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Edited Transcript of CONN earnings conference call or presentation 4-Apr-17 3:00pm GMT

Thomson Reuters StreetEvents

Q4 2017 Conn's Inc Earnings Call

BEAUMONT Apr 4, 2017 (Thomson StreetEvents) -- Edited Transcript of Conn's Inc earnings conference call or presentation Tuesday, April 4, 2017 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. - CFO and EVP

* Michael J. Poppe

Conn's, Inc. - Former President and COO of Credit & Collections

* Norman L. Miller

Conn's, Inc. - Chairman and CEO

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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 and Senior Analyst

* Dennis Mitchell Van Zelfden

SunTrust Robinson Humphrey, Inc., Research Division - Associate

* John Allen Baugh

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

* 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, 2017.

My name is Candace, and I will be your operator today. (Operator Instructions) As a reminder, this conference call is being recorded. The company's earnings release dated April 4, 2017, distributed before market opened this morning and slides that will be referenced during today's conference call can be accessed via the company's Investor Relations website at ir.conns.com.

I must remind you that some 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; Mike Poppe, the company's COO; and Lee Wright, the company's CFO.

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

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Norman L. Miller, Conn's, Inc. - Chairman and CEO [2]

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Good morning. Welcome to Conn's Fourth Quarter Fiscal 2017 Earnings Conference Call. I'll begin the call with an overview, and then Mike Poppe will discuss our credit performance for the quarter. Lee Wright will complete our prepared remarks with additional comments on the financial results.

As we have discussed throughout the year, our goals for fiscal 2017 were focused on turning around our financial results and creating a solid foundation to profitably support our long-term and differentiated retail growth model. Fiscal 2017's financial and operating results demonstrate the progress we are making towards achieving these goals. And I'm pleased that the company was able to return to profitability on an adjusted basis in the fourth quarter, which was driven by an exceptionally strong retail performance. Essential to our long-term success are the significant enhancements we made during the year to the company's credit model, including programs to increase yield, reduce losses and lower our borrowing cost. While the ultimate success of these improvements will take time to fully develop, I'm encouraged with the progress we made in fiscal 2017. I'm confident Conn's is headed in the right direction and believe we are positioned to return to annual profitability in the coming year. Over the past 12 months, Conn's has assembled proven credit and retail business leaders, who have experience managing large, complex organizations and are motivated by the significant growth potential Conn's unique business model represents. During the fourth quarter, we announced the appointment of additional seasoned executives, including a new President and Chief Operating Officer of Retail; Chief Accounting Officer; Vice President of Logistics; and Vice President of Service. With these changes, the majority of our executive transition is now complete, and we can now accelerate the implementation of our strategy. Our retail execution was strong in the fourth quarter despite the decision to proactively slow sales growth by refining our underwriting standards and limiting new store openings. Underwriting refinements made earlier this fiscal year impacted fourth quarter same-store sales by approximately 1,000 basis points. Despite lower overall sales, I'm extremely pleased with our retail execution in the fourth quarter, as retail operating margins increased significantly. Retail gross margin was a record 38.9% as a result of favorable product mix within all categories and lower warehouse delivery and transportation cost. In addition, the cost mitigation plans that we announced earlier this year helped to reduce consolidated SG&A expenses by 7% in the quarter versus the prior year period. The outcome of both higher retail gross margins and lower SG&A expenses helped Conn's produce very strong retail operating margin in the fiscal 2017 fourth quarter. Underwriting adjustments implemented in fiscal 2017 primarily focused on improving new customer credit performance. And it's important to look at same-store sales across our 3 store categories. Core stores, single stores in new markets and new stores in new markets. Core stores represent approximately 57% of our store base. Single stores in new markets represent about 18% of the same-store base. The remaining 25% of our same-store base represent new stores in new markets with existing locations resulting in the cannibalization of sales in these locations.

For the fiscal 2017 fourth quarter, same-store sales of our core stores were down 4.7%, single stores in new markets were down 17.6%, while stores in cannibalized markets were down 20.2%. Underwriting refinements impacted all markets, but a greater proportion of the approximately 1,000 basis-point impact was in our new markets. Within our stores and through our website, we received nearly 363,000 applications for credit during the past quarter and over $1.3 million during the fiscal year. Approximately 1/3 of our customers get approved for Conn's in-house financing and utilize their credit. As a result, a significant amount of traditional lease-to-own subprime customers come to our stores, and we are uniquely positioned to benefit from this traffic. During the fourth quarter, 9.3% of retail sales were completed through third-party lease-to-own plans, up from 4.6% of retail sales in the same period last year. We believe we have the opportunity to capture more lease-to-own sales, above fourth quarter levels. And during fiscal 2017, we started to review our third-party lease-to-own strategy. As you may have seen last week, Acceptance Now or A Now, a division of Rent-A-Center, announced that it has terminated its agreement with Conn's. And yesterday, Conn's announced a new partnership with Progressive, a subsidiary of Aaron's. There are a lot of moving parts, and I thought it might be helpful to understand the evolution of what has transpired in our path forward with Progressive.

Conn's has had a partnership with A Now for several years, and A Now has consistently communicated to us that our lease-to-own partnership has been profitable for them, albeit, at a lower level than their other A Now business. As our business has evolved and we have seen our decline rate increase, we believe our lease-to-own partner should be completing a greater amount of transactions, and we were disappointed with the amount of customers A Now was converting. Since the summer of 2016, we have had multiple discussions with A Now's senior management team regarding our disappointment with the high rate of decline and low rates of conversions. Beginning in the fall of 2016, we started having meetings with Progressive, who was actively pursuing a lease-to-own partnership with Conn's. On January 10, 2017, we notified A Now that we were terminating our long-term exclusive lease-to-own relationship with them, and we were only willing to extend that exclusive relationship for 2 months at a time, while we were monitoring the results of the program.

On February 26, 2017, we notified A Now that we were terminating certain locations of our A Now relationship. This termination notice was to allow us to bring Progressive into our stores to begin testing and integration. Over the last several weeks, we've been working with Progressive regarding the integration and launch of the Progressive lease-to-own program, and a full team of Progressive personnel was in our offices last week to advance the product launch. We expect to have the Progressive program available in our stores starting in May with a wider rollout in June 2017. Progressive's similar growth-oriented culture, advanced decisioning capabilities and robust balance sheet provides Conn's with a strong and committed partner. We believe there is a significant opportunity to grow our lease-to-own sales and look forward to partnering with Progressive to help us achieve this goal. As a reminder, this is a cash transaction to Conn's, and our third-party lease-to-own partners are responsible for underwriting, funding, collecting and servicing accounts. Conn's benefits from the retail transaction and avoids the capital requirements associated with financing the sale. Payments can be made in a Conn's location, and we have a unique experience providing in-store service for this customer base, which helps Conn's create a relationship and build our brand with this customer. In addition, Conn's may also benefit as lease-to-own customers improve their credit scores that potentially qualify and finance subsequent purchases to Conn's in-house credit offerings.

Retail's fourth quarter results demonstrate the compelling value we offer customers. We are confident in our differentiated retail segments' ability to deliver a long-term growth through our broad selection of brand name, top-of-the-line products, leading customer service and affordable credit offerings. The underwriting refinements we implemented in fiscal 2017 will continue to be a headwind to same-store sales throughout the first half of fiscal 2018. However, despite this near-term impact, we expect our retail business to continue to generate strong profitability and operating income throughout the year with improving same-store sales results as we lap fiscal 2017's underwriting changes. Our store growth plan will continue to be measured through fiscal 2018, and we expect to open only 3 locations, 2 of which we opened in our current quarter. As our turnaround strategies continue to take hold and the credit segment's financial performance improves, we will re-examine our unit growth plans and update investors accordingly. There is a significant opportunity for Conn's to expand its store base and become a national retailer, but creating a sustainable platform first is critical to our success.

Moving onto our credit segment. We continue to focus on executing strategies to improve performance and profitability. As we mentioned on our December call, the Texas direct loan program was implemented across all 55 Texas locations before the end of October and in time for the holiday season. Texas represented over 68% of originations during the fourth quarter, which helped increase the weighted average interest rate on fourth quarter originations 444 basis points to approximately 27%. In addition, in March, we successfully expanded our direct loan program to Louisiana, reflecting another 5% of our originations. As a result, over 80% of current originations now have a weighted average interest rate of 28.3%, up from 21.7% in September. During fiscal 2018, we expect to roll out direct loan offerings in 3 additional lower interest rate states. And once completed, nearly all originations from Conn's in-house financing will be at higher rates. As we have stated historically, our customer is a payment-focused buyer, and we've not seen any material negative trends associated with charging higher rates. Even at higher APRs, Conn's in-house credit offering is a valuable and affordable option for our core customers, and the initial success of our direct loan program is encouraging. The ultimate outcome of our transition to a direct lender in certain states and other programs to increase yield is expected to have a profound impact on our credit segment's financial model.

We continue to believe once these programs are fully implemented and seasoned into the portfolio, interest income and fee yield will improve approximately 600 basis points to 900 basis points to 22% to 25%. Throughout the past year, we've invested in programs to reduce losses by making refinements to our underwriting model, enhancing our origination scorecard and improving collection. Conn's core customer continues to be impacted by flat wages, higher revenue expenses and a greater access to credit. In addition, a more stringent regulatory environment makes collections more challenging than it has been historically. We have seen deteriorating trends at other subprime lenders and in the subprime model loan market. During the fourth quarter, delays in processing tax refunds for this year's tax season has impacted portfolio results. It's hard to say what the ultimate impact will be as there are still fewer returns filed and less total refunds paid this year compared to last year.

While we cannot control these external drivers, we can adjust our credit segment's strategy to ensure we are appropriately managing risk and effectively managing collections, while adhering to strict compliance standards regardless of the environment or the credit cycle. The refinements we made to underwriting are helping us navigate a modestly challenging credit cycle, albeit at a slower pace than we would prefer.

In addition to improving our underwriting model during the year, we upgraded our origination scorecard and made investments in people, systems and analytics. With greater sophistication, we are able to actively monitor credit performance and adjust as necessary to maximize results. During fiscal 2018, we will continue to make additional investments in people and tools to improve our credit performance. We are confident the strategies underway appropriately manage credit risk, and we are seeing recent originations perform better than prior periods. However, the benefits of stricter underwriting take time to appear, and our overall credit segment results continue to be impacted by slower growth, changes in credit strategy and the performance of accounts originated under prior underwriting standards.

As expected, a cohort of late-stage delinquency charged off in the fourth quarter, which impacted the fourth quarter's provision rate. Charge-offs and provision may remain elevated until the majority of these accounts either mature or charge off. With this said, we are optimistic overall credit performance will improve throughout fiscal 2018, as these legacy accounts leave the portfolio and are replaced with accounts benefiting from the tighter underwriting and higher yields.

The overall goal of our strategies to increase yield and reduce losses is aimed at achieving a spread of at least 1,000 basis points before servicing and financing cost. Creating this spread will provide Conn's with the flexibility to successfully navigate ever-changing economic, regulatory and credit trends, while maximizing financial performance. The groundwork to achieve this goal was implemented in fiscal 2017, it should be fully realized on a run-rate basis by the end of fiscal 2018.

Finally, increasing spread on credit should ultimately reduce our cost of funds. While trending in the right direction, our borrowing costs remain elevated. With improved performance, lower capital requirements and increasing profitability, our cost of funds and interest expense should decline. As Lee will discuss in his prepared remarks, our ABS notes are performing in line with expectations. I am pleased that Fitch recently upgraded our 2016-A Class B note to investment grading. With successful and continued ABS transactions, we continue to broaden our ABS investor base. This combined with the strengthening credit business that generates a widening spread should lead to lower ABS costs even in a rising rate environment.

As you can see, we've developed a well defined strategy to enhance performance, and our transformation is well underway. We have assembled a strong leadership team of proven credit and retail executives who are improving execution across all levels of Conn's unique organization. I am pleased with the hard work of all of our Conn's associates during this challenging period. Our turnaround initiatives are taking hold, and we expect to return to annual profitability in fiscal 2018, while creating a platform for sustained profitable growth. With this, let me turn the call over to Mike.

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Michael J. Poppe, Conn's, Inc. - Former President and COO of Credit & Collections [3]

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Thank you, Norm. Our credit portfolio has experienced many changes and has grown from $643 million at January 31, 2012, to $1.6 billion at January 31, 2017. This 142% increase in the portfolio balance was driven primarily by acquisition of new customers, resulting from unit growth and selling square footage expansion as well as expanded retail offerings and enhanced marketing efforts. During this period, we adjusted our credit strategy to improve results and increase the level of sophistication associated with managing a large rapidly growing and complex portfolio of largely subprime receivables.

Unfortunately, underwriting refinements made during fiscal years '15 and '16 did not go far enough and with macro-related economic and regulatory headwinds, performance did not improve as expected. In addition, adjustments to recovery collection strategies made after October of fiscal '15 and the change to our Synchrony bank long-term no-interest strategy during fiscal '17 put pressure on the loss trends of early fiscal '17 originations. Recall that the shift to Synchrony occurred in early fiscal '17 and removed a significant volume of high FICO score originations from our portfolio. While the removal of these high-quality originations impacts the optics of our portfolio results, we retained the highly profitable retail sales and increased the portfolio yield.

As we work to improve the spread between yield and charge-off to a minimum of 1,000 basis points, we are implementing strategies to increase yield and reduce charge-offs. Programs to increase yield are fundamentally enhancing the financial model of our credit segment. During fiscal '17, these programs included shifting high FICO long-term no-interest accounts to Synchrony, raising rates in states without interest rate caps to 29.99% and implementing a new direct loan offering in the state of Texas, allowing us to raise interest rates and charge up to a $100 administrative fee. We have since implemented a similar direct loan program in the state of Louisiana and expect to have direct loan programs rolled out in 3 additional lower interest rate states by the end of fiscal '18.

The outcome of these programs will produce a credit model that improves our interest income and fee yield approximately 600 basis points to 900 basis points to 22% to 25%. Interest income will continue to build as fiscal '18 progresses and legacy accounts are replaced with higher interest rate originations. In addition to the yield programs, the other component of the spread, lower losses, will be impacted by continued improvement in underwriting and collection execution. We believe the significant underwriting changes made in late March and June of fiscal '17 will help the company reduce delinquency in losses and navigate a more challenging credit cycle. These adjustments to underwriting were focused on reducing credit risk largely related to new customers. Early performance trends for originations made in the second half of fiscal '17 after the more significant underwriting changes were implemented are encouraging. Monthly vintage, 60-plus delinquency and first-pay default rates for originations from July through December fiscal '17 are better than the same months in the prior fiscal year. We expect similar performance from originations since December. However, at this point, they have not been outstanding long enough to provide this information. Remember that the prior year originations benefited from the high FICO no-interest originations now being funded by Synchrony. Originations since late June fiscal '17 underwriting changes account for approximately 45% of the portfolio as of January 31, 2017. The portfolio is expected to benefit from continued origination under these tighter standards.

As we have slowed sales and adjusted underwriting standards, we have experienced a meaningful increase in the number of repeat customers, as shown on Slide 4. This is important because existing customers historically have had meaningfully lower loss rates than new customers. Customer originations with more than 5 months since their first credit transaction at Conn's were nearly 53% of total originations during the recently completed quarter. This is the highest percentage of repeat customers since fiscal '13 and continues to increase as a result of tightened underwriting standards, slower store opening pace and increases in repeat purchases from customers in new markets entered over the past 4 years.

The underwriting changes and reduced store opening pace have resulted in the portfolio contracting $31.4 million or 2% since January 31, 2016. While slower growth and changes to our credit strategies are benefiting the underlying performance of the portfolio, they continue to have a negative effect on the portfolio metrics, including delinquency provision and charge-off rates.

However, as shown on Slide 5, on a dollar basis, we are seeing improvement in the balance of 60-plus day delinquency, which was lower sequentially and experienced the lowest year-over-year increase since January 31, 2013. In addition to macro factors, including weakness in the Houston market, slower portfolio growth combined with the decision to shift long-term no-interest programs to Synchrony impacted the reported 10.7% 60-day delinquency rate for the quarter. The 60-day delinquency rate at the end of the fiscal '17 fourth quarter adjusted for the slower growth and shift to Synchrony would have been 10 basis points better than the prior year on a comparable basis. During the fourth quarter, cohort of late stage delinquency charged off causing bad debt charge-off net of recoveries to increase to an annualized rate of 16.7% for the quarter.

Slide 6 shows our static pool loss expectations. We're expecting a static pool loss rate of approximately 14% for fiscal '14, which has only 0.5% of the origination amount remaining. The fiscal '15 loss rate expectation was increased slightly to be in the mid-14% range. We increased this estimate due to the impact on performance we have seen of the various macro factors we discussed earlier. There is only 5.2% of this vintage remaining compared with 5.5% for fiscal '14 at the same point in FY. The expected loss rate for fiscal '16 is in the upper 13% range. As you can see in our static loss analysis, fiscal '17's initial loss rate is higher than the previous year. This is attributable primarily to the decision to shift long-term no-interest programs to Synchrony and that all of the underwriting changes were not in place until the back half of the year. As noted earlier, the initial delinquency results for July and subsequent originations are better than the prior year and will start to benefit charge-off results late in the first quarter of fiscal '18.

We continue to believe our credit model can produce long-term static loss rates around 12%. Progress to improve credit performance is well underway. We believe our current underwriting standards appropriately manage risk, while supporting our differentiated retail strategy. We remain focused on enhancing our collection operation and investing in the right people, systems and analytics to create strong and sustainable credit platforms.

These strategies combined with programs to enhance yield are positioning the company to achieve a spread of at least 1,000 basis points. We expect fiscal '18's financial performance to show improving credit trends, and I look forward to sharing our successes with you. Now I'll turn the call over to Lee Wright. Lee?

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Lee A. Wright, Conn's, Inc. - CFO and EVP [4]

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Thanks, Mike. Before I discuss the fiscal 2017 fourth quarter financial results, I want to review some important changes to our asset base loan facility. As you will see detailed in the subsequent event section of our 10-K that will be filed later today, on Friday, we closed an amendment of this facility. Importantly, the amendment extends the maturity of the facility by 1 year to October 30, 2019. In addition, certain financial covenants and definitions were adjusted, and our pricing was increased slightly. We also reduced the size of the facility by $60 million from $810 million to $750 million. We believe this facility size provides Conn's with an appropriate level of liquidity and financial flexibility to support our long-term business plan. Our lending syndicate remains committed to Conn's, and we appreciate their support.

Consolidated revenues of $432.8 million for the fourth quarter of fiscal 2017, decreased 5.3% from the same period last year. Conn's was breakeven on a per-share basis for the fiscal 2017 fourth quarter compared to earnings of $0.03 per share for the prior year quarter. On a non-GAAP basis adjusted for charges and credits and nonrecurring tax items, diluted earnings per share for the quarter was $0.05 compared to $0.11 per share last year for the same period. Fourth quarter retail revenues were $356.2 million, which declined $20.7 million or 5.5% from the same quarter a year ago, while same-store sales declined 8.9%. Despite lower revenues, retail gross profit increased by 1.9% in the fourth quarter, and gross margin as a percentage of retail revenues expanded by 280 basis points from the same quarter in the prior year to 38.9%, a historical best for the company. On a sequential basis, retail gross margin increased 140 basis points versus the prior quarter. The improvement in gross margin is primarily due to product mix and lower warehouse delivery and transportation expenses through increased efficiencies and further optimization. Higher-margin furniture and mattress sales represented 34.6% of our fiscal 2017's fourth quarter retail product sales and 49% of our product gross profit. For the year, furniture and mattress sales increased to 35.5% of retail product sales, up from 34.2% for fiscal 2016. We continue to believe the longer-term goal of 45% of retail product sales from the furniture and mattress categories is achievable.

Disciplined cost management helped reduce retail SG&A by 6.7% in the fourth quarter versus the same quarter in the prior year. We offset our increased store occupancy cost from a higher store base through cost savings in other areas in a one-time $1.7 million financial benefit. Retail SG&A as a percentage of sales also leveraged 30 basis points from the same quarter last year to 22.9% of sales.

Turning now to our credit segment. Finance charges and other revenues were $76.6 million for the fourth quarter of fiscal 2017, down 4.1% from the same period last year. The decrease versus last year was due to a yield of 16.5%, a decrease of 50 basis points from last year and lower credit insurance commissions. The average balance of our customer receivable portfolio increased slightly by 20 basis points in Q4 from the same quarter last year.

SG&A expense in the credit segment for the quarter decreased 8% versus the same quarter last year. The decrease in SG&A was due to continued expense management, driving greater efficiencies and collections labor, partially offset by investments in credit analytics to improve the performance of our credit business. Credit SG&A as a percentage of total customer portfolio balance leveraged 70 basis points from the same period last year and improved 80 basis points from the fiscal 2017 third quarter. Provision for bad debts in the credit segment was $72.1 million for the fiscal 2017 fourth quarter, an increase of $7.6 million from the same period last year. Higher-than-expected charge-offs primarily drove the higher loss provision. As of January 31, 2017, we had $23.6 million in cash and approximately $162 million of immediately available borrowing capacity under the revolving credit facility.

On a pro forma basis for our new facility size, we had additional $406 million that could become available upon increases in eligible inventory and customer receivable balances under the borrowing base. Interest expense for the fourth quarter increased $1.2 million from the same period last year to $25.1 million. For the fourth quarter, annualized interest expense as a percentage of average portfolio balance was 6.5% with average net debt as a percentage of average portfolio balance of approximately 75%. We continue to make strides in improving our payable to inventory rate. Accounts payable as a percentage of inventory was approximately 62% at January 31, 2017, compared to 57% on October 31, 2016, and 43% at January 31, 2016. During the fourth quarter, we did not open any new stores. And for fiscal year 2017, we opened 10 new locations. All of these new stores are located in geographies supported by our existing distribution network. For fiscal year 2018, we have committed to only 3 new locations. Two stores have already opened in North Carolina in this current quarter. With limited store openings scheduled for fiscal 2018, we expect to invest between $20 million and $25 million in growth capital expenditures compared to $46.6 million in fiscal year 2017.

As we currently focus on improving our capital structure and increasing our cash provided by operating activities, we are benefiting from our decision to shift high FICO long-term no-interest accounts to Synchrony. This decision has freed up over $220 million of capital, which has reduced Conn's capital requirements. Our 2015 and 2016 ABS notes are performing in line with our expectations. We remain focused on building a track record not only with investors, but also with the rating agencies. As Norm mentioned earlier, we recently received an upgrade of our 2016-A Class B notes to investment grades with the rating of BBB. As we improve the spread of our portfolio by increasing the yield on originations and lowering losses, we expect to continue reducing our cost of funds from our ABS transactions even in a rising rate environment.

As of January 31, 2017, approximately 16% was remaining of our total 2015-A Class A and B notes. Approximately 36% was remaining of our total 2016-A Class A, B and C notes. And approximately 73% was remaining of our 2016-B Class A and B notes. During April, we plan to initiate and complete our fourth ABS transaction, which will be our first for fiscal 2018. As a point of reference, our last ABS deal had a blended all-in cost of our issued Class A and B notes of approximately 6.9%. Based on our ABS performance and current market conditions, we expect our next ABS transaction will demonstrate further reductions in our ABS financing cost. In addition to this transaction, we expect to complete 1 additional ABS transaction during this fiscal year. We are on track to accomplish our objectives in fiscal 2018, based on the foundation we've laid this year. During fiscal 2018, we will continue to focus on programs to enhance yield, refine underwriting, improve execution within our collections operations to reduce delinquency rates and future charge-offs, lower our cost of funds, reduce warehouse delivery and transportation cost and manage SG&A expenses, while continuing to offer customers a significant value for quality branded products for their homes. As we execute our near-term business objectives, we expect to deliver improving financial results aimed at achieving full year profitability. Now I'll turn the call back over to Norm.

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Norman L. Miller, Conn's, Inc. - Chairman and CEO [5]

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Thank you, Lee. Before we open the call for questions, I wanted to reiterate our optimism in Conn's long-term potential. As we've communicated throughout the year, we're working hard to reposition Conn's for sustainable and growing financial results. Our retail business is operating well and continues to demonstrate the value we offer customers as well as the differentiation we have in the market. I believe the turnaround strategies to improve credit performance are well underway and are starting to take hold. With each passing month, better performing and higher APR originations are supplanting legacy receivables, and we're moving closer to our goal of creating a credit business with the spread over 1,000 basis points.

I'm encouraged by the direction we're headed and excited about our opportunities for profitable growth in fiscal 2018. With that, operator, please open the call up to question.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Brad Thomas of KeyBanc Capital Markets.

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

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My first question is about the -- just the quality of credit. And you've given us a tremendous amount of data that's been very helpful. But I guess, if you could just maybe contextualize it a little bit higher level for us, is there a particular quarter perhaps where you're thinking in 2017, we may start to see an inflection point where the delinquencies start to get better on a year-over-year basis, more of that provisioning dollar value starts to decline year-over-year? Just trying to understand when you think we might hit that infection point given all the good work you all are doing, but balancing that against a backdrop that's still been a bit choppy.

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Michael J. Poppe, Conn's, Inc. - Former President and COO of Credit & Collections [3]

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Brad, this is Mike. So one thing I'd point out, and it's in the slide deck, is you can see the 60-day delinquency dollar trend is tightening on a year-over-year basis. And we do expect that trend to continue with the improved and tighter underwriting we have in place. As we noted on the call, we do still expect some pressure here in the early part of the year from the legacy receivables as they run out. And then as the tighter underwriting -- the receivables generated from the tighter underwriting continue to build in the portfolio, they'll have a bigger impact as we move later into the year.

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Bradley Bingham Thomas, KeyBanc Capital Markets Inc., Research Division - Director and Equity Research Analyst [4]

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Got you. Okay. Hello, am I still live?

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Unidentified Company Representative, [5]

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Yes, yes, you are.

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

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Okay, great, sorry, I thought that you all moved on. And then if I could just add a follow-up on SG&A. You've all done a very good job of controlling costs here. How are you thinking about SG&A going forward given that you do have a growing store base? And are we going to start to see areas that you will need to start putting more dollars into the business?

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Lee A. Wright, Conn's, Inc. - CFO and EVP [7]

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Brad, it's Lee. So as you noticed, obviously, very focused in controlling SG&A. Obviously, as we talked about we're only opening 3 new stores, of which 2 have already been opened for this year. So, we won't really have any pressure from new store openings as we go through this year and again, just continue to focus on managing this cost very carefully.

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Norman L. Miller, Conn's, Inc. - Chairman and CEO [8]

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Brad, it's Norm. And just to chime in, from where we were sitting this time last year, when you look at almost every single department and function, there has been a market improvement from a SG&A and a cost-control standpoint. And we are able to continue to leverage -- continue to gain leverage from a distribution standpoint, warehouse delivery standpoint, as those market season as well, which continue to bode positively for us going forward.

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Operator [9]

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And our next question comes from Rick Nelson of Stephens.

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Nels Richard Nelson, Stephens Inc., Research Division - MD [10]

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I wanted to ask you about the Progressive relationship, if you can compare the economics there versus Acceptance Now and if you envision any changes in underwriting where Progressive might take on more of your originations?

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Norman L. Miller, Conn's, Inc. - Chairman and CEO [11]

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Rick, it's Norm. As you heard in our prepared comments, we've been examining our lease-to-own strategy beginning last summer because our belief is we had tightened underwriting standards significantly and with that, obviously, the number of declines increase. Our expectation was just from a sheer volume standpoint, the opportunity for our lease-to-own partner to capture more of that business was significant. And as you saw in the fourth quarter, we started to get some traction. And you saw our lease-to-own as a percentage of sales was north of 9%. As we communicated from our perspective, we believe long term that it can be better than that, north of 10% on an ongoing basis. And our decision to initially test Progressive and then move forward with Progressive was really driven around their sophistication from an underwriting standpoint, their growth-minded culture and focus more better aligns with our strategy. And then lastly, they have the balance sheet from a capital standpoint to fund the type of growth that we're expecting going forward.

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

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Same-store guidance kind of mid-teens is -- does that relate to the transition from Acceptance Now to Progressive, that it takes time for them to ramp?

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Norman L. Miller, Conn's, Inc. - Chairman and CEO [13]

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That is absolutely a factor and why you saw the degradation in same-store sales and guidance quarter-over-quarter. That is an element of it as well. Also, the tax delay in processing refunds is an element of that as well. Clearly, the underwriting changes, we won't start to lap them to later in the second quarter and early part -- very early part of the third quarter. So -- and we are seeing some very general softness from a macro standpoint in some of the markets as well. It's really a combination of all those, but the Progressive transition is absolutely an important element of that.

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

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And finally, if I could ask you about the retail gross margin that's coming in a lot better than we anticipated, if you could discuss the drivers there, and are you, in fact, taking prices up in the stores to account for the higher loss rates from your customers?

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Lee A. Wright, Conn's, Inc. - CFO and EVP [15]

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Rick, it's Lee. So to answer your question, no. This isn't about raising prices in our stores. It's really product mix and product optimization, in addition to better efficiencies at our warehouse and deliveries and transportation as Norm mentioned, just getting better efficiencies and better optimized on that front.

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Operator [16]

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And our next question comes from Brian Nagel of Oppenheimer.

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Brian William Nagel, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [17]

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The first question I had just with -- I just want to understand this better. You mentioned on your press release in your comments about the charge-offs in the fourth quarter. I guess, it said there that the late stage delinquency is going to charge off and that'd have an impact upon your provision rate. So the question I have there, is that -- did that happen just in the normal course of the maturation of portfolio, is that -- or is that some more specific action you took to sort of, say, clean those -- clean it out.

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Norman L. Miller, Conn's, Inc. - Chairman and CEO [18]

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I'd say -- Brian, this is Mike. It's 2 things. One is there's certainly some natural course of those older legacy receivables flowing through. And then I'd say there's also some underperformance from an execution standpoint in late stage collections that we've made changes now and we're seeing improving results there, but those would be the 2 key drivers.

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Brian William Nagel, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [19]

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Okay. Then, I guess, I think somewhat related to that, but -- and you talked about this, probably get clearer on this as well, lot of talk out there in the marketplace right now about indications of weakness in subprime lending. I guess, lot of -- most of the news has been revolving around the auto business. But generally speaking and you mentioned it's still a challenging macro environment, are you seeing -- as you look at your credit business, are you seeing indications that for one reason or another the performance of subprime lending has gotten more challenging here recently?

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Michael J. Poppe, Conn's, Inc. - Former President and COO of Credit & Collections [20]

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Yes, certainly, and it's I'd say, predominantly, we see it in the existing customers where in Houston, we talk consistently about the Houston market and some of that is energy-related, some of that may be other macroeconomic factors. And that's what drove also as we went through this last year, a lot of the tightening, as we saw weakness in subprime, the growth of credit availability to these customers and making a significant enough change in underwriting to start turning the year-over-year performance, seeing better performance in the more recent originations.

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Norman L. Miller, Conn's, Inc. - Chairman and CEO [21]

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And Brian, this is Norm. There is absolutely -- we're seeing stress with that subprime consumer. And our investments from a credit and -- the credit group and an underwriting team is enabling us to really identify those areas and those pockets from both a credit limit standpoint as well as an approval on a decline standpoint, of where we can mitigate some of that. But we are absolutely seeing some stress with that subprime consumer.

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Brian William Nagel, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [22]

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So your experience -- and just to follow up on that. I think, one of the things that's surprising a lot of investors out there, a lot of market participants is that we're seeing that -- we're hearing indications of this incremental stress in the subprime consumer, but by a lot of metrics, the broader economy seems to be doing well or in employment. So, Norm or Mike, would you -- is there something you can point to, to explain maybe that dislocation that we're seeing?

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Michael J. Poppe, Conn's, Inc. - Former President and COO of Credit & Collections [23]

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So yes, I think a couple of things. And I think we've talked about this for several calls. First, for the subprime consumer, there has been a dramatic expansion in access to credit for them. So share of wallet, people trying to get share of wallet has grown pretty dramatically over the last couple of years, and you think about the significant increase in subprime auto lending, there's been growth in subprime revolving credit availability. And then all of the new lender sources trying to get in, trying to lend to those consumers, so they've put more stress on their wallet. And then you layer on top of that, they really have not seen an improvement in their earnings power, and so their disposable income continues to get stretched.

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Norman L. Miller, Conn's, Inc. - Chairman and CEO [24]

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It's not an employment issue, Brian, as much as it is wages. We haven't -- you haven't seen much wage growth. And for that subprime, our auto core consumer, it's really about wage growth. And even though the cost of living is not up dramatically, even slight increases for our core -- for that subprime consumer without the associated increase from a wages standpoint can start to put stress on that consumer.

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Operator [25]

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And our next question comes from John Baugh with Stifel.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [26]

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I was curious on the mix improvement in retail, is that being driven somewhat by decisioning on the credit underwriting side? I understand you're not raising prices, but you can certainly influence what is sold by what you underwrite?

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Norman L. Miller, Conn's, Inc. - Chairman and CEO [27]

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John, it's Norm. No, it's not driven by underwriting at all. We're still -- I mean, we make that decision based on the credit worthiness of the consumer at the end of the day and what their capability is. Not to steer them to one product or another. And to reiterate from Rick's earlier question, we've done no price increases in the store. The mix to furniture that you saw in this past quarter and over the past year is really you've seen that progress over the last 3 or 4 years, as we continue to get better and better from a furniture merchandising and a furniture -- from a furniture retailer standpoint. And we expect to continue to see that improve going forward.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [28]

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Great. And then, you comment on the fact -- all the factors that are impacting the Q1 comp guidance. Obviously, you had Q4 where you had the direct loans in place the whole quarter. You're very comfortable, I assume, with the statement that you just don't see a drag to retail closing sales from the direct loan program?

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Lee A. Wright, Conn's, Inc. - CFO and EVP [29]

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John, it's Lee. No, and we've not seen any material impact from our direct loan program, the increase in rates. Again, we've talked about before our customers are payment buyers, and we really continue to see that be true. The one other thing I would add to the comment on our guidance for same-store sales, in addition to what Norm said, is also we are seeing some impact with the immigration comments coming out of D.C., et cetera, creating I think some concern in that community and some lack of consumer spending in that community, which certainly is also having an impact.

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Michael J. Poppe, Conn's, Inc. - Former President and COO of Credit & Collections [30]

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And John, one additional comment to Lee's thoughts about why we're not seeing an impact to sales from the direct loan is, yes, they're payment buyers, but this is still the best value available to this consumer in the market. They can't acquire these products at this affordable of a monthly payment through any other source, and we still offer them a great opportunity to get great quality branded goods for their home.

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John Allen Baugh, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [31]

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Yes, I appreciate that. And Mike, maybe comment on the payment rate. That actually improved slightly, that's encouraging. And I'm curious though with the longer-term direct loans and I understand, it's not a huge percentage of the portfolio yet, but shouldn't that impact that somewhat negatively going forward? Or just discuss payment rate in general.

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Michael J. Poppe, Conn's, Inc. - Former President and COO of Credit & Collections [32]

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You bet. So there's the fee factors that would impact payment rate. And the first one is just going to be credit quality. So as an indicator of credit quality in the portfolio, we talked about first-pay defaults on the more recent originations being down. So number one, just more customers making their payments, payment rate's going to go the right direction.

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Norman L. Miller, Conn's, Inc. - Chairman and CEO [33]

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Which is the biggest driver of payment rate when everything's said and done.

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Michael J. Poppe, Conn's, Inc. - Former President and COO of Credit & Collections [34]

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That's right. And then, you're right that the longer term will -- could put some pressure the other way. There's no doubt about it. And then, the other factor that's a positive, as we slow down growth and the portfolio seasons and the age of the receivables -- and the weighted-average age of the accounts season, it puts -- that's a positive benefit to their payment rate also.

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

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Understood. And then, 0 to 550 went up as a percentage of the mix, is that just the inverse or the byproduct of the Synchrony business? Or is there some change in terms of loosening at all to that bucket of customers?

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Michael J. Poppe, Conn's, Inc. - Former President and COO of Credit & Collections [36]

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It's absolutely not a change in underwriting. It's just going to be -- yes, Synchrony being gone certainly on a year-over-year basis is a big impact. And we see a lot different flow of customers in the fourth quarter.

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Norman L. Miller, Conn's, Inc. - Chairman and CEO [37]

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Internally, we don't underwrite under that 5 (inaudible)

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Michael J. Poppe, Conn's, Inc. - Former President and COO of Credit & Collections [38]

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And we saw the existing customer mix coming up, so...

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

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Got it. And 2 more quick ones. One, account balance that's re-aged greater than 6 months is up pretty significantly year-over-year. The comment there, and has there been any changes in the re-age criteria in the last 12 months?

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Michael J. Poppe, Conn's, Inc. - Former President and COO of Credit & Collections [40]

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No. Two comments on that. One, there hasn't been any changes. We have seasonal programs when we go through the holidays, but that would be typical on a year-over-year basis. And then just keep in mind from an accounting standpoint in provisioning, once they are re-aged more than 3 months, the troubled debt restructuring accounting kicks in. And we're basically reserving the full life loss expectation on those accounts. So when it gets there, it's a much more conservative provisioning and reserve treatment.

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

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Okay. And my last question is just I'm curious, 69% is the lowest in-house number I've seen you underwrite in a long, long time. I'm curious whether strategically -- you commented on taking Progressive maybe north of 10%. Obviously, Synchrony's business is way up. How do we think about that? And is there sort of an implied derisking strategy here to reduce the amount of your revenues that are tied to in-house financing?

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Norman L. Miller, Conn's, Inc. - Chairman and CEO [42]

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I'll start and what I would say is, obviously, the move to Synchrony was a change of about 1,500 basis points. When we moved that from in-house to Synchrony, that's driving the largest percentage of that. And we did that for, as we've shared previously, for a multitude of regions, not the least of which was from a capital standpoint, we were able to -- for someone else to fund that $225 million in capital. From a lease-to-own standpoint, it's not about derisking. From my perspective, it's simply a sales opportunity that we have. And our stores are unique with the number of subprime consumers that walk through our door. And it's a much higher percentage of potential lease-to-own that wouldn't qualify for Conn's financing. And the intention with the move with Progressive is just to capture a greater percentage of those customers.

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Operator [43]

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And our next question comes from David Magee of SunTrust.

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Dennis Mitchell Van Zelfden, SunTrust Robinson Humphrey, Inc., Research Division - Associate [44]

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It's actually Mitch on for David. Just first, the remaining states you intend to raise APRs, what would be the time line for that? Is there a chance it could be all done by holiday?

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Michael J. Poppe, Conn's, Inc. - Former President and COO of Credit & Collections [45]

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Certainly, our target is to have them all completed before the end of the fiscal year. And our goal, certainly, would be to try to be done before the holiday.

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Dennis Mitchell Van Zelfden, SunTrust Robinson Humphrey, Inc., Research Division - Associate [46]

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Okay. And then, you've implemented a number of credit-tightening measures over the past few years. Are you satisfied with where you're at? Or do you see the potential to implement additional measures just given the state of subprime industry, and what have you?

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Norman L. Miller, Conn's, Inc. - Chairman and CEO [47]

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Yes, what I would say is that we really can't predict, Mitch, what's going to happen from a macro standpoint. That's part of the benefit of having a sophisticated credit underwriting team, it's something we look at literally on a daily basis, of what's happening with customers coming through the door from a credit quality standpoint. Having said that, we don't, as we sit here today, expect anything significant. We do look and make very minor changes from time-to-time both from a sales opportunity standpoint as well as from a loss standpoint. But as we sit here today, don't -- we don't expect any major underwriting changes.

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Dennis Mitchell Van Zelfden, SunTrust Robinson Humphrey, Inc., Research Division - Associate [48]

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Okay. And then just lastly, inventory positions per store looked a little light to me. Is that just a function of the warehouse efficiencies that you called out previously?

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Lee A. Wright, Conn's, Inc. - CFO and EVP [49]

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Yes, Mitch, it's Lee. Yes, that's exactly right. We're just seeing better optimization of our inventory levels. A lot of focus on that, but certainly, nothing from -- the lightening that went through, what we have in the stores.

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Norman L. Miller, Conn's, Inc. - Chairman and CEO [50]

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Yes, we moved to an automotive warehouse management system during this past year. And that significantly increased, as I mentioned in my notes, the VP of logistics that has come aboard that really is driving efficiency, that's driving that lowering of inventory in the distribution centers, not in the stores.

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Operator [51]

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Thank you. And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Mr. Miller for closing remarks.

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Norman L. Miller, Conn's, Inc. - Chairman and CEO [52]

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Thank you. I want to thank our thousands of Conn's associates for their hard work, their passion, their commitment each and every day. We look forward to sharing our performance with our investors next quarter. Thank you.

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Operator [53]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Have a great day everyone.