Conn’s, Inc. (NASDAQ/NM:CONN), a specialty retailer of consumer
electronics, home appliances, furniture, mattresses, computers and
lawn and garden products today announced its operating results for
the quarter ended October 31, 2011.
Significant items for the quarter include:
- The Company recorded a pretax charge of
$14.1 million, net of previously provided reserves, related to the
required adoption of recent accounting guidance related to troubled
debt restructuring, a pretax charge of $4.7 million for inventory
reserves related to aged product and a charge of $0.4 million
related to store closures, resulting in a reported net loss of
$12.7 million, or $0.40 per diluted share outstanding;
- Adjusted diluted earnings per share of
$0.02 for the third quarter of fiscal 2012, excluding the impact of
the adoption of the troubled debt restructuring accounting
guidance, inventory reserve adjustment and store closing costs, as
compared to an adjusted diluted loss per share of $0.12 for the
same period in the prior fiscal year, on a higher number of shares
outstanding in the current year period;
- Total revenues were $179.5 million, up
5.2% from the same period in the prior fiscal year, on a same store
sales increase of 18.9%;
- Retail segment adjusted retail gross
margin, excluding the inventory reserve adjustment, increased 240
basis points to 28.2%;
- Retail segment adjusted operating loss,
excluding the inventory reserve adjustment and store closing costs,
was reduced to $0.8 million for the quarter, as compared to $3.5
million for the same quarter in the prior fiscal year;
- Credit segment adjusted operating
income, excluding the required adoption of accounting guidance
related to troubled debt restructuring, decreased to $5.6 million
for the quarter, as compared to adjusted operating income of $6.8
million for the same quarter in the prior fiscal year;
- Credit segment 60+ day delinquency
percentage declined to 7.9%; and
- The Company initiated earnings guidance
for fiscal year 2013 of adjusted diluted earnings per share of
$1.05 to $1.15.
“I am encouraged by our sales performance, as we returned to
positive same store sales during the quarter,” commented Theodore
Wright, the Company’s CEO. “The improvements in our retail
operating performance carried over into the month of November, when
we experienced a same store sales increase of 10.5%.”
Retail Segment Results
The change in the retail segment’s total revenues was comprised
of a product sales increase of 11.6%, a repair service agreement
commission increase of 28.1% and a service revenue increase of
4.8%, as compared to the same quarter in the prior fiscal year. The
increase in sales during the quarter was driven by higher average
selling prices in all major categories and increased unit sales in
furniture and mattresses, home appliances and consumer
electronics.
The retail segment’s adjusted retail gross margin increased to
28.2% in the current-year quarter, from 25.8% in the same quarter
of the prior year. The increase in the retail gross margin was
driven by an increase in higher-margin furniture and mattress sales
as a percent of total product sales, improved gross margins in the
furniture and mattresses and home office categories, and increased
sales penetration of repair service agreements.
Credit Segment Results
The credit segment’s results, as compared to the same quarter in
the prior year, were impacted by:
- Reduced total portfolio balance and
delinquency levels, resulting in lower interest earnings and
reduced servicing costs;
- Changes in the Company’s charge-off
policy at July 31, 2011, and in its reaging policy during the third
quarter, that have resulted in:
- Accounts reaged more than twelve months
charging off more quickly, and thus an increase in the provision
for bad debts to account for the change in timing;
- A reduction in the number of accounts
reaged during the period, as compared to the prior year
period;
- A change in the approach to collections
of reaged accounts, allowing further reductions in servicing costs;
and
- The required adoption of accounting
guidance related to troubled debt restructuring, which, despite the
improving delinquency, reage and payment rate trends, resulted in
accelerating the recognition of expected losses on accounts that
qualify as restructured under the guidance, based on an estimate of
the present value of the account. As a result, the Company
increased its allowances for bad debts and cancellations of repair
service agreements and credit insurance by $14.1 million during the
quarter for accounts that qualified as restructured during the nine
months ended October 31, 2011.
The key credit portfolio performance metrics of the credit
segment for the quarter included:
- Net charge-offs for the third fiscal
quarter of 2012 totaled $5.4 million, as compared to $10.7 million
for the same period in the prior fiscal year, and benefited from
the impact of the charge-off policy change during the second
quarter, which accelerated charge-offs of delinquent accounts
during the second quarter of the current fiscal year;
- A 20 basis point improvement in the
60-209 day delinquency rate to 7.9% at October 31, 2011, from 8.1%
at October 31, 2010. The 60-209 day delinquency rate was 7.0% at
January 31, 2011;
- A 370 basis point improvement in the
percentage of the portfolio reaged to 16.0% at October 31, 2011,
from 19.7% at October 31, 2010. The percentage of the portfolio
reaged at January 31, 2011, was 19.8%; and
- The average monthly payment rate
(amount collected from customers as a percentage of the portfolio
balance) increased for the seventh consecutive quarter, versus the
same quarter in the prior year, to 5.39% for the quarter ended
October 31, 2011, from 5.10% for the quarter ended October 31,
2010.
More information on the credit portfolio and its performance may
be found in the table included with this press release and in the
Company’s Form 10-Q to be filed with the Securities and Exchange
Commission.
The Company reported a net loss of $12.7 million, or a diluted
loss per share of $0.40 for the third quarter of fiscal 2012,
compared to a net loss of $4.8 million, or a diluted loss per share
of $0.19, for the third quarter of fiscal 2011. The net loss for
the third quarter of fiscal 2012 was impacted by the Company’s
investments in advertising and sales staffing, in support of its
growth initiatives, to drive sales growth during the third and
fourth quarters of the current fiscal year and on an ongoing basis.
Adjusted net income, adjusted for the impact of the adoption of the
troubled debt restructuring accounting guidance, inventory reserve
adjustment and store closing costs, was $0.5 million, or adjusted
diluted earnings per share of $0.02, for the third quarter of
fiscal 2012.
Capital and Liquidity
As of October 31, 2011, there was $302.0 million, excluding $1.8
million of letters of credit, outstanding under the asset-based
loan facility. As of October 31, 2011, the Company had $80.1
million of immediately available borrowing capacity, and an
additional $46.1 million that could become available upon increases
in eligible inventory and customer receivable balances under the
borrowing base. Subsequent to the completion of the quarter, during
November 2011, the Company completed a $20 million expansion of its
asset-based loan facility, increasing the total commitment to $450
million to provide additional borrowing capacity to support future
growth.
Outlook and Guidance
The Company reduced its guidance for the fiscal year ending
January 31, 2012, to an adjusted diluted earnings per share range
of $0.55 to $0.65, excluding charges related to the Company’s
refinancing completed during the second quarter, costs related to
completed and future store closings, the impact of the required
adoption of accounting guidance related to troubled debt
restructuring and the additional inventory reserves recorded. The
following factors were considered in developing the guidance:
- Same stores sales are expected to be
positive during the fourth quarter;
- Retail segment retail gross margin is
expected to be between 28.0% and 29.0% during the fourth
quarter;
- The credit portfolio balance is
expected to grow during the fourth quarter;
- The provision for bad debts, including
adjustments related to the new troubled debt restructuring
accounting, is expected to be between 4.0% and 5.0%, on an
annualized basis, of the average portfolio balance outstanding
during the fourth quarter; and
- Selling, general and administrative
expense, as a percent of revenues, is expected to be consistent
with or slightly lower than prior year levels.
The Company initiated earnings guidance, for the fiscal year
ending January 31, 2013, of diluted earnings per share of $1.05 to
$1.15. The following factors were considered in developing the
guidance:
- Same stores sales are expected to be up
low to mid-single digits;
- Opening of between five and seven new
locations in new markets;
- Retail segment retail gross margin is
expected to be between 28.0% and 30.0%;
- The credit portfolio balance is
expected to increase;
- The provision for bad debts is expected
to be between 3.0% and 4.0% of the average portfolio balance
outstanding; and
- Selling, general and administrative
expense, as a percent of revenues, is expected to be between 28.5%
and 29.5% of total revenues.
Conference Call Information
Conn’s, Inc. will host a conference call and audio webcast
today, December 8, 2011, at 10:00 AM, CT, to discuss its financial
results for the quarter ended October 31, 2011. A link to the live
webcast, which will be archived for one year, and slides to be
referred to during the call will be available at IR.Conns.com.
Participants can join the call by dialing 877-754-5302 or
678-894-3020.
About Conn’s, Inc.
The Company is a specialty retailer currently operating 70
retail locations in Texas, Louisiana and Oklahoma: with 23 stores
in the Houston area, 17 in the Dallas/Fort Worth Metroplex, eight
in San Antonio, three in Austin, five in Southeast Texas, one in
Corpus Christi, four in South Texas, six in Louisiana and three in
Oklahoma. The Company’s primary product categories include:
- Home appliances, including
refrigerators, freezers, washers, dryers, dishwashers and
ranges;
- Consumer electronics, including LCD,
LED, 3-D, plasma and DLP televisions, camcorders, digital cameras,
Blu-ray and DVD players, video game equipment, portable audio, MP3
players and home theater products;
- Furniture and mattresses, including
furniture for the living room, dining room, bedroom and related
accessories and mattresses; and
- Home office, including desktop,
notebook, netbook and tablet computers, printers and computer
accessories.
Additionally, the Company offers a variety of products on a
seasonal basis, including lawn and garden equipment, and continues
to introduce additional product categories for the home to help
respond to its customers' product needs and to increase same store
sales. Unlike many of its competitors, the Company provides
flexible in-house credit options for its customers, in addition to
third-party financing programs and third-party rent-to-own payment
plans. In the last three years, the Company financed, on average,
approximately 60% of its retail sales under its in-house financing
plan.
This press release contains forward-looking statements that
involve risks and uncertainties. Such forward-looking statements
generally can be identified by the use of forward-looking
terminology such as "may," "will," "expect," "intend," "could,"
"estimate," "should," "anticipate," or "believe," or the negative
thereof or variations thereon or similar terminology. Although the
Company believes that the expectations reflected in such
forward-looking statements will prove to be correct, the Company
can give no assurance that such expectations will prove to be
correct. The actual future performance of the Company could differ
materially from such statements. Factors that could cause or
contribute to such differences include, but are not limited to:
- the Company's growth strategy and plans
regarding opening new stores and entering new markets;
- the Company's intention to update,
relocate or expand existing stores;
- the effect of closing or reducing the
hours of operation of existing stores;
- the Company's estimated capital
expenditures and costs related to the opening of new stores or the
update, relocation or expansion of existing stores;
- the Company's ability to introduce
additional product categories;
- sales trends in the home appliances,
consumer electronics and furniture and mattress industries and the
Company's ability to respond to those trends;
- the pricing actions and promotional
activities of competitors;
- relationships with the Company's key
suppliers;
- delinquency and loss trends in the
receivables portfolio;
- the Company’s ability to offer flexible
financing programs;
- changes in the Company’s collection
practices and policies;
- the Company’s ability to amend, renew
or replace its existing credit facilities before the maturity dates
of the facilities;
- the Company's ability to fund
operations, debt repayment and expansion from cash flow from
operations, borrowings on its revolving lines of credit and
proceeds from securitizations and from accessing debt or equity
markets;
- the ability of the Company to obtain
additional funding for the purpose of funding the receivables
generated by the Company;
- the ability of the Company to maintain
compliance with the covenants in its financing facilities or obtain
amendments or waivers of the covenants to avoid violations or
potential violations of the covenants;
- reduced availability under the
Company’s credit facilities as a result of borrowing base
requirements and the impact on the borrowing base calculation of
changes in the performance or eligibility of the customer
receivables financed by that facility;
- the ability of the financial
institutions providing lending facilities to the Company to fund
their commitments;
- the effect on borrowing costs of
downgrades by rating agencies or changes in laws or regulations on
the Company’s financing providers;
- the cost of any amended, renewed or
replacement credit facilities;
- interest rates;
- general economic and financial market
conditions;
- weather conditions in the Company's
markets;
- the outcome of litigation or government
investigations;
- changes in the Company's stock price;
and
- the actual number of shares of common
stock outstanding.
Further information on these risk factors is included in the
Company's filings with the Securities and Exchange Commission,
including the Company's annual report on Form 10-K filed on April
1, 2011. You are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this
press release. Except as required by law, the Company is not
obligated to publicly release any revisions to these
forward-looking statements to reflect the events or circumstances
after the date of this press release or to reflect the occurrence
of unanticipated events.
Conn's, Inc.
CONDENSED, CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(in thousands, except earnings per share)
Three Months EndedOctober
31,
Nine Months EndedOctober
31,
2010 2011 2010 2011 Revenues
Total net sales $ 135,650 $ 149,967 $ 474,694 $ 456,287 Finance
charges and other 34,914 29,578
106,719 98,081
Total revenues 170,564
179,545 581,413 554,368 Cost and
expenses
Cost of goods and parts sold, including
warehousing and occupancy costs
101,188 114,669 350,113 333,106 Selling, general and administrative
expense 55,288 59,623 174,589 172,062
Costs and impairment charges related to
store closings
- 375 - 4,033 Provision for bad debts 10,813
19,322 28,786 31,852
Total cost and
expenses 167,289 193,989
553,488 541,053
Operating income (loss) 3,275 (14,444 )
27,925 13,315 Interest expense, net 7,722 3,919
20,234 18,479
Costs related to financing transactions
not completed
2,896 - 2,896 - Loss from early extinguishment of debt - - - 11,056
Other income (expense), net (17 ) (5 ) 167
81
Income (loss) before income taxes
(7,326 ) (18,358 ) 4,628
(16,301 ) Provision (benefit) for income taxes
(2,546 ) (5,635 )
2,123 (4,877 ) Net income (loss)
$ (4,780 ) $ (12,723 )
$ 2,505 $ (11,424 )
Earnings (loss) per share Basic $ (0.19 ) $ (0.40 ) $ 0.10 $
(0.36 ) Diluted $ (0.19 ) $ (0.40 ) $ 0.10 $ (0.36 )
Average
common shares outstanding Basic 24,951
31,881
24,941 31,819 Diluted 24,951
31,881
24,944 31,819
Notes:
- Previously reported Earnings per share
and Average common shares outstanding amounts have been corrected
to retroactively adjust for the impact of the Company’s November
2010 common stock rights offering.
- Previously reported Finance charges and
other amounts have been revised to correct the Company’s prior
estimates related to its change from recording interest income
based on the Rule of 78’s to the interest method.
Conn's, Inc. - Retail Segment CONDENSED FINANCIAL
INFORMATION (unaudited) (in thousands, except store counts)
Three Months EndedOctober
31,
Nine Months EndedOctober
31,
2010 2011 2010 2011 Revenues
Product sales $ 125,817 $ 140,404 $ 439,492 $ 422,914 Repair
service agreement commissions, net 8,275 10,602 28,616 29,449
Service revenues 3,769 3,950
12,709 11,650 Total net sales 137,861
154,956 480,817 464,013
Finance charges and other 215 60
681 678
Total revenues
138,076 155,016
481,498 464,691 Cost and
expenses
Cost of goods sold, including warehousing
and occupancy costs
99,546 113,022 343,979 328,133
Cost of parts sold, including warehousing
and occupancy costs
1,642 1,647 6,134 4,973 Selling, general and administrative expense
40,148 45,721 126,689 128,653
Costs and impairment charges related to
store closings
- 375 - 4,033 Provision for bad debts 271 135
668 469
Total cost and
expenses 141,607 160,900
477,470 466,261
Operating income (loss) (3,531 ) (5,884
) 4,028 (1,570 ) Other (income)
expense, net (17 ) (5 ) 167 81
Segment income (loss) before income taxes $
(3,514 ) $ (5,879 ) $
3,861 $ (1,651 ) Retail
gross margin 25.8 % 25.2 % 26.5 % 27.5 %
Selling, general and administrative
expense as percent of revenues
29.1 % 29.5 % 26.3 % 27.7 % Operating margin (2.6 %) (3.8 %) 0.8 %
(0.3 %) Number of stores, end of period 76 70 76 70
Conn's, Inc. - Credit Segment
CONDENSED FINANCIAL INFORMATION (unaudited) (in thousands)
Three Months EndedOctober
31,
Nine Months EndedOctober
31,
2010 2011 2010 2011
Revenues Product sales $ - $ - $ - $ - Repair service
agreement commissions, net (2,211 ) (4,989 ) (6,123 ) (7,726 )
Service revenues - - -
- Total net sales (2,211 ) (4,989 )
(6,123 ) (7,726 ) Finance charges and other
34,699 29,518 106,038
97,403
Total revenues 32,488
24,529 99,915
89,677 Cost and expenses Selling, general and
administrative expense 15,140 13,902 47,900 43,409 Provision for
bad debts 10,542 19,187 28,118
31,383
Total cost and expenses
25,682 33,089
76,018 74,792 Operating
income (loss) 6,806 (8,560 ) 23,897
14,885 Interest expense, net 7,722 3,919 20,234 18,479
Costs related to financing transactions
not completed
2,896 - 2,896 - Loss from early extinguishment of debt -
- - 11,056
Segment income (loss) before income taxes $
(3,812 ) $ (12,479 ) $
767 $ (14,650 )
Selling, general and administrative
expense as percent of revenues
46.6 % 56.7 % 47.9 % 48.4 % Operating margin 20.9 % -34.9 % 23.9 %
16.6 %
MANAGED
PORTFOLIO STATISTICS (dollars in thousands, except average
outstanding balance per account)
Year ended January
31, Nine Months ended October 31, 2009
2010 2011 2010 2011 Total
accounts 537,957 551,312 525,950 521,316 472,791 Total outstanding
balance $ 753,513 $ 736,041 $ 675,766 $ 676,994 $ 605,650 Average
outstanding balance per account $ 1,401 $ 1,335 $ 1,285 $ 1,299 $
1,281
Weighted average origination credit score
of sales financed
612 620 624 627 623
Weighted average credit score of
outstanding balances
585 586 591 590 602 Balance 60+ days delinquent $ 55,141 $ 73,391 $
58,042 $ 64,934 $ 47,653 Percent 60+ days delinquent 7.3 % 10.0 %
8.6 % 9.6 % 7.9 % Percent 60-209 days delinquent 6.0 % 8.3 % 7.0 %
8.1 % 7.9 % Percent of portfolio reaged 18.8 % 20.2 % 19.8 % 19.7 %
16.0 % Weighted average monthly payment rate (YTD) 5.5 % 5.2 % 5.3
% 5.4 % 5.7 % Net charge-off ratio (YTD annualized) 3.3 % 4.1 % 5.6
% 5.5 % 5.5 %
Notes: The net charge-off ratio for the nine months ended
October 31, 2011, is impacted by the additional $4.4 million
charged-off as a result of the charge-off policy change earlier in
the fiscal year, which impacted the net charge-off ratio by
approximately 90 basis points.
Conn's, Inc. CONDENSED, CONSOLIDATED BALANCE
SHEETS (in thousands)
January 31,
October 31, 2011 2011 Assets
Current assets Cash and cash equivalents $ 10,977 $ 6,510
Other accounts receivable, net 30,476 30,515 Customer accounts
receivable, net 342,754 305,623 Inventories 82,354 96,703 Deferred
income taxes 19,477 21,388 Prepaid expenses and other assets
10,418 10,623
Total current assets 496,456
471,362 Non-current deferred income tax asset
8,009 9,721 Long-term customer accounts
receivable, net 289,965 255,346 Total property
and equipment, net 46,890 40,619 Other assets,
net 10,118 10,004 Total
assets $ 851,438 $ 787,052
Liabilities and Stockholders' Equity Current
Liabilities Current portion of long-term debt $ 167 $ 679
Accounts payable 57,740 59,480 Accrued compensation and related
expenses 5,477 7,425 Accrued expenses 25,423 29,579 Other current
liabilities 30,917 29,109
Total current
liabilities 119,724 126,272 Long-term debt
373,569 309,997 Other long-term liabilities
5,248 6,856 Total stockholders' equity
352,897 343,927 Total liabilities and
stockholders' equity $ 851,438 $
787,052
NON-GAAP RECONCILIATION OF NET INCOME (LOSS), AS ADJUSTED
AND DILUTED EARNINGS (LOSS) PER SHARE, AS ADJUSTED
(unaudited) (in thousands, except earnings per share)
Three Months EndedOctober
31,
Nine Months EndedOctober
31,
2010 2011 2010 2011 Net income
(loss), as reported $ (4,780 ) $
(12,723 ) $ 2,505 $
(11,424 ) Adjustments: Costs related to financing
transactions not completed 2,896 - 2,896 - Loss from early
extinguishment of debt - - - 11,056 Costs and impairment charges
related to store closings - 375 - 4,033 Severance costs - - - 813
Inventory reserve adjustment - 4,669 - 4,669
Charge to record reserves required by the
adoption of troubled debt restructuring accounting guidance
- 27,487 - 27,487
Reserves previously provided related to
accounts considered restructured under the troubled debt
restructuring accounting guidance
- (13,350 ) - (13,350 ) Tax impact of adjustments (1,019 )
(5,961 ) (1,019 ) (12,166 )
Net income
(loss), as adjusted $ (2,903 ) $
497 $ 4,382 $
11,118 Average common shares outstanding -
Diluted 24,951 31,881 24,944 31,819
Earnings (loss) per
share - Diluted As reported $ (0.19 ) $ (0.40 ) $ 0.10 $ (0.36
) As adjusted $ (0.12 ) $ 0.02 $ 0.18 $ 0.35
NON-GAAP RECONCILIATION OF RETAIL
SEGMENT OPERATING INCOME (LOSS), AS ADJUSTED (unaudited)
(in thousands)
Three Months EndedOctober
31,
Nine Months EndedOctober
31,
2010 2011 2010 2011 Operating income
(loss), as reported $ (3,531 ) $
(5,884 ) $ 4,028 $ (1,570
) Adjustments:
Inventory reserve adjustment
- 4,669 - 4,669
Costs and impairment charges related to
store closings
- 375 - 4,033
Operating income (loss), as adjusted $ (3,531
) $ (840 ) $ 4,028
$ 7,132
NON-GAAP RECONCILIATION OF RETAIL SEGMENT GROSS
MARGIN, AS ADJUSTED (unaudited) (in thousands)
Three Months EndedOctober
31,
Nine Months EndedOctober
31,
2010 2011 2010 2011 Product sales, as
reported $ 125,817 $ 140,404 $ 439,492 $ 422,914
Repair service agreement commissions, net,
as reported
8,275 10,602 28,616
29,449 134,092 151,006 468,108 452,363
Cost of goods sold, including warehousing
and occupancy costs, as reported
99,546 113,022 343,979
328,133
Gross Profit, as reported $
34,546 $ 37,984 $
124,129 $ 124,230 Gross
Margin, as reported 25.8 % 25.2 %
26.5 % 27.5 % Adjustments: Inventory
reserve adjustment - 4,669 -
4,669
Gross Profit, as adjusted
$ 34,546 $ 42,653
$ 124,129 $ 128,899
Gross Margin, as adjusted 25.8 % 28.2
% 26.5 % 28.5 %
NON-GAAP RECONCILIATION OF CREDIT SEGMENT OPERATING
INCOME (LOSS), AS ADJUSTED (unaudited) (in thousands)
Three Months EndedOctober
31,
Nine Months EndedOctober
31,
2010 2011 2010 2011 Operating income
(loss), as reported $ 6,806 $
(8,560 ) $ 23,897 $
14,885 Adjustments:
Charge to record reserves required by the
adoption of troubled debt restructuring accounting guidance
- 27,487 27,487
Reserves previously recorded related to
accounts considered restructured under the troubled debt
restructuring accounting guidance
- (13,350 ) - (13,350 )
Operating
income, as adjusted $ 6,806 $ 5,577
$ 23,897 $ 29,022
Basis for presentation of non-GAAP
disclosures:
To supplement the Company’s consolidated financial statements,
which are prepared and presented in accordance with generally
accepted accounting principles ("GAAP"), the Company also provides
adjusted net income and adjusted earnings per diluted share
information. These non-GAAP financial measures are not meant to be
considered as a substitute for comparable GAAP measures but should
be considered in addition to results presented in accordance with
GAAP, and are intended to provide additional insight into the
Company’s operations and the factors and trends affecting the
Company’s business. The Company’s management believes these
non-GAAP financial measures are useful to financial statement
readers because (1) they allow for greater transparency with
respect to key metrics the Company uses in its financial and
operational decision making and (2) they are used by some of its
institutional investors and the analyst community to help them
analyze the Company’s operating results.
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