Recent Underwriting Refinements Benefiting
Underlying Credit Performance;
Texas Direct Loan Program Implemented Ahead of
Schedule;
Further Reduction to Cost of Funds through
Successful ABS Transaction;
Retail Gross Margin Strengthened 40 Basis
Points Sequentially to 37.5%
Conn's, Inc. (NASDAQ:CONN), a specialty retailer of
furniture and mattresses, home appliances, consumer electronics and
home office products, and provider of consumer credit, today
announced its financial results for the third quarter ended
October 31, 2016.
"Our credit operation is already benefiting from the fiscal 2017
underwriting refinements. Initial indications are encouraging as
Conn's experienced meaningful reductions in early stage delinquency
and first pay defaults during the fiscal 2017 third quarter. In
addition, we successfully implemented our Texas direct loan program
ahead of schedule - it was fully operational across all 55 Texas
locations by the end of October. As a result of the rollout, all of
November's Texas originations were under the direct loan program,
which improved the APR on new originations to over 27%, an increase
in excess of 500 basis points compared to September. We expect the
direct loan program, planned changes in other states, and changes
to no-interest programs will increase Conn's overall yield by 600
to 900 basis points on new originations by the end of fiscal 2018,"
commented Norm Miller, Conn's Chairman, Chief Executive Officer and
President.
"The recent enhancements to our underwriting model affected the
third quarter's same store sales by approximately 1,000 basis
points and were the primary drivers of the 10.1% reduction in same
store sales. Adjusted for recent underwriting enhancements, same
store sales would have been a decrease of 0.1%, buoyed by favorable
trends across many categories including furniture and mattress,
appliances, and consumer electronics. While the near-term reduction
to retail sales was anticipated, we believe the long-term benefits
of improving credit quality and performance will meaningfully
increase Conn's future overall profitability. Slower portfolio
growth, combined with the decision to shift long-term no-interest
programs to Synchrony, impacted the 60-day delinquency rate for the
quarter. The 60-day delinquency rate at the end of the fiscal 2017
third quarter adjusted for these items was 10.9% of the total
outstanding loan balance, compared to 10.8% for the same period
last fiscal year.
"The provision for bad debt for the fiscal 2017 third quarter
benefited from improving portfolio performance, declining 11.4%
from the same period last year, which represents the first
year-over-year provision reduction in the past four quarters.
Seasonality and a cohort of late-stage delinquency from
originations prior to our underwriting changes are likely to impact
credit results in the fourth quarter. The performance of new
originations is encouraging as our turnaround initiatives take hold
and are expected to benefit next year's credit results.
"In October, we closed our third ABS transaction since September
2015 and sold the 2016-A Class C Notes at a premium. With each
successful transaction, Conn's has continually reduced its cost of
funds in the ABS market. We expect further reductions to our
borrowing costs as investors gain experience with the company's
receivables and our credit performance continues improving.
"Conn's retail operation continues to perform well despite the
significant impact underwriting refinements have had on sales.
During the fiscal 2017 third quarter, retail gross margins improved
40 basis points from both fiscal 2017 second quarter and fiscal
2016 third quarter levels. The increase in retail gross margins is
a result of improving product assortment, and warehousing and
delivery efficiencies. For November, same store sales were down
approximately 8%, primarily as a result of the recent underwriting
refinements. The implementation of Conn's direct loan program in
Texas has not meaningfully impacted retail sales, while it has
started increasing yield.
"We remain focused on improving the performance of our credit
operation and returning Conn's to profitability, while ensuring our
retail business is well-positioned to compete in an evolving and
competitive retail environment. It will take time for these
turn-around initiatives to impact the company's financial results,
but I remain confident we are headed in the right direction,"
concluded Mr. Miller.
Third Quarter Results
Net loss for the quarter was $3.8 million, or $0.12 loss per
diluted share, compared to a net loss for the prior-year quarter of
$2.4 million, or $0.07 loss per diluted share. On a non-GAAP basis,
adjusted net loss for the quarter was $2.5 million, or $0.08
adjusted loss per diluted share, which excludes charges and
credits. This compares to adjusted net earnings for the prior-year
quarter of $0.6 million, or $0.02 adjusted earnings per diluted
share, which excludes charges and credits and loss on
extinguishment of debt.
Retail Segment Third Quarter Results (on a year-over-year
basis unless otherwise noted)
Total retail revenues were $308.4 million for the third quarter
of fiscal 2017, a decrease of $14.7 million, or 4.5%, primarily a
result of the decline in same store sales partially offset by new
store openings. Sales were negatively impacted by underwriting
changes made in the fourth quarter of fiscal 2016 and during fiscal
2017. For the third quarter of fiscal 2017, retail segment
operating income was $33.9 million, and adjusted retail segment
operating income was $35.9 million after excluding net charges of
$2.0 million primarily associated with impairments from disposals,
legal and professional fees related to our securities-related
litigation, charges for severance and transition costs due to
changes in the executive management team.
The following table presents net sales and changes in net sales
by category:
Three
Months Ended October 31, % Same store (dollars in
thousands)
2016 % of Total
2015 % of Total Change
Change % change Furniture and mattress $ 98,898 32.1
% $ 105,735 32.7 % $ (6,837 ) (6.5 )% (13.5 )% Home appliance
85,785 27.8 $ 86,434 26.8 $ (649 ) (0.8 ) (6.5 ) Consumer
electronics 65,670 21.3 70,263 21.8 (4,593 ) (6.5 ) (9.9 ) Home
office 22,747 7.5 26,108 8.1 (3,361 ) (12.9 ) (15.5 ) Other 4,956
1.6 4,582 1.4 374 8.2 (3.9 )
Product sales 278,056 90.3 293,122 90.8 (15,066 ) (5.1 ) (10.6 )
Repair service agreement commissions 26,354 8.5 26,038 8.1 316 1.2
(6.2 ) Service revenues 3,623 1.2 3,474 1.1
149 4.3 Total net sales 308,033 100.0 % 322,634 100.0
% (14,601 ) (4.5 ) (10.1 )% Other revenues 337 416
(79 ) Total revenues $ 308,370 $ 323,050 $ (14,680 )
(4.5 )%
The following provides a summary of items impacting the
performance of our product categories during the third quarter of
fiscal 2017 compared to the prior-year period:
- Furniture unit volume decreased 13.7%,
partially offset by a 6.8% increase in average selling price;
- Mattress unit volume decreased 7.3%,
partially offset by a 4.8% increase in average selling price;
- Home appliance average selling price
decreased 6.0%, partially offset by a 5.6% increase in unit volume.
Total sales for laundry increased 3.2%, cooking decreased 7.0%, and
refrigeration decreased 2.0%;
- Consumer electronic unit volume
decreased 11.8%, partially offset by a 6.9% increase in average
selling price. Television sales decreased 5.7% as unit volume
decreased 11.6%, partially offset by a 6.7% increase in average
selling price; and
- Home office unit volume decreased 12.2%
and average selling price decreased 1.0%.
Credit Segment Third Quarter Results (on a year-over-year
basis unless otherwise noted)
Credit revenues decreased 5.2% to $68.4 million. The decrease in
credit revenue was the result of lower credit insurance commissions
due to higher claim volumes in Louisiana after the floods and lower
average rates in new states, as well as the yield rate of 15.0%, 80
basis points lower than a year ago, partially offset by growth in
the average balance of the customer receivable portfolio of 3.9%.
The total customer portfolio balance was $1.5 billion at
October 31, 2016, rising 2.2%, or $32.5 million, from
October 31, 2015.
Provision for bad debts for the third quarter of fiscal 2017 was
$51.3 million, a decrease of $6.8 million from the same prior-year
period. This decrease was primarily a result of a smaller growth in
the allowance for bad debt due to slower portfolio growth and
underwriting changes made in the fourth quarter of fiscal 2016 and
during fiscal 2017, partially offset by higher net-charge offs.
Additional information on the credit portfolio and its
performance may be found in the Customer Receivable Portfolio
Statistics table included within this press release and in the
Company's Form 10-Q for the quarter ended October 31, 2016, to
be filed with the Securities and Exchange Commission.
Store Update
During the third quarter, the Company opened one new Conn's
HomePlus® store in North Carolina, bringing the total store count
to 113. During fiscal year 2017, we have opened ten new stores with
no additional openings planned for the remainder of the year. For
fiscal 2018, the Company has committed to opening only three new
locations.
Liquidity and Capital Resources
As of October 31, 2016, the Company had $146.0 million of
immediately available borrowing capacity under its $810 million
revolving credit facility, with an additional $658.7 million that
could become available upon increases in eligible inventory and
customer receivable balances under the borrowing base. The Company
also had $59.1 million of unrestricted cash available for use.
Outlook and Guidance
The following are the Company's expectations for the business
for the fourth quarter of fiscal 2017:
- Change in same store sales down
approximately 10.0%;
- Retail gross margin between 37.0% and
37.5% of total net sales;
- Selling, general and administrative
expenses between 27.75% and 28.75% of total revenues;
- Provision for bad debts between 16.75%
and 17.75% of the average total customer portfolio balance
(annualized);
- Credit segment finance charges and
other revenues between 18.75% and 19.25% of the average total
customer portfolio balance (annualized); and
- Interest expense between $25.5 million
and $26.5 million.
Conference Call Information
The Company will host a conference call on December 6, 2016
at 10 a.m. CT / 11 a.m. ET to discuss its third quarter fiscal 2017
financial results. Participants can join the call by dialing
877-754-5302 or 678-894-3020. The conference call will also be
broadcast simultaneously via webcast on a listen-only basis. A link
to the earnings release, webcast and third quarter fiscal 2017
conference call presentation will be available at ir.conns.com.
Replay of the telephonic call can be accessed through December
13, 2016 by dialing 855-859-2056 or 404-537-3406 and Conference ID:
24021929.
About Conn's, Inc.
Conn's is a specialty retailer currently operating over 110
retail locations in Alabama, Arizona, Colorado, Georgia, Louisiana,
Mississippi, Nevada, New Mexico, North Carolina, Oklahoma, South
Carolina, Tennessee and Texas. The Company's primary product
categories include:
- Furniture and mattress, including
furniture and related accessories for the living room, dining room
and bedroom, as well as both traditional and specialty
mattresses;
- Home appliance, including
refrigerators, freezers, washers, dryers, dishwashers and
ranges;
- Consumer electronics, including LED,
OLED, Ultra HD, and internet-ready televisions, Blu-ray players,
home theater and portable audio equipment; and
- Home office, including computers,
printers and accessories.
Additionally, Conn's offers a variety of products on a seasonal
basis. Unlike many of its competitors, Conn's provides flexible
in-house credit options for its customers in addition to
third-party financing programs and third-party rent-to-own payment
plans.
This press release contains forward-looking statements within
the meaning of the federal securities laws, including but not
limited to, the Private Securities Litigation Reform Act of 1995
that involve risks and uncertainties. Such forward-looking
statements include information concerning the Company's future
financial performance, business strategy, plans, goals and
objectives. Statements containing the words "anticipate,"
"believe," "could," "estimate," "expect," "intend," "may," "plan,"
"project," "should," or the negative of such terms or other similar
expressions are generally forward-looking in nature and not
historical facts. We can give no assurance that such statements
will prove to be correct, and actual results may differ materially.
A wide variety of potential risks, uncertainties, and other factors
could materially affect the Company's ability to achieve the
results either expressed or implied by the Company's
forward-looking statements including, but not limited to: general
economic conditions impacting the Company's customers or potential
customers; the Company's ability to execute periodic
securitizations of future originated customer loans including the
sale of any remaining residual equity on favorable terms; the
Company's ability to continue existing customer financing programs
or to offer new customer financing programs; changes in the
delinquency status of the Company's credit portfolio; unfavorable
developments in ongoing litigation; increased regulatory oversight;
higher than anticipated net charge-offs in the credit portfolio;
the success of the Company's planned opening of new stores;
technological and market developments and sales trends for the
Company's major product offerings; the Company's ability to protect
against cyber-attacks or data security breaches and to protect the
integrity and security of individually identifiable data of the
Company's customers and employees; the Company's ability to fund
its operations, capital expenditures, debt repayment and expansion
from cash flows from operations, borrowings from the Company's
revolving credit facility, and proceeds from accessing debt or
equity markets; the ability to continue the repurchase program; and
the other risks detailed in the Company's most recent reports filed
with the Securities and Exchange Commission, including but not
limited to, the Company's Annual Report on Form 10-K, the Company's
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. If
one or more of these or other risks or uncertainties materialize
(or the consequences of such a development changes), or should our
underlying assumptions prove incorrect, actual outcomes may vary
materially from those reflected in our forward-looking statements.
You are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this
press release. We disclaim any intention or obligation to update
publicly or revise such statements, whether as a result of new
information, future events or otherwise. All forward-looking
statements attributable to us, or to persons acting on our behalf,
are expressly qualified in their entirety by these cautionary
statements.
CONN-G
CONN'S, INC. AND SUBSIDIARIES CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share
amounts)
Three Months Ended October
31, Nine Months Ended October 31,
2016 2015 2016
2015 Revenues: Total net sales $ 308,033 $ 322,634 $
958,574 $ 946,059 Finance charges and other revenues 68,740
72,599 205,469 210,300
Total revenues
376,773 395,233 1,164,043
1,156,359 Costs and expenses: Cost of goods
sold 192,374 202,901 605,709 592,495 Selling, general and
administrative expenses 114,457 113,668 347,550 314,175 Provision
for bad debts 51,564 58,208 169,978 157,397 Charges and credits
1,987 2,540 5,408 4,172
Total costs
and expenses 360,382 377,317
1,128,645 1,068,239 Operating
income 16,391 17,916 35,398 88,120
Interest expense 23,470 19,702 73,504 39,185 Loss on extinguishment
of debt — 1,367 — 1,367
Income
(loss) before income taxes (7,079 ) (3,153
) (38,106 ) 47,568 Provision (benefit)
for income taxes (3,264 ) (732 ) (12,618 ) 17,774
Net
income (loss) $ (3,815 ) $
(2,421 ) $ (25,488 ) $
29,794 Earnings (loss) per share: Basic $ (0.12 ) $
(0.07 ) $ (0.83 ) $ 0.82 Diluted $ (0.12 ) $ (0.07 ) $ (0.83 ) $
0.81
Weighted average common shares outstanding: Basic
30,816 35,704 30,737 36,175 Diluted 30,816 35,704 30,737 36,694
CONN'S, INC. AND SUBSIDIARIES CONDENSED
RETAIL SEGMENT FINANCIAL INFORMATION
(unaudited)
(dollars in thousands)
Three Months Ended October
31, Nine Months Ended October 31,
2016 2015 2016
2015 Revenues: Product sales $ 278,056 $ 293,122 $
864,269 $ 858,487 Repair service agreement commissions 26,354
26,038 82,849 77,590 Service revenues 3,623
3,474 11,456 9,982 Total net
sales 308,033 322,634 958,574 946,059 Other revenues 337
416 1,268 1,224
Total revenues 308,370
323,050 959,842
947,283 Costs and expenses: Cost of goods sold
192,374 202,901 605,709 592,495 Selling, general and administrative
expenses 79,777 81,484 244,598 226,394 Provision for bad debts 286
120 811 513 Charges and credits 1,987 2,540
5,408 4,172
Total costs and
expenses 274,424 287,045
856,526 823,574
Operating income $ 33,946 $
36,005 $ 103,316 $
123,709 Retail gross margin 37.5 % 37.1 % 36.8 % 37.4
% Selling, general and administrative expense as percent of
revenues 25.9 % 25.2 % 25.5 % 23.9 % Operating margin 11.0 % 11.1 %
10.8 % 13.1 %
Store count: Beginning of period 112 95 103 90
Opened 1 6 10 13 Closed — — —
(2 ) End of period 113 101
113 101
CONN'S,
INC. AND SUBSIDIARIES CONDENSED CREDIT SEGMENT FINANCIAL
INFORMATION
(unaudited)
(dollars in thousands)
Three Months Ended October
31, Nine Months Ended October 31,
2016 2015 2016
2015 Revenues - Finance charges and other
revenues $ 68,403 $ 72,183
$ 204,201 $ 209,076
Costs and expenses: Selling, general and
administrative expenses 34,680 32,184 102,952 87,781 Provision for
bad debts 51,278 58,088 169,167
156,884
Total costs and expenses
85,958 90,272
272,119 244,665 Operating
loss (17,555 ) (18,089 )
(67,918 ) (35,589 ) Interest expense
23,470 19,702 73,504 39,185 Loss on extinguishment of debt —
1,367 — 1,367
Loss before income taxes $ (41,025 )
$ (39,158 ) $ (141,422 )
$ (76,141 ) Selling, general and
administrative expense as percent of revenues 50.7 % 44.6 % 50.4 %
42.0 % Selling, general and administrative expense as percent of
average total customer portfolio balance (annualized) 9.0 % 8.7 %
8.9 % 8.2 % Operating margin (25.7 )% (25.1 )% (33.3 )% (17.0 )%
CONN'S, INC. AND SUBSIDIARIES CUSTOMER
RECEIVABLE PORTFOLIO STATISTICS
(unaudited)
As of October 31, 2016
2015 Weighted average credit score of outstanding
balances 591 594 Average outstanding customer balance $ 2,354 $
2,370 Balances 60+ days past due as a percentage of total customer
portfolio balance 11.0 % 10.2 % Re-aged balance as a percentage of
total customer portfolio balance 16.0 % 14.0 % Account balances
re-aged more than six months (in thousands) $ 73,385 $ 58,502
Allowance for bad debts as a percentage of total customer portfolio
balance 13.3 % 12.0 % Percent of total customer portfolio balance
represented by no-interest option receivables 28.3 % 36.2 %
Three Months Ended October 31, Nine
Months Ended October 31, 2016
2015 2016 2015 Total applications processed
326,131 306,749 975,363 911,346 Weighted average origination credit
score of sales financed 610 613 610 615 Percent of total
applications approved and utilized 32.7 % 42.2 % 35.1 % 43.8 %
Average down payment 3.1 % 3.1 % 3.4 % 3.5 % Average income of
credit customer at origination $ 42,200 $ 40,900 $ 41,400 $ 40,600
Percent of retail sales paid for by: In-house financing, including
down payment received 72.3 % 79.9 % 69.8 % 82.6 % Third-party
financing 16.4 % 9.8 % 15.4 % 6.6 % Third-party rent-to-own options
5.2 % 4.1 % 5.1 % 4.4 % 93.9 %
93.8 % 90.3 % 93.6 %
CONN'S,
INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE
SHEETS
(unaudited)
(in thousands)
October 31, January
31, 2016 2016 Assets Current
Assets: Cash and cash equivalents $ 59,065 $ 12,254 Restricted
cash 130,979 64,151 Customer accounts receivable, net of allowances
688,011 743,931 Other accounts receivable 73,206 95,404 Inventories
204,537 201,969 Income taxes recoverable 9,930 10,774 Prepaid
expenses and other current assets 13,810 20,092
Total current assets 1,179,538 1,148,575
Long-term portion of customer accounts receivable, net of
allowances 619,159 631,645 Long-term restricted cash 35,497 14,425
Property and equipment, net 171,753 151,483 Deferred income taxes
66,910 70,219 Other assets 7,777 8,953
Total
assets $ 2,080,634 $ 2,025,300
Liabilities and Stockholders' Equity Current
liabilities: Current maturities of capital lease obligations $
752 $ 799 Accounts payable 116,469 86,797 Accrued expenses 52,068
39,374 Other current liabilities 23,795 19,155
Total current liabilities 193,084 146,125
Deferred rent 89,294 74,559 Long-term debt and capital lease
obligations 1,259,009 1,248,879 Other long-term liabilities
22,554 17,456
Total liabilities 1,563,941
1,487,019 Stockholders' equity 516,693 538,281
Total liabilities and stockholders' equity $
2,080,634 $ 2,025,300 CONN'S,
INC. AND SUBSIDIARIES NON-GAAP RECONCILIATIONS
(unaudited)
(dollars in thousands, except per share
data)
RETAIL SEGMENT OPERATING INCOME, AS ADJUSTED
Three Months Ended October 31,
Nine Months Ended October 31,
2016 2015 2016
2015 Retail segment operating income, as reported
$ 33,946 $ 36,005 $
103,316 $ 123,709 Adjustments: Store and
facility closure costs 954 212 954 637 Impairments from disposals
595 — 1,980 — Legal and professional fees related to the
exploration of strategic alternatives and securities-related
litigation 158 999 747 2,206 Employee severance 280 — 1,493 —
Executive management transition costs — 1,329
234 1,329
Retail segment
operating income, as adjusted $ 35,933
$ 38,545 $ 108,724
$ 127,881 Retail segment total revenues $
308,370 $ 323,050 $ 959,842 $ 947,283
Retail segment operating
margin: As reported 11.0 % 11.1 % 10.8 % 13.1 % As adjusted
11.7 % 11.9 % 11.3 % 13.5 %
NET INCOME (LOSS), AS
ADJUSTED, AND DILUTED EARNINGS (LOSS) PER SHARE AS ADJUSTED
Three Months Ended October 31, Nine Months
Ended October 31, 2016 2015 2016
2015 Net income (loss), as reported $
(3,815 ) $ (2,421 ) $
(25,488 ) $ 29,794 Adjustments: Changes
in estimates — — 13,168 — Store and facility closure costs 954 212
954 637 Impairments from disposals 595 — 1,980 — Legal and
professional fees related to the exploration of strategic
alternatives and securities-related litigation 158 999 747 2,206
Employee severance 280 — 1,493 — Executive management transition
costs — 1,329 234 1,329 Loss on extinguishment of debt — 1,367 —
1,367 Tax impact of adjustments (719 ) (906 )
(6,159 ) (2,072 )
Net income (loss), as adjusted
$ (2,547 ) $ 580 $
(13,071 ) $ 33,261 Weighted
average common shares outstanding - Diluted 30,816 35,704 30,737
36,694
Earnings (loss) per share: As reported $ (0.12 ) $
(0.07 ) $ (0.83 ) $ 0.81 As adjusted $ (0.08 ) $ 0.02 $ (0.43 ) $
0.91
Basis for presentation of non-GAAP
disclosures:
To supplement the condensed consolidated financial statements,
which are prepared and presented in accordance with accounting
principles generally accepted in the United States of America
("GAAP"), we also provide retail segment adjusted operating income,
retail adjusted operating margin, adjusted net income (loss), and
adjusted earnings (loss) per diluted share. These non-GAAP
financial measures are not meant to be considered as a substitute
for comparable GAAP measures and should be considered in addition
to results presented in accordance with GAAP. They are intended to
provide additional insight into our operations and the factors and
trends affecting the business. Management believes these non-GAAP
financial measures are useful to financial statement readers
because (1) they allow for additional transparency with respect to
key metrics we use in our financial and operational decision making
and (2) they are used by some of our institutional investors and
the analyst community to help them analyze our operating
results.
View source
version on businesswire.com: http://www.businesswire.com/news/home/20161206005416/en/
S.M. Berger & CompanyAndrew Berger, 216-464-6400
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