Conn's, Inc. Reports Third-Quarter Fiscal 2015 Financial Results
Announces CFO Transition
Outlines Initiatives to Provide Additional Oversight
Financial Results
Third-quarter fiscal 2015 significant items included (on a year-over-year basis unless noted):
-
Consolidated revenues increased 19.0% to
$370 .1 million; - Same store sales declined 1.0%, influenced by tighter credit underwriting standards and the lapping of marketing strategy changes that drove a 35.1% increase a year ago;
- Furniture and mattress sales increased 37.4% and appliance sales rose 24.6%;
-
Entered three new markets with the opening of six Conn's
HomePlus ® stores; - Retail gross margin increased 50 basis points to 40.6%;
-
Adjusted retail segment operating income increased 11.9% to
$38 .1 million; -
Credit segment operating income decreased
$43.6 million to an operating loss of$33.2 million , driven by increased provision for bad debts; -
The percentage of the customer portfolio balance 60+ days delinquent
was 10.0% as of
October 31, 2014 , an increase of 130 basis points fromJuly 31, 2014 ; and -
Diluted loss was
$0.08 per share, compared to diluted earnings of$0.66 per share in the prior year.
He continued, "The retail segment successfully opened six new stores and delivered increased retail gross margins compared to the prior year quarter. Additionally, we had only a slight decline in same store sales, despite underwriting changes that negatively impacted same store sales by approximately 12% during the third quarter. November same store sales increased 0.5%. Television same store sales in November increased 5.5%, led by strong sales of Ultra HD televisions."
Retail Segment Results (on a year-over-year basis unless otherwise noted)
Total retail revenues were
The following table presents net sales and changes in net sales by category:
Three Months Ended |
Same store | |||||||||||||||||||||||
2014 | % of Total | 2013 | % of Total | Change | % Change | % change | ||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Furniture and mattress | $ | 86,820 | 28.5 | % | $ | 63,191 | 24.6 | % | $ | 23,629 | 37.4 | % | 7.0 | % | ||||||||||
Home appliance | 82,811 | 27.2 | 66,453 | 25.9 | 16,358 | 24.6 | 9.5 | |||||||||||||||||
Consumer electronics | 73,722 | 24.2 | 68,396 | 26.6 | 5,326 | 7.8 | (6.4 | ) | ||||||||||||||||
Home office | 28,380 | 9.3 | 28,613 | 11.1 | (233 | ) | (0.8 | ) | (11.1 | ) | ||||||||||||||
Other | 6,406 | 2.1 | 7,506 | 2.9 | (1,100 | ) | (14.7 | ) | (29.9 | ) | ||||||||||||||
Product sales | 278,139 | 91.3 | 234,159 | 91.1 | 43,980 | 18.8 | (0.4 | ) | ||||||||||||||||
Repair service | ||||||||||||||||||||||||
agreement commissions |
23,056 | 7.6 | 19,601 | 7.6 | 3,455 | 17.6 | (5.5 | ) | ||||||||||||||||
Service revenues | 3,414 | 1.1 | 3,286 | 1.3 | 128 | 3.9 | ||||||||||||||||||
Total net sales | $ | 304,609 | 100.0 | % | $ | 257,046 | 100.0 | % | $ | 47,563 | 18.5 | % | (1.0 | ) | % | |||||||||
The following provides a summary of items influencing Conn's product category performance during the quarter, compared to the prior-year period:
- Furniture unit sales increased 31.7% and the average selling price increased 2.0%;
- Mattress unit volume increased 24.8% and the average selling price increased 12.6%;
- Home appliances unit volume increased 17.1% with a 6.4% increase in average selling price. Laundry sales increased 30.2%, refrigeration sales increased 26.0%, cooking sales increased 21.4% and air conditioning sales declined 27.3%;
- Television sales increased 3.4% in total and declined 10.5% on a same store basis. Gaming hardware sales increased more than 400%;
- Computer sales increased 16.1% and tablet sales declined 47.0%; and
- Other sales declined 14.7% due to the exit of the lawn equipment category.
Retail gross margin was 40.6% for the quarter ended
In connection with the opening of eight stores in the third and fourth
quarters of fiscal 2015, the Company incurred
Credit Segment Results (on a year-over-year basis unless otherwise noted)
Credit revenues increased 21.6% to
Provision for bad debts for the three months ended
- A 36.4% increase in the average receivable portfolio balance resulting from new store openings and same store growth over the past 12 months;
- A 12.3% increase in the balances originated during the quarter compared to the prior year;
-
An increase of 150 basis points in the percentage of customer accounts
receivable balances greater than 60 days delinquent to 10.0% at
October 31, 2014 . Delinquency increased year-over-year across credit quality levels, customer groups, product categories, geographic regions and years of origination. Despite tighter underwriting and better collections execution, deterioration in the customer's ability to resolve delinquency continued throughout the quarter and the expectations for charge-offs over the next 12 months were adjusted to fully reflect this trend; - Higher expected charge-offs over the next twelve-month period as losses are occurring at a faster pace than previously anticipated, due to the continued deterioration in the customer's ability to resolve delinquency;
-
The decision to pursue collection of past and future charged-off
accounts internally rather than selling charged off accounts to a
third party. This change resulted in
$7.6 million in additional provision as recoveries are expected to occur over an extended time period, which results in a reduction in expected cash recoveries over the next twelve months; and -
The balance of customer receivables accounted for as troubled debt
restructurings increased to
$73.4 million , or 5.9% of the total portfolio balance, driving$4.1 million of the increase in provision for bad debts.
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 Quarterly Report on Form 10-Q for the quarter ended
Net Income Results
For the quarter ended
Store Update
Conn's opened six
Capital and Liquidity
As of
Management Change
Conn's today announced the departure of
"On behalf of Conn's Board of Directors, I would like to thank Brian for
his valuable contributions to Conn's growth over the last several years
and wish him the best in his future endeavors. Brian's commitment and
effort were essential to the expansion of the Company. Given Mark's
relevant industry and leadership experience, I have the utmost
confidence in his ability to assume the responsibilities of CFO during
the search for a permanent successor,"
Additional Oversight
Conn's also announced several new initiatives by its Board of Directors that are intended to enhance oversight of the business at a time when the senior management team is contending with a combination of rapid portfolio growth and a more difficult credit collection environment. Although the Company's retail operations have performed well, with successful new store openings and product margin expansion, the performance of the Company's credit operations has been disappointing several times over the last twelve months. Additionally, the Company recognizes that its credit operations forecasting has not been acceptably accurate.
To help address these challenges, the Board of Directors has established
a
Additionally, the Board of Directors has approved two new positions to
augment its management team. The Board of Directors has initiated a
search for a President, who will report directly to the Company's
Chairman and Chief Executive Officer. The Company is seeking candidates
for this position with demonstrated senior leadership capabilities in
large, complex retail and/or consumer credit organizations. The Board of
Directors has also initiated a search for a Chief Risk Officer, who will
report to the Company's Chief Operating Officer and provide periodic
reporting to the
Strategic Alternatives
In
No timetable has been set for the completion of the process.
Conn's does not expect to comment further or update the market with any further information on the process unless and until its Board of Directors has approved a specific transaction or otherwise deems disclosure appropriate or necessary. There can be no assurance that this strategic alternatives review will result in the Company changing its current business plan, pursuing a particular transaction or completing any such transaction.
Outlook and Guidance
With the ongoing review of strategic alternatives and the oversight initiatives being undertaken by the Company, the Company has decided to withdraw its earnings guidance for fiscal 2015 and is not currently providing earnings guidance with respect to fiscal 2016.
The following are the Company's expectations for its business for the fourth quarter:
- Same stores sales flat to up 3%;
- Retail gross margin between 39.0% and 40.0%;
- Opening of 2 new stores during the quarter; and
- Closure of 1 store during the quarter.
Beginning with December results, the Company will release, shortly after the end of the month, same store sales and greater than 60 days delinquency performance. The Company believes this will provide investors with timely, relevant information about business trends and expects to continue this practice until the Company experiences more stability in its results.
Conference Call Information
Conn's will host a conference call and audio webcast on
Replay of the telephonic call can be accessed through
About Conn's, Inc.
Conn's is a specialty retailer currently operating 91 retail locations
in
- 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 LCD, LED, 3-D, Ultra HD and plasma televisions, Blu-ray players, home theater and video game products, digital cameras and portable audio equipment; and
- Home office, including computers, tablets, 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 rent-to-own payment plans.
This press release contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 that
involve risks and uncertainties. Such forward-looking statements include
information concerning the Company's 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 the
Company's ability to achieve the results either expressed or implied by
the Company's forward-looking statements including, but not limited to:
whether any potential sale of or other strategic transaction by or
related to Conn's will be consummated and, if so, the timing and terms
of any such transaction, including any possible sale price; general
economic conditions impacting the customers or potential customers; the
Company's ability to continue existing or to offer new customer
financing programs; changes in the delinquency status of the Company's
credit portfolio; unfavorable developments in ongoing litigation;
increased regulatory oversight; higher than anticipated net charge-offs
in the credit portfolio; the success of the Company's planned opening of
new stores and the updating of existing stores; technological and market
developments and sales trends for the Company's major product offerings;
the Company's ability to protect against cyber-attacks or data security
breaches and to protect the integrity and security of individually
identifiable data of the customers and the Company's employees; the
Company's ability to fund the Company's operations, capital
expenditures, debt repayment and expansion from cash flows from
operations, borrowings from the Company's revolving credit facility, and
proceeds from accessing debt or equity markets; and the other risks
detailed in the Company's
|
||||||||||||||
CONDENSED, CONSOLIDATED STATEMENT OF OPERATIONS | ||||||||||||||
(unaudited) | ||||||||||||||
(in thousands, except per share amounts) | ||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||
|
|
|||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||
Revenues: | ||||||||||||||
Total net sales | $ | 304,609 | $ | 257,046 | $ | 870,519 | $ | 690,206 | ||||||
Finance charges and other | 65,449 | 53,830 | 187,951 | 142,422 | ||||||||||
Total revenues | 370,058 | 310,876 | 1,058,470 | 832,628 | ||||||||||
Cost and expenses: | ||||||||||||||
Cost of goods sold, including warehousing and occupancy costs |
178,976 | 151,987 | 508,475 | 411,484 | ||||||||||
Cost of parts sold, including warehousing and occupancy costs |
1,525 | 1,286 | 4,815 | 4,010 | ||||||||||
Selling, general and administrative expense | 112,562 | 90,341 | 320,069 | 242,353 | ||||||||||
Provision for bad debts | 72,019 | 22,730 | 133,862 | 58,049 | ||||||||||
Charges and credits | 355 | 2,834 | 3,601 | 2,834 | ||||||||||
Total cost and expenses |
365,437 | 269,178 | 970,822 | 718,730 | ||||||||||
Operating income | 4,621 | 41,698 | 87,648 | 113,898 | ||||||||||
Interest expense | 8,950 | 3,714 | 19,921 | 10,720 | ||||||||||
Other income, net | - | - | - | (38 | ) | |||||||||
Income (loss) before income taxes | (4,329 | ) | 37,984 | 67,727 | 103,216 | |||||||||
Provision (benefit) for income taxes | (1,265 | ) | 13,608 | 24,672 | 37,502 | |||||||||
Net income (loss) | $ | (3,064 | ) | $ | 24,376 | $ | 43,055 | $ | 65,714 | |||||
Earnings (loss) per share: | ||||||||||||||
Basic |
( |
) | $ | 0.68 | $ | 1.19 | $ | 1.84 | ||||||
Diluted |
( |
) | $ | 0.66 | $ | 1.17 | $ | 1.79 | ||||||
Weighted average common shares outstanding: | ||||||||||||||
Basic | 36,265 | 35,955 | 36,203 | 35,686 | ||||||||||
Diluted | 36,265 | 36,965 | 36,928 | 36,795 | ||||||||||
|
||||||||||||||||
CONDENSED RETAIL SEGMENT FINANCIAL INFORMATION | ||||||||||||||||
(unaudited) | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
|
|
|||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Revenues: | ||||||||||||||||
Product sales | $ | 278,139 | $ | 234,159 | $ | 796,525 | $ | 628,482 | ||||||||
Repair service agreement commissions | 23,056 | 19,601 | 64,042 | 52,756 | ||||||||||||
Service revenues | 3,414 | 3,286 | 9,952 | 8,968 | ||||||||||||
Total net sales | 304,609 | 257,046 | 870,519 | 690,206 | ||||||||||||
Finance charges and other revenues | 531 | 438 | 1,340 | 1,067 | ||||||||||||
Total revenues | 305,140 | 257,484 | 871,859 | 691,273 | ||||||||||||
Cost and expenses: | ||||||||||||||||
Cost of goods sold, including warehousing and occupancy costs |
178,976 | 151,987 | 508,475 | 411,484 | ||||||||||||
Cost of parts sold, including warehousing and occupancy costs |
1,525 | 1,286 | 4,815 | 4,010 | ||||||||||||
Selling, general and administrative expense | 86,436 | 69,920 | 245,102 | 188,340 | ||||||||||||
Provision for bad debts | 54 | 203 | 98 | 389 | ||||||||||||
Charges and credits | 355 | 2,834 | 3,601 | 2,834 | ||||||||||||
Total cost and expenses |
267,346 | 226,230 | 762,091 | 607,057 | ||||||||||||
Operating income | 37,794 | 31,254 | 109,768 | 84,216 | ||||||||||||
Other income, net | - | - | - | (38 | ) | |||||||||||
Income before income taxes | $ | 37,794 | $ | 31,254 | $ | 109,768 | $ | 84,254 | ||||||||
Retail gross margin | 40.6 | % | 40.1 | % | 40.9 | % | 39.6 | % | ||||||||
Selling, general and administrative expense as percent of revenues |
28.3 | % | 27.2 | % | 28.1 | % | 27.2 | % | ||||||||
Operating margin | 12.4 | % | 12.1 | % | 12.6 | % | 12.2 | % | ||||||||
Store count: | ||||||||||||||||
Beginning of period | 86 | 72 | 79 | 68 | ||||||||||||
Opened | 6 | 2 | 16 | 6 | ||||||||||||
Closed | (3 | ) | (2 | ) | (6 | ) | (2 | ) | ||||||||
End of period | 89 | 72 | 89 | 72 | ||||||||||||
|
||||||||||||||||
CONDENSED CREDIT SEGMENT FINANCIAL INFORMATION | ||||||||||||||||
(unaudited) | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
|
|
|||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Revenues - | ||||||||||||||||
Finance charges and other revenues | $ | 64,918 | $ | 53,392 | $ | 186,611 | $ | 141,355 | ||||||||
Cost and expenses: | ||||||||||||||||
Selling, general and administrative expense | 26,126 | 20,421 | 74,967 | 54,013 | ||||||||||||
Provision for bad debts | 71,965 | 22,527 | 133,764 | 57,660 | ||||||||||||
Total cost and expenses | 98,091 | 42,948 | 208,731 | 111,673 | ||||||||||||
Operating income (loss) | (33,173 | ) | 10,444 | (22,120 | ) | 29,682 | ||||||||||
Interest expense | 8,950 | 3,714 | 19,921 | 10,720 | ||||||||||||
Income (loss) before income taxes | $ | (42,123 | ) | $ | 6,730 | $ | (42,041 | ) | $ | 18,962 | ||||||
Selling, general and administrative expense as percent of revenues |
40.2 | % | 38.2 | % | 40.2 | % | 38.2 | % | ||||||||
Operating margin | (51.1 | )% | 19.6 | % | (11.9 | )% | 21.0 | % | ||||||||
CUSTOMER RECEIVABLE PORTFOLIO STATISTICS |
||||||||
(dollars in thousands, except average outstanding balance per account) |
||||||||
|
||||||||
2014 | 2013 | |||||||
Total outstanding balance | $ | 1,253,523 | $ | 944,826 | ||||
Weighted average credit score of outstanding balances | 595 | 591 | ||||||
Number of active accounts | 695,865 | 563,573 | ||||||
Weighted average months since origination of outstanding balance | 8.7 | 8.6 | ||||||
Average outstanding account balance | $ | 1,801 | $ | 1,676 | ||||
Account balances 60+ days past due | $ | 125,678 | $ | 80,505 | ||||
Percent of balances 60+ days past due to total outstanding balance | 10.0 | % | 8.5 | % | ||||
Total account balances re-aged | $ | 164,216 | $ | 102,802 | ||||
Percent of re-aged balances to total outstanding balance | 13.1 | % | 10.9 | % | ||||
Account balances re-aged more than six months | $ | 34,604 | $ | 20,738 | ||||
Percent of total allowance for bad debts to total outstanding customer receivable balance | 10.6 | % | 6.3 | % | ||||
Percent of total outstanding balance represented by no-interest option receivables | 33.9 | % | 33.4 | % | ||||
Three Months Ended | Nine Months Ended | |||||||||||||||
|
|
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2014 | 2013 | 2014 | 2013 | |||||||||||||
Data for the periods ended: | ||||||||||||||||
Total applications processed | 313,663 | 267,558 | 874,911 | 682,453 | ||||||||||||
Weighted average origination credit score of sales financed |
608 | 599 | 607 | 601 | ||||||||||||
Percent of total applications approved | 41.7 | % | 48.5 | % | 44.8 | % | 50.4 | % | ||||||||
Average down payment | 3.6 | % | 3.4 | % | 3.8 | % | 3.7 | % | ||||||||
Average income of credit customer at origination | $ | 40,700 | $ | 41,000 | $ | 39,800 | $ | 40,200 | ||||||||
Average total outstanding balance | $ | 1,220,935 | $ | 895,087 | $ | 1,147,793 | $ | 820,305 | ||||||||
Bad debt charge-offs (net of recoveries) | $ | 27,064 | $ | 16,922 | $ | 76,812 | $ | 42,653 | ||||||||
Percent of bad debt charge-offs (net of recoveries) to average outstanding balance, annualized |
8.9 | % | 7.6 | % | 8.9 | % | 6.9 | % | ||||||||
Weighted average monthly payment rate | 4.94 | % | 5.06 | % | 5.17 | % | 5.46 | % | ||||||||
Provision for bad debts | $ | 71,965 | $ | 22,527 | $ | 133,764 | $ | 57,660 | ||||||||
Provision for bad debts as a percentage of average outstanding balance (annualized) |
23.6 | % | 10.1 | % | 15.5 | % | 9.4 | % | ||||||||
Percent of retail sales paid for by: | ||||||||||||||||
In-house financing, including down payment received | 77.3 | % | 79.5 | % | 77.2 | % | 73.2 | % | ||||||||
Third-party financing | 11.4 | % | 11.5 | % | 11.9 | % | 11.7 | % | ||||||||
Third-party rent-to-own options | 4.8 | % | 2.5 | % | 4.3 | % | 2.9 | % | ||||||||
Total | 93.5 | % | 93.5 | % | 93.4 | % | 87.8 | % | ||||||||
|
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CONDENSED, CONSOLIDATED BALANCE SHEET | ||||||
(unaudited) | ||||||
(dollars in thousands) | ||||||
|
|
|||||
2014 | 2014 | |||||
Assets |
||||||
Current Assets | ||||||
Cash and cash equivalents | $ | 5,760 | $ |
5,727 |
||
Customer accounts receivable, net | 598,241 | 527,267 | ||||
Other accounts receivable, net | 75,245 | 51,480 | ||||
Inventories | 168,603 | 120,530 | ||||
Deferred income taxes | 40,562 | 20,284 | ||||
Income taxes recoverable | 12,846 | 2,187 | ||||
Prepaid expenses and other assets | 9,389 | 8,120 | ||||
Total current assets | 910,646 | 735,595 | ||||
Long-term customer accounts receivable, net | 507,399 | 457,413 | ||||
Property and equipment, net | 116,585 | 86,842 | ||||
Deferred income taxes | 11,070 | 7,721 | ||||
Other assets, net | 10,306 | 10,415 | ||||
Total Assets | $ | 1,556,006 | $ | 1,297,986 | ||
Liabilities and Stockholders' Equity | ||||||
Current Liabilities | ||||||
Current portion of long-term debt | $ | 391 | $ | 420 | ||
Accounts payable | 92,100 | 82,861 | ||||
Accrued expenses | 45,709 | 39,334 | ||||
Other current liabilities | 25,137 | 19,992 | ||||
Total current liabilities | 163,337 | 142,607 | ||||
Long-term debt | 696,310 | 535,631 | ||||
Other long-term liabilities | 59,681 | 30,458 | ||||
Total liabilities | 919,328 | 708,696 | ||||
Stockholders' equity | 636,678 | 589,290 | ||||
Total liabilities and stockholders' equity | $ | 1,556,006 | $ | 1,297,986 | ||
NON-GAAP RECONCILIATION OF RETAIL SEGMENT |
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OPERATING INCOME, AS ADJUSTED | ||||||||||||||||
(unaudited) | ||||||||||||||||
(dollars in thousands) | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
|
|
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2014 | 2013 | 2014 | 2013 | |||||||||||||
Operating income, as reported | $ | 37,794 | $ | 31,254 | $ | 109,768 | $ | 84,216 | ||||||||
Adjustments: | ||||||||||||||||
Costs (credits) related to facility closures | (141 | ) | 2,834 | 3,105 | 2,834 | |||||||||||
Legal and other fees related to evaluation of strategic alternatives and class action lawsuit |
496 | - | 496 | - | ||||||||||||
Operating income, as adjusted | $ | 38,149 | $ | 34,088 | $ | 113,369 | $ | 87,050 | ||||||||
Retail segment revenues | $ | 305,140 | $ | 257,484 | $ | 871,859 | $ | 691,273 | ||||||||
Operating margin | ||||||||||||||||
As reported | 12.4 | % | 12.1 | % | 12.6 | % | 12.2 | % | ||||||||
As adjusted | 12.5 | % | 13.2 | % | 13.0 | % | 12.6 | % | ||||||||
Basis for presentation of non-GAAP disclosures:
To supplement the Company's condensed consolidated financial statements,
which are prepared and presented in accordance with accounting
principles generally accepted in
CONN-G
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