Conn's, Inc. Reports Third Quarter Fiscal Year 2018 Financial Results

Second Consecutive Quarter of Profitability

Record Yield Drives Highest Spread in 11 Quarters

Direct Loan Program Successfully Implemented in Two Additional States

60+ Delinquency Rate Declined 110 Basis Points Year-Over-Year; First Year-Over-Year Decline in Four Years

Retail Platform Well Positioned for Planned New Store Growth in Fiscal Year 2019

THE WOODLANDS, Texas, Dec. 07, 2017 (GLOBE NEWSWIRE) — Conn’s, Inc. (NASDAQ:CONN), a specialty retailer of furniture and mattresses, home appliances, consumer electronics and home office products, and provider of consumer credit, today announced its financial results for the third quarter ended October 31, 2017.

“Our third quarter results demonstrate the continued success of Conn’s transformation, as we benefited from a record net yield, a widening credit spread, and strong retail gross margins, despite the impact Hurricane Harvey had on many of our communities,” stated Norm Miller, Conn’s Chairman and Chief Executive Officer.

Conn’s achieved a record net yield of 19.8%, and our credit spread increased to 460 basis points in the third quarter of fiscal year 2018, which was the highest level in the past 11 quarters.  During the third quarter, new direct loan programs were successfully implemented in Oklahoma and Tennessee. As a result, approximately 90% of current originations are now at higher rates and the average APR on total originations for the month of October was 27.9%, compared to 21.4% in July of last fiscal year.

During the third quarter of fiscal year 2018, the company’s 60+ delinquency rate fell year-over-year for the first time in four years.  This represents a significant milestone, and based on the performance of originations since June of last fiscal year, we anticipate credit segment profitability will continue to improve as newer accounts become a larger percentage of the portfolio.

“Retail performance remains solid and Conn’s achieved record third quarter retail gross margins, which helped produce another quarter of strong retail operating income. With improving credit trends, we are increasingly confident that the investments we have made in the credit platform can support profitable growth.  For fiscal year 2019 we are planning to open five to nine new stores, all in existing states which will allow us to leverage our current infrastructure.  I am encouraged by the successful transformation underway at Conn’s, and the long-term opportunities to create sustainable growth and profitability,” concluded Mr. Miller.

Third Quarter Results

Net income for the third quarter of fiscal year 2018 was $1.6 million, or $0.05 per diluted share, compared to a net loss for the third quarter of fiscal year 2017 of $3.8 million, or $0.12 per diluted share.  On a non-GAAP basis, adjusted net income for the third quarter of fiscal year 2018 was $5.6 million, or $0.18 per diluted share, which excludes a loss from the write-off of previously capitalized costs for a software project that was abandoned during the third quarter of fiscal year 2018 related to the implementation of a new point of sale system that began in fiscal year 2013 and a loss from extinguishment of debt related to the early redemption of our 2016-A Notes.  This compares to adjusted net loss for the third quarter of fiscal year 2017 of $2.5 million, or $0.08 per diluted share, which excludes costs associated with store and facility closures, impairments from disposals, legal and professional fees related to our securities-related litigation and severance costs due to changes in the executive management team. The impairments from disposals included the write-off of leasehold improvements for one store we relocated prior to the end of the useful life of the leasehold improvements and incurred costs for a terminated store project prior to starting construction. 

Retail Segment Third Quarter Results

Total retail revenues were $291.9 million for the third quarter of fiscal year 2018 compared to $308.4 million for the third quarter of fiscal year 2017, a decrease of 5.3%.  The decrease in retail revenue was primarily driven by a decrease in same store sales of 7.0%, partially offset by new store growth.  Sales for the three months ended October 31, 2017 were impacted negatively by general softness in consumer spending.  For the third quarter of fiscal year 2018, retail segment operating income was $29.6 million and, on a non-GAAP basis, adjusted retail segment operating income was $35.4 million, which excludes a loss from the write-off of previously capitalized costs for a software project that was abandoned during the third quarter of fiscal year 2018 related to the implementation of a new point of sale system that began in fiscal year 2013. 

The following table presents net sales and changes in net sales by category:

  Three Months Ended October 31,       %   Same store
(dollars in thousands) 2017   % of Total   2016   % of Total   Change   Change   % change
Furniture and mattress $ 97,146     33.3 %   $ 98,898     32.1 %   $ (1,752 )   (1.8 )%   (6.1 )%
Home appliance 83,837     28.7     $ 85,785     27.8     $ (1,948 )   (2.3 )   (3.3 )
Consumer electronics 58,062     19.9     65,670     21.3     (7,608 )   (11.6 )   (10.7 )
Home office 20,295     7.0     22,747     7.5     (2,452 )   (10.8 )   (8.1 )
Other 4,446     1.5     4,956     1.6     (510 )   (10.3 )   (11.1 )
Product sales 263,786     90.4     278,056     90.3     (14,270 )   (5.1 )   (6.6 )
Repair service agreement commissions 24,488     8.4     26,354     8.5     (1,866 )   (7.1 )   (10.1 )
Service revenues 3,534     1.2     3,623     1.2     (89 )   (2.5 )    
Total net sales 291,808     100.0 %   308,033     100.0 %   (16,225 )   (5.3 )   (7.0 )%

The following provides a summary of items impacting the performance of our product categories during the third quarter of fiscal year 2018 compared to the third quarter of fiscal year 2017:

  • Furniture unit volume decreased 12.5%, partially offset by a 9.3% increase in average selling price;
  • Mattress unit volume decreased 15.1%, partially offset by a 4.5% increase in average selling price;
  • Home appliance unit volume decreased 5.0%, partially offset by a 1.8% increase in average selling price;
  • Consumer electronic unit volume decreased 11.9%, partially offset by a 1.5% increase in average sales price; and
  • Home office unit volume decreased 20.4%, partially offset by a 15.5% increase in average selling price.

Credit Segment Third Quarter Results

Credit revenues were $81.3 million for the third quarter of fiscal year 2018 compared to $68.4 million for the third quarter of fiscal year 2017, an increase of 18.8%.  The increase in credit revenue was primarily the result of increased originations of our higher-yielding direct loan product, which contributed to the increase in the portfolio yield rate to 19.8% from 15.0%, partially offset by the impact of a 3.7% decline in the average balance of the customer receivables portfolio.  Credit revenues for the third quarter of fiscal year 2018 also reflect a decline in insurance income primarily due to a decrease in retrospective commissions as a result of higher claim volumes related to Hurricane Harvey.  The total customer portfolio balance was $1.49 billion at October 31, 2017 compared to $1.53 billion at October 31, 2016, a decrease of 3.0%.

Provision for bad debts was $56.3 million for the third quarter of fiscal year 2018 compared to $51.3 million for the third quarter of fiscal year 2017, an increase of $5.0 million.  The most significant reasons for the increase in the provision for bad debts for the three months ended October 31, 2017 compared to the three months ended October 31, 2016 were:

  1. growth in the customer receivables portfolio in the three months ended October 31, 2017 compared to a decline in the three months ended October 31, 2016;
  2. higher net-charge offs in the three months ended October 31, 2017 compared to the three months ended October 31, 2016; and
  3. an increase in the qualitative reserve related to Hurricane Harvey of $1.1 million; partially offset by
  4. a decrease in our estimated TDR loss rate as a result of improvements in TDR delinquency rates.

Additional information on the credit portfolio and its performance may be found in the Customer Receivable Portfolio Statistics table included within this press release and in the Company’s Form 10-Q for the quarter ended October 31, 2017, to be filed with the Securities and Exchange Commission.

Store Update

During fiscal year 2018, the Company has opened three new Conn’s HomePlus® stores, two of which were opened during the first quarter of fiscal year 2018 in North Carolina, and one of which was opened during the second quarter of fiscal year 2018 in Virginia, bringing the total store count to 116 in 14 states.  The Company does not intend to open any additional stores in fiscal year 2018.  The Company currently plans to open between five and nine stores in fiscal year 2019, all in existing states to leverage current infrastructure.

Liquidity and Capital Resources

As of October 31, 2017, the Company had $110.5 million of immediately available borrowing capacity under its $750.0 million revolving credit facility, with an additional $284.8 million that may become available under the Company’s revolving credit facility if the Company grows the balance of eligible customer receivables and eligible inventory balances under the borrowing base. The Company also had $12.7 million of unrestricted cash available for use.

Outlook and Guidance

The following are the Company’s expectations for the business for the fourth quarter of fiscal year 2018:

  • Change in same store sales down mid single digits;
  • Retail gross margin between 39.0% and 39.5% of total retail net sales;
  • Selling, general and administrative expenses between 27.0% and 29.0% of total revenues;
  • Provision for bad debts between $55.0 million and $59.5 million;
  • Finance charges and other revenues between $86.0 million and $90.0 million; and
  • Interest expense between $19.0 million and $20.5 million.

Conference Call Information

The Company will host a conference call on December 7, 2017 at 10 a.m. CT / 11 a.m. ET to discuss its third quarter fiscal 2018 financial results. Participants can join the call by dialing 877-754-5302 or 678-894-3020. The conference call will also be broadcast simultaneously via webcast on a listen-only basis. A link to the earnings release, webcast and third quarter fiscal 2018 conference call presentation will be available at ir.conns.com.

Replay of the telephonic call can be accessed through December 14, 2017 by dialing 855-859-2056 or 404-537-3406 and Conference ID: 5182279. A link to the earnings release and webcast will be available at ir.conns.com.

About Conn’s, Inc.

Conn’s is a specialty retailer currently operating 116 retail locations in Alabama, Arizona, Colorado, Georgia, Louisiana, Mississippi, Nevada, New Mexico, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, and Virginia. The Company’s primary product categories include:

  • Furniture and mattress, including furniture and related accessories for the living room, dining room and bedroom, as well as both traditional and specialty mattresses;
  • Home appliance, including refrigerators, freezers, washers, dryers, dishwashers and ranges;
  • Consumer electronics, including LED, OLED, Ultra HD, and internet-ready televisions, Blu-ray players, home theater and portable audio equipment; and
  • Home office, including computers, printers and accessories.

Additionally, Conn’s offers a variety of products on a seasonal basis. Unlike many of its competitors, Conn’s provides flexible in-house credit options for its customers in addition to third-party financing programs and third-party lease-to-own payment plans.

This press release contains forward-looking statements within the meaning of the federal securities laws, including but not limited to, the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties.  Such forward-looking statements include information concerning our future financial performance, business strategy, plans, goals and objectives. Statements containing the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “should,” “predict,” “will,” “potential,” or the negative of such terms or other similar expressions are generally forward-looking in nature and not historical facts.  Such forward-looking statements are based on our current expectations.  We can give no assurance that such statements will prove to be correct, and actual results may differ materially.  A wide variety of potential risks, uncertainties, and other factors could materially affect our ability to achieve the results either expressed or implied by our forward-looking statements including, but not limited to: general economic conditions impacting our customers or potential customers; our ability to execute periodic securitizations of future originated customer loans on favorable terms; our ability to continue existing customer financing programs or to offer new customer financing programs; changes in the delinquency status of our credit portfolio; unfavorable developments in ongoing litigation; increased regulatory oversight; higher than anticipated net charge-offs in the credit portfolio; the success of our planned opening of new stores; technological and market developments and sales trends for our major product offerings; our ability to manage effectively the selection of our major product offerings; our ability to protect against cyber-attacks or data security breaches and to protect the integrity and security of individually identifiable data of our customers and employees; our ability to fund our operations, capital expenditures, debt repayment and expansion from cash flows from operations, borrowings from our revolving credit facility, and proceeds from accessing debt or equity markets; and other risks detailed in Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended January 31, 2017 and other reports filed with the SEC.  If one or more of these or other risks or uncertainties materialize (or the consequences of such a development changes), or should our underlying assumptions prove incorrect, actual outcomes may vary materially from those reflected in our forward-looking statements.  You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this press release.  We disclaim any intention or obligation to update publicly or revise such statements, whether as a result of new information, future events or otherwise, or to provide periodic updates or guidance.  All forward-looking statements attributable to us, or to persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements.

CONN-G

S.M. Berger & Company
Andrew Berger (216) 464-6400

CONN’S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(dollars in thousands, except per share amounts)
       
  Three Months Ended
 October 31,
  Nine Months Ended
 October 31,
  2017   2016   2017   2016
Revenues:              
Total net sales $ 291,808     $ 308,033     $ 857,506     $ 958,574  
Finance charges and other revenues 81,364     68,740     238,139     205,469  
Total revenues 373,172     376,773     1,095,645     1,164,043  
Costs and expenses:              
Cost of goods sold 175,591     192,374     519,847     605,709  
Selling, general and administrative expenses 114,355     114,457     332,524     347,550  
Provision for bad debts 56,512     51,564     161,891     169,978  
Charges and credits 5,861     1,987     11,156     5,408  
Total costs and expenses 352,319     360,382     1,025,418     1,128,645  
Operating income 20,853     16,391     70,227     35,398  
Interest expense 18,095     23,470     62,142     73,504  
Loss on extinguishment of debt 461         2,907      
Income (loss) before income taxes 2,297     (7,079 )   5,178     (38,106 )
Provision (benefit) for income taxes 728     (3,264 )   1,916     (12,618 )
Net income (loss) $ 1,569     $ (3,815 )   $ 3,262     $ (25,488 )
Income (loss) per share:              
Basic $ 0.05     $ (0.12 )   $ 0.10     $ (0.83 )
Diluted $ 0.05     $ (0.12 )   $ 0.10     $ (0.83 )
Weighted average common shares outstanding:              
Basic 31,292,913     30,816,319     31,121,177     30,736,636  
Diluted 31,764,594     30,816,319     31,457,420     30,736,636  

CONN’S, INC. AND SUBSIDIARIES
CONDENSED RETAIL SEGMENT FINANCIAL INFORMATION
(unaudited)
(dollars in thousands)
       
  Three Months Ended
 October 31,
  Nine Months Ended
 October 31,
  2017   2016   2017   2016
Revenues:              
Product sales $ 263,786     $ 278,056     $ 774,741     $ 864,269  
Repair service agreement commissions 24,488     26,354     72,703     82,849  
Service revenues 3,534     3,623     10,062     11,456  
Total net sales 291,808     308,033     857,506     958,574  
Other revenues 95     337     267     1,268  
Total revenues 291,903     308,370     857,773     959,842  
Costs and expenses:              
Cost of goods sold 175,591     192,374     519,847     605,709  
Selling, general and administrative expenses 80,676     79,777     233,290     244,598  
Provision for bad debts 189     286     584     811  
Charges and credits 5,861     1,987     11,156     5,408  
Total costs and expenses 262,317     274,424     764,877     856,526  
Operating income $ 29,586     $ 33,946     $ 92,896     $ 103,316  
Retail gross margin 39.8 %   37.5 %   39.4 %   36.8 %
Selling, general and administrative expense as percent of revenues 27.6 %   25.9 %   27.2 %   25.5 %
Operating margin 10.1 %   11.0 %   10.8 %   10.8 %
Store count:              
Beginning of period 116     112     113     103  
Opened     1     3     10  
End of period 116     113     116     113  

CONN’S, INC. AND SUBSIDIARIES
CONDENSED CREDIT SEGMENT FINANCIAL INFORMATION
(unaudited)
(dollars in thousands)
       
  Three Months Ended
 October 31,
  Nine Months Ended
 October 31,
  2017   2016   2017   2016
Revenues:              
Finance charges and other revenues $ 81,269     $ 68,403     $ 237,872     $ 204,201  
Costs and expenses:              
Selling, general and administrative expenses 33,679     34,680     99,234     102,952  
Provision for bad debts 56,323     51,278     161,307     169,167  
Total costs and expenses 90,002     85,958     260,541     272,119  
Operating loss (8,733 )   (17,555 )   (22,669 )   (67,918 )
Interest expense 18,095     23,470     62,142     73,504  
Loss on extinguishment of debt 461         2,907      
Loss before income taxes $ (27,289 )   $ (41,025 )   $ (87,718 )   $ (141,422 )
Selling, general and administrative expense as percent of revenues 41.4 %   50.7 %   41.7 %   50.4 %
Selling, general and administrative expense as percent of average total customer portfolio balance (annualized) 9.1 %   9.0 %   8.9 %   8.9 %
Operating margin (10.7 )%   (25.7 )%   (9.5 )%   (33.3 )%

CONN’S, INC. AND SUBSIDIARIES
CUSTOMER RECEIVABLE PORTFOLIO STATISTICS
(unaudited)
   
  As of October 31,
  2017   2016
Weighted average credit score of outstanding balances (1) 589     591  
Average outstanding customer balance $ 2,405     $ 2,354  
Balances 60+ days past due as a percentage of total customer portfolio balance (2)(3) 9.9 %   11.0 %
Re-aged balance as a percentage of total customer portfolio balance (2)(4) 23.8 %   16.0 %
Account balances re-aged more than six months (in thousands) $ 80,516     $ 73,385  
Allowance for bad debts as a percentage of total customer portfolio balance 13.6 %   13.3 %
Percent of total customer portfolio balance represented by no-interest option receivables 22.3 %   28.3 %

  Three Months Ended
 October 31,
  Nine Months Ended
 October 31,
  2017   2016   2017   2016
Total applications processed 321,373     326,131     909,287     975,363  
Weighted average origination credit score of sales financed (1) 611     610     609     610  
Percent of total applications approved and utilized 29.1 %   32.7 %   31.1 %   35.1 %
Average down payment 2.9 %   3.1 %   3.2 %   3.4 %
Average income of credit customer at origination $ 43,500     $ 42,200     $ 42,700     $ 41,400  
Percent of retail sales paid for by:              
In-house financing, including down payments received 72.0 %   72.3 %   71.7 %   69.8 %
Third-party financing 15.1 %   16.4 %   15.8 %   15.4 %
Third-party lease-to-own options 5.7 %   5.2 %   5.7 %   5.1 %
  92.8 %   93.9 %   93.2 %   90.3 %
                       

(1) Credit scores exclude non-scored accounts.

(2) Accounts that become delinquent after being re-aged are included in both the delinquency and re-aged amounts.

(3) The balance of 60+ days past due as a percentage of total customer portfolio balance as of October 31, 2017 reflects the impact of first time re-ages related to customers within FEMA-designated Hurricane Harvey disaster areas.

(4) The re-aged balance as a percentage of total customer portfolio as of October 31, 2017 includes $71.8 million in first time re-ages related to customers within FEMA-designated Hurricane Harvey disaster areas. 

CONN’S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands)
 
  October 31,
 2017
  January 31,
 2017
Assets      
Current Assets:      
Cash and cash equivalents $ 12,742     $ 23,566  
Restricted cash 71,099     110,698  
Customer accounts receivable, net of allowances 635,700     702,162  
Other accounts receivable 63,203     69,286  
Inventories 235,479     164,856  
Income taxes recoverable 1,194     2,150  
Prepaid expenses and other current assets 14,721     14,955  
Total current assets 1,034,138     1,087,673  
Long-term portion of customer accounts receivable, net of allowances 616,665     615,904  
Property and equipment, net 144,747     159,202  
Deferred income taxes 72,554     71,442  
Other assets 6,285     6,913  
Total assets $ 1,874,389     $ 1,941,134  
Liabilities and Stockholders’ Equity      
Current liabilities:      
Current maturities of long-term debt and capital lease obligations $ 65,651     $ 849  
Accounts payable 109,738     101,612  
Accrued expenses 62,403     39,781  
Other current liabilities 24,531     25,139  
Total current liabilities 262,323     167,381  
Deferred rent 87,152     87,957  
Long-term debt and capital lease obligations 973,278     1,144,393  
Other long-term liabilities 22,245     23,613  
Total liabilities 1,344,998     1,423,344  
Stockholders’ equity 529,391     517,790  
Total liabilities and stockholders’ equity $ 1,874,389     $ 1,941,134  

CONN’S, INC. AND SUBSIDIARIES
NON-GAAP RECONCILIATIONS
(unaudited)
(dollars in thousands, except per share amounts)
 
RETAIL SEGMENT OPERATING INCOME, AS ADJUSTED
       
  Three Months Ended
 October 31,
  Nine Months Ended
 October 31,
  2017   2016   2017   2016
Retail segment operating income, as reported $ 29,586     $ 33,946     $ 92,896     $ 103,316  
Adjustments:              
Store and facility closure costs     954     1,349     954  
Impairments from disposals     595         1,980  
Legal and professional fees related to the exploration of strategic alternatives and securities-related litigation     158     34     747  
Employee severance     280     1,317     1,493  
Indirect tax audit reserve         2,595      
Write-off of capitalized software costs 5,861         5,861      
Executive management transition costs             234  
Retail segment operating income, as adjusted $ 35,447     $ 35,933     $ 104,052     $ 108,724  
Retail segment total revenues 291,903     308,370     857,773     959,842  
Retail segment operating margin:              
As reported 10.1 %   11.0 %   10.8 %   10.8 %
As adjusted 12.1 %   11.7 %   12.1 %   11.3 %

NET INCOME (LOSS), AS ADJUSTED, AND DILUTED INCOME (LOSS) PER SHARE, AS ADJUSTED
       
  Three Months Ended
 October 31,
  Nine Months Ended
 October 31,
  2017   2016   2017   2016
Net income (loss), as reported $ 1,569     $ (3,815 )   $ 3,262     $ (25,488 )
Adjustments:              
Changes in estimates             13,168  
Store and facility closure costs     954     1,349     954  
Impairments from disposals     595         1,980  
Legal and professional fees related to the exploration of strategic alternatives and securities-related litigation     158     34     747  
Employee severance     280     1,317     1,493  
Indirect tax audit reserve         2,595      
Write-off of capitalized software costs 5,861         5,861      
Executive management transition costs             234  
Loss on extinguishment of debt 461         2,907      
Tax impact of adjustments (2,289 )   (719 )   (5,092 )   (6,159 )
Net income (loss), as adjusted $ 5,602     $ (2,547 )   $ 12,233     $ (13,071 )
Weighted average common shares outstanding – Diluted 31,764,594     30,816,319     31,457,420     30,736,636  
Income (loss) per share:              
As reported $ 0.05     $ (0.12 )   $ 0.10     $ (0.83 )
As adjusted $ 0.18     $ (0.08 )   $ 0.39     $ (0.43 )


Basis for presentation of non-GAAP disclosures:

To supplement the condensed consolidated financial statements, which are prepared and presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), we provide the following non-GAAP financial measures: retail segment adjusted operating income, retail segment adjusted operating margin, adjusted net income (loss), and adjusted income (loss) per diluted share. These non-GAAP financial measures are not meant to be considered as a substitute for, or superior to, comparable GAAP measures and should be considered in addition to results presented in accordance with GAAP. They are intended to provide additional insight into our operations and the factors and trends affecting the business. Management believes these non-GAAP financial measures are useful to financial statement readers because (1) they allow for additional transparency with respect to key metrics we use in our financial and operational decision making and (2) they are used by some of our institutional investors and the analyst community to help them analyze our operating results.

Left Menu Icon
Right Menu Icon