April 3, 2012

Conn's, Inc. Reports Results for the Quarter Ended January 31, 2012

BEAUMONT, Texas--(BUSINESS WIRE)-- Conn's, Inc. (NASDAQ: CONN), a specialty retailer of consumer electronics, home appliances, furniture, mattresses, computers and lawn and garden products today announced its operating and financial results for the quarter ended January 31, 2012.

Significant items for the fourth quarter of fiscal 2012 include:

  • Adjusted diluted earnings per share of $0.34, excluding store closing costs and long-lived asset impairment charges, compared to an adjusted diluted loss per share of $0.00 for the same period in the prior fiscal year;
  • Total revenues increased 3.7% to $226.7 million, compared to the same period in the prior fiscal year;
  • Same store sales increased 12.1%;
  • Adjusted retail gross margin increased 460 basis points to 29.7%;
  • Retail segment adjusted operating income, excluding store closing costs and long-lived asset impairment charges, increased to $9.3 million, compared to $2.1 million for the same quarter in the prior fiscal year;
  • Credit segment operating income increased to $12.2 million, compared to $6.7 million for the same quarter in the prior fiscal year; and
  • The Company increased earnings guidance for fiscal year 2013 to adjusted diluted earnings per share of $1.20 to $1.30.

"We are pleased to report improved profitability in both our credit and retail segments," stated Theodore M. Wright, the Company's Chairman and Chief Executive Officer. "Sales and gross margins are increasing. Combined February and March same store sales grew 16.1% and retail gross margin for the first quarter of fiscal 2013 to date is above fourth quarter of fiscal 2012 levels. We are on track with our store opening plans and are looking forward to returning to unit growth after a period of retrenchment."

Retail Segment Results

The increase in net sales during the quarter was driven by higher average selling prices in all major categories and increased furniture and mattress unit sales. The retail segment's adjusted retail gross margin increased to 29.7% in the current-year quarter, from 25.1% in the same quarter of the prior year (the retail gross margins presented have been revised to reflect certain vendor rebates that were previously reported as a reduction of advertising expense in Selling, general and administrative expense, as a reduction of Cost of goods sold). The increase in the retail gross margin was driven by an increase in higher-margin furniture and mattress sales as a percent of total product sales, improved product gross margins and increased sales penetration of repair service agreements. During January 2012, the Company closed five underperforming locations, resulting in $5.1 million of store closing costs and long-lived asset impairment charges.

Credit Segment Results

The Company changed its presentation of net charge-offs and the provision for bad debts to be more consistent with finance industry practice. The impact of the change was to reflect the charges for repair service and credit insurance agreements related to credit account charge-offs in net charge-offs and the provision for bad debts. There was no effect on operating income or net income (loss) as a result of the presentation change.

The credit segment's results, compared to the same quarter in the prior year, were impacted by:

  • Reduced portfolio balances since the fourth quarter of fiscal year 2011;
  • Rising portfolio interest and fee yield to 18.8% from 18.2% in the prior year period;
  • Reductions in servicing costs, as highly re-aged and highly delinquent accounts are being charged off more quickly as a result of the previous changes in charge-off and re-age policies;
  • Lower provision for bad debts, as the credit quality of the receivables in the portfolio continues to improve; and
  • Reduced borrowing cost, as the Company has a reduced balance of debt outstanding and a lower interest rate paid on outstanding debt.

Given the underwriting and collection practice changes made during the past year, and the change in retail sales trends, the Company expects to see:

  • Year-over-year growth in the balance of the credit portfolio, beginning in the second half of fiscal year 2013;
  • Interest and fee yield expansion during fiscal year 2013, compared to the prior fiscal year;
  • Reduced servicing cost and provision for bad debts, as a result of the improving overall credit quality of the receivables in the portfolio; and
  • Lower borrowing cost during the first half of fiscal year 2013, compared to the first half of the prior fiscal year, as the Company expects to have a reduced balance of debt outstanding and a lower interest rate on outstanding debt.

More information on the credit portfolio and its performance may be found in the table included within this press release and in the Company's Form 10-K to be filed with the Securities and Exchange Commission.

The Company reported net income of $7.7 million, or diluted earnings per share of $0.24 for the fourth quarter of fiscal 2012, compared to a net loss of $3.6 million, or a diluted loss per share of $0.12, for the fourth quarter of fiscal 2011. Adjusted net income, considering the impact of the store closing costs and long-lived asset impairment charges, was $11.0 million, or adjusted diluted earnings per share of $0.34, for the fourth quarter of fiscal 2012.

Capital and Liquidity

As of January 31, 2012, there was $313.3 million, excluding $1.3 million of letters of credit, outstanding under the asset-based loan facility. Additionally, as of January 31, 2012, the Company had $79.1 million of immediately available borrowing capacity, and an additional $56.3 million that could become available upon increases in eligible inventory and customer receivable balances under the borrowing base. As of March 31, 2012, the Company had paid down the balance outstanding under its asset-based loan facility by $43.8 million, leaving $269.5 million outstanding, and increasing immediately available borrowing capacity to approximately $120 million.

Outlook and Guidance

The Company updated earnings guidance for the fiscal year ending January 31, 2013, to diluted earnings per share of $1.20 to $1.30. The following factors were considered in developing the guidance:

  • Same stores sales are expected to be up mid- to high-single digits;
  • New store openings expected to be between five and seven new locations in new markets;
  • Retail gross margin is expected to be between 30.0% and 32.0%;
  • The credit portfolio balance is expected to increase;
  • The provision for bad debts is expected to be between 5.0% and 6.0% of the average portfolio balance outstanding; and
  • Selling, general and administrative expense, as a percent of revenues, is expected to be between 28.5% and 29.5% of total revenues.

Conference Call Information

Conn's, Inc. will host a conference call and audio webcast today, April 3, 2012, at 10:00 AM, CDT, to discuss its financial results for the quarter ended January 31, 2012. A link to the live webcast, which will be archived for one year, and slides to be referred to during the call will be available at IR.Conns.com. Participants can join the call by dialing 877-754-5302 or 678-894-3020. Additionally, the Company has posted an updated investor presentation to its investor relations web page.

About Conn's, Inc.

The Company is a specialty retailer currently operating 65 retail locations in Texas, Louisiana and Oklahoma: with 22 stores in the Houston area, 15 in the Dallas/Fort Worth Metroplex, seven in San Antonio, three in Austin, five in Southeast Texas, one in Corpus Christi, four in South Texas, six in Louisiana and two in Oklahoma. The Company's primary product categories include:

  • Home appliances, including refrigerators, freezers, washers, dryers, dishwashers and ranges;
  • Consumer electronics, including LCD, LED, 3-D, plasma and DLP televisions, camcorders, digital cameras, Blu-ray and DVD players, video game equipment, portable audio, MP3 players and home theater products;
  • Furniture and mattresses, including furniture for the living room, dining room, bedroom and related accessories and mattresses; and
  • Home office, including desktop, notebook, netbook and tablet computers, printers and computer accessories.

Additionally, the Company offers a variety of products on a seasonal basis, including lawn and garden equipment, and continues to introduce additional product categories for the home to help respond to its customers' product needs and to increase same store sales. Unlike many of its competitors, the Company provides flexible in-house credit options for its customers, in addition to third-party financing programs and third-party rent-to-own payment plans. In the last three years, the Company financed, on average, approximately 61%, including down payments, of its retail sales under its in-house financing plan.

This press release contains forward-looking statements that involve risks and uncertainties. Such forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "could," "estimate," "should," "anticipate," or "believe," or the negative thereof or variations thereon or similar terminology. Although the Company believes that the expectations reflected in such forward-looking statements will prove to be correct, the Company can give no assurance that such expectations will prove to be correct. The actual future performance of the Company could differ materially from such statements. Factors that could cause or contribute to such differences include, but are not limited to:

  • the Company's growth strategy and plans regarding opening new stores and entering new markets;
  • the Company's intention to update, relocate or expand existing stores;
  • the effect of closing or reducing the hours of operation of existing stores;
  • the Company's estimated capital expenditures and costs related to the opening of new stores or the update, relocation or expansion of existing stores;
  • the Company's ability to introduce additional product categories;
  • sales trends in the home appliances, consumer electronics and furniture and mattress industries and the Company's ability to respond to those trends;
  • changes in product sales or gross margin trends;
  • the pricing actions and promotional activities of competitors;
  • relationships with the Company's key suppliers;
  • changes in outstanding balance, delinquency and loss trends in the receivables portfolio;
  • the Company's ability to offer flexible financing programs;
  • changes in the interest and fee yield earned on the receivables portfolio;
  • changes in the Company's underwriting and collection practices and policies;
  • changes in the costs to collect the receivables portfolio;
  • the Company's ability to amend, renew or replace its existing credit facilities before the maturity dates of the facilities;
  • the Company's ability to fund operations, debt repayment and expansion from cash flow from operations, borrowings on its revolving lines of credit and proceeds from securitizations and from accessing debt or equity markets;
  • the ability of the Company to obtain additional funding for the purpose of funding the receivables generated by the Company;
  • the ability of the Company to maintain compliance with the covenants in its financing facilities or obtain amendments or waivers of the covenants to avoid violations or potential violations of the covenants;
  • reduced availability under the Company's credit facilities as a result of borrowing base requirements and the impact on the borrowing base calculation of changes in the performance or eligibility of the customer receivables financed by that facility;
  • the ability of the financial institutions providing lending facilities to the Company to fund their commitments;
  • the effect on borrowing costs of downgrades by rating agencies or changes in laws or regulations on the Company's financing providers;
  • the cost of any amended, renewed or replacement credit facilities;
  • interest rates;
  • general economic and financial market conditions;
  • weather conditions in the Company's markets;
  • the outcome of litigation or government investigations;
  • changes in the Company's stock price; and
  • the actual number of shares of common stock outstanding.

Further information on these risk factors is included in the Company's filings with the Securities and Exchange Commission, including the Company's annual report on Form 10-K. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this press release. Except as required by law, the Company is not obligated to publicly release any revisions to these forward-looking statements to reflect the events or circumstances after the date of this press release or to reflect the occurrence of unanticipated events.

Conn's, Inc.
CONDENSED, CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except earnings per share)
                     
 
Three Months Ended

January 31,

Year Ended

January 31,

2012 2011 2012 2011
Revenues
Total net sales $ 189,671 $ 181,908 $ 653,684 $ 662,725
Finance charges and other   37,000     36,748     138,618     146,050  
Total revenues 226,671 218,656 792,302 808,775
Cost and expenses
Cost of goods and parts sold, including
warehousing and occupancy costs 132,273 136,677

462,020

482,475
Selling, general and administrative expense 62,491 60,902

237,911

239,806
Costs and impairment charges related
to store closings 5,082 2,321 9,115 2,321
Provision for bad debts   10,440     13,912     53,555     51,404  
Total cost and expenses   210,286     213,812     762,601     776,006  
Operating income 16,385 4,844 29,701 32,769
Interest expense, net 3,978 7,846 22,457 28,080
Costs related to financing facilities
terminated and transactions not completed - 1,387 - 4,283
Loss from early extinguishment of debt - - 11,056 -
Other (income) expense, net   (11 )   173     70     340  
Income (loss) before income taxes 12,418 (4,562 ) (3,882 ) 66
Provision (benefit) for income taxes   4,717     (984 )   (159 )   1,138  
Net income (loss) $ 7,701   $ (3,578 ) $ (3,723 ) $ (1,072 )
 
Earnings (loss) per share
Basic $ 0.24 $ (0.12 ) $ (0.12 ) $ (0.04 )
Diluted $ 0.24 $ (0.12 ) $ (0.12 ) $ (0.04 )
Average common shares outstanding
Basic 31,997

29,491

31,860 26,091
Diluted 32,572

29,491

31,860 26,091
 

Notes:

  • Vendor rebates previously reported as a reduction of advertising expense, in Selling, general and administrative expense, have been reclassified and are now reflected as a reduction of Cost of goods sold.
  • Previously reported Total net sales, Finance charges and other and Provision for bad debts have been revised to present charges for repair service and credit insurance agreements related to credit account charge-offs in Provision for bad debts.
  • Previously reported Earnings per share and Average common shares outstanding amounts have been corrected to retroactively adjust for the impact of the Company's November 2010 common stock rights offering.
  • Previously reported Finance charges and other amounts have been revised to correct the Company's prior estimates related to its change from recording interest income based on the Rule of 78's to the interest method.

 
Conn's, Inc. - Retail Segment
CONDENSED FINANCIAL INFORMATION
(unaudited)
(dollars in thousands)
                           
 
Three Months Ended

January 31,

Year Ended

January 31,

2012 2011 2012 2011
Revenues
Product sales $ 173,446 $ 168,951 $ 596,360 $ 608,443
Repair service agreement commissions 12,629 9,179 42,078 37,795
Service revenues   3,596     3,778     15,246     16,487  
Total net sales   189,671     181,908     653,684     662,725  
Finance charges and other   657     176     1,335     858  
Total revenues   190,328     182,084     655,019     663,583  
Cost and expenses
Cost of goods sold, including
warehousing and occupancy costs 130,719 135,032

455,493

474,696
Cost of parts sold, including
warehousing and occupancy costs 1,554 1,645 6,527 7,779
Selling, general and administrative expense 48,631 44,765

180,641

175,777
Costs and impairment charges related
to store closings 5,082 2,321 9,115 2,321
Provision for bad debts   121     149     590     817  
Total cost and expenses   186,107     183,912     652,366     661,390  
Operating income (loss) 4,221 (1,828 ) 2,653 2,193
Other (income) expense, net   (11 )   173     70     340  
Segment income (loss) before income taxes $ 4,232   $ (2,001 ) $ 2,583   $ 1,853  
 
Retail gross margin 29.7 % 24.2 % 28.7 % 26.5 %
Selling, general and administrative expense
as percent of revenues 25.6 % 24.6 % 27.6 % 26.5 %
Operating margin 2.2 % (1.0 %) 0.4 % 0.3 %
Number of stores, end of period 65 76 65 76
 

 
Conn's, Inc. - Credit Segment
CONDENSED FINANCIAL INFORMATION
(unaudited)
(in thousands)
                           
 
Three Months Ended

January 31,

Year Ended

January 31,

2012 2011 2012 2011
Revenues
Finance charges and other $ 36,343   $ 36,572   $ 137,283   $ 145,192  
Total revenues   36,343     36,572     137,283     145,192  
Cost and expenses
Selling, general and administrative expense 13,860 16,137 57,270 64,029
Provision for bad debts   10,319     13,763     52,965     50,587  
Total cost and expenses   24,179     29,900     110,235     114,616  
Operating income 12,164 6,672 27,048 30,576
Interest expense, net 3,978 7,846 22,457 28,080
Costs related to financing facilities terminated
and transactions not completed - 1,387 - 4,283
Loss from early extinguishment of debt   -     -     11,056     -  
Segment income (loss) before income taxes $ 8,186   $ (2,561 ) $ (6,465 ) $ (1,787 )
 
Selling, general and administrative expense
as percent of revenues 38.1 % 44.1 % 41.7 % 44.1 %
Operating margin 33.5 % 18.2 % 19.7 % 21.1 %
 
 
MANAGED PORTFOLIO STATISTICS
(dollars in thousands, except average outstanding balance per account)
                   
 
Year ended January 31,
2012 2011 2010 2009
 
Total accounts 484,169 525,950 551,312 537,957
Total outstanding balance $ 643,301 $ 675,766 $ 736,041 $ 753,513
Average outstanding balance per account $ 1,329 $ 1,285 $ 1,335 $ 1,401
Weighted average origination credit score of
sales financed 621 624 620 612
Weighted average credit score of
outstanding balances 602 591 586 585
Balance 60+ days delinquent $ 55,190 $ 58,042 $ 73,391 $ 55,141
Percent 60+ days delinquent 8.6 % 8.6 % 10.0 % 7.3 %
Percent 60-209 days delinquent 8.6 % 7.0 % 8.3 % 6.0 %
Percent of portfolio re-aged 13.8 % 19.8 % 20.2 % 18.8 %
Weighted average monthly payment rate (YTD) 5.60 % 5.37 % 5.23 % 5.48 %
Net charge-off ratio (YTD annualized) 7.5 % 7.3 % 5.0 % 4.4 %
 

Note: The net charge-off ratio for the year ended January 31, 2012, is impacted by the additional $5.9 million charged-off as a result of the charge-off policy change earlier in the fiscal year, which impacted the net charge-off ratio by approximately 90 basis points.

 
Conn's, Inc.
CONDENSED, CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands)
             
 
January 31, January 31,
2012 2011
Assets
Current assets
Cash and cash equivalents $ 6,265 $ 10,977
Other accounts receivable, net 38,715 30,476
Customer accounts receivable, net 316,385 337,673
Inventories 62,540 82,354
Deferred income taxes

17,111

19,478
Prepaid expenses and other assets   11,994   10,418
Total current assets

453,010

491,376
Non-current deferred income tax asset

9,754

8,009
Long-term customer accounts receivable, net 272,938 285,667
Total property and equipment, net 38,484 46,890
Other assets, net   9,564   10,118
Total assets $ 783,750 $ 842,060
Liabilities and Stockholders' Equity
Current Liabilities
Current portion of long-term debt $ 726 $ 167
Accounts payable 44,711 57,740
Accrued compensation and related expenses 7,213 5,477
Accrued expenses 24,482 16,045
Other current liabilities   17,994   22,925
Total current liabilities 95,126 102,354
Long-term debt 320,978 373,569
Other long-term liabilities 14,275

13,240

Total stockholders' equity   353,371   352,897
Total liabilities and stockholders' equity $ 783,750 $

842,060

 

 
NON-GAAP RECONCILIATION OF NET INCOME (LOSS), AS ADJUSTED
AND DILUTED EARNINGS (LOSS) PER SHARE, AS ADJUSTED
(unaudited)
(in thousands, except earnings per share)
                           
 
Three Months Ended

January 31,

Year Ended

January 31,

2012 2011 2012 2011
Net income (loss), as reported $ 7,701 $ (3,578 ) $ (3,723 ) $ (1,072 )
Adjustments:
Costs and impairment charges related to store closings 5,082 2,321 9,115 2,321
Costs related to financing facilities terminated
and transactions not completed - 1,387 - 4,283
Loss from early extinguishment of debt - - 11,056 -
Severance costs - - 813 -
Inventory reserve adjustments - 1,651 4,669 1,651
Charge to record reserves required by the adoption
of troubled debt restructuring accounting guidance - - 27,487 -
Reserves previously provided related to accounts
considered restructured under the troubled debt
restructuring accounting guidance - - (13,350 ) -
Tax impact of adjustments   (1,789 )   (1,886 )   (14,006 )   (2,906 )
Net income (loss), as adjusted $ 10,994   $ (105 ) $ 22,061   $ 4,277  
 
Average common shares
outstanding - Diluted 32,572

29,491

31,860 26,091
 
Earnings (loss) per share - Diluted
As reported $ 0.24 $ (0.12 ) $ (0.12 ) $ (0.04 )
As adjusted $ 0.34 $ (0.00 ) $ 0.69 $ 0.16
 

 
NON-GAAP RECONCILIATION OF RETAIL SEGMENT
OPERATING INCOME (LOSS), AS ADJUSTED
(unaudited)
(in thousands)
                   
 
Three Months Ended

January 31,

Year Ended

January 31,

2012 2011 2012 2011
Operating income (loss), as reported $ 4,221 $ (1,828 ) $ 2,653 $ 2,193
Adjustments:
Inventory adjustments - 1,651 4,669 1,651
Costs and impairment charges related
to store closings   5,082   2,321     9,115   2,321
Operating income, as adjusted $ 9,303 $ 2,144   $ 16,437 $ 6,165
 
 
NON-GAAP RECONCILIATION OF RETAIL SEGMENT
GROSS MARGIN, AS ADJUSTED
(unaudited)
(dollars in thousands)
                           
 
Three Months Ended

January 31,

Year Ended

January 31,

2012 2011 2012 2011
Product sales, as reported $ 173,446 $ 168,951 $ 596,360 $ 608,443
Repair service agreement commissions,
as reported   12,629     9,179     42,078     37,795  
186,075 178,130 638,438 646,238
Cost of goods sold, including warehousing and
occupancy costs, as reported   130,719     135,032     455,493     474,696  
Gross Profit, as reported $ 55,356   $ 43,098   $ 182,945   $ 171,542  
Gross Margin, as reported 29.7 % 24.2 % 28.7 % 26.5 %
Adjustments:
Inventory reserve adjustments   -     1,651     4,669     1,651  
Gross Profit, as adjusted $ 55,356   $ 44,749   $ 187,614   $ 173,193  

Gross Margin, as adjusted

29.7 % 25.1 % 29.4 % 26.8 %
 

 
NON-GAAP RECONCILIATION OF CREDIT SEGMENT
OPERATING INCOME, AS ADJUSTED
(unaudited)
(in thousands)
                     
 
Three Months Ended

January 31,

Year Ended

January 31,

2012 2011 2012 2011
Operating income, as reported $ 12,164 $ 6,672 $ 27,048 $ 30,576
Adjustments:
Charge to record reserves required by the
adoption of troubled debt restructuring
accounting guidance - - 27,487 -
Reserves previously recorded related to accounts
considered restructured under the troubled debt
restructuring accounting guidance   -   -   (13,350 )   -
Operating income, as adjusted $ 12,164 $ 6,672 $ 41,185   $ 30,576
 

Basis for presentation of non-GAAP disclosures:

To supplement the Company's consolidated financial statements, which are prepared and presented in accordance with generally accepted accounting principles ("GAAP"), the Company also provides adjusted net income and adjusted earnings per diluted share information. These non-GAAP financial measures are not meant to be considered as a substitute for comparable GAAP measures but should be considered in addition to results presented in accordance with GAAP, and are intended to provide additional insight into the Company's operations and the factors and trends affecting the Company's business. The Company's management believes these non-GAAP financial measures are useful to financial statement readers because (1) they allow for greater transparency with respect to key metrics the Company uses in its financial and operational decision making and (2) they are used by some of its institutional investors and the analyst community to help them analyze the Company's operating results.

Conn-F

Conn's, Inc., Beaumont
Mike Poppe, (409) 832-1696 Ext. 3294
Chief Financial Officer
or
Investors:
S.M. Berger & Company
Andrew Berger, (216) 464-6400

Source: Conn's, Inc.

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