December 3, 2012

Conn's, Inc. Announces Record Third Quarter Net Income

Adjusted diluted earnings per share of $0.38 for the quarter

Fiscal year 2014 earnings guidance initiated at $2.05 to $2.15 per diluted share

THE WOODLANDS, Texas--(BUSINESS WIRE)-- Conn's, Inc. (NASDAQ:CONN), a specialty retailer of home appliances, furniture, mattresses, consumer electronics and provider of consumer credit, today announced its results for the quarter ended October 31, 2012.

Significant items for the third quarter of fiscal 2013 include:

  • Same store sales rose 12.6% over the prior quarter, on top of same store sales growth of 18.9% a year ago;
  • Total revenues increased 10.6% to $206.4 million;
  • Retail gross margin was 35.5%;
  • Adjusted retail segment operating income was $12.9 million, up $13.8 million on an adjusted basis over the prior-year quarter;
  • Credit segment operating income totaled $11.6 million, compared to adjusted operating income of $5.6 million for the prior-year period;
  • Diluted earnings per share of $0.35 on a reported basis, versus loss of $0.40 per share last year; and
  • Fiscal year 2013 earnings guidance was raised to diluted earnings per share of $1.55 to $1.60 on an adjusted basis.

"Our Conn's HomePlus store in Albuquerque has performed well since opening in November. This week we will open three additional stores," stated Theodore M. Wright, Chairman and CEO. "We continue to see sales growth in our existing store base. November same store sales rose 6% on top of same store growth of 10% last year."

Retail Segment Results

Revenues were $167.7 million for the quarter, up $12.6 million, or 8.2% over last year. This growth was driven by a 31.7% increase in furniture and mattress sales and, to a lesser extent, higher customer demand for home office equipment and appliances. Reported net sales during the current quarter also reflects the benefit of the opening of a Conn's HomePlusTM store in Waco, Texas in mid-June and the completion of 15 store remodels over the past year. The reported revenue growth was partially offset by the impact of previous store closures.

Retail gross margin was 35.5% in the current-year quarter compared to 25.3% in the prior-year. During the three months ended October 31, 2011, the Company adjusted its inventory valuation reserve — reducing retail gross margin for the prior-year period and benefiting the reported margin expansion in the current-year period by 300 basis points. Margin expansion was reported within each of the major product categories. The margin improvement across all categories was driven by the focus on higher price-point, higher-margin products and sourcing opportunities. Growth in higher-margin furniture and mattress sales outpaced the overall increase realized in the other product categories, also favorably impacting retail gross margin.

Credit Segment Results

Revenues for the three-months ended October 31, 2012 were $38.7 million, an increase of $7.1 million, or 22.6%, over the same quarter last year. The majority of the year-over-year growth was driven by increases in both the portfolio interest and fee yield and the average portfolio balance outstanding. The portfolio interest and fee income yield was 19.3% in the third quarter of fiscal 2013 versus 18.0% reported in the prior-year period. Adoption of accounting guidance related to troubled debt restructuring reduced interest and fee income by $1.0 million and the reported yield by 70 basis points in the third quarter of fiscal 2012. The average portfolio balance was $674.5 million, up 11.7% over the prior-period average due to the growth in net sales over the past 12 months.

Provision for bad debts was $13.2 million in the current quarter, an increase of $0.1 million from the prior period after excluding a charge of $13.1 million in the year-ago period related to the adoption of the troubled debt restructuring accounting guidance.

Additional 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-Q to be filed with the Securities and Exchange Commission.

For the three months ended October 31, 2012, the Company reported net income of $0.35 per diluted share, which includes pre-tax charges of $0.8 million associated with the extension and expansion of the Company's revolving credit facility and $0.6 million associated with the relocation of the Company's corporate office to The Woodlands, Texas.

The Company's reported net loss was $0.40 per diluted share in the third quarter of fiscal 2012, and includes a pretax charge of $14.1 million, net of previously provided reserves, related to the required adoption of accounting guidance related to troubled debt restructuring, a pretax charge of $4.7 million for inventory reserves related to aged product and a charge of $0.4 million related to store closures.

Capital and Liquidity

As of October 31, 2012, the Company had $272.2 million, excluding $4.3 million of letters of credit, outstanding under its asset-based loan facility. Additionally, as of October 31, 2012, the Company had $157.5 million of immediately available borrowing capacity, and an additional $91.0 million that could become available upon increases in eligible inventory and customer receivable balances under the borrowing base.

On November 27, 2012, the Company added an additional lender to its asset-based loan facility. As a result, total commitments under the facility increased by $20.0 million to $545.0 million.

Outlook and Guidance

The Company increased earnings guidance for the fiscal year ending January 31, 2013, to diluted earnings per share of $1.55 to $1.60 on an adjusted basis. The following expectations were considered in developing the guidance for the full year:

  • Same stores sales up 13% to 16%;
  • New store openings of five;
  • Retail gross margin between 34.5% and 35.0%;
  • An increase in the credit portfolio balance;
  • Selling, general and administrative expense, as a percent of revenues, between 29.0% and 29.5% of total revenues; and
  • No significant change in the number of shares outstanding.

The Company also initiated earnings guidance of diluted earnings per share of $2.05 to $2.15 for the fiscal year ending January 31, 2014. The following expectations were considered in developing the guidance:

  • Same stores sales up 0% to 5%;
  • New store openings of between 10 and 12;
  • Retail gross margin between 34.5% and 35.5%;
  • An increase in the credit portfolio balance;
  • Selling, general and administrative expense, as a percent of revenues, between 28.0% and 29.0% of total revenues; and
  • No significant change in the number of shares outstanding.

Management Departure

After 14 years of valuable service, Rey de la Fuente, President — Credit Division, is leaving the Company to pursue other opportunities. He is staying through January 31, 2013, to complete the transition of his duties, which began early this year. Mr. de la Fuente, who reports to the Company's Chief Operating Officer, has been with the Company since 1998 and has focused his attention in recent quarters on credit underwriting.

"We appreciate Rey's many years of service and contributions to the company," stated Mike Poppe, Chief Operating Officer. "We wish Rey well in his future endeavors."

Conference Call Information

Conn's, Inc. will host a conference call and audio webcast on Monday, December 3, 2012, at 10:00 A.M. CT, to discuss its earnings and operating performance for the quarter. 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.

About Conn's, Inc.

Conn's is a specialty retailer and currently operates 66 retail locations, with 57 in Texas, six in Louisiana, two in Oklahoma and one in New Mexico. The Company's primary product categories include:

  • Home appliance, including refrigerators, freezers, washers, dryers, dishwashers, ranges and room air conditioners;
  • Furniture and mattress, including furniture for the living room, dining room, bedroom and related accessories and mattresses;
  • Consumer electronic, including LCD, LED, 3-D and plasma televisions, camcorders, digital cameras, Blu-ray players, video game equipment, portable audio and home theater products; and
  • Home office, including desktop and notebook computers, tablets, 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.

This press release contains forward-looking statements 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," or the negative of such terms or other similar expressions are generally forward-looking in nature and not historical facts. Although we believe that the expectations, opinions, projections, and comments reflected in these forward-looking statements are reasonable, we can give no assurance that such statements will prove to be correct. 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 continue existing or offer new customer financing programs; changes in the delinquency status of our credit portfolio; higher than anticipated net charge-offs in the credit portfolio; the success of our planned opening of new stores and the updating of existing stores; technological and market developments and sales trends for our major product offerings; 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 the other risks detailed from time-to-time in our SEC reports, including but not limited to, our Annual Report on Form 10-K for our fiscal year ended January 31, 2012 and our quarterly report on Form 10-Q for the quarter ended October 31, 2012. 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, we are not obligated to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this press release or to reflect the occurrence of unanticipated events.

 
CONN'S, INC. AND SUBSIDIARIES
CONDENSED, CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
                   
 
Three Months Ended Nine Months Ended
October 31, October 31,
2012 2011 2012 2011
Revenues
Total net sales $ 167,323 $ 154,956 $ 505,915 $ 464,013
Finance charges and other   39,078     31,667     108,773     101,618  
Total revenues 206,401 186,623 614,688 565,631
Cost and expenses

Cost of goods sold, including warehousing and occupancy costs

105,688 112,844 325,041 324,774

Cost of parts sold, including warehousing and occupancy costs

1,522 1,647 4,513 4,973
Selling, general and administrative expense 61,210 59,801 180,247 175,420
Provision for bad debts 13,449 26,400 34,838 43,115
Charges and credits   641     375     1,150     4,033  
Total cost and expenses   182,510     201,067     545,789     552,315  
Operating income (loss) 23,891 (14,444 ) 68,899 13,316
Interest expense 4,526 3,919 13,159 18,479
Loss on early extinguishment of debt 818 - 818 11,056
Other (income) expense, net   (3 )   (5 )   (105 )   81  
Income (loss) before income taxes 18,550 (18,358 ) 55,027 (16,300 )
Provision (benefit) for income taxes   6,765     (5,635 )   20,080     (4,876 )
Net income (loss) $ 11,785   $ (12,723 ) $ 34,947   $ (11,424 )
 
Earnings (loss) per share:
Basic $ 0.36 $ (0.40 ) $ 1.08 $ (0.36 )
Diluted $ 0.35 $ (0.40 ) $ 1.05 $ (0.36 )
Average common shares outstanding:
Basic 32,553 31,881 32,387 31,819
Diluted 33,539 31,881 33,207 31,819
 
 
CONN'S, INC. AND SUBSIDIARIES
CONDENSED RETAIL SEGMENT FINANCIAL INFORMATION
(unaudited)
(dollars in thousands)
                   
Three Months Ended Nine Months Ended
October 31, October 31,
2012 2011 2012 2011
Revenues
Product sales $ 151,663 $ 140,404 $ 459,804 $ 422,914
Repair service agreement commissions 12,183 10,602 35,930 29,449
Service revenues   3,477     3,950     10,181     11,650  
Total net sales   167,323     154,956     505,915     464,013  
Finance charges and other   340     60     857     678  
Total revenues 167,663 155,016 506,772 464,691
Cost and expenses

Cost of goods sold, including warehousing and occupancy costs

105,688 112,844 325,041 324,774

Cost of parts sold, including warehousing and occupancy costs

1,522 1,647 4,513 4,973
Selling, general and administrative expense 47,275 45,899 139,832 132,009
Provision for bad debts 229 135 630 469
Charges and credits   641     375     1,150     4,033  
Total cost and expenses   155,355     160,900     471,166     466,258  
Operating income (loss) 12,308 (5,884 ) 35,606 (1,567 )
Other (income) expense, net   (3 )   (5 )   (105 )   81  
Income (loss) before income taxes $ 12,311   $ (5,879 ) $ 35,711   $ (1,648 )
 
Retail gross margin 35.5 % 25.3 % 34.4 % 28.2 %

Selling, general and administrative expense as percent of revenues

28.2 % 29.6 % 27.6 % 28.4 %
Operating margin 7.3 % (3.8 )% 7.0 % (0.3 )%
 
Number of stores:
Beginning of period 65 75 65 76
Opened - - 1 -
Closed   -     (4 )   (1 )   (5 )
End of period   65     71     65     71  
 
 
CONN'S, INC. AND SUBSIDIARIES
CONDENSED CREDIT SEGMENT FINANCIAL INFORMATION
(unaudited)
(in thousands)
                   
Three Months Ended Nine Months Ended
October 31, October 31,
2012 2011 2012 2011
Revenues
Finance charges and other $ 38,738 $ 31,607 $ 107,916 $ 100,940
Cost and expenses
Selling, general and administrative expense 13,935 13,902 40,415 43,411
Provision for bad debts   13,220     26,265     34,208     42,646  
Total cost and expenses   27,155     40,167     74,623     86,057  
Operating income (loss) 11,583 (8,560 ) 33,293 14,883
Interest expense 4,526 3,919 13,159 18,479
Loss from early extinguishment of debt   818     -     818     11,056  
Income (loss) before income taxes $ 6,239   $ (12,479 ) $ 19,316   $ (14,652 )
 

Selling, general and administrative expense as percent of revenues

36.0 % 44.0 % 37.5 % 43.0 %
Operating margin 29.9 % (27.1 )% 30.9 % 14.7 %
 
 
MANAGED CUSTOMER RECEIVABLE PORTFOLIO STATISTICS
(dollars in thousands, except average outstanding balance per account)
         
Three months ended October 31,
2012 2011
Data for period ended:
Total outstanding balance $ 683,744 $ 605,650
Number of active accounts 462,200 472,791
Average outstanding balance per account $ 1,479 $ 1,281
Balance 60+ days delinquent $ 47,691 $ 47,653
Percent 60+ days delinquent 7.0 % 7.9 %
Percent of portfolio re-aged 11.4 % 16.0 %

Weighted average credit score of outstanding balances

603 602
 
Data for the three-month period:

Weighted average origination credit score of sales financed

616 619
Weighted average monthly payment rate 5.3 % 5.4 %
Interest and fee income yield, annualized 19.3 % 18.0 %

Percent of bad debt charge-offs (net of recoveries) to average outstanding balance, annualized

7.6 % 4.9 %
Percentage of sales generated by payment option:
GE Capital 14.5 % 14.1 %
Conn's Credit (including down payment) 72.3 % 62.1 %
RAC Acceptance (Rent-to-Own)   3.7 %   3.8 %
Total   90.5 %   80.0 %
 
 
CONN'S, INC. AND SUBSIDIARIES
CONDENSED, CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands)
               
October 31, January 31,
2012 2012
 
Assets
Current assets
Cash and cash equivalents $ 4,269 $ 6,265
Customer accounts receivable, net 345,546 316,385
Other accounts receivable, net 34,573 38,715
Inventories 77,150 62,540
Deferred income taxes 14,068 17,111
Prepaid expenses and other assets   15,999   11,542
Total current assets 491,605 452,558
Long-term customer accounts receivable, net 287,494 272,938
Property and equipment, net 52,794 38,484
Deferred income taxes 10,204 9,754
Other assets, net   10,767   9,564
Total assets $ 852,864 $ 783,298
Liabilities and Stockholders' Equity
Current Liabilities
Current portion of long-term debt $ 51,589 $ 726
Accounts payable 66,173 44,711
Accrued compensation and related expenses 8,451 7,213
Accrued expenses 21,156 24,030
Other current liabilities   16,393   17,994
Total current liabilities 163,762 94,674
Long-term debt 279,396 320,978
Other long-term liabilities 13,095 14,275
Stockholders' equity   396,611   353,371
Total liabilities and stockholders' equity $ 852,864 $ 783,298
 
     
NON-GAAP RECONCILIATION OF NET INCOME, AS ADJUSTED
AND DILUTED EARNINGS PER SHARE, AS ADJUSTED
(unaudited)
(in thousands, except earnings per share)
                     
Three Months Ended Nine Months Ended
October 31, October 31,
2012 2011 2012 2011
Net income (loss), as reported $ 11,785 $ (12,723 ) $ 34,947 $ (11,424 )
Adjustments:
Costs related to office relocation 641 - 987 -
Costs related to store closings - (313 ) 163 3,345
Loss from early extinguishment of debt 818 - 818 11,056
Inventory reserve adjustment - 4,669 - 4,669

Charge to record reserves required by the adoption of troubled debt restructuring accounting guidance

- 27,487 - 27,487

Reserves previously provided related to accounts considered restructured under the troubled debt restructuring accounting guidance

- (13,350 ) - (13,350 )
Impairment of long-lived assets - 688 - 688
Severance costs - - - 813
Tax impact of adjustments   (514 )   (5,961 )   (693 )   (12,166 )
Net income, as adjusted $ 12,730   $ 497   $ 36,222   $ 11,118  
 

Average common shares outstanding - Diluted

33,539 31,881 33,207 31,819
 
Earnings (loss) per share - Diluted
As reported $ 0.35 $ (0.40 ) $ 1.05 $ (0.36 )
As adjusted $ 0.38 $ 0.02 $ 1.09 $ 0.35
 
 
NON-GAAP RECONCILIATION OF RETAIL SEGMENT
OPERATING INCOME (LOSS), AS ADJUSTED
(unaudited)
(in thousands)
                   
Three Months Ended Nine Months Ended
October 31, October 31,
2012 2011 2012 2011
Operating income (loss), as reported $ 12,308 $ (5,884 ) $ 35,606 $ (1,567 )
Adjustments:
Costs related to office relocation 641 - 987 -
Inventory adjustment - 4,669 - 4,669
Costs related to store closings - (313 ) 163 3,345
Impairment of long-lived assets - 688 - 688
Severance costs   -     -     -     407  
Operating income (loss), as adjusted $ 12,949   $ (840 ) $ 36,756   $ 7,542  
 
Retail segment revenues $ 167,663 $ 155,016 $ 506,772 $ 464,691
 
Operating margin
As reported 7.3 % (3.8 )% 7.0 % (0.3 )%
As adjusted 7.7 % (0.5 )% 7.3 % 1.6 %
 
     
NON-GAAP RECONCILIATION OF CREDIT SEGMENT
OPERATING INCOME, AS ADJUSTED
(unaudited)
(in thousands)
             
Three Months Ended Nine Months Ended
October 31, October 31,
2012 2011 2012 2011
Operating income (loss), as reported $ 11,583 $ (8,560 ) $ 33,293 $ 14,883
Adjustments:

Charge to record reserves required by the adoption of troubled debt restructuring accounting guidance

- 27,487 - 27,487

Reserves previously provided related to accounts considered restructured under the troubled debt restructuring accounting guidance

- (13,350 ) - (13,350 )
Severance costs   -     -     -     406  
Operating income, as adjusted $ 11,583   $ 5,577   $ 33,293   $ 29,426  
 
Credit segment revenues $ 38,738 $ 31,607 $ 107,916 $ 100,940
 
Operating margin
As reported 29.9 % (27.1 )% 30.9 % 14.7 %
As adjusted 29.9 % 17.6 % 30.9 % 29.2 %
 

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 the following information: adjusted net income and adjusted earnings per diluted share; adjusted retail segment operating income and adjusted operating margin; and adjusted credit segment operating income and operating margin. 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.
Brian Taylor, 936-230-5899
Chief Financial Officer
or
Investors:
S.M. Berger & Company
Andrew Berger, 216-464-6400

Source: Conn's, Inc.

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