Conn's, Inc. Reports Earnings for the Quarter Ended October 31, 2007
BEAUMONT, Texas, Nov 29, 2007 (BUSINESS WIRE) -- Conn's, Inc. (NASDAQ/NM:CONN), a specialty retailer of home appliances, consumer electronics, computers, lawn and garden products, furniture and mattresses, today announced earnings results for the quarter and nine months ended October 31, 2007.
Net income for the third fiscal quarter was $4.0 million, compared with $7.2 million for the third quarter of last year, a decline of 43.8%, due to a non-cash decrease in the fair value of the Company's interests in securitized assets. Diluted earnings per share declined 43.3% to $0.17, compared with $0.30 for the third quarter of last year. Net income for the quarter ended October 31, 2007, includes a non-cash charge, net of tax, of $2.6 million, or $0.11 per diluted share, to reduce the fair value of the Company's "Interests in securitized assets." The reduction in fair value was driven by external financial market conditions, which resulted in an increase in the risk premium included in the discount rate assumption used in the Company's determination of the fair value of its "Interests in securitized assets," and was not related to the performance of the Company's credit portfolio. Total revenues for the quarter ended October 31, 2007, increased 9.0% to $189.4 million compared with $173.7 million for the quarter ended October 31, 2006. This increase in revenues included increases in net sales of $17.7 million, or 11.6%, and a decrease in "Finance charges and other" of $2.0 million, or 9.3%. "Finance charges and other" declined due to the non-cash fair value charge discussed above, which totaled $4.0 million before taxes. Same store sales (revenues earned in stores operated for the entirety of both periods) increased 6.8% for the third quarter of fiscal 2008.
The credit portfolio experienced rising delinquencies during the third quarter, though at a slightly slower pace than in the prior year quarter. Additionally, the annualized net charge-off rate rose to 2.7% for the nine months ended October 31, 2007. More information on the credit portfolio and its performance may be found in the table included with this press release and in the Company's filing with the Securities and Exchange Commission on Form 10-Q which will be filed later today.
During the first quarter of fiscal 2008 the Company adopted several new accounting pronouncements related to the accounting for its "Interests in securitized assets." This change in accounting was adopted effective February 1, 2007, and prior periods were not adjusted. These pronouncements resulted in the Company electing to account for its interests in securitized assets at fair value, with all changes in the fair value included in "Finance charges and other." Under the fair value accounting pronouncements, the Company is required to value the interests in securitized assets using assumptions it believes a market participant would use to value the asset. During the third quarter of fiscal 2008, "Finance charges and other" was reduced $4.0 million by the non-cash fair value adjustment, which was driven primarily by a higher discount rate assumption. The risk premium included in the discount rate assumption was increased principally due to external market conditions, and was not a result of changes in the underlying economics or expected cash flows of the securitization program. Due to the turmoil in the financial markets during the third quarter of fiscal 2008, the Company evaluated the risk premium included in the discount rate used in its discounted cash flow analysis. After discussions with its bankers and review of available market information, the Company estimated that, due to increases in the risk premiums expected for many securities, especially asset-backed securities, under the volatile market conditions experienced during the third quarter, a market participant would require a higher return on their investment if they were to purchase the Company's interests in securitized assets. The increase in the discount rate had the effect of reducing the current fair value of the asset and deferring earnings under the securitization program to future periods, but did not permanently reduce securitization income or the earnings of the Company. The deferred earnings will be recognized in future periods as interest income on the interests in securitized assets as the actual cash flows from the receivables are realized. More information on these changes may be found in the notes to the financial statements in the Company's filing with the Securities and Exchange Commission on Form 10-Q which will be filed later today.
Net income for the nine months ended October 31, 2007, declined 3.7% to $26.6 million compared with $27.6 million for the prior year. Diluted earnings per share for the nine months ended October 31, 2007, were $1.11 compared with $1.14 in the prior year period. Net income for the nine months ended October 31, 2007, includes a non-cash charge, net of tax, of $2.8 million, or $0.12 per diluted share, to reduce the fair value of the Company's "Interests in securitized assets." Total revenues for the nine months ended October 31, 2007, increased 9.1% to $598.2 million compared with $548.1 million for the nine months ended October 31, 2006. This increase in revenues included net sales increases of $42.7 million, or 8.8%, and increases in "Finance charges and other" of $7.4 million, or 12.3%. The increase in "Finance charges and other" was partially offset by the non-cash fair value charge discussed above, which totaled $4.3 million before taxes, for the nine months ended October 31, 2007. Same store sales (revenues earned in stores operated for the entirety of both periods) increased 3.5% for the first nine months of fiscal 2008. During the nine months ended October 31, 2007, the Company completed a legal entity reorganization that resulted in a one-time reduction in the provision for income taxes of $0.9 million.
"While we enjoyed solid growth at the top line, we were not satisfied with our bottom-line performance this quarter, even after excluding the impact of the fair value adjustment," said Thomas J. Frank, Sr., the Company's Chairman and CEO. "Since we anticipate the retail environment continuing to be very competitive, we must improve our execution to achieve the gross profit and operating margins we expect."
As part of the previously announced stock repurchase plan, the Company repurchased 542,100 shares of common stock for $12.0 million during the three months ended October 31, 2007. The Company has repurchased 1,041,185 shares since the inception of the plan for $24.5 million and intends to continue repurchasing shares up to the authorized limit of $50 million, dependent upon market conditions and share price.
The Company currently has 65 stores in operation. Additionally, the Company has under development and expects to open 11 stores by July 31, 2008, including two replacement stores and one new store in Oklahoma City, Oklahoma. The Company plans to continue its expansion by opening an additional two to five stores in the last half of next year.
EPS Guidance
Today, in light of the $0.11 per diluted share fair value adjustment, the Company lowered its guidance for its fiscal year 2008 (the year ending January 31, 2008) of earnings per diluted share in a range of $1.64 to $1.74.
Conference Call Information
Conn's, Inc. will host a conference call and audio webcast today, November 29, 2007, at 10:00 AM, CST, to discuss financial results for the quarter ended October 31, 2007. The webcast will be available live at www.conns.com and will be archived for one year. Participants can join the call by dialing 888-661-5167 or 913-312-1430.
About Conn's, Inc.
The Company is a specialty retailer currently operating 65 retail locations in Texas and Louisiana: 21 stores in the Houston area, 15 in the Dallas/Fort Worth Metroplex, 10 in San Antonio, five in Austin, four in Southeast Texas, one in Corpus Christi, three in South Texas and six stores in Louisiana. It sells major home appliances, including refrigerators, freezers, washers, dryers, dishwashers and ranges, and a variety of consumer electronics, including micro-display projection, plasma and LCD flat-panel televisions, camcorders, digital cameras, computers and computer accessories, DVD players (both standard and high definition), video game equipment, portable audio and home theater products. The Company also sells lawn and garden products, furniture and mattresses, 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 the last three years, the Company has financed, on average, approximately 58% of retail sales. Customer receivables are financed substantially through an asset-backed securitization facility, from which the Company derives servicing fee income and interest income. The Company transfers receivables, consisting of retail installment contracts and revolving accounts extended to its customers, to a qualifying special purpose entity (QSPE) in exchange for cash and subordinated securities. The QSPE funds its purchases of the receivables through the issuance of medium-term and variable funding notes secured by the receivables and issued to third parties, and subordinated securities to the Company.
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 or expand existing stores; the Company's estimated capital expenditures and costs related to the opening of new stores or the update or expansion of existing stores; the Company's ability to introduce additional product categories; the Company's cash flow from operations, borrowings from its revolving line of credit and proceeds from securitizations to fund operations, debt repayment and expansion; growth trends and projected sales in the home appliance and consumer electronics industry and the Company's ability to capitalize on such growth; relationships with the Company's key suppliers; the results of the Company's litigation; interest rates; weather conditions in the Company's markets; delinquency and loss trends in the receivables portfolio; changes in the assumptions used in the calculation of the fair value of its interests in securitized assets; 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 filed on March 29, 2007. 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 Nine Months Ended
October 31, October 31,
------------------- -------------------
2006 2007 2006 2007
--------- --------- --------- ---------
Revenues
Total net sales $152,390 $170,052 $487,732 $530,418
Finance charges and other 21,303 19,314 60,353 67,785
--------- --------- --------- ---------
Total revenues 173,693 189,366 548,085 598,203
Cost and expenses
Cost of goods sold,
including warehousing and
occupancy costs 110,627 125,359 356,112 390,007
Cost of parts sold,
including warehousing and
occupancy costs 1,834 2,257 4,788 6,246
Selling, general and
administrative expense 49,701 54,760 144,790 161,129
Provision for bad debts 526 582 959 1,490
--------- --------- --------- ---------
Total cost and expenses 162,688 182,958 506,649 558,872
--------- --------- --------- ---------
Operating income 11,005 6,408 41,436 39,331
Interest income, net (141) (110) (512) (601)
Other income, net (19) (34) (773) (920)
--------- --------- --------- ---------
Income before income taxes 11,165 6,552 42,721 40,852
Provision for income taxes 4,011 2,531 15,074 14,228
--------- --------- --------- ---------
Net income $ 7,154 $ 4,021 $ 27,647 $ 26,624
========= ========= ========= =========
Earnings per share
Basic $ 0.30 $ 0.17 $ 1.17 $ 1.14
Diluted $ 0.30 $ 0.17 $ 1.14 $ 1.11
Average common shares
outstanding
Basic 23,698 23,077 23,658 23,375
Diluted 24,165 23,550 24,318 23,907
Conn's, Inc.
CONDENSED, CONSOLIDATED BALANCE SHEETS
(in thousands)
January 31, October 31,
2007 2007
-------------- --------------
Assets (unaudited)
Current assets
Cash and cash equivalents $ 56,570 $ 23,045
Interests in securitized assets and
accounts receivable, net 168,296 200,995
Inventories 87,098 97,466
Deferred income taxes 551 2,652
Prepaid expenses and other assets 5,247 4,573
-------------- --------------
Total current assets 317,762 328,731
Non-current deferred income tax asset 2,920 -
Total property and equipment, net 59,440 55,362
Goodwill and other assets, net 9,825 9,784
-------------- --------------
Total assets $389,947 $393,877
============== ==============
Liabilities and Stockholders' Equity
Current Liabilities
Notes payable $ - $ -
Current portion of long-term debt 110 111
Accounts payable 54,045 43,609
Accrued compensation and related
expenses 9,234 9,073
Accrued expenses 20,424 23,785
Other current liabilities 13,209 14,224
-------------- --------------
Total current liabilities 97,022 90,802
Long-term debt 88 28
Non-current deferred income tax
liability - 123
Deferred gains on sales of property 309 1,314
Total stockholders' equity 292,528 301,610
-------------- --------------
Total liabilities and
stockholders' equity $389,947 $393,877
============== ==============
Conn's, Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited) (in thousands)
Nine Months Ended
October 31,
-------------------
2006 2007
--------- ---------
Net cash provided by (used in) operating
activities $ 11,090 $(11,610)
Cash flows from investing activities
Purchase of property and equipment (15,681) (12,043)
Proceeds from sale of property 2,272 8,897
--------- ---------
Net cash used in investing activities (13,409) (3,146)
Cash flows from financing activities
Purchase of treasury stock (684) (20,740)
Proceeds from stock issued under employee
benefit plans 1,695 2,053
Excess tax benefits from stock-based
compensation 196 2
Borrowings under promissory notes 208 -
Payment of promissory notes (145) (84)
--------- ---------
Net cash provided by (used in) financing
activities 1,270 (18,769)
--------- ---------
Net change in cash (1,049) (33,525)
Cash and cash equivalents
Beginning of the year 45,176 56,570
--------- ---------
End of period $ 44,127 $ 23,045
========= =========
CALCULATION OF GROSS MARGIN PERCENTAGE
(dollars in thousands)
Three Months Ended Nine Months Ended
October 31, October 31,
--------------------- ---------------------
2006 2007 2006 2007
---------- ---------- ---------- ----------
A Product sales $ 139,594 $ 155,657 $ 448,750 $ 486,089
B Service maintenance
agreement commissions,
net 6,845 8,336 21,875 26,688
C Service revenues 5,951 6,059 17,107 17,641
---------- ---------- ---------- ----------
D Total net sales 152,390 170,052 487,732 530,418
E Finance charges and
other 21,303 19,314 60,353 67,785
---------- ---------- ---------- ----------
F Total revenues 173,693 189,366 548,085 598,203
G Cost of goods sold,
including warehousing
and occupancy cost (110,627) (125,359) (356,112) (390,007)
H Cost of parts sold,
including warehousing
and occupancy cost (1,834) (2,257) (4,788) (6,246)
---------- ---------- ---------- ----------
I Gross margin dollars
(F+G+H) $ 61,232 $ 61,750 $ 187,185 $ 201,950
========== ========== ========== ==========
Gross margin percentage
(I/F) 35.3% 32.6% 34.2% 33.8%
J Product margin dollars
(A+G) $ 28,967 $ 30,298 $ 92,638 $ 96,082
K Product margin
percentage (J/A) 20.8% 19.5% 20.6% 19.8%
PORTFOLIO STATISTICS
For the periods ended January 31, 2005, 2006 and 2007 and October 31,
2006 and 2007
(dollars in thousands, except average outstanding balance per account)
January 31, October 31,
----------------------------- -------------------
2005 2006 2007 2006 2007
--------- --------- --------- --------- ---------
Total accounts 350,251 415,338 459,065 433,719 490,117
Total outstanding
balance $428,700 $519,721 $569,551 $535,688 $618,561
Average outstanding
balance per account $ 1,224 $ 1,251 $ 1,241 $ 1,235 $ 1,262
60 day delinquency $ 23,143 $ 35,537 $ 37,662 $ 37,800 $ 47,703
Percent delinquency 5.4% 6.8% 6.6% 7.1% 7.7%
Percent of portfolio
reaged 16.3% 17.9% 18.1% 18.5% 16.8%
Net charge-off ratio
(year-to-date,
annualized) 2.4% 2.5% 3.3% 3.4% 2.7%
SOURCE: Conn's, Inc.
Conn's, Inc., Beaumont Chairman and CEO Thomas J. Frank, 409-832-1696 Ext. 3218
Copyright Business Wire 2007
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