a6225705.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
Form 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 
For the fiscal year ended January 31, 2010 Commission File Number 000-50421
 
CONN'S, INC.
(Exact Name of Registrant as Specified in its Charter)
 
A Delaware corporation 06-1672840
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
 
3295 College Street
Beaumont, Texas  77701
(Address of Principal Executive Offices)
 
(409) 832-1696
(Registrant's Telephone Number, Including Area Code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
 
Name of Exchange on Which Registered
     
Common Stock, par value $0.01 per share
 
The NASDAQ Global Select Market, Inc

Securities registered pursuant to Section 12(g) of the Act:
NONE
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o   No x
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o   No x
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x   No o
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):  Large accelerated filer o  Accelerated filer x  Non-accelerated filer o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No x
 
The aggregate market value of the voting and non-voting common equity held by non-affiliates as of July 31, 2009, was approximately $183.4 million based on the closing price of the registrant’s common stock as reported on the NASDAQ Global Select Market, Inc.
 
There were 22,457,486 shares of common stock, $0.01 par value per share, outstanding on July 31, 2010.
 
DOCUMENTS INCORPORATED BY REFERENCE:
 
         Portions of the Definitive Proxy Statement for the Annual Meeting of Stockholders to be held May 25, 2010 (incorporated herein by reference in Part III).
 


 
 
 
 
TABLE OF CONTENTS
 
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PART I
 
ITEM 1. BUSINESS.
 
Unless the context indicates otherwise, references to "we," "us," and "our" refer to the consolidated business operations of Conn's, Inc. and all of its direct and indirect subsidiaries, limited liability companies and limited partnerships.

Overview
 
We are a specialty retailer and provider of consumer finance for purchases of a variety of durable consumer products for the home. We offer over 3,000 product items, or SKUs, at good-better-best price points in our core product categories of:

·    
Consumer Electronics, which includes LED, LCD, plasma and DLP televisions, camcorders, digital cameras, computers and computer accessories, Blu-ray and DVD players, video game equipment, portable audio, MP3 players, GPS devices and home theater products. We represent such brands as  Samsung, Sony, LG, Toshiba, Hewlett Packard, Panasonic, Mitsubishi, Compaq, Bose, Canon and JVC. Based on 2008 revenues, as reported in Twice, This Week in Consumer Electronics, we were the 33rd largest retailer of consumer electronics in the United States;
·    
Home Appliances, which includes refrigerators, freezers, washers, dryers, dishwashers, ranges and room air conditioners. We represent such brands as Whirlpool, Maytag, Frigidaire, Kitchen Aid, Samsung, LG, General Electric and Friedrich. Based on 2008 revenues, as reported in Twice, we were the 9th largest retailer of home appliances in the United States;
·    
Furniture and Mattresses, which includes living room, bedroom and dining room furniture. We represent such brands as Serta, Lady Americana, Better Homes and Gardens, Ashley, Lane, Broyhill, Franklin and Jackson Furniture; and
·    
Lawn and Garden Equipment, which includes lawn mowers, lawn tractors and handheld equipment. We represent such brands as Poulan, Husqvarna and Toro.

We sell our products for cash or for payment through major credit cards, in addition to offering our customers several financing alternatives through our proprietary credit programs and third-party financing. In the last three fiscal years, we financed, on average, approximately 61% of our retail sales through one of our two credit programs. We offer our customers a choice of installment payment plans and revolving credit plans through our primary credit portfolio. We also offer an installment program through our secondary credit portfolio to a limited number of customers who do not qualify for credit under our primary credit portfolio. Additionally, the most credit worthy customers in our primary credit portfolio may be eligible for no-interest financing plans.

We began as a small plumbing and heating business in 1890.  We began selling home appliances to the retail market in 1937 through one store located in Beaumont, Texas.  We opened our second store in 1959 and have since grown to 76 stores. We have been known for providing excellent customer service for over 119 years. We believe that our customer-focused business strategies make us an attractive alternative to appliance and electronics superstores, department stores and other national, regional and local retailers. We strive to provide our customers with:

 
 
a broad range of competitively priced, customer-driven, brand name products;
 
 
 
flexible financing alternatives through our proprietary credit programs and third-party financing;

 
 
next day delivery capabilities;
 
 
 
outstanding product repair service;

 
 
highly trained and knowledgeable sales personnel; and
 
 
 
a high level of customer service.
 
 
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We believe that these strategies drive repeat purchases and enable us to generate substantial brand name recognition and customer loyalty. During fiscal 2010, approximately 67.5% of our credit customers, based on the number of invoices written, were repeat customers.

In 1994, we realigned and added to our management team, enhanced our infrastructure and refined our operating strategy to position ourselves for future growth. From fiscal 1994 to fiscal 1999, we selectively grew our store base from 21 to 26 stores while improving operating margins from 5.2% to 8.7%. Since fiscal 1999, we have generated significant growth in our number of stores, revenue and profitability. Specifically:

 
 
we have grown from 26 stores to 76 stores, an increase of over 192%, and although we have no new store openings currently planned, we plan to continue our store development in the future, dependent on capital availability to fund the expansion of our consumer finance operations;
 
 
 
total revenues have grown 257%, at a compounded annual rate of 12.3%, from $234.5 million in fiscal 1999, to $836.7 million in fiscal 2010 and our same store sales growth from fiscal 1999 through fiscal 2010 has averaged 5.7%; it decreased by 13.8% for fiscal 2010;

 
 
our operating margin has averaged 8.0% since fiscal 1999, including the impacts of the non-cash fair value adjustments recorded during fiscal years 2009 and 2010; it was 2.9% for fiscal 2010; and
       
  
 
our consumer credit portfolio has grown 356.3%, at a compounded annual growth rate of 14.8%, from $161.3 million at July 31, 1999 to $736.0 million at January 31, 2010.
 
See additional discussion about our operations under Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Our principal executive offices are located at 3295 College Street, Beaumont, Texas  77701.  Our telephone number is (409) 832-1696, and our corporate website is www.conns.com.  We do not intend for information contained on our website to be part of this Form 10-K.
 
Industry Overview

As measured by Twice, the top 100 consumer electronics retailers in the United States reported equipment and software sales of $126.2 billion in 2008, a 1.0% increase from the $124.9 billion reported in 2007. According to the Consumer Electronics Association, or CEA, total industry manufacturer sales of consumer electronics products in the world, are projected to be $165.3 billion in 2010, up 0.3% from $164.9 billion in 2009. The consumer electronics market is highly fragmented with sales coming from large appliance and electronics superstores, national chains, small regional chains, single-store operators, and consumer electronics departments of selected department and discount stores. We estimate, based on data provided in Twice, that Best Buy and Circuit City, the two largest consumer electronics superstore chains together accounted for approximately 38% of the total electronics sales attributable to the 100 largest retailers in 2008. Based on revenue in 2008, we were the 33rd largest retailer of consumer electronics in the United States.

Technological advancements and the introduction of new products have largely driven growth in the consumer electronics market. Recently, industry growth has been fueled primarily by the introduction of products that incorporate digital technology, such as high definition flat-panel (including LED and new 3-D technology) and projection televisions, Blu-ray and traditional DVD players, digital cameras and camcorders, digital stereo receivers, satellite technology and MP3 products. Digital products offer significant advantages over their analog counterparts, including better clarity and quality of video and audio, durability of recording and compatibility with computers. Due to these advantages, we believe that digital technology will continue to drive industry growth.

Based on data published in Twice the top 100 major appliance retailers reported sales of approximately $22.8 billion in 2008, down approximately 1.0% from reported sales in 2007 of approximately $23.8 billion. The retail appliance market is large and concentrated among a few major dealers, with sales coming primarily from large appliance and electronics superstores, national chains, small regional chains and home improvement centers. Sears has been the leader in the retail appliance market, with a market share of the top 100 retailers of approximately 34% in 2008 and 35% in 2007. Lowe’s and Home Depot held the second and third place positions, respectively, in national market share in 2008.  Based on revenue in 2008, we were the 9th largest retailer of home appliances in the United States.

 
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In the home appliance market, many factors impact sales, including consumer confidence, economic conditions, household formations and new product introductions. Product design and innovation have recently been a key driver of sales in this market, while the reduction in sales of homes has negatively impacted appliance sales. Products recently introduced include high efficiency, front-loading laundry appliances and three door refrigerators, and variations on these products, including new features.
 
According to the U.S. Department of Commerce – Bureau of Economic Analysis, personal consumption expenditures for household furniture and mattresses were estimated to be approximately $85.8 billion in 2009, down from $92.8 billion in the prior year. Industry projections estimate that retail household furniture and mattress sales will grow approximately 3% to 5% annually from 2008 through 2013. The household furniture and mattress market is highly fragmented with sales coming from manufacturer-owned stores, independent dealers, furniture centers, specialty sleep product stores, national and local chains, mass market retailers, department stores and, to a lesser extent, home improvement centers, decorator showrooms, wholesale clubs, catalog retailers, and the Internet.
 
Based on data from the Federal Reserve System, estimated total consumer credit outstanding, which excludes primarily loans secured by real estate, was $2.45 trillion as of December 31, 2009, down 4.3% from $2.56 trillion at December 31, 2008. As a result of the recession that began in late 2007, consumers have increased their rate of savings and reduced their level of borrowing to fund purchases. Consumers obtain credit from banks, credit unions, finance companies and non-financial businesses that offer credit, including retailers. The credit obtained takes many forms, including revolving (e.g. credit cards) or fixed-term (automobile loans) credit, and at times is secured by the products being purchased.

Business Strategy
 
Our objective is to be the leading specialty retailer in each of our markets. We strive to achieve this objective through a continuing focus on superior execution in five key areas: merchandising, consumer credit, distribution, product service and training. Successful execution in each area relies on the following strategies:
 
 
 
Offering a broad range of customer-driven, brand name products.    We offer a comprehensive selection of high-quality, brand name merchandise to our customers at guaranteed low prices. Consistent with our good-better-best merchandising strategy, we offer a wide range of product selections from entry-level models through high-end models. We maintain strong relationships with the approximately 200 manufacturers and distributors that enable us to offer over 3,000 SKUs to our customers. Our principal suppliers include General Electric, Whirlpool, Frigidaire, Maytag, LG, Mitsubishi, Samsung, Sony, Toshiba, Serta, Ashley, Bose, Friedrich, Lane, Broyhill, Hewlett Packard, Compaq, Panasonic, Poulan, Husqvarna and Toro.

 
 
Offering flexible financing alternatives through our proprietary credit programs.     In the last three years, we financed, on average, approximately 61% of our retail sales through our internal credit programs. We believe that our credit programs provide our customers access to financing alternatives that our competitors typically do not offer and, as a result they:
 
· expand our potential customer base,
· increase our sales revenue,
· enhance customer loyalty, and
· enhance our overall profitability through consistent earnings from financing income.
       
     
Our credit department makes all credit decisions internally, entirely independent of our sales personnel. We provide special consideration to customers with good credit history with us. Before extending credit, we consider our loss experience by product category and the customer’s credit worthiness and income to debt level in determining the down payment amount and other credit terms. This facilitates product sales while keeping our credit risk within an acceptable range, allowing us to generate consistent credit portfolio performance. We provide a full range of credit products, including interest-free programs for the highest credit quality customers and our secondary portfolio for our credit-challenged customers.  The secondary portfolio, which has generally lower average credit scores than our primary portfolio, undergoes more intense internal underwriting scrutiny to mitigate the inherently greater risk, including address and employment verification and reference checks. Approximately 60% of our customers who have active credit accounts with us take advantage of our in-store payment option and come to our stores each month to make their payments, which we believe results in additional sales to these customers. We may be required in connection with our recently amended ABS credit facility to reduce or eliminate in-store payment options, dependent on certain criteria. We employ a rigorous series of measures to ensure collection of our credit receivables including contacting customers with past due accounts daily and attempt to work with them to collect payments in times of financial difficulty or periods of economic downturn. Our experience in credit underwriting and the collections process has enabled us to achieve an average net loss ratio of 3.3% over the past three years on the credit portfolio that we manage, including receivables transferred to our Qualifying Special Purpose Entity or QSPE.

 
5

 
 
 
Maintaining next day distribution capabilities.    We maintain four regional distribution centers and three other related facilities that, in combination with an outsourced third-party distribution arrangement in Louisiana, cover all of the major markets in which we operate. These facilities are part of a sophisticated inventory management system that also includes a fleet of approximately 70 transfer and delivery vehicles that service all of our markets. Our distribution operations enable us to deliver products on the day after the sale for approximately 94% of our customers who scheduled delivery during that timeframe.

 
 
Providing outstanding product repair service.    We service every product that we sell, and we service only the products that we sell. In this way, we can assure our customers that they will receive our service technicians’ exclusive attention to their product repair needs. All of our service centers are authorized factory service facilities that provide trained technicians to offer in-home diagnostic and repair service utilizing a fleet of approximately 120 service vehicles as well as on-site service and repairs for products that cannot be repaired in the customer’s home. At times, we also use third-party service providers to allow us to cover some of the markets outside our traditional service areas and maintain the appropriate level of customer service.

 
 
Developing and retaining highly trained and knowledgeable personnel.    We require all sales personnel to complete an intensive classroom training program and additional time riding in a delivery truck and a service truck to observe how we serve our customers after the sale is made. After the initial new hire training, all sales personnel participate in regular training programs to learn about new products and refresh their knowledge of the general sales process and maintaining a high level of customer service. Additionally, we also require all credit personnel to complete a two week classroom training program. Classroom instruction includes negotiation techniques and credit policy training to ensure customer retention and compliance with debt collection regulations. Post graduation, the collection trainees undergo additional skill set assessment training, coaching, and call monitoring within their respective department assignments. All credit personnel are required to complete monthly and quarterly refresher training and testing.

 
 
Providing a high level of customer service.    We endeavor to maintain a very high level of customer service as a key component of our culture, which has resulted in average customer satisfaction levels of approximately 90% over the past three years. We measure customer satisfaction on the sales floor, in our delivery operation and in our service department by sending survey cards to all customers to whom we have delivered or installed a product or made a service call. Our customer service resolution department takes more than 18,000 calls or online requests for assistance each month and attempts to assist customers within 72 hours of contact.

Store Development and Growth Strategy
 
In addition to executing our business strategy, we intend to continue to achieve profitable, controlled growth by increasing same store sales, and updating, expanding or relocating our existing stores, and although we have no new store openings planned currently, continuing our new store development in the future, dependent on future capital availability.

 
 
Increasing same store sales.    We plan to continue to increase our same store sales by:

 
 
continuing to offer quality products at competitive prices;

 
 
re-merchandising our product offerings in response to changes in consumer interest and demand;

 
 
adding new merchandise to our existing product lines;

 
6

 
 
 
training our sales personnel to increase sales closing rates;

 
 
updating our stores as needed;

 
 
continuing to provide a high level of customer service in sales, delivery and servicing of our products; and

 
 
increasing sales of our merchandise, finance products, repair service agreements and credit insurance through direct mail and in-store credit promotion programs.

 
 
Opening new stores.    While we currently have no plans to open any new stores or to update existing stores for fiscal 2011, we intend to take advantage of our reliable infrastructure and proven store model to open new stores in the future, dependent upon future capital availability. This infrastructure includes our proprietary management information systems, training processes, distribution network, merchandising capabilities, supplier relationships, product service capabilities and centralized credit approval and collection management processes. We intend to expand our store base in existing, adjacent and new markets, as follows:

 
 
Existing and adjacent markets.    Over the long-term, we intend to increase our market presence by opening new stores in our existing markets and in adjacent markets as we identify the need and opportunity. New store openings in these locations will allow us to maximize opportunity in those markets and leverage our existing distribution network, advertising presence, brand name recognition and reputation. In fiscal 2010, we opened one new store in each of Dallas and Houston.

 
 
New markets.   During fiscal 2008 we opened our first store in Oklahoma and opened two additional stores in the market during fiscal 2009. We intend to consider new markets over the next several fiscal years, beginning with markets in states in which we currently operate. We expect that new store growth will include major metropolitan markets in Texas and have also identified a number of smaller markets within Texas, Louisiana and Oklahoma in which we expect to explore new store opportunities. Our long-term growth plans include markets in other areas of significant population density in neighboring states.

 
 
Updating, expanding or relocating existing stores.    Over the last three years, we have updated, expanded or relocated many of our stores. We continue to update our prototype store model and implement it at new locations and in existing locations in which the market demands support the required design changes. As we continue to add new stores or update or replace existing stores, we intend to modify our floor plan to include elements of this new model. We continuously evaluate our existing and potential sites to ensure our stores are in the best possible locations and relocate stores that are not properly positioned. We typically lease rather than purchase our stores to retain the flexibility of managing our financial commitment to a location if we later decide that the store is performing below our standards or the market would be better served by a relocation. After updating, expanding or relocating a store, we expect to increase same store sales at the store.
 
The addition of new stores and new and expanded product categories have played a significant role in our continued growth and success. We currently operate 76 retail stores located in Texas, Louisiana and Oklahoma. We opened seven stores in each of fiscal 2008 and 2009 and two stores in fiscal 2010. Additionally, we closed two of our clearance center locations in fiscal 2010. While we currently have no plans to open any new stores or to update existing stores for fiscal 2011, we expect to continue our store development program in the future, with a long-range plan of increasing the store count by approximately 10% each year, and to update a portion of our existing stores each year, dependent upon capital availability. We believe that continuing our strategies of updating existing stores, growing our store base and locating our stores in desirable geographic markets is important to our future success.
 
 
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Customers
 
We do not have a significant concentration of sales with any individual customer and, therefore, the loss of any one customer would not have a material impact on our business.  No single customer accounts for more than 10% of our total revenues; in fact, no single customer accounted for more than $250,000 during the year ended January 31, 2010.
 
Products and Merchandising

Product Categories.    Each of our stores sells the major categories of products shown below. The following table, which has been adjusted from previous filings to ensure comparability, presents a summary of total revenues for the years ended January 31, 2008, 2009, and 2010:
 
   
Year Ended January 31,
 
   
2008
   
2009
   
2010
 
   
Amount
   
%
   
Amount
   
%
   
Amount
   
%
 
   
(in thousands)
 
Consumer electronics
  $ 244,872       29.7 %   $ 305,056       34.2 %   $ 262,751       31.4 %
Home appliances
    223,877       27.2       221,474       24.9       208,470       24.9  
Track
    101,289       12.3       109,799       12.3       97,463       11.6  
Furniture and mattresses
    62,797       7.6       68,869       7.7       68,208       8.2  
Lawn and garden
    20,914       2.5       21,132       2.4       14,694       1.8  
Delivery
    12,524       1.5       12,423       1.4       11,498       1.4  
Other
    5,298       0.7       4,976       0.6       4,317       0.5  
   Total product sales
    671,571       81.5       743,729       83.5       667,401       79.8  
Repair service agreement
                                               
  commissions
    36,424       4.4       40,199       4.5       33,272       4.0  
Service revenues
    22,997       2.8       21,121       2.4       22,115       2.6  
   Total net sales
    730,992       88.7       805,049       90.4       722,788       86.4  
Finance charges and other (1)
    93,136       11.3       85,701       9.6       113,887       13.6  
Total revenues
  $ 824,128       100.0 %   $ 890,750       100.0 %   $ 836,675       100.0 %
 
Note (1) – Includes non-cash fair value adjustments reducing interests in securitized assets by $4.8 million and $24.5 million in the years ended January 31, 2008 and 2009 and increasing interests in securitized assets by $2.6 million in the year ended January 31, 2010, respectively.

Within these major product categories (excluding repair service agreements, service revenues and delivery and installation), we offer our customers over 3,000 SKUs in a wide range of price points. Most of these products are manufactured by brand name companies, including General Electric, Whirlpool, Frigidaire, Friedrich, Maytag, LG, Mitsubishi, Samsung, Sony, Toshiba, Bose, Canon, JVC, Serta, Simmons, Spring Air, Ashley, Lane, Broyhill, Franklin, Hewlett Packard, Compaq, Poulan, Husqvarna and Toro. As part of our good-better-best merchandising strategy, our customers are able to choose from products ranging from low-end to mid- to high-end models in each of our key product categories, as follows:

Category
 
Products
 
Selected Brands
         
Home appliances
 
Refrigerators, freezers, washers, dryers, ranges, dishwashers, built-ins, air conditioners and vacuum cleaners
 
Whirlpool, Maytag, Frigidaire, Kitchen Aid, Samsung, LG, General Electric, Friedrich, Roper, Hoover, Dyson and Eureka
     
Consumer electronics
 
LCD, plasma, and DLP televisions, and home theater systems
 
Samsung, Sony, LG, Toshiba, Panasonic, Mitsubishi and Bose
     
Track
 
Computers, computer peripherals, camcorders, digital cameras, DVD players, audio components, compact disc players, GPS devices, video game equipment, speakers and portable electronics (e.g. MP3 players)
 
Hewlett Packard, Compaq, Sony, Canon, Garmin, Panasonic, Nintendo, Microsoft and JVC
     
Furniture and mattresses
 
Furniture and mattresses
 
Serta, Lady Americana, Better Homes and Gardens, Ashley, Lane, Broyhill, Franklin and Jackson Furniture
         
Other
 
Lawn and garden
 
Poulan, Husqvarna, Toro, Weedeater
 
 
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Purchasing.    We purchase products from over 200 manufacturers and distributors. Our agreements with these manufacturers and distributors typically cover a one-year time period, are renewable at the option of the parties and are terminable upon 30 days written notice by either party. Similar to other specialty retailers, we purchase a significant portion of our total inventory from a limited number of vendors. During fiscal 2010, 58.3% of our total inventory purchases were from six vendors, including 12.6%, 10.7% and 10.2% of our total inventory purchases from Samsung, LG and Toshiba, respectively. The loss of any one or more of these key vendors or our failure to establish and maintain relationships with these and other vendors could have a material adverse effect on our results of operations and financial condition.  We have no indication that any of our suppliers will discontinue selling us merchandise.  We have not experienced significant difficulty in maintaining adequate sources of merchandise, and we generally expect that adequate sources of merchandise will continue to exist for the types of products we sell.

Merchandising Strategy.    We focus on providing a comprehensive selection of high-quality merchandise to appeal to a broad range of potential customers. Consistent with our good-better-best merchandising strategy, we offer a wide range of product selections from entry-level models through high-end models. We primarily sell brand name warranted merchandise. Our established relationships with major appliance and electronic vendors and our affiliation with NATM, a major buying group with $5 billion in purchases annually, give us purchasing power that allows us to offer custom-featured appliances and electronics and provides us a competitive selling advantage over other independent retailers. As part of our merchandising strategy, we operate two clearance centers with one in Houston and one in Dallas to help sell damaged, used or discontinued merchandise.

Pricing.    We emphasize competitive pricing on all of our products and maintain a low price guarantee that is valid in all markets for 10 to 30 days after the sale, depending on the product. At most of our stores, to print an invoice that contains pricing other than the price maintained within our computer system, sales personnel must call a special “hotline” number at the corporate office for approval. Personnel staffing this hotline number are familiar with competitor pricing and are authorized to make price adjustments to fulfill our low price guarantee when a customer presents acceptable proof of the competitor’s lower price. This centralized function allows us to maintain control of pricing and gross margins, and to store and retrieve pricing data of our competitors.

Customer Service

We focus on customer service as a key component of our strategy. We believe our next day delivery option is one of the keys to our success. Additionally, our customer resolution department takes more than 18,000 calls or online requests or assistance each month and we attempt to assist customers within 72 hours of contact. We track customer service levels by individual salesperson, delivery person and service technician. We send out over 31,000 customer satisfaction survey cards each month covering all deliveries and service calls. Over the past three years, based upon a response rate from our customers of approximately 17%, we consistently report an average customer satisfaction level of approximately 90%.

 
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Store Operations

Stores.     We currently operate 76 retail and clearance stores located in Texas, Louisiana and Oklahoma. We recently closed our clearance center in San Antonio, Texas, to provide additional space for the expansion of our credit collection center, which was located in the same facility and our clearance center in Baytown, Texas. The following table illustrates our markets, the number of freestanding and strip mall stores in each market and the calendar year in which we opened our first store in each market:
 
 
  
Number of Stores
  
 
  
Stand
  
Strip 
  
Market  
Alone
 
Mall
 
Houston
  
5
   
18
   
San Antonio/Austin  
  
5
   
9
   
Golden Triangle (Beaumont, Port Arthur, Lufkin and Orange, Texas
             
     and Lake Charles, Louisiana)  
  
1
   
5
   
Baton Rouge/Lafayette  
  
1
   
4
   
Corpus Christi  
  
1
   
1
   
Dallas/Fort Worth  
  
1
   
18
   
South Texas
  
1
   
3
   
Oklahoma  
 
0
   
3
   
Total
  
15
   
61
   
 
Our stores have an average selling space of approximately 22,000 square feet, plus a rear storage area averaging approximately 5,500 square feet for fast-moving or smaller products that customers prefer to carry out rather than wait for in-home delivery. Two of our stores are clearance centers for discontinued product models, damaged merchandise, returns and repossessed product located in our Houston and Dallas markets and contain 30,630 square feet of combined selling space. All stores are open from 10:00 a.m. to 9:30 p.m. Monday through Friday, from 9:00 a.m. to 9:30 p.m. on Saturday, and from 11:00 a.m. to 7:00 p.m. on Sunday.  We also offer extended store hours during the holiday selling season.

Approximately 80% our stores are located in strip shopping centers and regional malls, with the balance being stand-alone buildings in “power centers” of big box consumer retail stores. All of our locations have parking available immediately adjacent to the store’s front entrance. Our storefronts have a distinctive front that guides the customer to the entrance of the store. Inside the store, a large colorful tile track circles the interior floor of the store. One side of the track leads the customer to major appliances, while the other side of the track leads the customer to a large display of television and home theater products. The inside of the track contains various home office and consumer electronic products such as computers, laptops, printers, Blu-ray and DVD players, camcorders, digital cameras, MP3 players, video game equipment and GPS devices. Mattresses, furniture and lawn and garden equipment displays occupy the rear of the sales floor. To reach the cashier’s desk at the center of the track area, our customers must walk past our products. We believe this increases sales to customers who have purchased products from us on credit in the past and who return to our stores to make their monthly credit payments.

We have updated many of our stores in the last three fiscal years. We expect to continue to update our stores as needed to address each store’s specific needs. All of our updated stores, as well as our new stores, include modern interior selling spaces featuring attractive signage and display areas specifically designed for each major product type. Our prototype store for future expansion has from 20,000 to 25,000 square feet of retail selling space, which approximates the average size of our existing stores and a rear storage area of between 5,000 and 7,000 square feet. Our investment to update our stores has averaged approximately $168,025 per store over the past three years, and as a result of the updating, we expect to increase same store sales at those stores. Over the last three years, we have invested approximately $10.4 million updating, refurbishing or relocating our existing stores.

 
10

 
Site Selection.    Our stores are typically located adjacent to freeways or major travel arteries and in the vicinity of major retail shopping areas. We prefer to locate our stores in areas where our prominent storefront will be the anchor of the shopping center or readily visible from major thoroughfares. We also attempt to locate our stores in the vicinity of major home appliance and electronics superstores. We have typically entered major metropolitan markets where we can potentially support at least 10 to 12 stores. We believe this number of stores allows us to optimize advertising and distribution costs. We have and may continue to elect to experiment with opening lower numbers of new stores in smaller communities where customer demand for products and services outweighs any extra cost. Other factors we consider when evaluating potential markets include the distance from our distribution centers, our existing store locations and store locations of our competitors and population, demographics and growth potential of the market.

Store Economics.    We lease 72 of our 76 current store locations, with an average monthly rent of $20,900. Our average per store investment for the 14 new leased stores we have opened in the last three years was approximately $1.4 million, including leasehold improvements, fixtures and equipment and inventory (net of accounts payable). Our total investment for the owned location that was built in 2008 totaled approximately $4.6 million, including land, buildings, fixtures and equipment and inventory (net of accounts payable). For these new stores, excluding the clearance center, the net sales per store have averaged $0.5 million per month.

Our new stores have typically been profitable on an operating basis within their first three to six months of operation and, on average, have returned our net cash investment in 20 months or less. We consider a new store to be successful if it achieves $8 million to $9 million in sales volume and 4% to 7% in operating margins before other ancillary revenues and allocations of overhead and advertising in the first full year of operation. We expect successful stores that have matured, which generally occurs after two to three years of operations, to generate annual sales of approximately $12 million to $15 million and 9% to 12% in operating margins before other ancillary revenues and overhead and allocations.  However, depending on the credit and insurance penetration of an individual store, we believe that a store that does not achieve these levels of sales can still contribute significantly to our pretax margin.

Personnel and Compensation.    We staff a typical store with a store manager, an assistant manager, an average of 17 sales personnel and other support staff including cashiers and/or porters based on store size and location. Managers have an average tenure with us of approximately five years and typically have prior sales floor experience. In addition to store managers, we have seven district management personnel that generally oversee from seven to ten stores in each market. Our senior retail management personnel generally have an average of approximately 15 years of sales experience with us.

We compensate the majority of our sales associates on a straight commission arrangement, while we generally compensate store managers on a salary basis plus incentives and cashiers at an hourly rate. In some instances, store managers receive earned commissions plus base salary. We believe that because our store compensation plans are tied to sales, they generally provide us an advantage in attracting and retaining highly motivated employees.

Training.    New sales personnel must complete an intensive classroom training program in the markets where they will be assigned, under the direction of sales management personnel in those markets. We then require them to spend additional time riding in delivery and service trucks to gain an understanding of how we serve our customers after the sale is made. Installation and delivery staff and service personnel receive training through an on-the-job program in which individuals are assigned to an experienced installation and delivery or service employee as helpers prior to working alone. In addition, our employees benefit from on-site training conducted by many of our vendors.

We attempt to identify store manager candidates early in their careers with us and place them in a defined program of training. They generally first attend our in-house training program, which provides guidance and direction for the development of managerial and supervisory skills. They then attend a Dale Carnegie® certified management course that helps solidify their management knowledge and builds upon their internal training. After completion of these training programs, manager candidates work as assistant managers for six to twelve months and are then allowed to manage one of our smaller stores, where they are supervised closely by the store’s district manager. We give new managers an opportunity to operate larger stores as they become more proficient in their management skills. Each store manager attends mandatory training sessions on a monthly basis and also attends bi-weekly sales training meetings where participants receive and discuss new product information.

 
11

 
Marketing

We design our marketing and advertising programs to increase our brand name recognition, educate consumers about our products and services and generate customer traffic in order to increase sales. We conduct our advertising programs primarily through newspapers, radio and television stations, direct mail, telephone and our website. Our promotional programs include the use of discounts, rebates, product bundling and no-interest financing plans.

Our website, www.conns.com, provides customers the ability to purchase our products on-line, offers information about our selection of products and provides useful information to the consumer on pricing, features and benefits for each product. Our website also allows the customers residing in the markets in which we operate retail locations to apply and be considered for credit. The website currently averages approximately 15,000 visits per day from potential and existing customers and during fiscal 2010 was a source of retail sales and credit applications.  The website is linked to a call center, allowing us to better assist customers with their credit and product needs.

Distribution and Inventory Management

We typically locate our stores in close proximity of our four regional distribution centers located in Houston, San Antonio, Dallas and Beaumont, Texas and smaller cross-dock facilities in Austin and Harlingen, Texas,  and Oklahoma City, Oklahoma. This enables us to deliver products to our customers quickly, reduces inventory requirements at the individual stores and facilitates regionalized inventory and accounting controls.

In our retail stores we maintain an inventory of fast-moving items and products that the customer is likely to carry out of the store. Our sophisticated Distribution Inventory Sales computer system and the use of scanning technology in our distribution centers allow us to determine, on a real-time basis, the exact location of any product we sell. If we do not have a product at the desired retail store at the time of sale, we can provide it through our distribution system on a next day basis.

We maintain a fleet of tractors and trailers that allow us to move products from market to market and from distribution centers to stores to meet customer needs. We recently have outsourced the deliveries in our Louisiana market to a third party. Our fleet of home delivery vehicles enables our highly-trained delivery and installation specialists, in combination with the outsourced distribution arrangement in Louisiana, to quickly complete the sales process, enhancing customer service. We receive a delivery fee based on the products sold and the services needed to complete the delivery. Additionally, we are able to complete deliveries to our customers on the day after the sale for approximately 94% of our customers who have scheduled delivery during that timeframe.

Finance Operations

General.    We sell our products for cash or for payment through major credit cards and third-party financing, in addition to offering our customers several financing alternatives through our proprietary credit programs. In the last three fiscal years, we financed, on average, approximately 61% of our retail sales through one of our two credit programs. We offer our customers a choice of installment payment plans and revolving credit plans through our primary credit portfolio. We also offer an installment program through our secondary credit portfolio to a limited number of customers who do not qualify for credit under our primary credit portfolio. Additionally, the most credit worthy customers in our primary credit portfolio may be eligible for no-interest financing plans. We use a third-party finance company to provide a portion of our no-interest financing offerings.
 
 
12

 
The following table shows our product and repair service agreements sales, net of returns and allowances, by method of payment for the periods indicated.
 
   
Year Ended January 31,
 
   
2008
   
2009
   
2010
 
   
Amount
   
%
   
Amount
   
%
   
Amount
   
%
 
   
(in thousands)
 
Cash and other credit cards
  $ 267,931       37.8 %   $ 293,131       37.4 %   $ 293,512       41.9 %
Primary credit portfolio:
                                               
Installment
    340,274       48.1       390,040       49.8       336,337       48.0  
Revolving
    34,025       4.8       23,105       2.9       28,638       4.1  
Secondary credit portfolio
    65,765       9.3       77,652       9.9       42,186       6.0  
Total
  $ 707,995       100.0 %   $ 783,928       100.0 %   $ 700,673       100.0 %
 
Credit Approval.    Our credit programs are managed by our centralized credit underwriting department staff, independent of sales personnel. As part of our centralized credit approval process, we have developed a proprietary standardized scoring model that provides preliminary credit decisions, including down payment amounts and credit terms, based on customer risk, income level, and product risk. While we automatically approve some credit applications from customers, approximately 85% of all of our credit decisions are based on evaluation of the customer’s creditworthiness by a qualified in-house credit grader. As of January 31, 2010, we employed over 620 full-time and part-time employees who focus on credit approval, collections and credit customer service. Employees in these operational areas are trained to follow our strict methodology in approving credit, collecting our accounts, and charging off any uncollectible accounts based on pre-determined aging criteria, depending on their area of responsibility.

Part of our ability to control delinquency and net charge-off is based on the level of down payments that we require and the purchase money security interest that we obtain in the product financed, which reduce our credit risk and increase our customers’ ability and willingness to meet their future obligations. We require the customer to purchase or provide proof of credit property insurance coverage to offset potential losses relating to theft or damage of the product financed.

Installment accounts are paid over a specified period of time with set monthly payments. Revolving accounts provide customers with a specified amount which the customer may borrow, repay and re-borrow so long as the credit limit is not exceeded. Most of our installment accounts provide for payment over 12 to 36 months, with the average account in the primary credit portfolio remaining outstanding for approximately 14 to 16 months. Our revolving accounts remain outstanding approximately 14 to 16 months. During fiscal 2010, approximately 34% of the applications approved under the primary program were approved automatically through our computer system based on the customer’s credit history. The remaining applications, of both new and repeat customers, are sent to an experienced in-house credit grader.

We created our secondary credit portfolio program to meet the needs of those customers who do not qualify for credit under our primary program, typically due to past credit problems or lack of credit history. If we cannot approve a customer’s application for credit under our primary portfolio, we automatically send the application to the credit staff of our secondary portfolio for further consideration, using stricter underwriting criteria. The additional requirements include verification of employment and recent work history, reference checks and higher required down payment levels. We offer only the installment program to those customers who qualify under these stricter underwriting criteria, and these customers are not eligible for our no-interest programs. An experienced, in-house credit grader administers the credit approval process for all applications received under our secondary portfolio program. Most of the installment accounts approved under this program provide for repayment over 12 to 36 months, with the average account remaining outstanding for approximately 19 to 21 months.

 
13

 
The following tables present, for comparison purposes, information regarding our two credit portfolios.
 
   
Primary Portfolio (1)
 
   
Year Ended January 31,
 
   
2008
   
2009
   
2010
 
    (total outstanding balance in thousands)  
Total outstanding balance (period end)
  $ 511,586     $ 589,922     $ 597,360  
Average outstanding customer balance
  $ 1,287     $ 1,403     $ 1,339  
Number of active accounts (period end)
    397,606       420,585       446,203  
Weighted average credit score of outstanding balances
    605       603       600  
Total applications processed (2)
    823,627       850,538       802,765  
Percent of retail sales financed
    53.5 %     53.9 %     53.5 %
Weighted average origination credit score of sales financed
    634       633       632  
Total applications approved
    49.8 %     50.0 %     51.1 %
Average down payment
    7.4 %     5.9 %     5.2 %
Average interest spread (3)
    12.9 %     12.4 %     13.4 %
 
 
   
Secondary Portfolio (1)
 
   
Year Ended January 31,
 
   
2008
   
2009
   
2010
 
    (total outstanding balance in thousands)  
Total outstanding balance (period end)
  $ 143,281     $ 163,591     $ 138,681  
Average outstanding customer balance
  $ 1,264     $ 1,394     $ 1,319  
Number of active accounts (period end)
    113,316       117,372       105,109  
Weighted average credit score of outstanding balances
    521       521       526  
Total applications processed (2)
    400,592       386,126       351,613  
Percent of retail sales financed
    9.5 %     10.3 %     6.6 %
Weighted average origination credit score of sales financed
    537       533       550  
Total applications approved
    29.8 %     29.4 %     20.2 %
Average down payment
    24.6 %     20.5 %     21.2 %
Average interest spread (3)
    14.0 %     13.7 %     12.8 %
 
 
   
Combined Portfolio (1)
 
   
Year Ended January 31,
 
   
2008
   
2009
   
2010
 
    (total outstanding balance in thousands)  
Total outstanding balance (period end)
  $ 654,867     $ 753,513     $ 736,041  
Average outstanding customer balance
  $ 1,282     $ 1,401     $ 1,335  
Number of active accounts (period end)
    510,922       537,957       551,312  
Weighted average credit score of outstanding balances
    587       585       586  
Total applications processed (2)
    1,224,219       1,236,664       1,154,378  
Percent of retail sales financed
    63.4 %     64.1 %     60.1 %
Weighted average origination credit score of sales financed
    614       612       620  
Total applications approved
    45.3 %     45.7 %     45.9 %
Average down payment
    10.1 %     8.2 %     7.6 %
Average interest spread (3)
    13.2 %     12.7 %     13.3 %
___________________________

(1) 
The Portfolios consist of owned and sold receivables.
(2) 
Unapproved and not declined credit applications in the primary portfolio are automatically referred to the secondary portfolio.
(3)
Difference between the average interest rate yield on the portfolio and the average cost of funds under our financing programs plus the allocated interest related to funds required to finance the credit enhancement portion of the portfolio. Also reflects the loss of interest income resulting from interest free promotional programs.

 
14

 
Credit Quality.    We closely monitor the credit portfolios to identify delinquent accounts early and dedicate resources to contacting customers concerning past due accounts. We believe that our unique underwriting model, secured interest in the products financed, required down payments, local presence, ability to work with customers, relative to their product, service and credit insurance needs, and the flexible financing alternatives we offer contribute to the historically low net charge-off rates on these portfolios. In addition, our customers have the opportunity to make their monthly payments in our stores, and approximately 60% of our active credit accounts did so at some time during the last 12 months. We believe that these factors help us maintain a relationship with the customer that keeps losses lower while encouraging repeat purchases. We may be required in connection with our recently amended ABS credit facility to reduce or eliminate in-store payment options, dependent on certain criteria.

Our collection activities involve a combination of efforts that take place in our Beaumont, Texas and San Antonio collection centers, and field collection efforts that involve a visit by one of our credit counselors to the customer’s home. We maintain a predictive dialer system, including virtual collection systems, and letter campaign that helps us contact over 35,000 delinquent customers daily. We also maintain an experienced skip-trace department that utilizes current technology to locate customers who have moved and left no forwarding address. Our field collectors provide on-site contact with the customer to assist in the collection process or, if needed, to voluntarily repossess the product in the event of non-payment. As part of our effort to work with our customers to achieve and maintain a habit of making consistent monthly payments on their credit accounts with us we will, at times, extend their contractual payment terms, also known as reaging, which usually results in updating the past due status of the account to reflect it as current. Typically, we will agree to reage an account when a customer has experienced a financial hardship, such as temporary loss of employment, if, after discussing the situation with the customer, we validate that they will be able to resume making their regularly scheduled payments. Generally, for the reage process to be completed, the customer is required to pay interest on the account for the number of months reaged and at times may require one or more full monthly payments. An account can be reaged multiple times over its life, but the use of the reage program is limited and must comply with Company guidelines. We believe our reaging programs reduce our ultimate net charge-offs and enhance our ability to collect the full amounts due to us from sales under our credit programs and results in building long-term relationships with those customers that help drive future sales. Repossessions are made when it is clear that the customer is unwilling to establish a reasonable payment program. Our legal department represents us in bankruptcy proceedings and filing of delinquency judgment claims and helps handle any legal issues associated with the collection process.

Generally, we deem an account to be uncollectible and charge it off if the account is 120 days or more past due and we have not received a payment in the last seven months. Over the last 36 months, we have recovered approximately 11% of charged-off amounts through our collection activities. The income that we realize from the receivables portfolio that we manage depends on a number of factors, including expected credit losses. Therefore, it is to our advantage to maintain a low delinquency rate and net loss ratio on the credit portfolios.

Our accounting and credit staff consistently monitor trends in charge-offs by examining the various characteristics of the charge-offs, including store of origination, product type, customer credit and income information, down payment amounts and other identifying information. We track our charge-offs both gross, before recoveries, and net, after recoveries. We periodically adjust our credit granting, collection and charge-off policies based on this information.

 
15

 
The following tables reflects the performance of our two credit portfolios, net of unearned interest.
 
   
Primary Portfolio (1)
   
Secondary Portfolio (1)
 
    Year Ended January 31,     Year Ended January 31,  
   
2008
   
2009
   
2010
   
2008
   
2009
   
2010
 
   
(dollars in thousands)
   
(dollars in thousands)
 
Total outstanding balance (period end)
  $ 511,586     $ 589,922     $ 597,360     $ 143,281     $ 163,591     $ 138,681  
Average total outstanding balance
  $ 465,429     $ 538,673     $ 592,376     $ 141,202     $ 157,529     $ 151,380  
Account balances over 60 days old (period end)
  $ 31,558     $ 35,153     $ 48,775     $ 18,220     $ 19,988     $ 24,616  
Percent of balances over 60 days old to total
                                       
outstanding (period end)
    6.2 %     6.0 %     8.2 %     12.7 %     12.2 %     17.8 %
Total account balances reaged (2)
  $ 71,883     $ 90,560     $ 95,038     $ 35,844     $ 50,602     $ 49,135  
Percent of balances reaged to total
                                         
outstanding (period end) (2)
    14.1 %     15.4 %     15.9 %     25.0 %     30.9 %     35.4 %
Account balances reaged more than six months
  $ 35,631     $ 36,452     $ 35,448     $ 15,599     $ 19,860     $ 21,920  
Bad debt charge-offs (net of recoveries)
  $ 12,429     $ 15,071     $ 20,777     $ 4,989     $ 7,291     $ 8,165  
Percent of charge-offs (net of recoveries) to average outstanding
    2.7 %     2.8 %     3.5 %     3.5 %     4.6 %     5.4 %
Bad debt charge-offs (net of recoveries)
                                       
of reaged balances as a percent of average
                                       
reaged balances outstanding (3)
    10.2 %     9.8 %     13.6 %     10.6 %     10.4 %     11.3 %
 
   
Combined Portfolio (1)
 
   
Year Ended January 31,
 
   
2008
   
2009
   
2010
 
   
(dollars in thousands)
 
Total outstanding balance (period end)
  $ 654,867     $ 753,513     $ 736,041  
Average total outstanding balance
  $ 606,631     $ 696,202     $ 743,756  
Account balances over 60 days old (period end)
  $ 49,778     $ 55,141     $ 73,391  
Percent of balances over 60 days old to total
                       
outstanding (period end)
    7.6 %     7.3 %     10.0 %
Total account balances reaged (2)
  $ 107,727     $ 141,162     $ 144,173  
Percent of  balances reaged to total
                       
outstanding (period end) (2)
    16.5 %     18.7 %     19.6 %
Account balances reaged more than six months
  51,230     56,312     57,368  
Bad debt charge-offs (net of recoveries)
  $ 17,418     $ 22,362     $ 28,942  
Percent of charge-offs (net of recoveries) to average outstanding
    2.9 %     3.2 %     3.9 %
Bad debt charge-offs (net of recoveries) of reaged balances
                       
as a percent of average reaged balances outstanding (3)
    10.3  %     10.0  %     12.8  %
                         
                         
 
(1)  
The Portfolios consists of owned and sold receivables.
(2)  
At January 31, 2009, this amount was impacted as we assisted our customers after Hurricanes Gustav and Ike in September 2008.
(3)  
Is included as a component of Percent of charge-offs (net of recoveries) to average outstanding.

The following table presents information regarding the growth of our combined credit portfolios, including unearned interest.
 
   
Year Ended January 31,
 
   
2008
   
2009
   
2010
 
   
(dollars in thousands)
 
Beginning balance
  $ 675,253     $ 780,318     $ 906,777  
New receivables financed
    616,983       698,265       559,348  
Revolving finance charges
    3,838       3,734       3,392  
Returns on account
    (6,851 )     (8,082 )     (8,245 )
Collections on account
    (491,487 )     (545,096 )     (559,312 )
Accounts charged off
    (19,622 )     (24,754 )     (31,519 )
Recoveries of charge-offs
    2,204       2,392       2,577  
Ending balance
    780,318       906,777       873,018  
Less unearned interest at end of period
    (125,451 )     (153,264 )     (136,977 )
Total portfolio, net
  $ 654,867     $ 753,513     $ 736,041  

 
 
16

 
Product Support Services

Credit Insurance.    Acting as agents for unaffiliated insurance companies, we offer credit life, credit disability, credit involuntary unemployment and credit property insurance at all of our stores on sales financed under our credit programs. These products cover payment of the customer’s credit account in the event of the customer’s death, disability or involuntary unemployment or if the financed property is lost or damaged. We receive sales commissions from the unaffiliated insurance company at the time we sell the coverage, and we receive retrospective commissions, which are additional commissions paid by the insurance carrier if insurance claims are less than earned premiums.

We require proof of property insurance on all installment credit purchases, although we do not require that customers purchase this insurance from us. During fiscal 2010, approximately 72.3% of our credit customers purchased one or more of the credit insurance products we offer, and approximately 14.9% purchased all of the insurance products we offer. Commission revenues from the sale of credit insurance contracts represented approximately 2.6%, 2.3% and 2.0% of total revenues for fiscal years 2008, 2009 and 2010, respectively.

Warranty Service.    We provide service for all of the products we sell and only for the products we sell. Customers purchased repair service agreements on products representing approximately 45.1% of our total retail sales for fiscal 2010. These agreements broaden and extend the period of covered manufacturer warranty service for up to four years from the date of purchase, depending on the product, and cover certain items during the manufacturer’s warranty period. These agreements are sold at the time the product is purchased. Customers may finance the cost of the agreements along with the purchase price of the associated product. We contact the customer prior to the expiration of the repair service agreement period to provide them the opportunity to renew the period of coverage.

We have contracts with unaffiliated third party insurers that issue the repair service agreements to cover the costs of repairs performed under these agreements. The initial service agreement is between the customer and the independent third-party insurance company, and we are obligated to provide service when it is needed under each agreement sold. We receive a commission on the sale of the contract, which is recognized in revenues at the time of the sale, and we receive retrospective commissions, which are additional commissions paid by the insurance carrier over time if the cost of repair claims are less than earned premiums. Additionally, we bill the insurance company for the cost of the service work that we perform. We are the obligor under renewal contracts sold after the primary warranty and third-party repair service agreements expire.  Under renewal contracts we recognize revenues received, and direct selling expenses incurred, over the life of the contracts, and expense the cost of the service work performed as products are repaired.

Of the 16,000 repairs, on average, that we perform each month, approximately 47.3% are covered under repair service agreements, approximately 40.9% are covered by manufacturer warranties and the remainder are cash and customer accommodation repairs. Revenues from the sale of repair service agreements represented approximately 5.0%, 5.0% and 4.6% of net sales during fiscal years 2008, 2009 and 2010, respectively.

Management Information Systems

We have a fully integrated management information system that tracks, on a real-time basis, point-of-sale information, inventory receipt and distribution, merchandise movement and financial information. The management information system also includes a local area network that connects all corporate users to e-mail, scheduling and various servers. All of our facilities are linked by a wide-area network that provides communication for in-house credit authorization and real-time capture of sales and merchandise movement at the store level. In our distribution centers, we use wireless terminals to assist in receiving, stock put-away, stock movement, order filling, cycle counting and inventory management. At our stores, we currently use desktop terminals to provide sales, and inventory receiving, transferring and maintenance capabilities.

Our integrated management information system also includes extensive functionality for management of the complete credit portfolio life cycle as well as functionality for the management of product service. The credit system provides in-house credit underwriting, new account set up and tracking, credit portfolio reporting, collections, credit employee productivity metrics, skip-tracing, and bankruptcy, fraud and legal account management. The service system provides for service order processing, warranty claims processing, parts inventory management, technician scheduling and dispatch, technician performance metrics and customer satisfaction measurement. The sales, credit and service systems share a common customer and product sold database.

 
17

 
Our invoicing system uses an IBM Series i5 hardware system that runs on the i5OS operating system. This system enables us to use a variety of readily available applications in conjunction with software that supports the system. All of our current business application software, except our website, accounting, human resources and credit legal systems, has been developed in-house by our management information system employees. We believe our management information systems efficiently support our current operations and provide a foundation for future growth.

We employ Nortel telephone switches and state of the art Avaya predictive dialers, as well as a redundant data network and cable plant, to improve the efficiency of our collection and overall corporate communication efforts.

As part of our ongoing system availability protection and disaster recovery planning, we have implemented a secondary IBM Series i5 system. We installed and implemented the back-up IBM Series i5 system in our corporate offices to provide the ability to switch production processing from the primary system to the secondary system within thirty minutes should the primary system become disabled or unreachable. The two machines are kept synchronized utilizing third party software. This backup system provides “high availability” of the production processing environment. The primary IBM Series i5 system is geographically removed from our corporate office for purposes of disaster recovery and security. Our disaster recovery plan worked as designed during our evacuation from our corporate headquarters in Beaumont, Texas, due to Hurricane Rita in September 2005, and Hurricanes Gustav and Ike in September 2008. While we were displaced, our store, distribution and service operations that were not impacted by the hurricane continued to have normal system availability and functionality.

Competition

As measured by Twice, the top 100 consumer electronics retailers in the United States reported equipment and software sales of $126.2 billion in 2008, a 1.0% increase from the $124.9 billion reported in 2007. The consumer electronics market is highly fragmented with sales coming from large appliance and electronics superstores, national chains, small regional chains, single-store operators, and consumer electronics departments of selected department and discount stores. We estimate, based on data provided in Twice, that Best Buy and Circuit City, the two largest consumer electronics superstore chains, together accounted for approximately 38% of the total electronics sales attributable to the 100 largest retailers in 2008. Based on revenue in 2008, we were the 33rd largest retailer of consumer electronics in the United States.

Based on data published in Twice the top 100 major appliance retailers reported sales of approximately $22.8 billion in 2008, down approximately 1.0% from reported sales in 2007 of approximately $23.8 billion. The retail appliance market is large and concentrated among a few major dealers, with sales coming primarily from large appliance and electronics superstores, national chains, small regional chains and home improvement centers. Sears has been the leader in the retail appliance market, with a market share of the top 100 retailers of approximately 34% in 2008 and 35% in 2007. Lowe’s and Home Depot held the second and third place positions, respectively, in national market share in 2008.  Based on revenue in 2008, we were the 9th largest retailer of home appliances in the United States.

According to the U.S. Department of Commerce – Bureau of Economic Analysis, personal consumption expenditures for household furniture and mattresses were estimated to be approximately $85.8 billion in 2009, down from $92.8 billion in the prior year. Industry projections estimate that retail household furniture and mattress sales will grow approximately 3% to 5% annually from 2008 through 2013. The household furniture and mattress market is highly fragmented with sales coming from manufacturer-owned stores, independent dealers, furniture centers, specialty sleep product stores, national and local chains, mass market retailers, department stores and, to a lesser extent, home improvement centers, decorator showrooms, wholesale clubs, catalog retailers, and the Internet.

Based on data from the Federal Reserve System, estimated total consumer credit outstanding, which excludes primarily loans secured by real estate, was $2.45 trillion as of December 31, 2009, down 4.3% from $2.56 trillion at December 31, 2008. As a result of the recession that began in late 2007, consumers have increased their rate of savings and reduced their level of borrowing to fund purchases. Consumers obtain credit from banks, credit unions, finance companies and non-financial businesses that offer credit, including retailers. The credit obtained takes many forms, including revolving (e.g. credit cards) or fixed-term (automobile loans) credit, and at times is secured by the products being purchased.

 
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We compete primarily based on enhanced customer service and customer shopping experience through our unique sales force training and product knowledge, next day delivery capabilities, proprietary in-house credit program, guaranteed low prices and product repair service.

Regulation

The extension of credit to consumers is a highly regulated area of our business. Numerous federal and state laws impose disclosure and other requirements on the origination, servicing and enforcement of credit accounts. These laws include, but are not limited to, the Federal Truth in Lending Act, Equal Credit Opportunity Act and Federal Trade Commission Act. State laws impose limitations on the maximum amount of finance charges that we can charge and also impose other restrictions on consumer creditors, such as us, including restrictions on collection and enforcement. We routinely review our contracts and procedures to ensure compliance with applicable consumer credit laws. Failure on our part to comply with applicable laws could expose us to substantial penalties and claims for damages and, in certain circumstances, may require us to refund finance charges already paid and to forego finance charges not yet paid under non-complying contracts. We believe that we are in substantial compliance with all applicable federal and state consumer credit and collection laws.

Our sale of credit life, credit disability, credit involuntary unemployment and credit property insurance products is also highly regulated. State laws currently impose disclosure obligations with respect to our sales of credit and other insurance products similar to those required by the Federal Truth in Lending Act, impose restrictions on the amount of premiums that we may charge and require licensing of certain of our employees and operating entities. We believe we are in substantial compliance with all applicable laws and regulations relating to our credit insurance business.

Employees

As of January 31, 2010, we had approximately 2,800 full-time employees and 350 part-time employees, of which approximately 1,300 were sales personnel. We offer a comprehensive benefits package including health, life, short and long term disability, and dental insurance coverage as well as a 401(k) plan, employee stock purchase plan, paid vacation and holiday pay, for eligible employees. None of our employees are covered by collective bargaining agreements and we believe our employee relations are good. Conn’s has a formal dispute resolution plan that requires mandatory arbitration for employment related issues.

Tradenames and Trademarks
 
We have registered the trademarks "Conn's" and our logos.

Available Information

We are subject to reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, and its rules and regulations.  The Exchange Act requires us to file reports, proxy and other information statements and other information with the Securities and Exchange Commission (SEC). Copies of these reports, proxy statements and other information can be inspected and copied at the SEC Public Reference Room, 100 F Street, N.E., Washington, D.C. 20549.  You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  You may also obtain these materials electronically by accessing the SEC’s home page on the Internet at www.sec.gov.
 
Our board has adopted a code of business conduct and ethics for our employees, a code of ethics for our chief executive officer and senior financial professionals and a code of business conduct and ethics for our board of directors. A copy of these codes are published on our website at www.conns.com under “Investor Relations – Corporate Governance.” We intend to make all required disclosures concerning any amendments to, or waivers from, these codes on our website. In addition, we make available, free of charge on our Internet website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file this material with, or furnish it to, the SEC.  You may review these documents, under the heading “Investor Relations – Corporate Governance,” by accessing our website at www.conns.com.
 
 
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ITEM 1A. RISK FACTORS.
 
An investment in our common stock involves risks and uncertainties.  You should consider carefully the following information about these risks and uncertainties before buying shares of our common stock.  The occurrence of any of the risks described below could adversely affect our business prospects, financial condition or results of operations.  In that case, the trading price of our stock could decline, and you could lose all or part of the value of your investment.
 
The inability to obtain funding for our credit operations may adversely affect our business and expansion plans.
 
We finance our customer receivables through asset-backed securitization facilities and an asset based loan facility that together provide $560 million in financing commitments as of January 31, 2010. The securitization facilities provide two separate series of asset-backed notes that allowed us, as of January 31, 2010, to borrow up to $350 million to finance customer receivables. Under each note series, we transfer customer receivables to a qualifying special purpose entity we formed for this purpose, in exchange for cash and subordinated securities. The qualifying special purpose entity, in turn, issues notes collateralized by these receivables that entitle the holders of the notes to participate in certain cash flows from these receivables.  The 2002 Series A program is a $200 million variable funding note, of which $196.4 million was drawn as of January 31, 2010, and is annually renewable, at our option, until August 2011. Additionally, in connection with recent amendments to the variable funding note facility, the commitment will be reduced from its current $200 million level, to $170 million in April 2010, and then to $130 million in April 2011. Further, we agreed to use the proceeds from any capital raising activity to further reduce the commitments and debt outstanding under the QSPE’s debt facilities, The 2006 Series A program consists of $150 million in private bond placements that will require scheduled principal payments beginning in September 2010. These bonds have been downgraded by the rating agency that originally rated the bonds, which may make it more difficult for us to issue medium-term bonds in the future if the ratings are not subsequently raised. The asset based loan facility is a syndicated revolving bank facility that provides a $210 million of borrowing capacity, of which $129.2 million was drawn, including outstanding letters of credit, as of January 31, 2010, and matures in August 2011.
 
Our ability to raise additional capital through further securitization transactions or other debt or equity transactions, and to do so on economically favorable terms, depends in large part on factors that are beyond our control.
 
These factors include:
 
·  
conditions in the securities and finance markets generally;
 
·  
our credit rating or the credit rating of any securities we may issue;
 
·  
economic conditions;
 
·  
conditions in the markets for securitized instruments, or other debt or equity instruments;
 
·  
the credit quality and performance of our customer receivables;
 
·  
our overall sales performance and profitability;
 
·  
our ability to obtain financial support for required credit enhancement;
 
·  
our ability to adequately service our financial instruments;
 
·  
the absence of any material downgrading or withdrawal of ratings given to our securities previously issued in securitizations;
 
·  
our ability to meet debt covenant requirements; and
 
·  
prevailing interest rates.
 
 
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Our ability to finance customer receivables under our current financing facilities depends on our continued compliance with covenants relating to our business and our customer receivables. In February and March 2010, we completed amendments to our financing facilities in order to obtain relief from potential covenant violations as of January 31, 2010 and revise certain future covenant requirements. If we had been unable to complete these amendments, or if we are unable to complete amendments, if required, in the future, and we are unable to arrange substitute financing facilities or other sources of capital, we may have to limit or cease offering credit through our finance programs. If our financing programs reach their capacity or if availability under the borrowing base calculations is reduced, or otherwise becomes unavailable, and we are unable to arrange substitute financing facilities or other sources of capital, we may have to limit the amount of credit that we make available through our customer finance programs.  A reduction in our ability to offer customer credit may adversely affect revenues and results of operations.  Further, our inability to obtain funding through securitization facilities or other sources may adversely affect the profitability of outstanding accounts under our credit programs if existing customers fail to repay outstanding credit due to our refusal to grant additional credit.
 
Additionally, the inability of any of the financial institutions providing our financing facilities to fund their commitment would adversely affect our ability to fund our credit programs, capital expenditures and other general corporate needs.
 
An increase in interest rates may have a negative impact on our results of operations.
 
The interest rates on our bank credit facility and the 2002 Series A program under our asset-backed securitization facility fluctuate up or down based upon the LIBOR rate, the prime rate of our administrative agent or the federal funds rate in the case of the bank credit facility and the commercial paper rate in the case of the 2002 Series A program. The level of interest rates in the market in general will impact the interest rate on medium-term notes issued under our asset-backed securitization facility or other debt instruments issued, if any. Additionally, we may issue debt securities or enter into credit facilities under which we pay interest at a higher rate than we have historically paid, which would reduce our margins and negatively impact our results of operations.
 
We have significant future capital needs which we may be unable to fund, and we may need additional funding sooner than currently anticipated.
 
We will need substantial capital to finance our operations and any future expansion plans, including funds for capital expenditures, pre-opening costs and initial operating losses related to any new store openings, and growth in the accounts receivable portfolio. We may not be able to obtain additional capital or financing on acceptable terms.  If adequate capital and funds are not available, we will have to curtail future growth, which could materially adversely affect our business, financial condition, operating results or cash flows.
 
Based on our current plans, we estimate that capital expenditures during fiscal 2011 will be approximately $5 million to $10 million and that capital expenditures during future years may exceed this amount, dependent on the availability of capital to fund growth in the future. Our capital expenditure plan for 2011 could increase, depending on the availability of capital to fund new store openings and accounts receivable portfolio growth. We expect that cash provided by operating activities and available borrowings under our credit facilities will be sufficient to fund our operations and capital expenditure programs for at least 12 months.  However, this may not be the case.  We may be required to seek additional capital earlier than anticipated if future cash flows from operations fail to meet our expectations and costs or capital expenditures exceed anticipated amounts.
 
Our ability to open and operate profitably new stores in existing, adjacent and new geographic markets.
 
While we currently have no plans to open any new stores, we expect to continue our expansion in the future. New stores that we open may not be profitable or meet our goals.  Any of these circumstances could have a material adverse effect on our financial results. There are a number of factors that could affect our ability to open and operate new stores consistent with our business plan, including:
 
·  
the availability of additional financial resources;
 
 
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·  
competition in existing, adjacent and new markets;
 
·  
competitive conditions, consumer tastes and discretionary spending patterns in adjacent and new markets that are different from those in our existing markets;
 
·  
a lack of consumer demand for our products or financing programs at levels that can support new store growth;
 
·  
inability to make customer financing programs available that allow consumer to purchase products at levels that can support new store growth;
 
·  
limitations created by covenants and conditions under our credit facilities and our asset-backed securitization program;
 
·  
the substantial outlay of financial resources required to open new stores and the possibility that we may recognize little or no related benefit;
 
·  
an inability or unwillingness of vendors to supply product on a timely basis at competitive prices;
 
·  
the failure to open enough stores in new markets to achieve a sufficient market presence;
 
·  
the inability to identify suitable sites and to negotiate acceptable leases for these sites;
 
·  
unfamiliarity with local real estate markets and demographics in adjacent and new markets;
 
·  
problems in adapting our distribution and other operational and management systems to an expanded network of stores;
 
·  
difficulties associated with the hiring, training and retention of additional skilled personnel, including store managers; and
 
·  
higher costs for print, radio and television advertising.
 
These factors may also affect the ability of any newly opened stores to achieve sales and profitability levels comparable with our existing stores or to become profitable at all.
 
If we are unable to manage our growing business, our revenues may not increase as anticipated, our cost of operations may rise and our results of operations may decline.
 
We face many business risks associated with growing companies, including the risk that our management, financial controls and information systems will be inadequate to support our expansion in the future. Our growth will require management to expend significant time and effort and additional resources to ensure the continuing adequacy of our financial controls, operating procedures, information systems, product purchasing, warehousing and distribution systems and employee training programs. We cannot predict whether we will be able to manage effectively these increased demands or respond on a timely basis to the changing demands that our expansion will impose on our management, financial controls and information systems. If we fail to manage successfully the challenges of growth, do not continue to improve these systems and controls or encounter unexpected difficulties during expansion, our business, financial condition, operating results or cash flows could be materially adversely affected.
 
A decrease in our credit sales or a decline in credit quality could lead to a decrease in our product sales and profitability.
 
In the last three fiscal years, we financed, on average, approximately 61% of our retail sales through our internal credit programs.  Our ability to provide credit as a financing alternative for our customers depends on many factors, including the quality of our accounts receivable portfolio.  Payments on some of our credit accounts become delinquent from time to time, and some accounts end up in default, due to several factors, such as general and local economic conditions, including the impact of rising interest rates and unemployment rates.  As we expand into new markets, we will obtain new credit accounts that may present a higher risk than our existing credit accounts since new credit customers do not have an established credit history with us.  A general decline in the quality of our accounts receivable portfolio could lead to a reduction in the advance rates used or eligible receivable balances included in the borrowing base calculations and thus a reduction of available credit to fund our finance operations.  As a result, if we are required to reduce the amount of credit we grant to our customers, we might sell fewer products, which could adversely affect our earnings.  Further, because approximately 60% of our credit customers have historically made their credit account payments in our stores, any decrease in credit sales could reduce traffic in our stores and lower our revenues.  A decline in the credit quality of our credit accounts could also cause an increase in our credit losses, which would result in an adverse effect on our earnings. A decline in credit quality could also lead to stricter underwriting criteria which might have a negative impact on net sales.
 
 
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A downturn in the economy may affect consumer purchases of discretionary items, which could reduce our net sales or gross margins.
 
A portion of our net sales represent discretionary spending by our customers.  Many factors affect spending, including regional or world events, war, conditions in financial markets, general business conditions, interest rates, inflation, energy and gasoline prices, consumer debt levels, the availability of consumer credit, taxation, unemployment trends and other matters that influence consumer confidence and spending.  Our customers’ purchases of discretionary items, including our products, could decline during periods when disposable income is lower or periods of actual or perceived unfavorable economic conditions.  If this occurs, our net sales and results of operations could decline.
 
We face significant competition from national, regional, local and Internet retailers of home appliances, consumer electronics and furniture.
 
The retail market for consumer electronics is highly fragmented and intensely competitive and the market for home appliances is concentrated among a few major dealers.  We currently compete against a diverse group of retailers, including national mass merchants such as Sears, Wal-Mart, Target, Sam’s Club and Costco, specialized national retailers such as Best Buy and Rooms To Go, home improvement stores such as Lowe’s and Home Depot, and locally-owned regional or independent retail specialty stores that sell home appliances, consumer electronics and furniture similar, and often identical, to those items we sell.  We also compete with retailers that market products through store catalogs and the Internet. In addition, there are few barriers to entry into our current and contemplated markets, and new competitors may enter our current or future markets at any time.
 
We may not be able to compete successfully against existing and future competitors. Some of our competitors have financial resources that are substantially greater than ours and may be able to purchase inventory at lower costs and better sustain economic downturns. As a result, our sales may decline if we cannot offer competitive prices to our customers or we may be required to accept lower profit margins. Our competitors may respond more quickly to new or emerging technologies and may have greater resources to devote to promotion and sale of products and services.  If two or more competitors consolidate their businesses or enter into strategic partnerships, they may be able to compete more effectively against us.
 
Our existing competitors or new entrants into our industry may use a number of different strategies to compete against us, including:
 
·  
expansion by our existing competitors or entry by new competitors into markets where we currently operate;
 
·  
entering the television market as the decreased size of flat-panel televisions allows new entrants to display and sell the product more easily;
 
·  
lower pricing;
 
·  
aggressive advertising and marketing;
 
·  
extension of credit to customers on terms more favorable than we offer;
 
·  
larger store size, which may result in greater operational efficiencies, or innovative store formats; and
 
·  
adoption of improved retail sales methods.
 
 
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Competition from any of these sources could cause us to lose market share, sales and customers, increase expenditures or reduce prices, any of which could have a material adverse effect on our results of operations.
 
If new products are not introduced or consumers do not accept new products, our sales may decline.
 
Our ability to maintain and increase sales depends to a large extent on the periodic introduction and availability of new products and technologies.  We believe that the introduction and continued growth in consumer acceptance of new or enhanced products, such as digital Blu-ray players and digital, high-definition televisions, will have a significant impact on our ability to increase sales. These products are subject to significant technological changes and pricing limitations and are subject to the actions and cooperation of third parties, such as movie distributors and television and radio broadcasters, all of which could affect the success of these and other new consumer electronics technologies.  It is possible that new products will never achieve widespread consumer acceptance or will be supplanted by alternative products and technologies that do not offer us a similar sales opportunity or are sold at lower price points or margins.
 
If we fail to anticipate changes in consumer preferences, our sales will decline.
 
Our products must appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to change.  Our success depends upon our ability to anticipate and respond in a timely manner to trends in consumer preferences relating to home appliances and consumer electronics.  If we fail to identify and respond to these changes, our sales of these products will decline.  In addition, we often make commitments to purchase products from our vendors up to six months in advance of proposed delivery dates. Significant deviation from the projected demand for products that we sell may have a material adverse effect on our results of operations and financial condition, either from lost sales or lower margins due to the need to reduce prices to dispose of excess inventory.
 
A disruption in our relationships with, or in the operations of, any of our key suppliers could cause our sales to decline.
 
The success of our business and growth strategies depends to a significant degree on our relationships with our suppliers, particularly our brand name suppliers such as General Electric, Whirlpool, Frigidaire, Friedrich, Maytag, LG, Mitsubishi, Panasonic, Samsung, Sony, Toshiba, Bose, Canon, JVC, Serta, Spring Air, Ashley, Lane, Broyhill, Jackson Furniture, Franklin, Hewlett Packard, Compaq, Poulan, Husqvarna and Toro.  We do not have long term supply agreements or exclusive arrangements with the majority of our vendors.  We typically order our inventory and repair parts through the issuance of individual purchase orders to vendors.  We also rely on our suppliers for cooperative advertising support.  We may be subject to rationing by suppliers with respect to a number of limited distribution items.  In addition, we rely heavily on a relatively small number of suppliers.  Our top five suppliers represented 51.7% of our purchases for fiscal 2010, and the top two suppliers represented approximately 23.3% of our total purchases.  The loss of any one or more of these key vendors or failure to establish and maintain relationships with these and other vendors, and limitations on the availability of inventory or repair parts could have a material adverse effect on our results of operations and financial condition. If one of our vendors were to go out of business, it could have a material adverse effect on our results of operations and financial condition if such vendor is unable to fund amounts due to us, including payments due for returns of product and warranty claims.
 
Our ability to enter new markets successfully depends, to a significant extent, on the willingness and ability of our vendors to supply merchandise to additional warehouses or stores. If vendors are unwilling or unable to supply some or all of their products to us at acceptable prices in one or more markets, our results of operations and financial condition could be materially adversely affected.
 
Furthermore, we rely on credit from vendors to purchase our products.  As of January 31, 2010, we had $39.9 million in accounts payable and $63.5 million in merchandise inventories.  A substantial change in credit terms from vendors or vendors' willingness to extend credit to us, including providing inventory under consignment arrangements, would reduce our ability to obtain the merchandise that we sell, which would have a material adverse effect on our sales and results of operations.
 
Our vendors also supply us with marketing funds and volume rebates. If our vendors fail to continue these incentives it could have a material adverse effect on our sales and results of operations.
 
 
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You should not rely on our comparable store sales as an indication of our future results of operations because they fluctuate significantly.
 
Our historical same store sales growth figures have fluctuated significantly from quarter to quarter. For example, same store sales growth for each of the quarters of fiscal 2010 was -4.6%, -5.2%, -9.3%, and -31.7%, respectively, while same store sales growth for each of the quarters for fiscal 2009 was 1.0%, -1.4%, 5.8%, and 12.5%, respectively. A number of factors have historically affected, and will continue to affect, our comparable store sales results, including:
 
·  
changes in competition, such as pricing pressure, and the opening of new stores by competitors in our markets;
 
·  
general economic conditions;
 
·  
new product introductions;
 
·  
consumer trends;
 
·  
changes in our merchandise mix;
 
·  
changes in the relative sales price points of our major product categories;
 
·  
ability to offer credit programs attractive to our customers;
 
·  
the impact of any new stores on our existing stores, including potential decreases in existing stores’ sales as a result of opening new stores;
 
·  
weather conditions in our markets;
 
·  
timing of promotional events;
 
·  
timing, location and participants of major sporting events;
 
·  
reduction in new store openings;
 
·  
what percentage of our stores are mature stores;
 
·  
the locations of our stores and the traffic drawn to those areas:
 
·  
how often we update our stores; and
 
·  
our ability to execute our business strategy effectively.
 
Changes in our quarterly and annual comparable store sales results could cause the price of our common stock to fluctuate significantly.
 
Because we experience seasonal fluctuations in our sales, our quarterly results will fluctuate, which could adversely affect our common stock price.
 
We typically experience seasonal fluctuations in our net sales and operating results, with the quarter ending January 31st, which includes the holiday selling season, generally accounting for a larger share of our sales net income. We also incur significant additional expenses during this fiscal quarter due to higher purchase volumes and increased staffing.  If we miscalculate the demand for our products generally or for our product mix during the fiscal quarter ending January 31, of if we experience adverse events, such as bad weather in our markets during our fourth fiscal quarter, our net sales could decline, resulting in excess inventory or increased sales discounts to sell excess inventory, which would harm our financial performance.  A shortfall in expected net sales, combined with our significant additional expenses during this fiscal quarter, could cause a significant decline in our operating results and such sales may not be deferred to future periods.
 
Our business could be adversely affected by changes in consumer protection laws and regulations.
 
Federal and state consumer protection laws and regulations, such as the Fair Credit Reporting Act, limit the manner in which we may offer and extend credit.  Since we finance a substantial portion of our sales, any adverse change in the regulation of consumer credit could adversely affect our total sales and gross margins.  For example, new laws or regulations could limit the amount of interest or fees that may be charged on consumer credit accounts or restrict our ability to collect on account balances, which would have a material adverse effect on our cash flow and results of operations. Compliance with existing and future laws or regulations could require us to make material expenditures, in particular personnel training costs, or otherwise adversely affect our business or financial results.  Failure to comply with these laws or regulations, even if inadvertent, could result in negative publicity, fines or additional licensing expenses, any of which could have an adverse effect on our cash flow and results of operations and stock price.
 
 
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Pending litigation relating to the sale of credit insurance and the sale of repair service agreements in the retail industry could adversely affect our business.
 
We understand that states’ attorneys general and private plaintiffs have filed lawsuits against other retailers relating to improper practices conducted in connection with the sale of credit insurance in several jurisdictions around the country. We offer credit insurance in our stores on sales financed under our credit programs and require the customer to purchase property insurance from us or provide evidence from a third party insurance provider, at their election, in connection with sales of merchandise on installment credit; therefore, similar litigation could be brought against us.  While we believe we are in full compliance with applicable laws and regulations, if we are found liable in any future lawsuit regarding credit insurance or repair service  agreements, we could be required to pay substantial damages or incur substantial costs as part of an out-of-court settlement, either of which could have a material adverse effect on our results of operations and stock price. An adverse judgment or any negative publicity associated with our repair service agreements or any potential credit insurance litigation could also affect our reputation, which could have a negative impact on cash flow and the results of operations.
 
The Texas Attorney General’s lawsuit and the resulting changes to our operations could materially adversely affect our results of operations, stock price and financial position.
 
Under our settlement agreement with the Texas Attorney General relating to litigation filed against us in May of last year, we consented to certain changes made to the service agreements and replacement product plan agreements that we sell for a third party insurer and to strengthen the manner in which we market and service these programs. The impact of the changes in these programs are unknown and could materially and adversely affect our results of operations.
 
Adverse or negative publicity, including the publicity related to the settlement of the lawsuit filed against us by the Texas Attorney General, could cause our business to suffer or result in copycat lawsuits.
 
Any negative publicity associated with the settlement of the lawsuit filed against us by the Texas Attorney General or our repair service agreements or our product replacement agreements or any other negative publicity could adversely affect our reputation and negatively impact our sales and results of operations. For a discussion of the settlement, see Item 3 – “Legal Proceedings” contained herein.
 
If we lose key management or are unable to attract and retain the qualified sales and credit granting and collection personnel required for our business, our operating results could suffer.
 
Our future success depends to a significant degree on the skills, experience and continued service of our key executives or the identification of suitable successors for them.  If we lose the services of any of these individuals, or if one or more of them or other key personnel decide to join a competitor or otherwise compete directly or indirectly with us, and we are unable to identify a suitable successor, our business and operations could be harmed, and we could have difficulty in implementing our strategy. In addition, as our business grows, we will need to locate, hire and retain additional qualified sales personnel in a timely manner and develop, train and manage an increasing number of management level sales associates and other employees. Additionally, if we are unable to attract and retain qualified credit granting and collection personnel, our ability to perform quality underwriting of new credit transactions and maintain workloads for our collections personnel at a manageable level, our operation could be adversely impacted and result in higher delinquency and net charge-offs on our credit portfolio.  Competition for qualified employees could require us to pay higher wages to attract a sufficient number of employees, and increases in the federal minimum wage or other employee benefits costs could increase our operating expenses.  If we are unable to attract and retain personnel as needed in the future, our net sales and operating results could suffer.
 
 
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Our costs of doing business could increase as a result of changes in federal, state or local regulations
 
Changes in the federal, state or local minimum wage requirements or changes in other wage or workplace regulations could increase our cost of doing business. In addition, changes in federal, state or local regulations governing the sale of some of our products or tax regulations could increase our cost of doing business. Also, passage of the Employer Free Choice Act or similar laws in Congress could lead to higher labor costs by encouraging unionization efforts among our associates and disruption of store operations.
 
Because our stores are located in Texas, Louisiana and Oklahoma, we are subject to regional risks.
 
Our 76 stores are located exclusively in Texas, Louisiana and Oklahoma.  This subjects us to regional risks, such as the economy, weather conditions, hurricanes and other natural disasters.  If the region suffered an economic downturn or other adverse regional event, there could be an adverse impact on our net sales and results of operations and our ability to implement our planned expansion program.  Several of our competitors operate stores across the United States and thus are not as vulnerable to the risks of operating in one region. Additionally, these states in general, and the local economies where many of our stores are located in particular, are dependent, to a degree, on the oil and gas industries, which can be very volatile. Additionally, because of fears of climate change, legislation has been introduced or is being considered that could materially and adversely impact the oil and gas industries. To the extent the oil and gas industries are negatively impacted by declining commodity prices, climate change legislation and other factors, we could be negatively impacted by reduced employment, or other negative economic factors that impact the local economies where we have our stores.
 
Our information technology infrastructure is vulnerable to damage that could harm our business.
 
Our ability to operate our business from day to day, in particular our ability to manage our credit operations and inventory levels, largely depends on the efficient operation of our computer hardware and software systems.  We use management information systems to track inventory information at the store level, communicate customer information, aggregate daily sales information and manage our credit portfolio.  These systems and our operations are subject to damage or interruption from:
 
·  
power loss, computer systems failures and Internet, telecommunications or data network failures;
 
·  
operator negligence or improper operation by, or supervision of, employees;
 
·  
physical and electronic loss of data or security breaches, misappropriation and similar events;
 
·  
computer viruses;
 
·  
intentional acts of vandalism and similar events; and
 
·  
hurricanes, fires, floods and other natural disasters.
 
The software that we have developed to use in our daily operations may contain undetected errors that could cause our network to fail or our expenses to increase.  Any failure due to any of these causes, if it is not supported by our disaster recovery plan, could cause an interruption in our operations and result in reduced net sales and results of operations.
 
If we are unable to maintain our insurance licenses in the states we operate, our results of operations would suffer.
 
We derive a significant portion of our revenues and operating income from the sale of various insurance products of third-party insurers to our customers. These products include credit insurance, property insurance, repair service agreements and product replacement policies. If for any reason we were unable to maintain our insurance licenses in the states we operate our results of operations would suffer.
 
 
27

 
If we are unable to maintain current insurance coverage for the repair service agreements, our customers who purchase, or have purchased these products, could incur additional costs and our repair expenses would increase, which would adversely affect our financial condition and results of operations.
 
There are a limited number of insurance carriers that provide coverage for our repair service agreements.  If insurance becomes unavailable from our current carriers for any reason, we may be unable to provide replacement coverage to our customers on the same terms, if at all. Even if we are able to obtain replacement coverage, higher premiums could have an adverse impact on our profitability if we are unable to pass along the increased cost of such coverage to our customers.  Inability to obtain insurance coverage for repair service agreements could cause fluctuations in our repair expenses and greater volatility of earnings.
 
If we are unable to maintain group credit insurance policies from insurance carriers, which allow us to offer their credit insurance products to our customers purchasing our merchandise on credit, our revenues could be reduced and bad debts might increase.
 
There are a limited number of insurance carriers that provide credit insurance coverage for sale to our customers.  If credit insurance becomes unavailable for any reason we may be unable to offer replacement coverage on the same terms, if at all.  Even if we are able to obtain replacement coverage, it may be at higher rates or reduced coverage, which could affect the customer acceptance of these products, reduce our revenues or increase our credit losses.
 
Changes in premium and commission rates allowed by regulators on credit insurance and repair service agreements we sell as allowed by the laws and regulations in the states in which we operate could affect our revenues.
 
We derive a significant portion of our revenues and operating income from the sale of various third-party insurance products to our customers. These products include credit insurance and repair service agreements. If the rate we are allowed to charge on those products declines, our operating results could suffer.
 
Changes in trade regulations, currency fluctuations and other factors beyond our control could affect our business.
 
A significant portion of our inventory is manufactured and/or assembled overseas and in Mexico.  Changes in trade regulations, currency fluctuations or other factors beyond our control may increase the cost of items we purchase or create shortages of these items, which in turn could have a material adverse effect on our results of operations and financial condition.  Conversely, significant reductions in the cost of these items in U.S. dollars may cause a significant reduction in the retail prices of those products, resulting in a material adverse effect on our sales, margins or competitive position.  In addition, commissions earned on both our credit insurance and repair service agreement products could be adversely affected by changes in statutory premium rates, commission rates, adverse claims experience and other factors.
 
We may be unable to protect our intellectual property rights, which could impair our name and reputation.
 
We believe that our success and ability to compete depends in part on consumer identification of the name "Conn’s."  We have registered the trademarks "Conn’s" and our logo.  We intend to protect vigorously our trademark against infringement or misappropriation by others.  A third party, however, could attempt to misappropriate our intellectual property in the future.  The enforcement of our proprietary rights through litigation could result in substantial costs to us that could have a material adverse effect on our financial condition or results of operations.
 
Failure to protect the security of our customer’s information could expose us to litigation, judgments for damages and undermine the trust placed with us by our customers.
 
We capture, transmit, handle and store sensitive information, which involves certain inherent security risks. Such risks include, among other things, the interception of by persons outside the Company or by our own employees. While we believe we have taken appropriate steps to protect confidential information, there can be no assurance that we can prevent the compromise of our customers’ data or other confidential information.  If such a breach should occur at Conn’s, it could have a severe negative impact on our business and results of operations.
 
 
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Any changes in the tax laws of the states in which we operate could affect our state tax liabilities. Additionally, beginning operations in new states could also affect our state tax liabilities.
 
As we experienced in fiscal year 2008 with the change in the Texas tax law, legislation could be introduced at any time that changes our state tax liabilities in a way that has an adverse impact on our results of operations. The Texas margin tax increased our effective rate from approximately 35.3%, before its introduction, to 38.1% in fiscal year 2009 and to 44.5% in fiscal year 2010. Our recent commencement of operations in Oklahoma and the potential to enter new states in the future could adversely affect our results of operations, dependent upon the tax laws in place in those states.
 
Significant volatility in oil and gasoline prices could affect our customers’ determination to drive to our stores, and cause us to raise our delivery charges.
 
Significant volatility in oil and gasoline prices could adversely affect our customers’ shopping decisions and patterns.  We rely heavily on our internal distribution system and our next day delivery policy to satisfy our customers’ needs and desires, and increases in oil and gasoline prices could result in increased distribution charges.  Such increases may not significantly affect our competitors.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS.
 
None.
 
ITEM 2. PROPERTIES.
 
The following summarizes the geographic location of our stores, warehouse and distribution centers and corporate facilities by major market area:
 
 
Geographic Location
 
No. of
Locations
   
Leased
Facilities
   
Total
Square
Feet
   
Storage
Square
Feet
   
Leases
With
Options
Expiring
Beyond 10
Years
 
                               
Golden Triangle District (1)
    6       6       189,531       40,655       0  
Louisiana District
    5       5       148,628       38,394       0  
Houston District
    23       22       614,216       106,708       1  
San Antonio/Austin District
    14       14       427,372       83,434       1  
Corpus Christi
    2       1       92,149       23,619       0  
South Texas
    3       3       91,697       15,484       0  
Oklahoma District
    3       3       87,216       18,969       0  
Dallas District
    20       18       588,082       105,120       4  
   Store Totals
    76       72       2,238,891       432,383       6  
Warehouse/Distribution Centers
    7       5       753,314       753,314       1  
Service Centers
    5       3       162,603       162,603       1  
Corporate Offices
    2       2       146,783       30,000       1  
   Total
    90       82       3,301,591       1,378,300       9  
___________
 
(1) Includes one store in Lake Charles, Louisiana.
 
 
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ITEM 3. LEGAL PROCEEDINGS.
 
On November 24, 2009, we settled litigation filed against us on May 28, 2009 by the Texas Attorney General in the Texas State District Court of Harris County, Texas, alleging that we engaged in unlawful and deceptive practices in violation of the Texas Deceptive Trade Practices-Consumer Protection Act. Under the terms of the settlement with the Texas Attorney General, we do not admit and continue to deny any wrongdoing. As part of the settlement agreement, we made two cash payments, one in the amount of $2.5 million on December 17, 2009 and a second payment in the amount of $2.0 million on February 18, 2010, both to the Texas Attorney General for distribution to consumers as restitution for claims the customers have.  We also paid $250,000 to the Texas Attorney General in attorney’s fees, and we also agreed to and did donate $100,000 to the University of Houston Law Center for use in its consumer protection programs. This settlement caps our financial exposure under this litigation, in connection with the all of the allegations contained in the suit.

We are also involved in routine litigation and claims incidental to our business from time to time, and, as required, have accrued our estimate of the probable costs for the resolution of these matters. These estimates have been developed in consultation with counsel and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. It is possible, however, that future results of operations for any particular period could be materially affected by changes in our assumptions or the effectiveness of our strategies related to these proceedings. However, the results of these proceedings cannot be predicted with certainty, and changes in facts and circumstances could impact our estimate of reserves for litigation. As of January 31, 2010, we have recorded approximately $2.0 million in litigation reserves, inclusive of the Attorney General settlement, that reflect our best estimate of what we expect will be required to settle outstanding litigation.

 
PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
What is the principal market for our common stock?
 
The principal market for our common stock is the NASDAQ Global Select Market.  Our common stock is listed on the NASDAQ Global Select Market under the symbol "CONN."  Information regarding the high and low sales prices for our common stock for each quarterly period within the two most recent fiscal years as reported on NASDAQ is summarized as follows:
 
   
High
   
Low
 
Quarter ended April 30, 2008
  $ 20.27     $ 11.50  
Quarter ended July 31, 2008
  $ 19.00     $ 13.64  
Quarter ended October 31, 2008
  $ 25.27     $ 10.49  
Quarter ended January 31, 2009
  $ 13.66     $ 4.64  
Quarter ended April 30, 2009
  $ 17.67     $ 10.75  
Quarter ended July 31, 2009
  $ 16.38     $ 9.84  
Quarter ended October 31, 2009
  $ 15.19     $ 6.15  
Quarter ended January 31, 2010
  $ 7.24     $ 5.34  
 
How many common stockholders do we have?
 
As of March 19, 2010, we had approximately 52 common stockholders of record and an estimated 3,800 beneficial owners of our common stock.
 
Did we declare any cash dividends in fiscal 2009 or fiscal 2010?
 
No cash dividends were paid in fiscal 2009 or 2010. We do not anticipate paying dividends in the foreseeable future.  Any future payment of dividends will be at the discretion of the Board of Directors and will depend upon our results of operations, financial condition, cash requirements and other factors deemed relevant by the Board of Directors, including the terms of our indebtedness. Provisions in agreements governing our long-term indebtedness restrict the amount of dividends that we may pay to our stockholders.  See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”
 
 
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Have we had any sales of unregistered securities during the last year?
 
We have had no sales of unregistered securities during the past three fiscal years.
 
Have we purchased any of our securities during the past quarter?
 
We have not purchased any of our securities during the past fiscal quarter.
 
ITEM 6. SELECTED FINANCIAL DATA.
 
   
Year Ended January 31,
 
   
2006
   
2007
   
2008
   
2009
   
2010
 
   
(dollars and shares in thousands, except per share amounts)
 
               
(A)
   
(B)
   
(C)
 
Statement of Operations:
                             
                               
Total revenues
  $ 701,148     $ 760,657     $ 824,128     $ 890,750     $ 836,675  
Operating expense:
                                       
Cost of goods sold, including warehousing and
                                       
occupancy cost
    427,843       473,064       517,166       590,061       544,700  
Selling, general and administrative expense
    208,259       224,979       245,317       253,813       255,489  
Goodwill impairment
    -       -       -       -       9,617  
Provision for bad debts
    1,133       1,476       1,908       4,273       9,086  
Total operating expense
    637,235       699,519       764,391       848,147       818,892  
Operating income
    63,913       61,138       59,737       42,603       17,783  
Interest (income) expense, net and minority interest
    400       (676 )     (515 )     961       4,003  
Other (income) expense
    69       (772 )     (943 )     117       (123 )
Earnings before income taxes
    63,444       62,586       61,195       41,525       13,903  
Provision for income taxes
    22,341       22,275       21,509       15,833       6,181  
Net income
  $ 41,103     $ 40,311     $ 39,686     $ 25,692     $ 7,722  
Earnings per common share:
                                       
       Basic
  $ 1.76     $ 1.70     $ 1.71     $ 1.15     $ 0.34  
       Diluted
  $ 1.71     $ 1.66     $ 1.68     $ 1.14     $ 0.34  
Average common shares  outstanding:
                                       
       Basic
    23,412       23,663       23,193       22,413       22,456  
       Diluted
    24,088       24,289       23,673       22,577       22,610  
                                         
Other Financial Data:
                                       
Stores open at end of period
    56       62       69       76       76  
Same store sales change (1
    16.9 %     3.6 %     3.2 %     2.0 %     -13.8 %
Inventory turns (2)
    6.1       5.7       5.7       6.0       6.1  
Gross margin percentage (3)
    39.0 %     37.8 %     37.2 %     33.8 %     34.9 %
Operating margin (4)
    9.1 %     8.0 %     7.2 %     4.8 %     2.1 %
Ratio of earnings to fixed charges (5)     8.2       7.4       6.7       3.9       1.8  
Return on average equity (6)
    17.7 %     14.7 %     13.3 %     8.0 %     2.3 %
Capital expenditures
  $ 18,490     $ 18,425     $ 18,955     $ 17,597     $ 10,255  
                                         
Balance Sheet Data:
                                       
Working capital
  $ 190,073     $ 220,740     $ 233,773     $ 279,071     $ 314,679  
Total assets
  $ 355,617     $ 389,947     $ 382,852     $ 516,629     $ 551,439  
Total debt
  $ 136     $ 198     $ 119     $ 62,917     $ 105,904  
Total stockholders’ equity
  $ 255,861     $ 292,528     $ 304,418     $ 334,150     $ 344,327  
___________
(1)  
Same store sales change is calculated by comparing the reported sales by store for all stores that were open throughout the entire year to reported sales by store for all stores that were open throughout the prior year.  Sales from closed stores have been removed from each period.  Sales from relocated stores have been included in each period because each such store was relocated within the same general geographic market. Sales from expanded stores have been included in each period.
(2)  
Inventory turns are defined as the cost of goods sold, excluding warehousing and occupancy cost, divided by the monthly average product inventory balance, excluding consigned goods.
(3)  
Gross margin percentage is defined as total revenues less cost of goods and parts sold, including warehousing and occupancy cost, divided by total revenues.
(4)  
Operating margin is defined as operating income divided by total revenues.
(5)  
Ratio of earning to fixed charges is calculated as income before income taxes plus fixed charges, divided by fixed charges. Fixed charges consist of the sum of interest expensed and capitalized, amortized premiums, discounts and capitalized expenses related to indebtedness and an estimate of the interest within rental expense.
(6)  
Return on average equity is calculated as current period net income divided by the average of the beginning and ending equity.

(A)  
Fiscal 2008 revenues, and operating, pretax and net income were impacted by a non-cash fair value adjustment of $4.8 million which reduced the fair value of our interests in securitized assets.
(B)  
Fiscal 2009 revenues, and operating, pretax and net income were impacted by a non-cash fair value adjustment of $24.5 million which reduced the fair value of our interests in securitized assets.
(C)  
Fiscal 2010 revenues, and operating, pretax and net income were impacted by a non-cash fair value adjustment of $2.6 million which increased the fair value of our interests in securitized assets.

 
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
Forward-Looking Statements
 
This report contains forward-looking statements.  We sometimes use words such as "believe," "may," "will," "estimate," "continue," "anticipate," "intend," "expect," "project" and similar expressions, as they relate to us, our management and our industry, to identify forward-looking statements.  Forward-looking statements relate to our expectations, beliefs, plans, strategies, prospects, future performance, anticipated trends and other future events.  We have based our forward-looking statements largely on our current expectations and projections about future events and financial trends affecting our business. Actual results may differ materially.  Some of the risks, uncertainties and assumptions about us that may cause actual results to differ from these forward-looking statements include, but are not limited to:
 
·  
our or our QSPE’s inability to maintain compliance with debt covenant requirements, including taking the actions necessary to maintain compliance with the covenants, such as obtaining amendments to the borrowing facilities that modify the covenant requirements, which could result in higher borrowing costs;
 
·  
reduced availability under our revolving credit facility as a result of borrowing base requirements and the impact on the borrowing base calculation of changes in the performance or eligibility of the receivables financed by that facility;
 
·  
increases in the retained portion of our receivables portfolio under our current QSPE’s asset-backed securitization program as a result of changes in performance or types of receivables sold, or as a result of a change in the mix of funding sources available to the QSPE, requiring higher collateral levels, or limitations on the ability of the QSPE to obtain financing through its commercial paper-based funding sources;
 
·  
the success of our growth strategy and plans regarding opening new stores and entering adjacent and new markets, including our plans to continue expanding into existing markets;
 
·  
our ability to open and profitably operate new stores in existing, adjacent and new geographic markets;
 
 
  ·
our intention to update or expand existing stores;
 
 
  ·
our ability to introduce additional product categories;
 
 
  ·
our ability to obtain capital for required capital expenditures and costs related to the opening of new stores or to update, relocate or expand existing stores;
 
 
  ·
our ability to fund our operations, capital expenditures, debt repayment and expansion from cash flows from operations, borrowings from our revolving line of credit and proceeds from securitizations, and proceeds from accessing debt or equity markets;
 
·  
our ability and our QSPE’s ability to obtain additional funding for the purpose of funding the receivables generated by us, including limitations on the ability of the QSPE to obtain financing through its commercial paper-based funding sources and its ability to maintain the current credit rating issued by a recognized statistical rating organization;
 
·  
the ability of the financial institutions providing lending facilities to us or the QSPE to fund their commitments;
 
 
32

 
·  
the effect of any downgrades by rating agencies of our or our QSPE’s lenders on borrowing costs;
 
·  
the effect on our or our QSPE’s borrowing cost of changes in laws and regulations affecting the providers of debt financing;
 
·  
the cost or terms of any amended, renewed or replacement credit facilities;
 
·  
the effect of rising interest rates or borrowing spreads that could increase our cost of borrowing or reduce securitization income;
 
·  
the effect of rising interest rates or other economic conditions on mortgage borrowers that could impair our customers’ ability to make payments on outstanding credit accounts;
 
·  
our inability to make customer financing programs available that allow consumers to purchase products at levels that can support our growth;
 
·  
the potential for deterioration in the delinquency status of the sold or owned credit portfolios or higher than historical net charge-offs in the portfolios could adversely impact earnings;
 
 
  ·
technological and market developments, growth trends and projected sales in the home appliance and consumer electronics industry, including, with respect to digital products like Blu-ray players, HDTV, LED and 3-D televisions, GPS devices, home networking devices and other new products, and our ability to capitalize on such growth;
 
 
  ·
the potential for price erosion or lower unit sales points that could result in declines in revenues;
 
 
  ·
the effect of changes in oil and gas prices that could adversely affect our customers’ shopping decisions and patterns, as well as the cost of our delivery and service operations and our cost of products, if vendors pass on their additional fuel costs through increased pricing for products;
 
·  
the ability to attract and retain qualified personnel;
 
 
  ·
both the short-term and long-term impact of adverse weather conditions (e.g. hurricanes) that could result in volatility in our revenues and increased expenses and casualty losses;
 
 
  ·
changes in laws and regulations and/or interest, premium and commission rates allowed by regulators on our credit, credit insurance and repair service agreements as allowed by those laws and regulations;
 
 
  ·
our relationships with key suppliers and their ability to provide products at competitive prices and support sales of their products through their rebate and discount programs;
 
 
  ·
the adequacy of our distribution and information systems and management experience to support our expansion plans;
 
 
  ·
the accuracy of our expectations regarding competition and our competitive advantages;
 
 
  ·
changes in our stock price or the number of shares we have outstanding;
 
 
  ·
the potential for market share erosion that could result in reduced revenues;
 
 
  ·
the accuracy of our expectations regarding the similarity or dissimilarity of our existing markets as compared to new markets we enter;
 
·  
the use of third parties to complete certain of our distribution, delivery and home repair services;
 
 
  ·
general economic conditions in the regions in which we operate; and
 
 
  ·
the outcome of litigation or government investigations affecting our business.
 
 
33

 
Additional important factors that could cause our actual results to differ materially from our expectations are discussed under “Risk Factors” in this Form 10-K.  In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this report might not happen.

The forward-looking statements in this report reflect our views and assumptions only as of the date of this report.  We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

All forward-looking statements attributable to us, or to persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements.

General

We intend the following discussion and analysis to provide you with a better understanding of our financial condition and performance in the indicated periods, including an analysis of those key factors that contributed to our financial condition and performance and that are, or are expected to be, the key drivers of our business.

Through our 76 retail stores, we provide products and services to our customers in seven primary market areas, including Houston, San Antonio/Austin, Dallas/Fort Worth, southern Louisiana, Southeast and South Texas and Oklahoma. Products and services offered through retail sales outlets include home appliances, consumer electronics, home office equipment, lawn and garden products, mattresses, furniture, repair service agreements, customer credit programs, including installment and revolving credit account programs, and various credit insurance products. These activities are supported through our extensive service, warehouse and distribution system. Our stores bear the “Conn’s” name, after our founder’s family, and deliver the same products and services to our customers. All of our stores follow the same procedures and methods in managing their operations. Our management evaluates performance and allocates resources based on the operating results of the retail stores and considers the credit programs, repair service contracts and distribution system to be an integral part of our retail operations.

Presented below is a diagram setting forth our five cornerstones which represent, in our view, the five components of our sales goal – strong merchandising systems, flexible credit options for our customers, an extensive warehousing and distribution system, a service system to support our customer’s needs during and beyond the product warranty periods, and our uniquely, well-trained employees in each area.  Each of these systems combine to create a “nuts and bolts” support system for our customers needs and desires.  Each of these systems is discussed at length in the “Business” section of this report.
 
34

 
We derive the majority of our revenues from our product and repair service agreement sales. However, unlike many of our competitors, we provide in-house credit options for our customers’ product purchases. In the last three years, we have financed, on average, approximately 61% of our retail sales through these programs. In turn, we finance substantially all of our customer receivables from these credit options through a revolving credit facility and an asset-backed securitization facility. See “Business – Finance Operations” for a detailed discussion of our in-house credit programs and our sources of funding. As part of our asset-backed securitization facility, we have created a qualifying special purpose entity, which we refer to as the QSPE or the issuer, to purchase customer receivables from us and to issue medium-term and variable funding notes secured by the receivables to finance its acquisition of the receivables. We transfer eligible receivables, consisting of retail installment and revolving account receivables extended to our customers, to the issuer in exchange for cash and subordinated securities. Customer receivables funded by our revolving credit facility are retained on our consolidated balance sheet.

While our warehouse and distribution system does not directly generate revenues, other than the fees paid by our customers for delivery and installation of the products to their homes, it is our extra, “value-added” program that our existing customers have come to rely on, and our new customers are hopefully sufficiently impressed with to become repeat customers. We derive revenues from our repair services on the products we sell. Additionally, acting as an agent for unaffiliated companies, we sell credit insurance to protect our customers from credit losses due to death, disability, involuntary unemployment and damage to the products they have purchased; to the extent they do not already have it.

Executive Overview
 
This overview is intended to provide an executive level overview of our operations for our fiscal year ended January 31, 2010.  A detailed explanation of the changes in our operations for the fiscal year ended January 31, 2010, as compared to the prior year is included beginning under “Results of Operations”. Our performance during fiscal 2010 was impacted by the slowdown in the economy and rising unemployment in our markets that occurred during the year. Following are significant financial items in management’s view:

·  
Our revenues for the fiscal year ended January 31, 2010, decreased by 6.1%, or $54.1 million, from fiscal year 2009, to $836.7 million due primarily to a decline in product sales and related reduction in repair service agreement commissions. Sales declined during the year largely as a result of the slowdown in the economic conditions in our markets, reduced average selling prices for televisions and were also impacted by tighter credit underwriting standards implemented during the year to improve the credit quality of our consumer receivable portfolio. The decline in our total revenues was partially offset by a non-cash increase in the fair value of our interests in securitized assets, which totaled $2.6 million in fiscal 2010, as compared to $24.5 million decrease in fiscal 2009. Our same store sales declined 13.8% in the fiscal year ended January 31, 2010, as compared to an increase of 2.0% for fiscal 2009.

·  
The addition of stores in our existing Dallas/Fort Worth, Houston, Southeast and South Texas markets and the opening of three stores in Oklahoma in fiscal 2009 had a positive impact on our revenues.  We achieved approximately $20.3 million of increases in product sales and repair service agreement (SMA) commissions for the year ended January 31, 2010, from the opening of nine new stores in these markets since February 2008. While we have no current plans to open additional stores, we have additional sites under consideration for future development and continue to evaluate our store opening plans for future periods, provided we have adequate capital availability.

·  
Deferred interest and ”same as cash” plans continue to be an important part of our sales promotion plans and are utilized to provide a wide variety of financing to enable us to appeal to a broader customer base.  For the fiscal year ended January 31, 2010, $130.7 million, or 19.6%, of our product sales were financed by deferred interest and “same as cash” plans. We have been able to reduce the volume of promotional credit as a percent of product sales, as compared to the prior year. For the comparable period in the prior year, product sales financed by deferred interest and “same as cash” sales were $155.8 million, or 21.0%. Our promotional credit programs (same as cash and deferred interest programs), which require monthly payments, are reserved for our highest credit quality customers, thereby reducing the overall risk in the portfolio, and are used primarily to finance sales of our highest margin products.  We expect to continue to offer extended term promotional credit in the future. During the fiscal year ended January 31, 2010, we began offering promotional credit programs through third-party consumer credit programs, which financed $15.3 million of our product and repair service agreement sales during the year.

 
35

 
·  
Our gross margin was 34.9% for fiscal 2010, an increase from 33.8% in fiscal 2009, primarily as a result of:
o  
a $2.6 million increase in the fair value of our interest in securitized assets in fiscal 2010, as compared to the $24.5 million reduction in the prior year, which positively impacted the total gross margin by 200 basis points,
 
o  
reduced gross margin realized on product sales from 22.0% in the year ended January 31, 2009, to 19.9% in fiscal year 2010, which negatively impacted the total gross margin by 160 basis points. The product gross margins were negatively impacted by a highly price-competitive retail market and our successful strategy early in the fiscal year to grow market share, and
 
o  
a change in the revenue mix in the year ended January 31, 2010, such that higher gross margin finance charge and other revenues contributed a larger percentage of total revenues, excluding the non-cash fair value adjustment, partially offset by reduced revenue contribution from repair service agreement commissions, which contributed a smaller percentage of total revenues, and resulted in an increase in the total gross margin of approximately 70 basis points.
 
·  
Finance charges and other increased 0.9% for the fiscal year ended January 31, 2010, when compared to the same period last year, primarily due to a growth in interest income earned on customer receivables retained on the balance sheet. As a result of the increase in the balance of receivables retained on our balance sheet, Interest income and fees increased to $36.5 million for the twelve months ended January 31, 2010, from $9.1 million in the prior year period, partially offset by a decrease in securitization income resulting from the reduction in the volume of receivables sold to the QSPE, and reduced insurance commission income.
 
·  
During the fiscal year ended January 31, 2010, Selling, general and administrative (SG&A) expense increased as a percent of revenues to 30.5% from 28.5% in the prior year period, primarily due to the litigation reserves we established to reflect our best estimate of the amount we expect will be required to settle outstanding litigation as well as the increase in expenses related to the new stores opened during the prior fiscal year and the general de-leveraging effect of the decline in same store sales.  Partially offsetting the increase was the positive impact of the fair value adjustments related to our Interests in securitized assets on Total revenues, which accounted for approximately 90 basis points of decrease in the twelve month period.
 
·  
During the fiscal year ended January 31, 2010, we determined, as a result of the sustained decline in our market capitalization, the increasingly challenging economic environment and its impact on our comparable store sales, credit portfolio performance and operating results, that an interim goodwill impairment test was necessary. A two-step method was utilized for determining goodwill impairment. Our valuation was performed utilizing the services of outside valuation consultants using both an income approach utilizing our discounted debt-free cash flows and comparable valuation multiples. Upon completion of the impairment test, we concluded that the carrying value of our recorded goodwill was impaired. As a result, we recorded a goodwill impairment charge of $9.6 million to write-off the carrying value of our goodwill during the three month period ended October 31, 2009.
 
·  
The provision for bad debts increased to $9.1 million in fiscal 2010, from $4.3 million in the prior year. This increase is due to an increase in the balance of customer receivables retained on our consolidated balance sheet, as expected, after the completion of our asset-based revolving credit facility in August 2008, and higher actual net credit charge-offs on the retained receivables as a result of the increased balances over the past 18 months. Additionally, as a result of the recent credit portfolio performance and expectations about future net charge-offs, the bad debt and uncollectible interest reserves for receivables retained on our balance sheet were increased, as a percent of the customer receivable balance, to 4.5% at January 31, 2010, from 3.6% at January 31, 2009. As opposed to our interests in the customer receivables transferred to the QSPE, which we account for at fair value, we are required to record a reserve for estimated future net credit losses for receivables retained on our consolidated balance sheet, which we estimate based on our historical and projected loss trends.
 
·  
Net interest expense increased in fiscal 2010, due primarily to the increase in customer receivables retained on our consolidated balance sheet. As a result, we have used previously invested cash balances and borrowings under our revolving credit facility to fund the growth in customer receivables retained.
 
·  
The provision for income taxes was negatively impacted by the effect of the taxes for the state of Texas, which are based on gross margin, instead of income before taxes.

 
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Operational Changes and Outlook

We have implemented, continued to focus on, or modified operating initiatives that we believe will positively impact future results, including:

·  
Increased emphasis on sales of furniture and mattresses by enhancing our product offerings and displays;
 
·  
Increased emphasis on improving gross margin; and
 
·  
Adjusted credit underwriting guidelines to improve the credit quality and profitability of our in-house credit programs.

During the year, we opened one new store in the Houston market and one in the Dallas/Fort Worth market and closed two of our clearance centers, one in the Houston market and one in the San Antonio market. We have additional areas under consideration for future store locations and continue to evaluate our store opening plans for future periods, provided we have adequate capital availability.

In order to improve the credit quality of our credit portfolio and reduce the amount of capital used in our credit operations, we reduced the amount of credit granted as a percentage of sales during the past fiscal year. Additionally, as a result of these changes, we have seen the mix between the primary and secondary receivables portfolios shift to a greater proportion of the receivables being in the higher quality primary portfolio.

While we benefited from our operations being concentrated in the Texas, Louisiana and Oklahoma region in the earlier months of 2009, turmoil in the national economy, including instability in the financial markets, declining consumer confidence and falling oil prices have and will present significant challenges to our operations. Specifically, future sales volumes, gross profit margins and credit portfolio performance could be negatively impacted, and thus impact our overall results of operations and liquidity. Additionally, declines in our future operating performance could impact compliance with our credit facility covenants, which we recently renegotiated to avoid potentially triggering the default provisions of our credit facilities. As a result, while we will strive to maintain our market share, improve credit portfolio performance and reduce expenses, we will also work to maintain our access to the liquidity necessary to maintain our operations through these challenging times.

Application of Critical Accounting Policies

In applying the accounting policies that we use to prepare our consolidated financial statements, we necessarily make accounting estimates that affect our reported amounts of assets, liabilities, revenues and expenses. Some of these accounting estimates require us to make assumptions about matters that are highly uncertain at the time we make the accounting estimates. We base these assumptions and the resulting estimates on authoritative pronouncements, historical information and other factors that we believe to be reasonable under the circumstances, and we evaluate these assumptions and estimates on an ongoing basis. We could reasonably use different accounting estimates, and changes in our accounting estimates could occur from period to period, with the result in each case being a material change in the financial statement presentation of our financial condition or results of operations. We refer to accounting estimates of this type as critical accounting estimates. We believe that the critical accounting estimates discussed below are among those most important to an understanding of our consolidated financial statements as of January 31, 2010.
 
Transfers of Financial Assets.  We transfer eligible customer receivables to a QSPE that issues asset-backed securities to third-party lenders using these accounts as collateral, and we continue to service these accounts after the transfer. We recognize the sale of these accounts when we relinquish control of the transferred financial asset. As we transfer the accounts we record an asset representing the fair value of our interest in the cash flows of the QSPE, which is the difference between the interest earned on customer accounts and the cost associated with financing and servicing the transferred accounts, including an estimate of future net credit losses associated with the transferred accounts, plus our retained interest in the transferred receivables, discounted using a return that we estimate would be expected by a third-party investor. We recognize the income from our interest in these transferred accounts as gains on the transfer of the asset, interest income and servicing fees. This income is recorded as Finance charges and other in our consolidated statements of operations. Additionally, changes in the fair value of our interest are recorded in Finance charges and other. We value our interest in the cash flows of the QSPE at fair value.

 
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We estimate the fair value of our Interests in securitized assets using a discounted cash flow model with most of the inputs used being unobservable inputs. The primary unobservable inputs, which are derived principally from our historical experience, with input from our investment bankers and financial advisors, include the estimated portfolio yield, net credit loss rate, discount rate, payment rate and delinquency rate and reflect our judgments about the assumptions market participants would use in determining fair value. We offer reage programs to past due customers that have experienced a financial hardship, if they meet the conditions of our reage policy. Reaging a customer’s account can result in updating it from a delinquent status to a current status. At January 31, 2010, reaged receivable balances represented 23.5% of the total portfolio balance held by the QSPE. The impact of our reaging programs are reflected in the historical payment rate, loss rate and delinquency trends considered in setting the market participant assumptions. In determining the cost of borrowings, we use current actual borrowing rates, and adjust them, as appropriate, using interest rate futures data from market sources to project interest rates over time. Effective February 1, 2010, we will consolidate the operations of the QSPE into our financial statements and the fair value of our Interest in securitized assets will be eliminated in the consolidation. See the discussion of recent accounting pronouncements in the notes to our consolidated financial statements for further information on the impact the consolidation will have on our financial statements

During the twelve months ended January 31, 2010, Finance charges and other included a non-cash increase in the fair value our Interests in securitized assets of $2.6 million, reflecting primarily lower risk premiums included in the discount rate input during the year ended January 31, 2010, and a decrease in the discount period input for its net equity position, partially offset by changes in the funding mix, a higher net loss rate input and a lower portfolio yield input. Based on a review of the changes in market risk premiums during the year ended January 31, 2010, and discussions with its investment bankers and financial advisors, we estimated that a market participant would require a risk premium that was approximately 550 basis points less than was utilized at January 31, 2009. As a result, we decreased the weighted average discount rate input from 30.0% at January 31, 2009 to 24.2% at January 31, 2010, after reflecting a 21 basis point decrease in the risk-free interest rate included in the discount rate input at January 31, 2010. During the year ended January 31, 2010, after a review of the expected maturity dates on the conduit facility, we shortened the discount period input for our net equity position to be consistent with the final maturity on the existing bonds that finance the facility. These increases were partially offset by a higher weighted-average loss rate included in the inputs in the year ended January 31, 2010. Based on our loss rate expectations and the additional risk premium that a market participant would require on that loss rate, we estimated that a market participant would require a loss rate input that was approximately 100 basis points higher than what was utilized at January 31, 2009.  As a result we increased the weighted-average loss rate from 4.0% to 5.0% at January 31, 2010. These changes, along with changes in the funding mix inputs utilized, representing changes in the portion of Company-provided financing as opposed to the funding obtained by the QSPE from third-party sources, and other input changes which decreased the fair value, resulted in an increase in fair value for the fiscal year ended January 31, 2010 (see reconciliation of the balance of interests in securitized assets in the notes to the consolidated financial statements). The changes in fair value resulted in an increase in Income before taxes of $2.6 million, an increase in net income of $1.7 million, and an increase in basic and diluted earnings per share of $0.08 for the fiscal year ended January 31, 2010, respectively. If a market participant were to require a discount rate that is 10% higher than we estimated in the fair value calculation, the fair value of our Interests in securitized assets would be decreased by an additional $3.4 million as of January 31, 2010. If we had assumed a 10.0% reduction in net interest spread (which might be caused by rising interest rates or reductions in rates charged on the accounts transferred), our Interests in securitized assets and Finance charges and other would have been reduced by $4.9 million as of January 31, 2010. If the assumption used for estimating credit losses was increased by 10%, the impact to Finance charges and other would have been a reduction in revenues and pretax income of $1.8 million as of January 31, 2010. If the assumption used for the discount period on the net equity position was increased by 10%, Interests in securitized assets and Finance charges and other would have been reduced by $0.9 million as of January 31, 2010.

Revenue Recognition.    Revenues from the sale of retail products are recognized at the time the customer takes possession of the product. Such revenues are recognized net of any adjustments for sales incentive offers such as discounts, coupons, rebates, or other free products or services and discounts of promotional credit sales that will extend beyond one year. We sell repair service agreements and credit insurance contracts on behalf of unrelated third parties. For contracts where the third parties are the obligors on the contract, commissions are recognized in revenues at the time of sale, and in the case of retrospective commissions, at the time that they are earned. Where we sell repair service  renewal agreements in which we are deemed to be the obligor on the contract at the time of sale, revenue is recognized ratably, on a straight-line basis, over the term of the repair service agreement. These repair service agreements are renewal contracts that provide our customers protection against product repair costs arising after the expiration of the manufacturer's warranty and the third party obligor contracts. These agreements typically range from 12 months to 36 months. These agreements are separate units of accounting and are valued based on the agreed upon retail selling price. The amounts of repair service renewal agreement revenues deferred at January 31, 2009 and 2010 were $4.5 million and $4.3 million, respectively, and are included in Deferred revenue in the accompanying consolidated balance sheets. The amounts of repair service agreement revenue recognized for the fiscal years ended January 31, 2008, 2009 and 2010 were $5.3 million, $5.7 million and $5.8 million, respectively.

 
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Vendor Allowances.    We receive funds from vendors for price protection, product rebates (earned upon purchase or sale of product), marketing, training and promotion programs which are recorded on the accrual basis as a reduction to the related product cost, cost of sales, or advertising expense, according to the nature of the program. We accrue rebates based on the satisfaction of terms of the program and sales of qualifying products even though funds may not be received until the end of a quarter or year. If the programs are related to product purchases, the allowances, credits or payments are recorded as a reduction of product cost; if the programs are related to product sales, the allowances, credits or payments are recorded as a reduction of cost of goods sold; if the programs are directly related to promotion or marketing of the product, the allowances, credits, or payments are recorded as a reduction of advertising expense in the period in which the expense is incurred. We received $36.1 million, $46.2 million and $51.3 million in vendor allowances during the fiscal years ended January 31, 2008, 2009 and 2010, respectively, of which $6.6 million, $6.4 million and $5.1 million, respectively, represented advertising assistance allowances. The increase in the current year is due to increased use of instant rebates by vendors to drive sales. Over the past three years we have received funds from approximately 50 vendors, with the terms of the programs ranging between one month and one year.

Accounting for Leases.  We analyze each lease, at its inception and any subsequent renewal, to determine whether it should be accounted for as an operating lease or a capital lease. Additionally, monthly lease expense for each operating lease is calculated as the average of all payments required under the minimum lease term, including rent escalations. Generally, the minimum lease term begins with the date we take possession of the property and ends on the last day of the minimum lease term, and includes all rent holidays, but excludes renewal terms that are at our option. Any tenant improvement allowances received are deferred and amortized into income as a reduction of lease expense on a straight line basis over the minimum lease term. The amortization of leasehold improvements is computed on a straight line basis over the shorter of the remaining lease term or the estimated useful life of the improvements. For transactions that qualify for treatment as a sale-leaseback, any gain or loss is deferred and amortized as rent expense on a straight-line basis over the minimum lease term.  Any deferred gain would be included in Deferred gain on sale of property and any deferred loss would be included in Other assets on the consolidated balance sheets.

Receivables Not Sold.  Accounts receivable not eligible for inclusion in the securitization program are carried on our consolidated balance sheet in Customer accounts receivable.  We record the amount of principal on those receivables that is expected to be collected within the next twelve months, based on contractual terms, in current assets on its consolidated balance sheet.  Those amounts expected to be collected after 12 months, based on contractual terms, are included in long-term assets.  Typically, a receivable is considered delinquent if a payment has not been received on the scheduled due date. Additionally, we offer reage programs to past due customers that have experienced a financial hardship, if they meet the conditions of our reage policy. Reaging a customer’s account can result in updating it from a delinquent status to a current status. Generally, an account that is delinquent more than 120 days and for which no payment has been received in the past seven months will be charged-off against the allowance and interest accrued subsequent to the last payment will be reversed. Interest income is accrued using the Rule of 78’s method for installment contracts and the simple interest method for revolving charge accounts, and is reflected in Finance charges and other. Typically, interest income is accrued until the contract or account is paid off or charged-off and we provide an allowance for estimated uncollectible interest. Interest income is recognized on our “same as cash” promotion accounts based on our historical experience related to customers that fail to satisfy the requirements of the interest-free programs. We have a secured interest in the merchandise financed by these receivables and therefore have the opportunity to recover a portion of the charged-off amount.

 
39

 
Allowance for Doubtful Accounts.  We record an allowance for doubtful accounts for our Customer accounts receivable, based on our historical net loss experience and expectations for future losses.  The net charge-off data used in computing the loss rate is reduced by the amount of post-charge-off recoveries received, including cash payments, amounts realized from the repossession of the products financed and, at times, payments under credit insurance policies. Additionally, we separately evaluate the primary and secondary portfolios when estimating the allowance for doubtful accounts. The balance in the allowance for doubtful accounts and uncollectible interest for customer receivables was $3.9 million and $9.6 million, at January 31, 2009, and 2010, respectively. Additionally, as a result of our practice of reaging customer accounts, if the account is not ultimately collected, the timing and amount of the charge-off is impacted. If these accounts had been charged-off sooner the historical net loss rates over time might have been higher. Due to the recent growth in the balance of receivables on the balance sheet, as of January 31, 2010, reaged receivable balances represented only 10.1% of the total retained portfolio balance. If the historical loss rate used to calculate the allowance for doubtful accounts was increased by 10% at January 31, 2010, we would have increased our Provision for bad debts by $0.8 million.

Recently Issued Accounting Pronouncements. In June 2009, the FASB issued revised authoritative guidance to improve the relevance and comparability of the information which a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. When enacted, the concept of a qualifying special-purpose entity will no longer be relevant for accounting purposes.  Therefore, formerly qualifying special-purpose entities (as defined under previous accounting standards) should be evaluated for consolidation by reporting entities on and after the effective date in accordance with the applicable consolidation guidance.  If the evaluation on the effective date results in consolidation, the reporting entity should apply the transition guidance provided in the pronouncement that requires consolidation. The new FASB-issued authoritative guidance is effective for us beginning on February 1, 2010
 
In June 2009, the FASB issued revised authoritative guidance to improve financial reporting by companies involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. This revised guidance would require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has both of the following characteristics:
 
a.  
The power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance
 
b.  
The obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity.
 
We have concluded that the elimination of the exemption for qualifying special-purpose entities and revised guidance related to variable interest entities discussed above will result in us consolidating the operations of our QSPE, which is currently recorded off-balance sheet, beginning February 1, 2010. Additional discussion, including condensed, consolidated pro forma balance sheets and pro forma statements of operations, assuming we adopted these recently issued accounting pronouncements on February 1, 2007 are included in the notes to our consolidated financial statements.

 
40

 
Results of Operations

The following table sets forth certain statement of operations information as a percentage of total revenues for the periods indicated.
 
   
Year ended January 31,
 
   
2008
   
2009
   
2010
 
                   
Revenues:
                 
Product sales
    81.5 %     83.5 %     79.8 %
Service maintenance agreement commissions (net)
    4.4       4.5       4.0  
Service revenues
    2.8       2.4       2.6  
Total net sales
    88.7       90.4       86.4  
Finance charges and other
    11.9       12.4       13.3  
Net decrease in fair value
    (0.6 )     (2.8 )     0.3  
Total finance charges and other
    11.3       9.6       13.6  
Total revenues
    100.0       100.0       100.0  
Cost and expenses:
                       
Cost of goods sold, including warehousing and occupancy costs
    61.7       65.2       63.9  
Cost of parts sold, including warehousing and occupancy costs
    1.0       1.1       1.2  
Selling, general and administrative expense
    29.8       28.5       30.5  
Goodwill impairment
    0.0       0.0       1.2  
Provision for bad debts
    0.3       0.4       1.1  
    Total costs and expenses
    92.8       95.2       97.9  
Operating income
    7.2       4.8       2.1  
Interest (income) expense
    (0.1 )     0.1       0.5  
Other (income) expense
    (0.1 )     0.0       0.0  
Earnings before income taxes
    7.4       4.7       1.6  
Provision for income taxes
    2.6       1.8       0.7  
Net income
    4.8 %     2.9 %     0.9 %

The table above identifies several changes in our operations for the periods presented, including changes in revenue and expense categories expressed as a percentage of revenues. These changes are discussed in the “Executive Overview”, and in more detail in the discussion of operating results beginning in the analysis below.
 
The presentation of our gross margins may not be comparable to other retailers since we include the cost of our in-home delivery service as part of selling, general and administrative expense. Similarly, we include the cost of merchandising our products, including amounts related to purchasing the product in selling, general and administrative expense. It is our understanding that other retailers may include such costs as part of cost of goods sold.

 
41

 
The following table presents certain operations information in dollars and percentage changes from year to year:
 
Analysis of Consolidated Statements of Operations
                                     
(in thousands except percentages)
                   
2009 vs. 2008
   
2010 vs. 2009
 
   
Year Ended January 31,
   
Incr/(Decr)
   
Incr/(Decr)
 
   
2008
   
2009
   
2010
   
Amount
   
Pct
   
Amount
   
Pct
 
Revenues
                                         
Product sales
  $ 671,571     $ 743,729     $ 667,401     $ 72,158       10.7 %   $ (76,328 )     (10.3 )%
Repair service agreement
                                                       
commissions (net)
    36,424       40,199       33,272       3,775       10.4       (6,927 )     (17.2 )
Service revenues
    22,997       21,121       22,115       (1,876 )     (8.2 )     994       4.7  
Total net sales
    730,992       805,049       722,788       74,057       10.1       (82,261 )     (10.2 )
Finance charges and other
    97,941       110,209       111,242       12,268       12.5       1,033       0.9  
Net increase (decrease) in fair value
    (4,805 )     (24,508 )     2,645       (19,703 )     N/A       27,153       N/A  
Total finance charges and other
    93,136       85,701       113,887       (7,435 )     (8.0 )     28,186       32.9  
Total revenues
    824,128       890,750       836,675       66,622       8.1       (54,075 )     (6.1 )
Cost and expenses