth quarter, annualized interest expense as a percentage of average portfolio balance was 3.9% compared to 4.8% for the same period last fiscal year.

Average net debt as a percentage of average portfolio balance was approximately 59.4% compared to approximately 69.5% for the same period last fiscal year.

ABS notes currently outstanding include the B and C classes of our 2017-B Notes and all classes of our 2018-A notes.

We currently expect to complete 2 ABS transactions during fiscal year 2020.

I am pleased with the improvements we made in our capital position during fiscal year 2019.

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.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Brian Nagel with Oppenheimer & Co.

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Brian William Nagel, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [2]

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First off, congrats. I mean, you definitely made significant progress here over the last several quarters, so congrats on all that.

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

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Thank you.

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Brian William Nagel, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [4]

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The question I have is for both Norm and Lee, but with regard to sales growth -- and look, there's a lot of transitory factors, or seemingly transitory factors out there, whether they'd be issues with the government shut down, Harvey, et cetera. But it still seems as though there's something kind of -- there's a factor or factors that are sort of, say, holding back what should be better retail sales growth, given all the improvements in the business. And you've taken a very analytical approach to how to better address or penetrate your customer. So the question I have is, looking at all this, what is holding it back right now? What is -- what can you see that's holding back what should be better underlying sales growth?

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

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What I would say, Brian, is first, when you look at -- you're right, there a lot of moving parts and a lot of transitionary things. Harvey, the lapping of Harvey being a significant element. And as you looked at the same-store sales results for the fourth quarter, from a Harvey standpoint, it was down 12.9%, which was greater than what we anticipated it to be. However, as we had shared, the non-Harvey was actually up 3.7%, which you have to go back 5 years to find a same-store sales number that's in that range where the company has performed at that level. And we saw strong performance in November. Even December was strong performance, almost 5% same-store sales in December. January -- early part of January, we saw nice performance in January until the middle part of the month or so, early to mid part of the month with the government shutdown. And that obviously, and ultimately, at the end of the day, resulted in a 3.7% number up from a non-Harvey standpoint. So I would tell you, Brian, I'm very, very pleased with the underlying performance because I see non-Harvey as the underlying performance. February, tax season is very, very important to our customers, and if you look at February results, we're down about 4% same-store sales in February in non-Harvey. Harvey was actually down 17%. And Harvey impacted even more last year because of the fact that last year, during tax season, people had funds to be able to buy our products that they typically wouldn't be able to do during the year. So now, what we're seeing in March and April, if you look at our midpoint, our implied midpoint for March and April, we're looking just a little bit under 2% for the 2 months in non-Harvey, and even Harvey at down only about 6%. If you look at the midpoint of our guidance for the quarter, those are the implied numbers for March and April. So what I would say is, I know there's a lot of noise and moving parts. I've never been more bullish than I am as I sit here today on where our performance is. And our long-term model, as you well know, is low single-digit same-store sales, and we were there and exceeded that in the fourth quarter, and could be very close to that, we think, here in the first quarter and position ourselves with the new store growth as well to really take advantage of our very powerful retail model going forward.

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Brian William Nagel, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [6]

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Norm, that's really helpful. Let me just ask one follow up. With regard to Harvey, we've been talking about the Harvey-affected markets now for a while. What is it? Is it simply that -- and I think you may have alluded to this in the prepared comments, that following the weather events, there was this surge of demand as people replaced products and then that has basically [stamped] up demand going forward, or is it -- what is -- I guess the question I am really asking, what is it with our -- what's the dynamic behind Harvey and how should we think about that? What has to happen for that to abate?

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

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That's a great question, Brian. So what happens is, after the hurricane, you -- within about a 30- or 45-day time frame, you start to see recovery and increased sales from a replacement standpoint. So for us, that was in the middle of the third quarter. The fourth quarter, our -- Harvey, as everyone knows, was a rain event so it stretched out even longer than what you typically see with a wind-event hurricane, and so we're lapping through the first quarter. The numbers will start to abate in the first quarter. There will still be an impact in the second quarter. And then in the third quarter, very early in the quarter, there might be a little bleed into that, but for the most part, the vast majority of that will be lapped in the rebuilding side. Now the one area that could linger a little bit and impact, we're not talking double-digit here, but could have a -- could put some downward pressure in that market is you do pull replacements forward when you have a hurricane. So somebody that wouldn't be replacing, potentially, their refrigerator or their furniture for another year, 1.5 years, are forced to do it because of the hurricane. So you get some pull forward of demand that will put downward -- some downward pressure, but nothing like we're seeing here over this quarter and last quarter.

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Operator [8]

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Our next question comes from the line of Rick Nelson with Stephens Inc.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [9]

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I would like to follow up on the retail gross margin, record level and up 160 basis points. You had a mix shift toward what I would think would be lower-margin electronics, and like to get behind what is driving that improvement.

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Lee A. Wright, Conn's, Inc. - Executive VP & CFO [10]

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Yes, Rick. It's Lee. So as you said, rightly so, there was a mix shift and with more electronics. One of the things that we have done, I think, an excellent job, and credit to the merchandising team, is continuing to look at better sourcing, getting the right value from our vendors, and you see that come through. So we've been extremely pleased. But even with the mix shift change, you've seen a higher margin. So it's one of the things that we talked about on the call though, is -- again, we have done a lot of that. So as we go forward, obviously, it is important for us to continue and we are focused on enhancing the mix with furniture and mattress, because obviously that's a higher margin. But again, I think it's a big hats-off to our team here that we are able to produce those margins with this mix.

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Norman L. Miller, Conn's, Inc. - President, CEO, President & COO of Retail and Chairman of the Board [11]

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Rick, there's been a lot of focus on -- for obvious reasons, on the credit side and the investment that we've done from a people standpoint there. But we make significant investments from a people standpoint on the retail side of the house as well. And the merchandising, the buying team, the effectiveness that team has brought to the table here this past year as far as how they buy, who they buy from, the programs they have in place with our vendors all have been accretive and enabled us to achieve the record quarterly gross margin we had this past quarter. Now as Lee mentioned, we won't -- we still think we have upside, primarily driven by mix going forward. But as we said in the prepared comments, our business model at a 40%-plus retail margin is extremely powerful, which is really what our target has been all along, to get into that 40%-plus margin rate.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [12]

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Are you in fact taking any prices up in the stores to try to stimulate that margin?

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Norman L. Miller, Conn's, Inc. - President, CEO, President & COO of Retail and Chairman of the Board [13]

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We are not, and we still price -- we do [map] minus 10% pricing from an advertising standpoint, we still match pricing from a price guarantee for anything that's advertised with our major competitors. None of that has changed, Rick.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [14]

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See the down payment rate was 2% this quarter. It's been trending lower for some time now. Is that an initiative to drive same-store sales? And are there credit implications down the line from that strategy?

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Norman L. Miller, Conn's, Inc. - President, CEO, President & COO of Retail and Chairman of the Board [15]

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No, it's not at all an effort to drive same-store sales. It's really just inherent credit quality has been a little bit better coming in, and depending on the overall credit quality coming in is really what's driving that, more than anything.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [16]

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Got you. And store growth, which was really ramping this year. If you could speak to the stores that are now opening here, I think there were a couple in Texas you opened a year ago at this time, how those are performing versus the store model that you've got in your PowerPoint, Page 14?

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Lee A. Wright, Conn's, Inc. - Executive VP & CFO [17]

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Hey, Rick. It's Lee. No, we are very pleased with our store openings, and they are in line with our expectations. Again, as we've talked about, stores that are in -- all of our stores we are opening are in existing states, but we do have stores in existing markets. And what you see is those stores in existing markets, where we already have advertising and have the brand name, we see a higher ramp than what we have as sort of our midpoint average range of sales in the first year. And then when we're going into new markets, even though they're existing states, they're still new markets, obviously a bit of slower ramp, but all in line with our expectations. And we're very excited, as Norm talked about on the call, with a new store in Montgomery, Alabama, now it's a new market, and then a new store in New Orleans, and we talked about 2 more stores, just very excited about the reception that we received in those markets. And again, we're very excited about the new store growth plan that we've got this year and the reception we believe we'll get.

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Norman L. Miller, Conn's, Inc. - President, CEO, President & COO of Retail and Chairman of the Board [18]

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And one final thing on it, Rick, is your question kind of ties, to me, the question that you had mentioned about the margin -- or, I'm sorry, about the deposit down payment. And as we mentioned -- and we highlighted it in the script just so that the folks are comfortable with the fact that we are not playing with the credit model to drive retail sales. Now we're not going to do it if we're not seeing the return on investment -- invested capital and the risk is not appropriate. And we highlighted that our first payment default for our new markets in the back half of last year are actually 20% lower than the total portfolio, which speaks to the fact that the tack we're taking here is a long-term one of -- we can drive same -- positive, same-store sales, low single digit by what's within our control from a merchandising, a retail execution standpoint, a marketing standpoint and maintain that credit portfolio in a very, very stable position, and we're not going to vary from that, as tempting as sometimes it might be for folks to want us to do that.

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Operator [19]

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Our next question comes from the line of Kyle Joseph with Jefferies.

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Kyle M. Joseph, Jefferies LLC, Research Division - Equity Analyst [20]

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Just going back to tax refunds, you guys talked about the impact on retail sales. Just looking at the results and guidance, it doesn't look like there was an impact on credit, but can you just talk about if you saw any sort of delays there and impacts on [DQs]?

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Norman L. Miller, Conn's, Inc. - President, CEO, President & COO of Retail and Chairman of the Board [21]

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Yes. We saw a little bit of an impact, more driven because our execution is getting better on the collection side of the house. What I would say is, we didn't have as good a performance in the last part of February from a collection execution standpoint that we anticipated, even though it was stronger performance than prior year. But I will tell you that in March, with the refunds catching up, we're seeing for the 2 months our performance end up being where we expect it to be overall.

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Kyle M. Joseph, Jefferies LLC, Research Division - Equity Analyst [22]

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Got it. And then Lee, you kind of talked about credit getting -- approaching the 12% to 13% long-term target in terms of losses. But looking at your credit guidance for the first quarter, it looks very good, looks like you guys are guiding towards a provision being down a little bit year-over-year. Is that just ongoing lingering strength from the end of the year and would you anticipate it sort of stabilizing going forward, particularly in the context that your portfolio is now growing a bit?

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Lee A. Wright, Conn's, Inc. - Executive VP & CFO [23]

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Yes, a part of that is obviously seasonality, as you know, in Q1, Kyle. But again, we're very pleased with the credit platform and the results that we're receiving there. So again, don't anticipate any major changes from that perspective.

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Operator [24]

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Our next question comes from the line of Brad Thomas with KeyBanc Capital Markets.

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Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [25]

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Let's see here, a couple of questions, if I could. Just a follow-up on that dynamic of your forecast for provisions for 1Q. In dollars, the provisions were up a little bit in 4Q, your portfolio is obviously growing, you have it modeled down in 1Q. I guess, just wanted to follow up on the puts and takes there, particularly as you look at what's happening with tax refunds of late.

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Lee A. Wright, Conn's, Inc. - Executive VP & CFO [26]

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Yes. Brad, it's Lee. So again, obviously, Q1, you get the tax refunds that come in and again, with, as Norm talked about, the better collections execution, so therefore, less charge-offs. So that's really what's going to drive our -- from our projection and what we put in our guidance, the lower provision here. So...

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Norman L. Miller, Conn's, Inc. - President, CEO, President & COO of Retail and Chairman of the Board [27]

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Plus the $2 million in recoveries.

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Lee A. Wright, Conn's, Inc. - Executive VP & CFO [28]

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That's true.

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

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We mentioned in February that we're really starting to get traction there as well. So that's a nice tailwind for us as well from a credit standpoint.

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Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [30]

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Got you. Okay. And then as we think about SG&A, obviously, you'll be opening up stores here and incur some costs ahead of when those stores actually are open. In the fourth quarter, SG&A dollar is up almost 8%. It looks like maybe in 1Q, what's implied is it might not grow quite that high of a rate. But at a high level, is that what you think we should be thinking about here, kind of a mid, maybe high single-digit growth rate in SG&A dollars for the year?

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

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Yes, and I think that it's directionally correct, Brad. What I would say is, we had to get to the point of where we lap the consistent number of new stores. That's really the -- not the only driver, but it's probably 70% of the driver of SG&A cost.

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Lee A. Wright, Conn's, Inc. - Executive VP & CFO [32]

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Yes, yes. Brad, that's right. Obviously, as Norm talked about, until we start lapping the number of new stores. But one other thing that we did talk about on the call, we are making our investments in new systems, which we're extremely excited about. We will get leverage on them in the future, but that obviously had some costs. But again, some of the things that we're doing from an SG&A perspective, we talk about the new stores and the importance of execution of those. Obviously, we're hiring managers-in-training that are in our existing stores so that we can have existing managers and go staff the new stores because it's so important to get good execution from the new stores. All those do add some incremental costs that are important and they're the right investments to make, but that's -- again, as we talked about, the G&A increase, that's what driving some of those things.

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Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [33]

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Yes, and just if I kind of triangulate here, you all obviously don't give explicit earnings guidance for quarters or for the annual basis. But when I think about the credit seasoning tailwind that you still have, that confidence in the 1,000 basis points spread, when I look at your implied guidance for 1Q, it does look like we should have earnings higher year-over-year in 1Q and I would think we should get that in just about every quarter of this year with what you know today. Do you think that's a reasonable way of looking at the business?

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Norman L. Miller, Conn's, Inc. - President, CEO, President & COO of Retail and Chairman of the Board [34]

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We clearly don't like to guide beyond the quarter we're in, but I think that's a very reasonable way to look at the business.

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Lee A. Wright, Conn's, Inc. - Executive VP & CFO [35]

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Brad, the one thing to keep in mind, obviously, we've talked about it, as we grow the portfolio, we do have to take that allowance in upfront so that again, with growth, you do get some hit to your credit from that perspective.

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Norman L. Miller, Conn's, Inc. - President, CEO, President & COO of Retail and Chairman of the Board [36]

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From the provision.

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Lee A. Wright, Conn's, Inc. - Executive VP & CFO [37]

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From the provision, exactly.

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Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [38]

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Great. And if I could squeeze one more in from a product perspective. The furniture/mattress category did see some acceleration from the 3Q into 4Q, but the performance in that category is a little bit below some other areas of the store. I guess, can you talk about what's going on in there? Any other opportunities? Are you still pleased with the switch that you made from the Tempur products over to the Serta/Simmons products? Any more color would be great.

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Norman L. Miller, Conn's, Inc. - President, CEO, President & COO of Retail and Chairman of the Board [39]

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Yes, I mean, we are still pleased with the transition that we made. We are seeing a little more softness on the mattress side than we are on the furniture side when you look at the 2 categories. But frankly, we feel as much of it is on -- from a retail execution standpoint, and we have the ability to impact that. So our expectations going forward is -- those categories that are our bread-and-butter and -- both mattress and furniture, and leaders for us and we're looking for improved performance there going forward.

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Operator [40]

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Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Miller for any final comments.

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Norman L. Miller, Conn's, Inc. - President, CEO, President & COO of Retail and Chairman of the Board [41]

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Thank you, I just want to take a moment, first of all, and always take the time to thank our almost 5,000 associates across the company for the job they do each and every day. Our record profitability results this past year are a direct reflection and result of those folks serving our customers and doing the job they do, day in and day out. So thank you to all of them. And we appreciate your interest in the company, and we look forward to talking to you at the end of next quarter. Have a great day.

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Operator [42]

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