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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For
the quarterly period ended July 31, 2021
or
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☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For
the transition period from
to
.
Commission File Number 001-34956
CONN’S, INC.
(Exact name of registrant as specified in its charter)
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Delaware |
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06-1672840 |
(State or other jurisdiction of incorporation or
organization) |
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(I.R.S. Employer Identification Number) |
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2445 Technology Forest Blvd.,
Suite 800,
The Woodlands, TX
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77381 |
(Address of principal executive offices)
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(Zip Code)
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Registrant’s
telephone number, including area code: (936)
230-5899
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class |
Trading Symbol |
Name of Each Exchange on Which Registered |
Common Stock, par value $0.01 per share |
CONN |
NASDAQ Global Select Market |
Indicate by check mark whether the registrant (l) 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 ☒ No ☐
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
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Large accelerated filer
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Accelerated filer
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☒
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Non-accelerated filer |
☐
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Smaller reporting company |
☐
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Emerging growth company
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☐
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If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act ☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act).
Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s
classes of common stock, as of August 23,
2021:
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Class |
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Outstanding |
Common stock, $0.01 par value per share |
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29,483,140 |
CONN’S, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE FISCAL QUARTER ENDED JULY 31, 2021
TABLE OF CONTENTS
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Page No. |
PART I. |
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FINANCIAL INFORMATION |
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Item 1. |
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Financial Statements |
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Item 2. |
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Item 3. |
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Item 4. |
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PART II. |
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OTHER INFORMATION |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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This Quarterly Report on Form 10-Q includes our trademarks such as
“Conn’s,” “Conn’s HomePlus,” “YE$ YOU’RE APPROVED,” “YES Money,”
“YE$ Money,” “YES Lease,” “YE$ Lease,” and our logos, which are
protected under applicable intellectual property laws and are the
property of Conn’s, Inc. This report also contains
trademarks, service marks, trade names and copyrights of other
companies, which are the property of their respective owners.
Solely for convenience, trademarks and trade names referred to in
this Quarterly Report may appear without the ® or TM symbols, but
such references are not intended to indicate, in any way, that we
will not assert, to the fullest extent under applicable law, our
rights or the rights of the applicable licensor to these trademarks
and trade names.
References to “we,” “our,” “us,” “the Company,” “Conn’s” or “CONN”
refer to Conn’s, Inc. and, as apparent from the context, its
consolidated bankruptcy-remote variable-interest entities (“VIEs”),
and its wholly-owned subsidiaries.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONN’S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited and dollars in thousands, except per share
amounts)
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July 31,
2021 |
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January 31,
2021 |
Assets |
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Current assets: |
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Cash and cash equivalents |
$ |
8,736 |
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$ |
9,703 |
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Restricted cash (includes VIE balances of $28,911 and $48,622,
respectively)
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30,961 |
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50,557 |
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Customer accounts receivable, net of allowances (includes VIE
balances of $159,338 and $259,811, respectively)
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461,491 |
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478,734 |
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Other accounts receivable |
55,260 |
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61,716 |
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Inventories |
223,662 |
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196,463 |
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Income taxes receivable |
32,223 |
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|
38,059 |
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Prepaid expenses and other current assets |
20,725 |
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|
8,831 |
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Total current assets |
833,058 |
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844,063 |
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Long-term portion of customer accounts receivable, net of
allowances (includes VIE balances of $70,927 and $184,304,
respectively)
|
415,208 |
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430,749 |
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Property and equipment, net |
186,072 |
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190,962 |
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Operating lease right-of-use assets |
258,702 |
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265,798 |
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Deferred income taxes |
— |
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|
9,448 |
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Other assets |
15,907 |
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14,064 |
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Total assets |
$ |
1,708,947 |
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$ |
1,755,084 |
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Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Current finance lease obligations |
$ |
1,371 |
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$ |
934 |
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Accounts payable |
89,001 |
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|
69,367 |
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Accrued compensation and related expenses |
27,366 |
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24,944 |
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Accrued expenses |
71,712 |
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58,046 |
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Operating lease liability - current |
54,800 |
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|
44,011 |
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Income taxes payable |
2,233 |
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|
1,447 |
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Deferred revenues and other credits |
14,937 |
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|
13,007 |
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Total current liabilities |
261,420 |
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211,756 |
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Operating lease liability - non current |
338,289 |
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354,598 |
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Long-term debt and finance lease obligations (includes VIE balances
of $214,562 and $411,551, respectively)
|
438,242 |
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608,635 |
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Deferred tax liability |
7,803 |
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— |
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Other long-term liabilities |
20,743 |
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22,940 |
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Total liabilities |
1,066,497 |
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1,197,929 |
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Commitments and contingencies |
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Stockholders’ equity: |
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Preferred stock ($0.01 par value, 1,000,000 shares authorized; none
issued or outstanding)
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— |
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— |
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Common stock ($0.01 par value, 100,000,000 shares authorized;
32,967,808 and 32,711,623 shares issued, respectively)
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329 |
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327 |
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Treasury stock (at cost; 3,485,441 shares and 3,485,441 shares,
respectively)
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(66,290) |
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(66,290) |
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Additional paid-in capital |
134,999 |
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132,108 |
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Retained earnings |
573,412 |
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491,010 |
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Total stockholders’ equity |
642,450 |
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557,155 |
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Total liabilities and stockholders’ equity
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$ |
1,708,947 |
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$ |
1,755,084 |
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See notes to condensed consolidated financial
statements.
CONN’S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and dollars in thousands, except per share
amounts)
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Three Months Ended
July 31, |
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Six Months Ended
July 31, |
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2021 |
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2020 |
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2021 |
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2020 |
Revenues: |
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Product sales |
$ |
320,245 |
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$ |
256,142 |
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$ |
589,456 |
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$ |
463,340 |
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Repair service agreement commissions |
23,700 |
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20,164 |
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42,831 |
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40,265 |
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Service revenues |
2,840 |
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3,430 |
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5,794 |
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6,461 |
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Total net sales |
346,785 |
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279,736 |
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638,081 |
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510,066 |
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Finance charges and other revenues |
71,598 |
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87,180 |
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144,004 |
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174,010 |
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Total revenues |
418,383 |
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366,916 |
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782,085 |
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684,076 |
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Costs and expenses: |
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Cost of goods sold |
216,042 |
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176,623 |
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400,921 |
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323,637 |
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Selling, general and administrative expense |
137,870 |
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115,278 |
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263,919 |
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228,285 |
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Provision for bad debts |
10,262 |
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32,045 |
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(6,874) |
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149,371 |
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Charges and credits |
— |
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|
1,534 |
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— |
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3,589 |
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Total costs and expenses |
364,174 |
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325,480 |
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657,966 |
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704,882 |
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Operating income (loss) |
54,209 |
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41,436 |
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124,119 |
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(20,806) |
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Interest expense |
6,088 |
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|
13,222 |
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15,292 |
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|
28,215 |
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Loss on extinguishment of debt |
— |
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— |
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|
1,218 |
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— |
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Income (loss) before income taxes |
48,121 |
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|
28,214 |
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|
107,609 |
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(49,021) |
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Provision (benefit) for income taxes |
11,117 |
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|
7,694 |
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|
25,207 |
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(13,339) |
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Net income (loss) |
$ |
37,004 |
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$ |
20,520 |
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$ |
82,402 |
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$ |
(35,682) |
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Income (loss) per share: |
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Basic |
$ |
1.26 |
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$ |
0.71 |
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$ |
2.80 |
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$ |
(1.23) |
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Diluted |
$ |
1.22 |
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$ |
0.70 |
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$ |
2.74 |
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$ |
(1.23) |
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Weighted average common shares outstanding: |
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Basic |
29,438,605 |
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29,070,607 |
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29,382,162 |
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28,948,216 |
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Diluted |
30,212,448 |
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29,140,546 |
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30,072,401 |
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28,948,216 |
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See notes to condensed consolidated financial
statements.
CONN’S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY
(unaudited and in thousands, except for number of
shares)
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Additional Paid-in Capital |
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Common Stock |
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Retained Earnings |
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Treasury Stock |
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Shares |
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Amount |
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Shares |
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Amount |
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Total |
Balance January 31, 2021 |
32,711,623 |
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|
$ |
327 |
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$ |
132,108 |
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$ |
491,010 |
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(3,485,441) |
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$ |
(66,290) |
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$ |
557,155 |
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Exercise of options and vesting of restricted stock, net of
withholding tax |
115,159 |
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|
1 |
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(999) |
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|
— |
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|
— |
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|
— |
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(998) |
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Issuance of common stock under Employee Stock Purchase
Plan |
18,240 |
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|
— |
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|
180 |
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|
— |
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|
— |
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— |
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|
180 |
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Stock-based compensation |
— |
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— |
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|
2,039 |
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— |
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— |
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— |
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|
2,039 |
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Net income |
— |
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|
— |
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— |
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|
45,398 |
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— |
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|
— |
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|
45,398 |
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Balance April 30, 2021 |
32,845,022 |
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$ |
328 |
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$ |
133,328 |
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$ |
536,408 |
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(3,485,441) |
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$ |
(66,290) |
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$ |
603,774 |
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Exercise of options and vesting of restricted stock, net of
withholding tax |
112,223 |
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|
1 |
|
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(229) |
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|
— |
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|
— |
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|
— |
|
|
(228) |
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Issuance of common stock under Employee Stock Purchase
Plan |
10,563 |
|
|
— |
|
|
187 |
|
|
— |
|
|
— |
|
|
— |
|
|
187 |
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Stock-based compensation |
— |
|
|
— |
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|
1,713 |
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|
— |
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|
— |
|
|
— |
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|
1,713 |
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Net income |
— |
|
|
— |
|
|
— |
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|
37,004 |
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|
— |
|
|
— |
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|
37,004 |
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Balance July 31, 2021 |
32,967,808 |
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|
$ |
329 |
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|
$ |
134,999 |
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$ |
573,412 |
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(3,485,441) |
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$ |
(66,290) |
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$ |
642,450 |
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Additional Paid-in Capital |
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Common Stock |
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Retained Earnings |
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Treasury Stock |
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Shares |
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Amount |
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Shares |
|
Amount |
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Total |
Balance January 31, 2020 |
32,125,055 |
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|
$ |
321 |
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$ |
122,513 |
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$ |
570,636 |
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(3,485,441) |
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$ |
(66,290) |
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$ |
627,180 |
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Adoption of ASU 2016-13 |
— |
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|
— |
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|
— |
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(76,490) |
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|
— |
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|
— |
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(76,490) |
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Exercise of options and vesting of restricted stock, net of
withholding tax |
321,468 |
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3 |
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(1,288) |
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|
— |
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|
— |
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|
— |
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(1,285) |
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Issuance of common stock under Employee Stock Purchase
Plan |
47,450 |
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|
1 |
|
|
176 |
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|
— |
|
|
— |
|
|
— |
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|
177 |
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Stock-based compensation |
— |
|
|
— |
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|
2,430 |
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|
— |
|
|
— |
|
|
— |
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|
2,430 |
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Net loss |
— |
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|
— |
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|
— |
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(56,202) |
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|
— |
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|
— |
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|
(56,202) |
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Balance April 30, 2020 |
32,493,973 |
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|
$ |
325 |
|
|
$ |
123,831 |
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$ |
437,944 |
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|
(3,485,441) |
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$ |
(66,290) |
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$ |
495,810 |
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Exercise of options and vesting of restricted stock, net of
withholding tax |
70,271 |
|
|
1 |
|
|
(159) |
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|
— |
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|
— |
|
|
— |
|
|
(158) |
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Issuance of common stock under Employee Stock Purchase
Plan |
51,643 |
|
|
— |
|
|
160 |
|
|
— |
|
|
— |
|
|
— |
|
|
160 |
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Stock-based compensation |
— |
|
|
— |
|
|
2,254 |
|
|
— |
|
|
— |
|
|
— |
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|
2,254 |
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Net income |
— |
|
|
— |
|
|
— |
|
|
20,520 |
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|
— |
|
|
— |
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|
20,520 |
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Balance July 31, 2020 |
32,615,887 |
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|
$ |
326 |
|
|
$ |
126,086 |
|
|
$ |
458,464 |
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|
(3,485,441) |
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|
$ |
(66,290) |
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$ |
518,586 |
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See notes to condensed consolidated financial
statements.
CONN’S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
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Six Months Ended July 31, |
|
2021 |
|
2020 |
Cash flows from operating activities: |
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Net income (loss) |
$ |
82,402 |
|
|
$ |
(35,682) |
|
Adjustments to reconcile net income (loss) to net cash from
operating activities: |
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Depreciation |
22,836 |
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|
19,929 |
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Change in right-of-use asset |
17,005 |
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|
15,328 |
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Amortization of debt issuance costs |
3,254 |
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|
4,237 |
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Provision for bad debts and uncollectible interest |
8,071 |
|
|
181,286 |
|
Stock-based compensation expense |
3,752 |
|
|
4,683 |
|
Charges, net of credits |
— |
|
|
3,589 |
|
Deferred income taxes |
17,251 |
|
|
(2,472) |
|
Loss on extinguishment of debt |
1,218 |
|
|
— |
|
Loss on disposal of property and equipment |
104 |
|
|
— |
|
Tenant improvement allowances received from landlords |
10,864 |
|
|
10,277 |
|
Change in operating assets and liabilities: |
|
|
|
Customer accounts receivable |
24,873 |
|
|
63,745 |
|
Other accounts receivables |
6,296 |
|
|
13,068 |
|
Inventories |
(27,199) |
|
|
38,863 |
|
Other assets |
(11,390) |
|
|
690 |
|
Accounts payable |
19,633 |
|
|
13,442 |
|
Accrued expenses |
17,907 |
|
|
2,485 |
|
Operating leases |
(26,293) |
|
|
(20,086) |
|
Income taxes |
5,622 |
|
|
(9,578) |
|
Deferred revenues and other credits |
733 |
|
|
1,921 |
|
Net cash provided by operating activities |
176,939 |
|
|
305,725 |
|
Cash flows from investing activities: |
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Purchases of property and equipment |
(19,162) |
|
|
(32,459) |
|
Net cash used in investing activities |
(19,162) |
|
|
(32,459) |
|
Cash flows from financing activities: |
|
|
|
Proceeds from issuance of asset-backed notes |
62,900 |
|
|
— |
|
Payments on asset-backed notes |
(261,356) |
|
|
(315,225) |
|
Borrowings under revolving credit facility |
740,850 |
|
|
835,717 |
|
Payments on revolving credit facility |
(573,850) |
|
|
(800,917) |
|
Payments of debt issuance costs and amendment fees |
(4,231) |
|
|
(2,055) |
|
Proceeds from stock issued under employee benefit plans |
367 |
|
|
338 |
|
Tax payments associated with equity-based compensation
transactions |
(1,227) |
|
|
(1,444) |
|
Payment for extinguishment of debt |
(141,279) |
|
|
— |
|
Other |
(514) |
|
|
(314) |
|
Net cash used in financing activities |
(178,340) |
|
|
(283,900) |
|
Net change in cash, cash equivalents and restricted
cash |
(20,563) |
|
|
(10,634) |
|
Cash, cash equivalents and restricted cash, beginning of
period |
60,260 |
|
|
80,855 |
|
Cash, cash equivalents and restricted cash, end of
period |
$ |
39,697 |
|
|
$ |
70,221 |
|
Non-cash investing and financing activities: |
|
|
|
Right-of-use assets obtained in exchange for new finance lease
liabilities |
$ |
493 |
|
|
$ |
1,045 |
|
Right-of-use assets obtained in exchange for new operating lease
liabilities |
$ |
12,415 |
|
|
$ |
47,950 |
|
Property and equipment purchases not yet paid |
$ |
5,962 |
|
|
$ |
11,662 |
|
Supplemental cash flow data: |
|
|
|
Cash interest paid |
$ |
10,931 |
|
|
$ |
23,976 |
|
Cash income taxes paid (refunded), net |
$ |
2,334 |
|
|
$ |
(1,026) |
|
See notes to condensed consolidated financial
statements.
CONN’S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting
Policies
Business.
Conn’s, Inc., a Delaware corporation, is a holding company
with no independent assets or operations other than its
investments in its subsidiaries. References to “we,” “our,” “us,”
“the Company,” “Conn’s” or “CONN” refer to Conn’s, Inc. and, as
apparent from the context, its subsidiaries. Conn’s is a leading
specialty retailer that offers a broad selection of quality,
branded durable consumer goods and related services in addition to
proprietary credit solutions for its core credit-constrained
consumers. We operate an integrated and scalable business through
our retail stores and website. Our complementary product offerings
include furniture and mattresses, home appliances, consumer
electronics and home office products from leading global brands
across a wide range of price points. Our credit offering provides
financing solutions to a large, under-served population of
credit-constrained consumers who typically have limited credit
alternatives.
We operate two reportable segments: retail and credit. Our retail
stores bear the “Conn’s HomePlus” name with all of our stores
providing the same products and services to a common customer
group. Our stores follow the same procedures and methods in
managing their operations. Our retail business and credit business
are operated independently from each other. The credit segment is
dedicated to providing short- and medium-term financing to our
retail customers. The retail segment is not involved in credit
approval decisions or collection efforts. Our management evaluates
performance and allocates resources based on the operating results
of the retail and credit segments.
Basis of Presentation.
The accompanying unaudited Condensed Consolidated Financial
Statements of Conn’s, Inc. and its wholly-owned subsidiaries,
including its Variable Interest Entities (“VIEs”), have been
prepared by management in accordance with U.S. generally accepted
accounting principles (“GAAP”) and prevailing industry practice for
interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, we do not
include all of the information and footnotes required by GAAP for
complete financial statements. The accompanying financial
statements reflect all adjustments that are, in the opinion of
management, necessary for a fair presentation of the results for
the interim periods presented. All such adjustments are of a normal
recurring nature. The condensed consolidated financial position,
results of operations and cash flows for these interim periods are
not necessarily indicative of the results that may be expected in
future periods. The balance sheet at January 31, 2021 has been
derived from the audited financial statements at that date. The
financial statements should be read in conjunction with the audited
consolidated financial statements and the notes thereto included in
our Annual Report on Form 10-K for the fiscal year ended
January 31, 2021 (the “2021 Form 10-K”) filed with the United
States Securities and Exchange Commission (the “SEC”) on March 31,
2021.
Fiscal Year.
Our fiscal year ends on January 31. References to a fiscal year
refer to the calendar year in which the fiscal year
ends.
Principles of Consolidation.
The Condensed Consolidated Financial Statements include the
accounts of Conn’s, Inc. and its wholly-owned subsidiaries. All
material intercompany transactions and balances have been
eliminated in consolidation.
Variable Interest Entities.
VIEs are consolidated if the Company is the primary beneficiary.
The primary beneficiary of a VIE is the party that has (i) the
power to direct the activities that most significantly impact the
performance of the VIE and (ii) the obligation to absorb losses or
the right to receive benefits that could potentially be significant
to the VIE.
We securitize customer accounts receivables by transferring the
receivables to various bankruptcy-remote VIEs. We retain the
servicing of the securitized portfolio and have a variable interest
in each corresponding VIE by holding the residual equity. We have
determined that we are the primary beneficiary of each respective
VIE because (i) our servicing responsibilities for the securitized
portfolio give us the power to direct the activities that most
significantly impact the performance of the VIE and (ii) our
variable interest in the VIE gives us the obligation to absorb
losses and the right to receive residual returns that potentially
could be significant. As a result, we consolidate the respective
VIEs within our Condensed Consolidated Financial
Statements.
Refer to Note 4,
Debt and Financing Lease Obligations,
and Note 6,
Variable Interest Entities,
for additional information.
Use of Estimates.
The preparation of financial statements in accordance with GAAP
requires management to make informed judgments and estimates that
affect the reported amounts of assets, liabilities, revenues and
expenses, and the disclosure of contingent assets and liabilities.
Changes in facts and circumstances or additional information may
result in revised estimates, and actual results may differ, even
significantly, from these estimates. Management evaluates its
estimates and related assumptions regularly, including those
related to the allowance for doubtful accounts and allowances for
no-interest option credit programs, which are particularly
sensitive given the size of our customer portfolio
balance.
Cash and Cash Equivalents.
As of July 31, 2021 and January 31, 2021, cash and cash
equivalents included cash and credit card deposits in transit.
Credit card deposits in transit included in cash and cash
equivalents were $6.8 million and $7.9 million as of July 31,
2021 and January 31, 2021, respectively.
CONN’S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Restricted Cash.
The restricted cash balance as of July 31, 2021 and
January 31, 2021 includes $24.1 million and $41.6 million,
respectively, of cash we collected as servicer on the securitized
receivables that was subsequently remitted to the VIEs and $4.8
million and $7.0 million, respectively, of cash held by the VIEs as
additional collateral for the asset-backed notes.
Customer Accounts Receivable.
Customer accounts receivable reported in the Condensed Consolidated
Balance Sheet includes total receivables managed, including both
those transferred to the VIEs and those not transferred to the
VIEs. Customer accounts receivable are recognized at the time the
customer takes possession of the product. Expected lifetime losses
on customer accounts receivable are recognized upon origination
through an allowance for credit losses account that is deducted
from the customer account receivable balance and presented net.
Customer accounts receivable include the net of unamortized
deferred fees charged to customers and origination costs. Customer
receivables are considered delinquent if a payment has not been
received on the scheduled due date. Accounts that are delinquent
more than 209 days as of the end of a month are charged-off against
the allowance for doubtful accounts along with interest accrued
subsequent to the last payment.
In an effort to mitigate losses on our accounts receivable, we may
make loan modifications to a borrower experiencing financial
difficulty. The loan modifications are intended to maximize net
cash flow after expenses and avoid the need to exercise legal
remedies available to us. We may extend or “re-age” a portion of
our customer accounts, which involves modifying the payment terms
to defer a portion of the cash payments due. Our re-aging of
customer accounts does not change the interest rate or the total
principal amount due from the customer and typically does not
reduce the monthly contractual payments. To a much lesser extent,
we may provide the customer the ability to refinance their account,
which typically does not change the interest rate or the total
principal amount due from the customer but does reduce the monthly
contractual payments and extend the term. We consider accounts that
have been re-aged in excess of three months or refinanced as
Troubled Debt Restructurings (“TDR” or “Restructured
Accounts”).
On March 27, 2020 the Coronavirus Aid, Relief and Economic Security
Act (“CARES Act”) was signed into law to address the economic
impact of the COVID-19 pandemic. Under the CARES Act, modifications
deemed to be COVID-19 related are not considered a TDR if the loan
was current (not more than 30 days past due as of March 31, 2020)
and the deferral was executed between April 1, 2020 and the earlier
of 60 days after the termination of the COVID-19 national emergency
or December 31, 2020. In response to the CARES Act, the Company
implemented
short-term deferral
programs for our customers. The carrying value of the customer
receivables on accounts which were current prior to receiving a
COVID-19 related deferment was $33.5 million and $65.2 million
as of July 31, 2021 and January 31, 2021, respectively.
All COVID-19 specific deferral programs ended during the third
quarter of fiscal year 2021.
Interest Income on Customer Accounts Receivable.
Interest income, which includes interest income and amortization of
deferred fees and origination costs, is recorded using the interest
method and is reflected in finance charges and other revenues.
Typically, interest income is recorded until the customer account
is paid off or charged-off and we provide an allowance for
estimated uncollectible interest. We reserve for interest that is
more than 60 days past due. Any contractual interest income
received from customers in excess of the interest income calculated
using the interest method is recorded as deferred revenue on our
balance sheets. At July 31, 2021 and January 31, 2021,
there was $8.4 million and $8.9 million, respectively, of deferred
interest included in deferred revenues and other credits and other
long-term liabilities. The deferred interest will ultimately be
brought into income as the accounts pay off or
charge-off.
We offer a 12-month no-interest option program. If the customer is
delinquent in making a scheduled monthly payment or does not repay
the principal in full by the end of the no-interest option program
period (grace periods are provided), the account does not qualify
for the no-interest provision and none of the interest earned is
waived. Interest income is recognized based on estimated accrued
interest earned to date on all no-interest option finance programs
with an offsetting reserve for those customers expected to satisfy
the requirements of the program based on our historical
experience.
We recognize interest income on TDR accounts using the interest
income method, which requires reporting interest income equal to
the increase in the net carrying amount of the loan attributable to
the passage of time. Cash proceeds and other adjustments are
applied to the net carrying amount such that it equals the present
value of expected future cash flows.
We place accounts in non-accrual status when legally required.
Payments received on non-accrual loans are applied to principal and
reduce the balance of the loan. At July 31, 2021 and
January 31, 2021, the carrying value of customer accounts
receivable in non-accrual status was $7.0 million and $8.5 million,
respectively. At July 31, 2021 and January 31, 2021, the
carrying value of customer accounts receivable that were past due
90 days or more and still accruing interest totaled $55.2 million
and $111.5 million, respectively. At July 31, 2021 and
January 31, 2021, the carrying value of customer accounts
receivable in a bankruptcy status that were less than 60 days past
due of $6.4 million and $5.2 million, respectively, were included
within the customer receivables balance carried in non-accrual
status.
Allowance for Doubtful Accounts.
The determination of the amount of the allowance for credit losses
is, by nature, highly complex and subjective. Future events that
are inherently uncertain could result in material changes to the
level of the allowance for credit losses. General economic
conditions, changes to state or federal regulations and a variety
of other factors
CONN’S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
that affect the ability of borrowers to service their debts or our
ability to collect will impact the future performance of the
portfolio.
We establish an allowance for credit losses, including estimated
uncollectible interest, to cover expected credit losses on our
customer accounts receivable resulting from the failure of
customers to make contractual payments. Our customer accounts
receivable portfolio balance consists of a large number of
relatively small, homogeneous accounts. None of our accounts are
large enough to warrant individual evaluation for impairment. The
allowance for credit losses is measured on a collective (pool)
basis where similar risk characteristics exist. The allowance for
credit losses is determined for each pool and added to the pool’s
carrying amount to establish a new amortized cost
basis.
We use a risk-based, pool-level segmentation framework to calculate
the expected loss rate. This framework is based on our historical
gross charge-off history. In addition to adjusted historical gross
charge-off rates, estimates of post-charge-off recoveries,
including cash payments from customers, sales tax recoveries from
taxing jurisdictions, and payments received under credit insurance
and repair service agreement (“RSA”) policies are also considered.
We also consider forward-looking economic forecasts based on a
statistical analysis of economic factors (specifically, forecast of
unemployment rates over the reasonable and supportable forecasting
period). To the extent that situations and trends arise which are
not captured in our model, management will layer on additional
qualitative adjustments.
Pursuant to ASC 326 requirements, the Company uses a 24-month
reasonable and supportable forecast period for the customer
accounts receivable portfolio. We estimate losses beyond the
24-month forecast period based on historic loss rates experienced
over the life of our historic loan portfolio by loan pool type. We
revisit our measurement methodology and assumption annually, or
more frequently if circumstances warrant.
As of July 31, 2021 and January 31, 2021, the balance of
allowance for doubtful accounts and uncollectible interest for
non-TDR customer receivables was $150.7 million and
$219.7 million, respectively. As of July 31, 2021 and
January 31, 2021, the amount included in the allowance for
doubtful accounts associated with principal and interest on TDR
accounts was $51.4 million and $78.3 million,
respectively.
Debt Issuance Costs.
Costs that are direct and incremental to debt issuance are deferred
and amortized to interest expense using the effective interest
method over the expected life of the debt. All other costs related
to debt issuance are expensed as incurred. We present debt issuance
costs associated with long-term debt as a reduction of the carrying
amount of the debt. Unamortized costs related to the Revolving
Credit Facility, as defined in Note 4,
Debt and Financing Lease Obligations,
are included in other assets on our Condensed Consolidated Balance
Sheet and were $5.9 million and $3.5 million as of July 31,
2021 and January 31, 2021, respectively.
Loss on Extinguishment.
During the six months ended July 31, 2021, we incurred a loss of
$1.0 million related to the retirement of the remaining
$141.2 million aggregate principal amount of our 7.25% Senior
Notes due 2022 (“Senior Notes”) and a loss of $0.2 million
related to the amendment of our Fifth Amended and Restated Loan and
Security Agreement.
Income Taxes.
For the six months ended July 31, 2021 and 2020, we utilized the
estimated annual effective tax rate based on our estimated fiscal
year 2022 and 2021 pre-tax income, respectively, in determining
income tax expense.
Provision for income taxes for interim periods is based on an
estimated annual income tax rate, adjusted for discrete tax items.
As a result, our interim effective tax rates may vary significantly
from the statutory tax rate and the annual effective tax
rate.
For the six months ended July 31, 2021 and 2020, the effective tax
rate was 23.4% and 27.2%, respectively. The primary factor
affecting the decrease in our effective tax rate for the six months
ended July 31, 2021 was the impact of the tax loss carryback
provisions of the CARES Act that was reflected in the prior
period.
Stock-based Compensation.
During the six months ended July 31, 2021, the Company granted
performance stock awards (“PSUs”) and restricted stock awards
(“RSUs”). The awards had a combined aggregate grant date fair value
of $9.3 million. The PSUs will vest in fiscal year 2025, if at
all, upon certification by the Compensation Committee of the Board
of Directors of satisfaction of certain total stockholder return
performance conditions over the three fiscal years commencing with
fiscal year 2022. The RSUs will vest ratably, over periods of three
years to four years from the date of grant.
Stock-based compensation expense is recorded, net of actual
forfeitures, for share-based compensation awards over the requisite
service period using the straight-line method. For
equity-classified share-based compensation awards, expense is
recognized based on the grant-date fair value. For stock option
grants, we use the Black-Scholes model to determine fair value. For
grants of restricted stock units, the fair value of the grant is
the market value of our stock at the date of issuance. For grants
of performance-based restricted stock units, the fair value is the
market value of our stock at the date of issuance adjusted for the
market condition using a Monte Carlo model.
CONN’S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the RSUs and PSUs granted during the
three and six months ended July 31, 2021 and
2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
July 31, |
|
Six Months Ended
July 31, |
|
2021 |
|
2020 |
|
2021 |
|
2020 |
RSUs
(1)
|
41,087 |
|
|
101,774 |
|
|
381,731 |
|
|
622,195 |
|
PSUs
(2)
|
— |
|
|
— |
|
|
152,349 |
|
|
270,828 |
|
Total stock awards granted |
41,087 |
|
|
101,774 |
|
|
534,080 |
|
|
893,023 |
|
Aggregate grant date fair value (in thousands) |
$ |
960 |
|
|
$ |
750 |
|
|
$ |
9,250 |
|
|
$ |
7,957 |
|
(1)The
RSUs issued during the six months ended July 31, 2021 and 2020 are
scheduled to vest ratably over periods of three years to four years
from the date of grant.
(2)The
weighted-average assumptions used in the Monte Carlo model for the
PSUs granted during the six months ended July 31, 2021 included
expected volatility of 83.0%, an expected term
of 3 years and risk-free interest rate
of 0.17%. No dividend yield was included in the
weighted-average assumptions for the PSUs granted during the six
months ended July 31, 2021. The weighted-average assumptions used
in the Monte Carlo model for the PSUs granted during the six months
ended July 31, 2020 included expected volatility of 60.0%, an
expected term of 3 years and risk-free interest rate of 1.42%. No
dividend yield was included in the weighted average assumptions for
the PSUs granted during the six months ended July 31,
2020.
For the three months ended July 31, 2021 and 2020, stock-based
compensation expense was $1.7 million and $2.3 million,
respectively. For the six months ended July 31, 2021 and 2020,
stock-based compensation expense was $3.8 million and
$4.7 million, respectively.
Earnings (loss) per Share.
Basic earnings (loss) per share for a particular period is
calculated by dividing net income (loss) by the weighted-average
number of common shares outstanding during the period. Diluted
earnings per share includes the dilutive effects of any stock
options, RSUs and PSUs, which are calculated using the
treasury-stock method. The following table sets forth the shares
outstanding for the earnings per share
calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
July 31, |
|
Six Months Ended
July 31, |
|
2021 |
|
2020 |
|
2021 |
|
2020 |
Weighted-average common shares outstanding - Basic |
29,438,605 |
|
|
29,070,607 |
|
|
29,382,162 |
|
|
28,948,216 |
|
Dilutive effect of stock options, PSUs and RSUs |
773,843 |
|
|
69,939 |
|
|
690,239 |
|
|
— |
|
Weighted-average common shares outstanding - Diluted |
30,212,448 |
|
|
29,140,546 |
|
|
30,072,401 |
|
|
28,948,216 |
|
For the three months ended July 31, 2021 and 2020, the weighted
average number of stock options, RSUs and PSUs not included in the
calculation due to their anti-dilutive effect, was 656,987 and
1,116,730, respectively. For the six months ended July 31, 2021 and
2020, the weighted average number of stock options, RSUs and PSUs
not included in the calculation due to their anti-dilutive effect,
was 731,647 and 1,479,599, respectively
Fair Value of Financial Instruments.
Fair value is defined as the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Assets and
liabilities recorded at fair value are categorized using defined
hierarchical levels related to subjectivity associated with the
inputs to fair value measurements as follows:
•Level
1 – Inputs represent unadjusted quoted prices in active markets for
identical assets or liabilities.
•Level
2 – Inputs other than quoted prices included within Level 1 that
are observable for the asset or liability, either directly or
indirectly (for example, quoted market prices for similar assets or
liabilities in active markets or quoted market prices for identical
assets or liabilities in markets not considered to be active,
inputs other than quoted prices that are observable for the asset
or liability, or market-corroborated inputs).
•Level
3 – Inputs that are not observable from objective sources such as
our internally developed assumptions used in pricing an asset or
liability (for example, an estimate of future cash flows used in
our internally developed present value of future cash flows model
that underlies the fair-value measurement).
In determining fair value, we use observable market data when
available, or models that incorporate observable market data. When
we are required to measure fair value and there is not a
market-observable price for the asset or liability or for a similar
asset or liability, we use the cost or income approach depending on
the quality of information available to support management’s
assumptions. The cost approach is based on management’s best
estimate of the current asset replacement cost.
CONN’S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The income approach is based on management’s best assumptions
regarding expectations of future net cash flows and discounts the
expected cash flows using a commensurate risk-adjusted discount
rate. Such evaluations involve significant judgment, and the
results are based on expected future events or conditions such as
sales prices, economic and regulatory climates, and other factors,
most of which are often outside of management’s control. However,
we believe assumptions used reflect a market participant’s view of
long-term prices, costs, and other factors and are consistent with
assumptions used in our business plans and investment
decisions.
In arriving at fair-value estimates, we use relevant observable
inputs available for the valuation technique employed. If a
fair-value measurement reflects inputs at multiple levels within
the hierarchy, the fair-value measurement is characterized based on
the lowest level of input that is significant to the fair-value
measurement.
The fair value of cash and cash equivalents, restricted cash and
accounts payable approximate their carrying amounts because of the
short maturity of these instruments. The fair value of customer
accounts receivable, determined using a Level 3 discounted cash
flow analysis, approximates their carrying value, net of the
allowance for doubtful accounts. The fair value of our Revolving
Credit Facility approximates carrying value based on the current
borrowing rate for similar types of borrowing arrangements. At
July 31, 2021, the fair value of the asset backed notes was
$216.9 million as compared to the carrying value of $215.5 million
and was determined using Level 2 inputs based on inactive trading
activity.
Deferred Revenue.
Deferred revenue related to contracts with customers consists of
deferred customer deposits and deferred RSA administration fees.
During the six months ended July 31, 2021, we recognized
$4.7 million of revenue for customer deposits deferred as of
January 31, 2021. During the six months ended July 31, 2021,
we recognized $1.9 million of revenue for RSA administrative
fees deferred as of January 31, 2021.
Recent Accounting Pronouncements Adopted.
Simplifying the Accounting for Income Taxes.
In December 2019, the FASB issued ASU 2019-12, Income
Taxes (Topic 740): Simplifying the Accounting for Income
Taxes,
an update intended to simplify various aspects related to
accounting for income taxes. This guidance removes certain
exceptions to the general principles in Topic 740 and also
clarifies and amends existing guidance to improve consistent
application. This accounting standards update became effective for
us in the first quarter of fiscal year 2022. The adoption did not
have a material impact on our consolidated financial
statements.
Recent Accounting Pronouncements Yet to Be Adopted.
Reference Rate Reform on Financial Reporting.
In March 2020, the FASB issued ASU 2020-04,
Reference Rate Reform (Topic 848): Facilitation of the Effects of
Reference Rate Reform on Financial Reporting,
an update that provides optional expedients and exceptions for
applying GAAP to contracts, hedging relationships, and other
transactions affected by reference rate reform if certain criteria
are met. In January 2021, the FASB issued ASU 2021-01,
Reference Rate Reform (Topic 848), Scope,
to clarify the scope of the guidance and reduce potential diversity
in practice. The amendments in this update apply only to contracts,
hedging relationships, and other transactions that reference LIBOR
or another reference rate expected to be discontinued because of
reference rate reform. These accounting standard updates were
effective upon issuance, with adoption permitted through December
31, 2022. We expect to adopt ASC 2020-04 and ASC 2021-01 upon
transition from LIBOR, prior to December 31, 2022. We do not expect
the adoption to have a material impact on our consolidated
financial statements.
CONN’S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. Customer Accounts Receivable
Customer accounts receivable consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
July 31,
2021 |
|
January 31,
2021 |
Customer accounts receivable
(1)
|
$ |
1,105,713 |
|
|
$ |
1,233,717 |
|
Deferred fees and origination costs, net |
(13,265) |
|
|
(14,212) |
|
Allowance for no-interest option credit programs |
(13,650) |
|
|
(11,985) |
|
Allowance for uncollectible interest |
(11,868) |
|
|
(21,427) |
|
Carrying value of customer accounts receivable |
1,066,930 |
|
|
1,186,093 |
|
Allowance for credit losses
(2)
|
(190,231) |
|
|
(276,610) |
|
Carrying value of customer accounts receivable, net of allowance
for credit losses |
876,699 |
|
|
909,483 |
|
Short-term portion of customer accounts receivable,
net |
(461,491) |
|
|
(478,734) |
|
Long-term customer accounts receivable, net |
$ |
415,208 |
|
|
$ |
430,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value |
(in thousands) |
July 31,
2021 |
|
January 31,
2021 |
Customer accounts receivable 60+ days past due
(3)
|
$ |
76,293 |
|
|
$ |
146,820 |
|
Re-aged customer accounts receivable
(4)
|
218,086 |
|
|
306,845 |
|
Restructured customer accounts receivable
(5)
|
130,725 |
|
|
178,374 |
|
(1)As
of July 31, 2021 and January 31, 2021, the customer
accounts receivable balance included $20.1 million and
$31.1 million,
respectively, in interest receivable. Net of the allowance for
uncollectible interest, interest receivable outstanding as of
July 31, 2021 and January 31, 2021 was $8.2 million
and
$9.7 million,
respectively.
(2)Our
current methodology to estimate expected credit losses utilized
macroeconomic forecasts as of July 31, 2021 and January 31,
2021, which incorporated the continued estimated impact of the
global COVID-19 outbreak on the U.S. economy. Our forecast utilized
economic projections from a major rating service reflecting a
decrease in unemployment rates.
(3)As
of July 31, 2021 and January 31, 2021, the carrying value
of customer accounts receivable past due one day or greater was
$234.6 million and $340.8 million, respectively. These amounts
include the 60+ days past due balances shown above.
(4)The
re-aged carrying value as of July 31, 2021 and
January 31, 2021 includes $42.4 million and $88.0 million,
respectively, in carrying value that are both 60+ days past due and
re-aged.
(5)The
restructured carrying value as of July 31, 2021 and
January 31, 2021 includes $26.7 million and $57.1 million,
respectively, in carrying value that are both 60+ days past due and
restructured.
The allowance for credit losses included in the current and
long-term portion of customer accounts receivable, net as shown in
the Condensed Consolidated Balance Sheet were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
July 31, 2021 |
|
January 31, 2021 |
Customer accounts receivable - current |
$ |
575,231 |
|
|
$ |
643,903 |
|
Allowance for credit losses for customer accounts receivable -
current |
(113,740) |
|
|
(165,169) |
|
Customer accounts receivable, net of allowances |
461,491 |
|
|
478,734 |
|
Customer accounts receivable - non current |
503,567 |
|
|
563,617 |
|
Allowance for credit losses for customer accounts receivable - non
current |
(88,359) |
|
|
(132,868) |
|
Long-term portion of customer accounts receivable, net of
allowances |
415,208 |
|
|
430,749 |
|
Total customer accounts receivable, net |
$ |
876,699 |
|
|
$ |
909,483 |
|
CONN’S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following presents the activity in our allowance for credit
losses and uncollectible interest for customer
receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended July 31, 2021 |
|
Six Months Ended July 31, 2020 |
(in thousands) |
Customer
Accounts
Receivable |
|
Restructured
Accounts |
|
Total |
|
Customer
Accounts
Receivable |
|
Restructured
Accounts |
|
Total |
Allowance at beginning of period, prior to adoption of ASC
326 |
$ |
219,740 |
|
|
$ |
78,297 |
|
|
$ |
298,037 |
|
|
$ |
145,680 |
|
|
$ |
88,123 |
|
|
$ |
233,803 |
|
Impact of adoption ASC 326 |
— |
|
|
— |
|
|
— |
|
|
95,136 |
|
|
3,526 |
|
|
98,662 |
|
Provision for (benefit from) credit losses
(1)
|
(5,422) |
|
|
13,333 |
|
|
7,911 |
|
|
138,395 |
|
|
42,541 |
|
|
180,936 |
|
Principal charge-offs
(2)
|
(61,323) |
|
|
(38,709) |
|
|
(100,032) |
|
|
(101,746) |
|
|
(47,301) |
|
|
(149,047) |
|
Interest charge-offs |
(16,997) |
|
|
(10,729) |
|
|
(27,726) |
|
|
(29,135) |
|
|
(13,545) |
|
|
(42,680) |
|
Recoveries
(3)
|
14,657 |
|
|
9,252 |
|
|
23,909 |
|
|
10,269 |
|
|
4,773 |
|
|
15,042 |
|
Allowance at end of period |
$ |
150,655 |
|
|
$ |
51,444 |
|
|
$ |
202,099 |
|
|
$ |
258,599 |
|
|
$ |
78,117 |
|
|
$ |
336,716 |
|
Average total customer portfolio balance |
$ |
982,186 |
|
|
$ |
159,894 |
|
|
$ |
1,142,080 |
|
|
$ |
1,271,225 |
|
|
$ |
222,025 |
|
|
$ |
1,493,250 |
|
(1)Includes
provision for uncollectible interest, which is included in finance
charges and other revenues, and changes in expected future
recoveries.
(2)Charge-offs
include the principal amount of losses (excluding accrued and
unpaid interest). Recoveries include the principal amount collected
during the period for previously charged-off balances. Net
charge-offs are calculated as the net of principal charge-offs and
recoveries.
(3)Recoveries
include the principal amount collected during the period for
previously charged-off balances.
We manage our customer accounts receivable portfolio using
delinquency as a key credit quality indicator. The following table
presents the delinquency distribution of the carrying value of
customer accounts receivable by year of origination. The
information is presented as of July 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
Delinquency Bucket |
2021 |
2020 |
2019 |
2018 |
Prior |
Total |
% of Total |
Current |
$ |
358,052 |
|
$ |
291,693 |
|
$ |
150,885 |
|
$ |
27,872 |
|
$ |
3,813 |
|
$ |
832,315 |
|
78.0 |
% |
1-30 |
27,833 |
|
44,758 |
|
36,874 |
|
11,070 |
|
1,755 |
|
122,290 |
|
11.5 |
% |
31-60 |
7,311 |
|
12,236 |
|
11,779 |
|
4,034 |
|
672 |
|
36,032 |
|
3.4 |
% |
61-90 |
3,700 |
|
7,390 |
|
6,720 |
|
2,438 |
|
478 |
|
20,726 |
|
1.9 |
% |
91+ |
5,077 |
|
21,727 |
|
19,429 |
|
7,503 |
|
1,831 |
|
55,567 |
|
5.2 |
% |
Total |
$ |
401,973 |
|
$ |
377,804 |
|
$ |
225,687 |
|
$ |
52,917 |
|
$ |
8,549 |
|
$ |
1,066,930 |
|
100.0 |
% |
3. Finance Charges and Other
Revenues
Finance charges and other revenues consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
July 31, |
|
Six Months Ended
July 31, |
(in thousands) |
2021 |
|
2020 |
|
2021 |
|
2020 |
Interest income and fees |
$ |
65,003 |
|
|
$ |
83,599 |
|
|
$ |
132,682 |
|
|
$ |
165,442 |
|
Insurance income |
6,371 |
|
|
3,385 |
|
|
10,889 |
|
|
8,137 |
|
Other revenues |
224 |
|
|
196 |
|
|
433 |
|
|
431 |
|
Total finance charges and other revenues |
$ |
71,598 |
|
|
$ |
87,180 |
|
|
$ |
144,004 |
|
|
$ |
174,010 |
|
Interest income and fees and insurance income are derived from the
credit segment operations, whereas other revenues are derived from
the retail segment operations. Insurance income is comprised of
sales commissions from third-party insurance companies that are
recognized when coverage is sold and retrospective income paid by
the insurance carrier if insurance claims are less than earned
premiums.
CONN’S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
During the three months ended July 31, 2021 and 2020, interest
income and fees reflected provisions for uncollectible interest of
$7.4 million and $11.8 million, respectively. The amounts included
in interest income and fees related to TDR accounts for the three
months ended July 31, 2021 and 2020 were $6.7 million and $10.1
million, respectively. During the six months ended July 31, 2021
and 2020, interest income and fees reflected provisions for
uncollectible interest of $14.9 million and $31.9 million,
respectively. The amounts included in interest income and fees
related to TDR accounts for the six months ended July 31, 2021 and
2020 were $14.2 million and $19.6 million,
respectively.
4. Debt and Financing Lease
Obligations
Debt and financing lease obligations consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
July 31,
2021 |
|
January 31,
2021 |
Revolving Credit Facility |
$ |
219,000 |
|
|
$ |
52,000 |
|
Senior Notes |
— |
|
|
141,172 |
|
2019-A VIE Asset-backed Class A Notes |
— |
|
|
19,521 |
|
2019-A VIE Asset-backed Class B Notes |
— |
|
|
25,069 |
|
2019-A VIE Asset-backed Class C Notes |
— |
|
|
24,202 |
|
2019-B VIE Asset-backed Class A Notes |
— |
|
|
17,860 |
|
2019-B VIE Asset-backed Class B Notes |
19,078 |
|
|
85,540 |
|
2019-B VIE Asset-backed Class C Notes |
83,270 |
|
|
83,270 |
|
2020-A VIE Asset-backed Class A Notes |
22,986 |
|
|
93,326 |
|
2020-A VIE Asset-backed Class B Notes |
45,909 |
|
|
65,200 |
|
2020-A VIE Asset-backed Class C Notes |
44,290 |
|
|
— |
|
Financing lease obligations |
6,051 |
|
|
6,072 |
|
Total debt and financing lease obligations |
440,584 |
|
|
613,232 |
|
Less: |
|
|
|
Discount on debt |
— |
|
|
(524) |
|
Deferred debt issuance costs |
(971) |
|
|
(3,139) |
|
Current maturities of long-term debt and financing lease
obligations |
(1,371) |
|
|
(934) |
|
Long-term debt and financing lease obligations |
$ |
438,242 |
|
|
$ |
608,635 |
|
Senior Notes.
On July 1, 2014, we issued an aggregate principal amount of $250.0
million in unsecured 7.25% Senior Notes due 2022 (the “Senior
Notes”) pursuant to an indenture dated July 1, 2014 (as amended,
the “Indenture”), among Conn’s, Inc., its subsidiary guarantors
(the “Guarantors”) and U.S. Bank National Association, as trustee.
On April 15, 2021 we completed the redemption of all of our
outstanding Senior Notes in an aggregate principal amount of
$141.2 million.
Asset-backed Notes.
From time to time, we securitize customer accounts receivables by
transferring the receivables to various bankruptcy-remote VIEs. In
turn, the VIEs issue asset-backed notes secured by the transferred
customer accounts receivables and restricted cash held by the
VIEs.
Under the terms of the securitization transactions, all cash
collections and other cash proceeds of the customer receivables go
first to the servicer and the holders of issued notes, and then to
us as the holder of non-issued notes, if any, and residual equity.
We retain the servicing of the securitized portfolios and receive a
monthly fee of 4.75% (annualized) based on the outstanding balance
of the securitized receivables. In addition, we, rather than the
VIEs, retain all credit insurance income together with certain
recoveries related to credit insurance and RSAs on charge-offs of
the securitized receivables, which are reflected as a reduction to
net charge-offs on a consolidated basis.
The asset-backed notes were offered and sold to qualified
institutional buyers pursuant to the exemptions from registration
provided by Rule 144A under the Securities Act of 1933. If an event
of default were to occur under the indenture that governs the
respective asset-backed notes, the payment of the outstanding
amounts may be accelerated, in which event the cash proceeds of the
receivables that otherwise might be released to the residual equity
holder would instead be directed entirely toward repayment of the
asset-backed notes, or if the receivables are liquidated, all
liquidation proceeds could be directed solely to repayment of the
asset-backed notes as governed by the respective terms of the
asset-backed notes. The holders of the asset-backed notes have no
recourse to assets outside of the VIEs. Events of default include,
but are not limited to, failure to make required payments on the
asset-backed notes or specified bankruptcy-related
events.
CONN’S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The asset-backed notes outstanding as of July 31, 2021
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset-Backed Notes |
|
Original Principal Amount |
|
Original Net Proceeds
(1)
|
|
Current Principal Amount |
|
Issuance Date |
|
Maturity Date |
|
Contractual Interest Rate |
|
Effective Interest Rate
(2)
|
2019-B Class B Notes |
|
$ |
85,540 |
|
|
$ |
84,916 |
|
|
$ |
19,078 |
|
|
11/26/2019 |
|
6/17/2024 |
|
3.62% |
|
4.58% |
2019-B Class C Notes |
|
83,270 |
|
|
82,456 |
|
|
83,270 |
|
|
11/26/2019 |
|
6/17/2024 |
|
4.60% |
|
5.19% |
2020-A Class A Notes |
|
174,900 |
|
|
173,716 |
|
|
22,986 |
|
|
10/16/2020 |
|
6/16/2025 |
|
1.71% |
|
4.56% |
2020-A Class B Notes |
|
65,200 |
|
|
64,754 |
|
|
45,909 |
|
|
10/16/2020 |
|
6/16/2025 |
|
4.27% |
|
5.54% |
2020-A Class C Notes |
|
62,900 |
|
|
62,535 |
|
|
44,290 |
|
|
2/24/2021 |
|
6/16/2025 |
|
4.20% |
|
5.75% |
Total |
|
$ |
471,810 |
|
|
$ |
468,377 |
|
|
$ |
215,533 |
|
|
|
|
|
|
|
|
|
(1)After
giving effect to debt issuance costs.
(2)For
the six months ended July 31, 2021, and inclusive of the impact of
changes in timing of actual and expected cash flows.
On February 24, 2021, the Company completed the sale of
$62.9 million aggregate principal amount of 4.20% Asset Backed
Notes, Class C, Series 2020-A, which were previously issued and
held by the Company. The asset-backed notes are secured by the
transferred customer accounts receivables and restricted cash held
by a consolidated VIE, which resulted in net proceeds to us of
$62.5 million, net of debt issuance costs. Net proceeds from
the sale were used to repay amounts outstanding under the Company’s
Revolving Credit Facility.
On May 12, 2021, the Company completed the redemption of the 2019-A
Asset Backed Notes at an aggregate redemption price of
$41.1 million (which was equal to the entire outstanding
principal balance plus accrued interest). We funded the redemption
with cash on hand and borrowings under our Revolving Credit
Facility.
Revolving Credit Facility.
On March 29, 2021, Conn’s, Inc. and certain of its subsidiaries
(the “Borrowers”) entered into the Fifth Amended and Restated Loan
and Security Agreement (the “Fifth Amended and Restated Loan
Agreement”), with certain lenders, which provides for a $650.0
million asset-based revolving credit facility (as amended, the
“Revolving Credit Facility”) under which credit availability is
subject to a borrowing base and a maturity date of March 29,
2025.
The Fifth Amended and Restated Loan Agreement, among other things,
permits borrowings under the Letter of Credit Subline (as defined
in the Fifth Amended and Restated Loan Agreement) that exceed the
cap of $40 million to $100 million, solely at the
discretion of the lenders for such amounts in excess of
$40 million. The obligations under the Revolving Credit
Facility are secured by substantially all assets of the Company,
excluding the assets of the VIEs. As of July 31, 2021, we had
immediately available borrowing capacity of $362.9 million under
our Revolving Credit Facility, net of standby letters of credit
issued of $22.5 million. We also had $45.6 million that may become
available under our Revolving Credit Facility were we to grow the
balance of eligible customer receivables and total eligible
inventory balances.
Loans under the Revolving Credit Facility bear interest, at our
option, at a rate of LIBOR plus a margin ranging from 2.50% to
3.25% per annum (depending on a pricing grid determined by our
total leverage ratio) or the alternate base rate plus a margin
ranging from 1.50% to 2.25% per annum (depending on a pricing grid
determined by our total leverage ratio). We also pay an unused fee
on the portion of the commitments that is available for future
borrowings or letters of credit at a rate ranging from 0.25% to
0.50% per annum, depending on the average outstanding balance and
letters of credit of the Revolving Credit Facility in the
immediately preceding quarter. The weighted-average interest rate
on borrowings outstanding and including unused line fees under the
Revolving Credit Facility was 4.9% for the six months ended July
31, 2021.
The Revolving Credit Facility places restrictions on our ability to
incur additional indebtedness, grant liens on assets, make
distributions on equity interests, dispose of assets, make loans,
pay other indebtedness, engage in mergers, and other matters. The
Revolving Credit Facility restricts our ability to make dividends
and distributions unless no event of default exists and a liquidity
test is satisfied. Subsidiaries of the Company may pay dividends
and make distributions to the Company and other obligors under the
Revolving Credit Facility without restriction. As of July 31,
2021, we were restricted from making distributions in excess of
$217.6 million as a result of the Revolving Credit Facility
distribution and payment restrictions. The Revolving Credit
Facility contains customary default provisions, which, if
triggered, could result in acceleration of all amounts outstanding
under the Revolving Credit Facility.
CONN’S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Debt Covenants.
We were in compliance with our debt covenants at July 31,
2021. A summary of the significant financial covenants that govern
our Revolving Credit Facility compared to our actual compliance
status at July 31, 2021 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual |
|
Required Minimum/ Maximum |
Interest Coverage Ratio for the quarter must equal or exceed
minimum |
14.37:1.00 |
|
1.00:1.00 |
Interest Coverage Ratio for the trailing two quarters must equal or
exceed minimum |
12.77:1.00 |
|
1.50:1.00 |
Leverage Ratio must not exceed maximum |
1.20:1.00 |
|
4.50:1.00 |
ABS Excluded Leverage Ratio must not exceed maximum |
0.91:1.00 |
|
2.50:1.00 |
Capital Expenditures, net, must not exceed maximum |
$20.8 million |
|
$100.0 million |
All capitalized terms in the above table are defined in the
Revolving Credit Facility and may or may not match directly to the
financial statement captions in this document. The covenants are
calculated quarterly, except for capital expenditures, which is
calculated for a period of four consecutive fiscal quarters, as of
the end of each fiscal quarter.
5. Contingencies
Securities Litigation.
On May 15, 2020, a putative securities class action lawsuit was
filed against us and two of our executive officers in the United
States District Court for the Southern District of Texas, captioned
Uddin v. Conn’s, Inc., et al., No. 4:20-1705 (“Uddin Action”). On
November 16, 2020, the lead plaintiff voluntarily dismissed the
action without prejudice. The court entered an order recognizing
the dismissal on November 17, 2020.
On April 2, 2018, MicroCapital Fund, LP, MicroCapital Fund, Ltd.,
and MicroCapital LLC (collectively, “MicroCapital”) filed a lawsuit
against us and certain of our former executive officers in the U.S.
District Court for the Southern District of Texas, Cause No.
4:18-CV-01020 (the “MicroCapital Action”). The plaintiffs in this
action allege that the defendants made false and misleading
statements or failed to disclose material facts about our credit
and underwriting practices, accounting and internal controls.
Plaintiffs allege violations of sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder, Texas and Connecticut common law fraud, and Texas
common law negligent misrepresentation against all defendants; as
well as violations of section 20A of the Securities Exchange Act of
1934; and Connecticut common law negligent misrepresentation
against certain defendants arising from plaintiffs’ purchase of
Conn’s, Inc. securities between April 3, 2013 and February 20,
2014. The complaint does not specify the amount of damages
sought.
The Court previously stayed the MicroCapital Action pending
resolution of other outstanding litigation (In re Conn’s Inc. Sec.
Litig., Cause No. 14-CV-00548 (S.D. Tex.) (the “Consolidated
Securities Action”)), which was settled in October 2018. After that
settlement, the stay was lifted, and the defendants filed a motion
to dismiss plaintiff’s complaint in the MicroCapital Action on
November 6, 2018. On July 26, 2019, the magistrate judge issued a
report recommending that defendants’ motion to dismiss the
complaint be granted in part and denied in part. On September 25,
2019, the district court adopted the magistrate judge’s report,
which permitted MicroCapital to file an amended complaint, which
MicroCapital filed on October 30, 2019. Defendants filed their
answer to the amended complaint on November 27, 2019.
We intend to vigorously defend our interests in the MicroCapital
Action. It is not possible at this time to predict the timing or
outcome of this litigation, and we cannot reasonably estimate the
possible loss or range of possible loss from these
claims.
Derivative Litigation. On December 1, 2014, an alleged shareholder,
purportedly on behalf of the Company, filed a derivative
shareholder lawsuit against us and certain of our current and
former directors and former executive officers captioned as Robert
Hack, derivatively on behalf of Conn’s, Inc., v. Theodore M. Wright
(former executive officer and former director), Bob L. Martin, Jon
E.M. Jacoby (former director), Kelly M. Malson, Douglas H. Martin,
David Schofman, Scott L. Thompson (former director), Brian Taylor
(former executive officer) and Michael J. Poppe (former executive
officer) and Conn’s, Inc., Case No. 4:14-cv-03442 (S.D. Tex.) (the
“Original Derivative Action”). The complaint asserts claims for
breach of fiduciary duty, unjust enrichment, gross mismanagement,
and insider trading based on substantially similar factual
allegations as those asserted in the Consolidated Securities
Action. The plaintiff seeks unspecified damages against these
persons and does not request any damages from Conn’s. Setting forth
substantially similar claims against the same defendants, on
February 25, 2015, an additional federal derivative action,
captioned 95250 Canada LTEE, derivatively on Behalf of Conn’s, Inc.
v. Wright et al., Cause No. 4:15-cv-00521 (S.D. Tex.), which was
consolidated with the Original Derivative Action.
The Court previously approved a stipulation among the parties to
stay the Original Derivative Action pending resolution of the
Consolidated Securities Action. The stay was lifted on November 1,
2018, and the defendants filed a motion to dismiss plaintiff’s
complaint. Briefing on the motion to dismiss was completed December
3, 2018. On May 29, 2019, the magistrate
CONN’S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
judge issued a report, recommending that defendants’ motion to
dismiss the complaint be granted, but recommended that the
plaintiff be permitted to replead his claims. The district court
adopted the recommendation on July 5, 2019.
On July 19, 2019, plaintiff filed an amended complaint. On November
1, 2019, the magistrate judge heard argument on the motion to
dismiss and postponed certain deadlines. Adopting the report and
recommendation issued by the magistrate judge on July 22, 2020, the
district court entered an order on September 25, 2020 denying
defendant’s motion on the breach of fiduciary duty claims and
granting defendants’ motion on the insider trading claims. The
district court also allowed plaintiff leave to amend to add 95250
Canada LTEE, which had been omitted from the amended complaint, as
a party to the case. Plaintiffs filed a corrected amended complaint
on October 21, 2020 in accordance with the district court’s
order.
Another derivative action was filed on January 27, 2015, captioned
as Richard A. Dohn v. Wright, et al., Cause No. 2015-04405, in the
281st Judicial District Court, Harris County, Texas. This action
makes substantially similar allegations to the Original Derivative
Action against the same defendants. This case is stayed until at
least April 29, 2022.
Prior to filing a lawsuit, an alleged shareholder, Robert J. Casey
II (“Casey”), submitted a demand under Delaware law, which our
Board of Directors refused. On May 19, 2016, Casey, purportedly on
behalf of the Company, filed a lawsuit against us and certain of
our current and former directors and former executive officers in
the 55th Judicial District Court, Harris County, Texas, captioned
as Casey, derivatively on behalf of Conn’s, Inc., v. Theodore M.
Wright (former executive officer and former director), Michael J.
Poppe (former executive officer), Brian Taylor (former executive
officer), Bob L. Martin, Jon E.M. Jacoby (former director), Kelly
M. Malson (former director), Douglas H. Martin, David Schofman,
Scott L. Thompson (former director) and William E. Saunders Jr.,
and Conn’s, Inc., Cause No. 2016-33135. The complaint asserts
claims for breach of fiduciary duties and unjust enrichment based
on substantially similar factual allegations as those asserted in
the Original Derivative Action. The complaint does not specify the
amount of damages sought. Since April 2018, this case has been
abated pending the resolution of related cases. In July 2021, the
parties requested that the court extend the abatement pending
further developments in the Original Derivative
Action.
Other than Casey, none of the plaintiffs in the other derivative
actions made a demand on our Board of Directors prior to filing
their respective lawsuits. The defendants in the derivative actions
intend to vigorously defend against these claims. It is not
possible at this time to predict the timing or outcome of any of
this litigation, and we cannot reasonably estimate the possible
loss or range of possible loss from these claims.
We are involved in other routine litigation and claims, incidental
to our business from time to time which, individually or in the
aggregate, are not expected to have a material adverse effect on
us. As required, we accrue estimates 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. 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.
The Company believes that any probable and reasonably estimable
loss associated with the foregoing has been adequately reflected in
the accompanying financial statements.
6. Variable Interest Entities
From time to time, we securitize customer accounts receivables by
transferring the receivables to various bankruptcy-remote VIEs.
Under the terms of the respective securitization transactions, all
cash collections and other cash proceeds of the customer
receivables go first to the servicer and the holders of the
asset-backed notes, and then to the residual equity holder. We
retain the servicing of the securitized portfolio and receive a
monthly fee of 4.75% (annualized) based on the outstanding balance
of the securitized receivables, and we currently hold all of the
residual equity. In addition, we, rather than the VIEs, will retain
certain credit insurance income together with certain recoveries
related to credit insurance and RSAs on charge-offs of the
securitized receivables, which will continue to be reflected as a
reduction of net charge-offs on a consolidated basis for as long as
we consolidate the VIEs.
We consolidate VIEs when we determine that we are the primary
beneficiary of these VIEs, we have the power to direct the
activities that most significantly impact the performance of the
VIEs and our obligation to absorb losses and the right to receive
residual returns are significant.
CONN’S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the assets and liabilities held by the
VIEs (for legal purposes, the assets and liabilities of the VIEs
will remain distinct from Conn’s, Inc.):
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
July 31,
2021 |
|
January 31,
2021 |
Assets: |
|
|
|
Restricted cash |
$ |
28,911 |
|
|
$ |
48,622 |
|
Due from Conn’s, Inc., net |
(10,367) |
|
|
(5,661) |
|
Customer accounts receivable: |
|
|
|
Customer accounts receivable |
225,602 |
|
|
509,574 |
|
Restructured accounts |
81,179 |
|
|
105,395 |
|
Allowance for uncollectible accounts |
(73,655) |
|
|
(159,849) |
|
Allowance for no-interest option credit programs |
(475) |
|
|
(5,502) |
|
Deferred fees and origination costs |
(2,386) |
|
|
(5,503) |
|
Total customer accounts receivable, net |
230,265 |
|
|
444,115 |
|
Total assets |
$ |
248,809 |
|
|
$ |
487,076 |
|
Liabilities: |
|
|
|
Accrued expenses |
$ |
1,871 |
|
|
$ |
3,707 |
|
Other liabilities |
2,279 |
|
|
4,459 |
|
|
|
|
|
Long-term debt: |
|
|
|
2019-A Class A Notes |
— |
|
|
19,521 |
|
2019-A Class B Notes |
— |
|
|
25,069 |
|
2019-A Class C Notes |
— |
|
|
24,202 |
|
2019-B Class A Notes |
— |
|
|
17,860 |
|
2019-B Class B Notes |
19,078 |
|
|
85,540 |
|
2019-B Class C Notes |
83,270 |
|
|
83,270 |
|
2020-A Class A Notes |
22,986 |
|
|
93,326 |
|
2020-A Class B Notes |
45,909 |
|
|
65,200 |
|
2020-A Class C Notes |
44,290 |
|
|
— |
|
|
215,533 |
|
|
413,988 |
|
Less: deferred debt issuance costs |
(971) |
|
|
(2,437) |
|
Total debt |
$ |
214,562 |
|
|
$ |
411,551 |
|
Total liabilities |
$ |
218,712 |
|
|
$ |
419,717 |
|
The assets of the VIEs serve as collateral for the obligations of
the VIEs. The holders of asset-backed notes have no recourse to
assets outside of the respective VIEs.
7.
Segment
Information
Operating segments are defined as components of an enterprise that
engage in business activities and for which discrete financial
information is available that is evaluated on a regular basis by
the chief operating decision maker to make decisions about how to
allocate resources and assess performance. We are a leading
specialty retailer and offer a broad selection of quality, branded
durable consumer goods and related services in addition to a
proprietary credit solution for our core credit-constrained
consumers. We have two operating segments: (i) retail and (ii)
credit. Our operating segments complement one another. The retail
segment operates primarily through our stores and website. Our
retail segment product offerings include furniture and mattresses,
home appliances, consumer electronics and home office products from
leading global brands across a wide range of price points. Our
credit segment offers affordable financing solutions to a large,
under-served population of credit-constrained consumers who
typically have limited credit alternatives. Our operating segments
provide customers the opportunity to comparison shop across brands
with confidence in our competitive prices as well as affordable
monthly payment options, next day delivery and installation in the
majority of our markets, and product repair service. The operating
segments follow the same accounting policies used in our Condensed
Consolidated Financial Statements.
CONN’S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
We evaluate a segment’s performance based upon operating income
before taxes. Selling, general and administrative expenses
(“SG&A”) includes the direct expenses of the retail and credit
operations, allocated overhead expenses, and a charge to the credit
segment to reimburse the retail segment for expenses it incurs
related to occupancy, personnel, advertising and other direct costs
of the retail segment, which benefit the credit operations by
sourcing credit customers and collecting payments. The
reimbursement received by the retail segment from the credit
segment is calculated using an annual rate of 2.5% times the
average outstanding portfolio balance for each applicable
period.
As of July 31, 2021, we operated retail stores in 15 states
with no operations outside of the United States. No single customer
accounts for more than 10% of our total revenues.
Financial information by segment is presented in the following
tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, 2021 |
|
Three Months Ended July 31, 2020 |
(in thousands) |
Retail |
|
Credit |
|
Total |
|
Retail |
|
Credit |
|
Total |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
Furniture and mattress |
$ |
109,259 |
|
|
$ |
— |
|
|
$ |
109,259 |
|
|
$ |
80,984 |
|
|
$ |
— |
|
|
$ |
80,984 |
|
Home appliance |
135,444 |
|
|
— |
|
|
135,444 |
|
|
107,682 |
|
|
— |
|
|
107,682 |
|
Consumer electronics |
48,413 |
|
|
— |
|
|
48,413 |
|
|
47,384 |
|
|
— |
|
|
47,384 |
|
Home office |
17,986 |
|
|
— |
|
|
17,986 |
|
|
14,979 |
|
|
— |
|
|
14,979 |
|
Other |
9,143 |
|
|
— |
|
|
9,143 |
|
|
5,113 |
|
|
— |
|
|
5,113 |
|
Product sales |
320,245 |
|
|
— |
|
|
320,245 |
|
|
256,142 |
|
|
— |
|
|
256,142 |
|
Repair service agreement commissions |
23,700 |
|
|
— |
|
|
23,700 |
|
|
20,164 |
|
|
— |
|
|
20,164 |
|
Service revenues |
2,840 |
|
|
— |
|
|
2,840 |
|
|
3,430 |
|
|
— |
|
|
3,430 |
|
Total net sales |
346,785 |
|
|
— |
|
|
346,785 |
|
|
279,736 |
|
|
— |
|
|
279,736 |
|
Finance charges and other revenues |
224 |
|
|
71,374 |
|
|
71,598 |
|
|
196 |
|
|
86,984 |
|
|
87,180 |
|
Total revenues |
347,009 |
|
|
71,374 |
|
|
418,383 |
|
|
279,932 |
|
|
86,984 |
|
|
366,916 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
216,042 |
|
|
— |
|
|
216,042 |
|
|
176,623 |
|
|
— |
|
|
176,623 |
|
Selling, general and administrative expense
(1)
|
102,157 |
|
|
35,713 |
|
|
137,870 |
|
|
78,584 |
|
|
36,694 |
|
|
115,278 |
|
Provision for bad debts |
142 |
|
|
10,120 |
|
|
10,262 |
|
|
182 |
|
|
31,863 |
|
|
32,045 |
|
Charges and credits |
— |
|
|
— |
|
|
— |
|
|
1,355 |
|
|
179 |
|
|
1,534 |
|
Total costs and expenses |
318,341 |
|
|
45,833 |
|
|
364,174 |
|
|
256,744 |
|
|
68,736 |
|
|
325,480 |
|
Operating income |
28,668 |
|
|
25,541 |
|
|
54,209 |
|
|
23,188 |
|
|
18,248 |
|
|
41,436 |
|
Interest expense |
— |
|
|
6,088 |
|
|
6,088 |
|
|
— |
|
|
13,222 |
|
|
13,222 |
|
Income before income taxes |
$ |
28,668 |
|
|
$ |
19,453 |
|
|
$ |
48,121 |
|
|
$ |
23,188 |
|
|
$ |
5,026 |
|
|
$ |
28,214 |
|
CONN’S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended July 31, 2021 |
|
Six Months Ended July 31, 2020 |
(in thousands) |
Retail |
|
Credit |
|
Total |
|
Retail |
|
Credit |
|
Total |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
Furniture and mattress |
$ |
203,750 |
|
|
$ |
— |
|
|
$ |
203,750 |
|
|
$ |
149,877 |
|
|
$ |
— |
|
|
$ |
149,877 |
|
Home appliance |
248,705 |
|
|
— |
|
|
248,705 |
|
|
188,967 |
|
|
— |
|
|
188,967 |
|
Consumer electronics |
86,451 |
|
|
— |
|
|
86,451 |
|
|
83,160 |
|
|
— |
|
|
83,160 |
|
Home office |
32,507 |
|
|
— |
|
|
32,507 |
|
|
32,345 |
|
|
— |
|
|
32,345 |
|
Other |
18,043 |
|
|
— |
|
|
18,043 |
|
|
8,991 |
|
|
— |
|
|
8,991 |
|
Product sales |
589,456 |
|
|
— |
|
|
589,456 |
|
|
463,340 |
|
|
— |
|
|
463,340 |
|
Repair service agreement commissions |
42,831 |
|
|
— |
|
|
42,831 |
|
|
40,265 |
|
|
— |
|
|
40,265 |
|
Service revenues |
5,794 |
|
|
— |
|
|
5,794 |
|
|
6,461 |
|
|
— |
|
|
6,461 |
|
Total net sales |
638,081 |
|
|
— |
|
|
638,081 |
|
|
510,066 |
|
|
— |
|
|
510,066 |
|
Finance charges and other revenues |
433 |
|
|
143,571 |
|
|
144,004 |
|
|
431 |
|
|
173,579 |
|
|
174,010 |
|
Total revenues |
638,514 |
|
|
143,571 |
|
|
782,085 |
|
|
510,497 |
|
|
173,579 |
|
|
684,076 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
400,921 |
|
|
— |
|
|
400,921 |
|
|
323,637 |
|
|
— |
|
|
323,637 |
|
Selling, general and administrative expense
(1)
|
193,050 |
|
|
70,869 |
|
|
263,919 |
|
|
156,758 |
|
|
71,527 |
|
|
228,285 |
|
Provision for bad debts |
160 |
|
|
(7,034) |
|
|
(6,874) |
|
|
350 |
|
|
149,021 |
|
|
149,371 |
|
Charges and credits |
— |
|
|
— |
|
|
— |
|
|
1,355 |
|
|
2,234 |
|
|
3,589 |
|
Total costs and expenses |
594,131 |
|
|
63,835 |
|
|
657,966 |
|
|
482,100 |
|
|
222,782 |
|
|
704,882 |
|
Operating income (loss) |
44,383 |
|
|
79,736 |
|
|
124,119 |
|
|
28,397 |
|
|
(49,203) |
|
|
(20,806) |
|
Interest expense |
— |
|
|
15,292 |
|
|
15,292 |
|
|
— |
|
|
28,215 |
|
|
28,215 |
|
Loss on extinguishment of debt |
— |
|
|
1,218 |
|
|
1,218 |
|
|
— |
|
|
— |
|
|
— |
|
Income (loss) before income taxes |
$ |
44,383 |
|
|
$ |
63,226 |
|
|
$ |
107,609 |
|
|
$ |
28,397 |
|
|
$ |
(77,418) |
|
|
$ |
(49,021) |
|
|
July 31, 2021 |
|
July 31, 2020 |
(in thousands) |
Retail |
|
Credit |
|
Total |
|
Retail |
|
Credit |
|
Total |
Total assets
|
$ |
672,944 |
|
|
$ |
1,036,003 |
|
|
$ |
1,708,947 |
|
|
$ |
726,304 |
|
|
$ |
1,115,396 |
|
|
$ |
1,841,700 |
|
(1)For
the three months ended July 31, 2021 and 2020, the amount of
corporate overhead allocated to each segment reflected in SG&A
was $9.8 million and $8.5 million, respectively. For the three
months ended July 31, 2021 and 2020, the amount of reimbursement
made to the retail segment by the credit segment was $6.9 million
and $8.9 million, respectively. For the six months ended July 31,
2021 and 2020, the amount of corporate overhead allocated to each
segment reflected in SG&A was $18.8 million and $15.7 million,
respectively. For the six months ended July 31, 2021 and 2020, the
amount of reimbursement made to the retail segment by the credit
segment was $14.2 million and $18.7 million,
respectively.
ITEM 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Forward-Looking Statements
This report 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 our future financial performance, business
strategy, plans, goals and objectives. Statements containing the
words “anticipate,” “believe,” “could,” “estimate,” “expect,”
“intend,” “may,” “plan,” “project,” “should,” “predict,” “will,”
“potential,” or the negative of such terms or other similar
expressions are generally forward-looking in nature and not
historical facts. Such forward-looking statements are based on our
current expectations. 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 our ability to achieve the results either
expressed or implied by our forward-looking statements including,
but not limited to: general economic conditions impacting our
customers or potential customers; our ability to execute periodic
securitizations of future originated customer loans on favorable
terms; our ability to continue existing customer financing programs
or to offer new customer financing programs; changes in the
delinquency status of our credit portfolio; unfavorable
developments in ongoing litigation; increased regulatory oversight;
higher than anticipated net charge-offs in the credit portfolio;
the success of our planned opening of new stores; technological and
market developments and sales trends for our major product
offerings; our ability to manage effectively the selection of our
major product offerings; our ability to protect against
cyber-attacks or data security breaches and to protect the
integrity and security of individually identifiable data of our
customers and employees; our ability to fund our operations,
capital expenditures, debt repayment and expansion from cash flows
from operations, borrowings from our Revolving Credit Facility,
proceeds from accessing debt or equity markets; the effects of
epidemics or pandemics, including the COVID-19 pandemic; and other
risks detailed in Part I, Item 1A, Risk Factors, in our Annual
Report on Form 10-K for the fiscal year ended January 31, 2021
(the “2021 Form 10-K”) and other reports filed with the SEC. 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
report. We disclaim any intention or obligation to update publicly
or revise such statements, whether as a result of new information,
future events or otherwise, or to provide periodic updates or
guidance. All forward-looking statements attributable to us, or to
persons acting on our behalf, are expressly qualified in their
entirety by these cautionary statements.
The Company makes available in the investor relations section of
its website at
ir.conns.com
updated monthly reports to the holders of its asset-backed notes.
This information reflects the performance of the securitized
portfolio only, in contrast to the financial statements contained
herein, which reflect the performance of all of the Company’s
outstanding receivables, including those originated subsequent to
those included in the securitized portfolio. The website and
the information contained on our website is not incorporated in
this Quarterly Report on Form 10-Q or any other document filed with
the SEC.
Overview
We continue to monitor the evolving nature of COVID-19 and respond
to its impact on our business. We have experienced and continue to
experience challenges related to the pandemic. These challenges
increased the complexity of our business, including with respect to
supply chain and sales, and, despite our strong performance during
the second quarter of fiscal year 2022, will likely continue until
the effects of COVID-19 diminish. The full impact of COVID-19
remains uncertain and will depend on future developments, including
the duration and spread of the pandemic, and related actions taken
by federal, state and local government officials to prevent and
manage disease spread and mitigate its economic impact, all of
which are uncertain and unpredictable.
We encourage you to read this Management’s Discussion and Analysis
of Financial Condition and Results of Operations in conjunction
with the accompanying Condensed Consolidated Financial Statements
and related notes. Our fiscal year ends on January 31. References
to a fiscal year refer to the calendar year in which the fiscal
year ends.
Executive Summary
Total revenues were $418.4 million for the three months ended
July 31, 2021 compared to $366.9 million for the three months
ended July 31, 2020, an increase of $51.5 million or 14.0%.
Retail revenues were $347.0 million for the three months ended
July 31, 2021 compared to $279.9 million for the three months
ended July 31, 2020, an increase of $67.1 million or 24.0%.
The increase in retail revenue was primarily driven by an increase
in same store sales of 16.4% and by new store growth. The increase
in same store sales reflects an increase in demand across all of
the Company’s home-related product categories. The increase also
reflects the impact of prior year proactive underwriting changes
and industry wide supply chain disruptions, each of which was the
result of the COVID-19 pandemic. Credit revenues were $71.4 million
for the three months ended July 31, 2021 compared to $87.0
million for the three months ended July 31, 2020, a decrease
of $15.6 million or 17.9%. The decrease
in credit revenue was primarily due to a 22.7% decrease in the
average outstanding balance of the customer receivable portfolio.
These decreases were partially offset by an increase in the yield
rate, from 23.2% for the three months ended July 31, 2020 to 23.3%
for the three months ended July 31, 2021 and an increase in
insurance commissions.
Retail gross margin for the three months ended July 31, 2021
was
37.7%,
an increase of 80 basis points from the 36.9% reported for the
three months ended July 31, 2020. The year-over-year increase
in retail gross margin was primarily driven by a shift in sales
from lower margin products to higher margin products, a decrease in
third-party credit fees and the impact of fixed logistics costs on
higher sales. The increase was partially offset by a slower rate of
increase in repair service agreement commissions compared to
product sales year-over-year.
Selling, general and administrative expense (“SG&A”) for the
three months ended July 31, 2021 was $137.9 million compared
to $115.3 million for the three months ended July 31, 2020, an
increase of $22.6 million or 19.6%. The SG&A increase in the
retail segment was primarily due to increases in new store
occupancy costs, labor costs, advertising expense and general
operating costs. The retail segment increase also reflects the
impact of prior year precautionary cost saving measures enacted in
response to the COVID-19 pandemic.
The SG&A decrease in the credit segment was primarily due to a
decrease in labor costs.
Provision for bad debts was $10.3 million for the three months
ended July 31, 2021 compared to $32.0 million for the three
months ended July 31, 2020, a decrease of $21.7 million. The
change was primarily driven by a year-over-year decrease in net
charge-offs of $43.8 million, partially offset by a smaller
decrease in the allowance for bad debts during the three months
ended July 31, 2021 compared to the three months ended July 31,
2020. The smaller decrease was driven by a lower year-over-year
decline in the customer accounts receivable portfolio balance,
partially offset by a $5.0 million decrease in the economic
adjustment that was driven by an improvement in the forecasted
unemployment rate.
Interest expense was $6.1 million for the three months ended
July 31, 2021 and $13.2 million for the three months ended
July 31, 2020, a decrease of $7.1 million or 53.8%. The
decrease was primarily driven by a lower average outstanding
balance of debt and by a lower effective interest
rate.
Net income for the three months ended July 31, 2021 was $37.0
million, or $1.22 per diluted share, compared to net income of
$20.5 million, or $0.70 per diluted share, for the three months
ended July 31, 2020.
How We Evaluate Our Operations
Senior management focuses on certain key indicators to monitor our
performance including:
•Same
store sales - Our management considers same store sales, which
consists of both brick and mortar and eCommerce sales, to be an
important indicator of our performance because they reflect our
attempts to leverage our SG&A costs, which include rent and
other store expenses, and they have a direct impact on our total
net sales, net income, cash and working capital. Same store sales
is calculated by comparing the reported sales for all stores that
were open during both comparative fiscal years, starting in the
first period in which the store has been open for a full quarter.
Sales from closed stores, if any, are removed from each period.
Sales from relocated stores have been included in each period if
each such store was relocated within the same general geographic
market. Sales from expanded stores have also been included in each
period.
•Retail
gross margin - Our management views retail gross margin as a key
indicator of our performance because it reflects our pricing power
relative to the prices we pay for our products. Retail gross margin
is calculated by comparing retail total net sales to the cost of
goods sold.
•60+
Day Delinquencies - Our management views customer account
delinquencies as a key indicator of our performance because it
reflects the quality of our credit portfolio, drives future credit
performance and credit offerings, and impacts the interest rates we
pay on our asset-backed securitizations. Delinquencies are measured
as the percentage of balances that are 60+ days past
due.
•Net
yield - Our management considers yield to be a key performance
metric because it drives future credit decisions and credit
offerings and directly impacts our net income. Yield reflects
the amount of interest we receive from our
portfolio.
Company Initiatives
In the second quarter of fiscal year 2022, we delivered strong
results driven by our store and eCommerce performance. We delivered
the following financial and operational results in the second
quarter of fiscal year 2022:
•Net
earnings increased to a second quarter record of $1.22 per diluted
share, compared to $0.70 per diluted share for the same period last
fiscal year;
•Same
store sales increased 16.4% for the second quarter of fiscal year
2022 as compared to the second quarter of fiscal year 2021 and
increased 3.2% on a two-year basis;
•Strong
same store sales combined with the contribution of new showrooms
drove a 24.0% increase in total retail sales for the second
quarter;
•eCommerce
sales during the second quarter of fiscal year 2022 increased
210.9% to $17.3 million, as compared to the prior fiscal year
period;
•Lease-to-own
sales during the second quarter of fiscal year 2022 increased 70.3%
to $41.6 million, as compared to the prior fiscal year
period;
•During
the second quarter of fiscal year 2022, the Company added three new
showrooms, all within the state of Florida, bringing the total
number of showrooms at July 31, 2021 to 155, compared to 141
at July 31, 2020; and
•At
July 31, 2021, the carrying value of customer accounts
receivable 60+ days past due declined 42.1% year-over-year to the
lowest level in eight fiscal years, and the carrying value of
re-aged accounts declined 44.5% year-over-year to the lowest level
in six fiscal years.
We believe that we have laid the foundation to execute our
long-term growth strategy and prudently manage financial and
operational risk while maximizing shareholder value. We remain
focused on the following strategic priorities for fiscal year
2022:
•Increase
net income by improving performance across our core operational and
financial metrics: same store sales, retail margin, charge-offs and
net yield;
•Open
11 to 13 new stores in our current geographic footprint to leverage
our existing infrastructure (inclusive of the nine new stores
opened during the first half of fiscal year 2022);
•Optimize
our mix of quality, branded products and gain efficiencies in our
warehouse, delivery and transportation operations to increase our
retail gross margin;
•Continue
to grow our lease-to-own sales;
•Continue
to grow our eCommerce sales;
•Maintain
disciplined oversight of our SG&A;
•Ensure
that the Company has the leadership and human capital pipeline and
capability to drive results and meet present and future business
objectives as the Company continues to expand its retail store
base; and
•Leverage
technology and shared services to drive efficient, effective and
scalable processes.
Outlook
As noted in the “Overview” above, our business and industry
continue to be impacted by the COVID-19 pandemic in the United
States. Going forward, the full extent to which the pandemic will
impact our supply chain, future business and operating results is
uncertain. Government support, including the American Rescue Plan
Act of 2021, 2021 Child Tax Credit Payments and Infrastructure
Investment and Jobs Act, has provided our customers with additional
financial means which we expect has helped, and may continue to
help, our business. We feel we are well positioned to continue
serving our customers and supporting our employees as we continue
to monitor and respond to the pandemic.
The broad appeal of our value proposition to our geographically
diverse core demographic and the unit economics of our business
should provide the stability necessary to maintain and grow our
business. We expect our brand recognition and long history in our
core markets to give us the opportunity to further penetrate our
existing footprint, particularly as we leverage existing marketing
spend, logistics infrastructure, and service footprint. There are
also many markets in the U.S. with demographic characteristics
similar to those in our existing footprint, which provides
substantial opportunities for future growth. We plan to improve our
operating results by leveraging our existing infrastructure and
seeking to continually optimize the efficiency of our marketing,
merchandising, distribution and credit operations. As we expand in
existing markets and penetrate new markets, we expect to increase
our purchase volumes, achieve distribution efficiencies and
strengthen our relationships with our key vendors. Over time, we
also expect our increased store base and higher net sales to
further leverage our existing corporate and regional
infrastructure.
Results of Operations
The following tables present certain financial and other
information, on a condensed consolidated basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated: |
Three Months Ended
July 31, |
|
Six Months Ended
July 31, |
(in thousands) |
2021 |
|
2020 |
|
Change |
|
2021 |
|
2020 |
|
Change |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
$ |
346,785 |
|
|
$ |
279,736 |
|
|
$ |
67,049 |
|
|
$ |
638,081 |
|
|
$ |
510,066 |
|
|
$ |
128,015 |
|
Finance charges and other revenues |
71,598 |
|
|
87,180 |
|
|
(15,582) |
|
|
144,004 |
|
|
174,010 |
|
|
(30,006) |
|
Total revenues |
418,383 |
|
|
366,916 |
|
|
51,467 |
|
|
782,085 |
|
|
684,076 |
|
|
98,009 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
216,042 |
|
|
176,623 |
|
|
39,419 |
|
|
400,921 |
|
|
323,637 |
|
|
77,284 |
|
Selling, general and administrative expense |
137,870 |
|
|
115,278 |
|
|
22,592 |
|
|
263,919 |
|
|
228,285 |
|
|
35,634 |
|
Provision for bad debts |
10,262 |
|
|
32,045 |
|
|
(21,783) |
|
|
(6,874) |
|
|
149,371 |
|
|
(156,245) |
|
Charges and credits |
— |
|
|
1,534 |
|
|
(1,534) |
|
|
— |
|
|
3,589 |
|
|
(3,589) |
|
Total costs and expenses |
364,174 |
|
|
325,480 |
|
|
38,694 |
|
|
657,966 |
|
|
704,882 |
|
|
(46,916) |
|
Operating income (loss) |
54,209 |
|
|
41,436 |
|
|
12,773 |
|
|
124,119 |
|
|
(20,806) |
|
|
144,925 |
|
Interest expense |
6,088 |
|
|
13,222 |
|
|
(7,134) |
|
|
15,292 |
|
|
28,215 |
|
|
(12,923) |
|
Loss on extinguishment of debt |
— |
|
|
— |
|
|
— |
|
|
1,218 |
|
|
— |
|
|
1,218 |
|
Income (loss) before income taxes |
48,121 |
|
|
28,214 |
|
|
19,907 |
|
|
107,609 |
|
|
(49,021) |
|
|
156,630 |
|
Provision (benefit) for income taxes |
11,117 |
|
|
7,694 |
|
|
3,423 |
|
|
25,207 |
|
|
(13,339) |
|
|
38,546 |
|
Net income (loss) |
$ |
37,004 |
|
|
$ |
20,520 |
|
|
$ |
16,484 |
|
|
$ |
82,402 |
|
|
$ |
(35,682) |
|
|
$ |
118,084 |
|
Supplementary Operating Segment Information
Operating segments are defined as components of an enterprise that
engage in business activities and for which discrete financial
information is available that is evaluated on a regular basis by
the chief operating decision maker to make decisions about how to
allocate resources and assess performance. We are a leading
specialty retailer and offer a broad selection of quality, branded
durable consumer goods and related services in addition to a
proprietary credit solution for our core credit-constrained
consumers. We have two operating segments: (i) retail and (ii)
credit. Our operating segments complement one another. The retail
segment operates primarily through our stores and website and its
product offerings include furniture and mattresses, home
appliances, consumer electronics and home office products from
leading global brands across a wide range of price points. Our
credit segment offers affordable financing solutions to a large,
under-served population of credit-constrained consumers who
typically have limited credit alternatives. Our operating segments
provide customers the opportunity to comparison shop across brands
with confidence in our competitive prices as well as affordable
monthly payment options, next day delivery and installation in the
majority of our markets, and product repair service. We believe our
large, attractively merchandised retail stores and credit solutions
offer a distinctive value proposition compared to other retailers
that target our core customer demographic. The operating segments
follow the same accounting policies used in our Condensed
Consolidated Financial Statements.
We evaluate a segment’s performance based upon operating income
(loss). SG&A includes the direct expenses of the retail and
credit operations, allocated corporate overhead expenses, and a
charge to the credit segment to reimburse the retail segment for
expenses it incurs related to occupancy, personnel, advertising and
other direct costs of the retail segment which benefit the credit
operations by sourcing credit customers and collecting payments.
The reimbursement received by the retail segment from the credit
segment is calculated using an annual rate of 2.5% multiplied by
the average outstanding portfolio balance for each applicable
period.
The following table represents total revenues, costs and expenses,
operating income (loss) and income (loss) before taxes attributable
to these operating segments for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Segment: |
Three Months Ended
July 31, |
|
Six Months Ended
July 31, |
(dollars in thousands) |
2021 |
|
2020 |
|
Change |
|
2021 |
|
2020 |
|
Change |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
Product sales |
$ |
320,245 |
|
|
$ |
256,142 |
|
|
$ |
64,103 |
|
|
$ |
589,456 |
|
|
$ |
463,340 |
|
|
$ |
126,116 |
|
Repair service agreement commissions |
23,700 |
|
|
20,164 |
|
|
3,536 |
|
|
42,831 |
|
|
40,265 |
|
|
2,566 |
|
Service revenues |
2,840 |
|
|
3,430 |
|
|
(590) |
|
|
5,794 |
|
|
6,461 |
|
|
(667) |
|
Total net sales |
346,785 |
|
|
279,736 |
|
|
67,049 |
|
|
638,081 |
|
|
510,066 |
|
|
128,015 |
|
Finance charges and other |
224 |
|
|
196 |
|
|
28 |
|
|
433 |
|
|
431 |
|
|
2 |
|
Total revenues |
347,009 |
|
|
279,932 |
|
|
67,077 |
|
|
638,514 |
|
|
510,497 |
|
|
128,017 |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold |
216,042 |
|
|
176,623 |
|
|
39,419 |
|
|
400,921 |
|
|
323,637 |
|
|
77,284 |
|
Selling, general and administrative expense
(1)
|
102,157 |
|
|
78,584 |
|
|
23,573 |
|
|
193,050 |
|
|
156,758 |
|
|
36,292 |
|
Provision for bad debts |
142 |
|
|
182 |
|
|
(40) |
|
|
160 |
|
|
350 |
|
|
(190) |
|
Charges and credits |
— |
|
|
1,355 |
|
|
(1,355) |
|
|
— |
|
|
1,355 |
|
|
(1,355) |
|
Total costs and expenses |
318,341 |
|
|
256,744 |
|
|
61,597 |
|
|
594,131 |
|
|
482,100 |
|
|
112,031 |
|
Operating income |
$ |
28,668 |
|
|
$ |
23,188 |
|
|
$ |
5,480 |
|
|
$ |
44,383 |
|
|
$ |
28,397 |
|
|
$ |
15,986 |
|
Number of stores: |
|
|
|
|
|
|
|
|
|
|
|
Beginning of period |
152 |
|
|
139 |
|
|
|
|
146 |
|
|
137 |
|
|
|
Opened |
3 |
|
|
2 |
|
|
|
|
9 |
|
|
4 |
|
|
|
End of period |
155 |
|
|
141 |
|
|
|
|
155 |
|
|
141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Segment: |
Three Months Ended
July 31, |
|
Six Months Ended
July 31, |
(in thousands) |
2021 |
|
2020 |
|
Change |
|
2021 |
|
2020 |
|
Change |
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
Finance charges and other revenues |
$ |
71,374 |
|
|
$ |
86,984 |
|
|
$ |
(15,610) |
|
|
$ |
143,571 |
|
|
$ |
173,579 |
|
|
$ |
(30,008) |
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
(1)
|
35,713 |
|
|
36,694 |
|
|
(981) |
|
|
70,869 |
|
|
71,527 |
|
|
(658) |
|
Provision for bad debts |
10,120 |
|
|
31,863 |
|
|
(21,743) |
|
|
(7,034) |
|
|
149,021 |
|
|
(156,055) |
|
Charges and credits |
— |
|
|
179 |
|
|
(179) |
|
|
— |
|
|
2,234 |
|
|
(2,234) |
|
Total costs and expenses |
45,833 |
|
|
68,736 |
|
|
(22,903) |
|
|
63,835 |
|
|
222,782 |
|
|
(158,947) |
|
Operating income (loss) |
25,541 |
|
|
18,248 |
|
|
7,293 |
|
|
79,736 |
|
|
(49,203) |
|
|
128,939 |
|
Interest expense |
6,088 |
|
|
13,222 |
|
|
(7,134) |
|
|
15,292 |
|
|
28,215 |
|
|
(12,923) |
|
Loss on extinguishment of debt |
— |
|
|
— |
|
|
— |
|
|
1,218 |
|
|
— |
|
|
1,218 |
|
Income (loss) before income taxes |
$ |
19,453 |
|
|
$ |
5,026 |
|
|
$ |
14,427 |
|
|
$ |
63,226 |
|
|
$ |
(77,418) |
|
|
$ |
140,644 |
|
(1)For
the three months ended July 31, 2021 and 2020, the amount of
overhead allocated to each segment reflected in SG&A was $9.8
million and $8.5 million, respectively. For the three months ended
July 31, 2021 and 2020, the amount of reimbursement made to the
retail segment by the credit segment was $6.9 million and $8.9
million, respectively. For the six months ended July 31, 2021 and
2020, the amount of corporate overhead allocated to each segment
reflected in SG&A was $18.8 million and $15.7 million,
respectively. For the six months ended July 31, 2021 and 2020, the
amount of reimbursement made to the retail segment by the credit
segment was $14.2 million and $18.7 million,
respectively.
Three months ended July 31, 2021 compared to three months
ended July 31, 2020
Revenues.
The following table provides an analysis of retail net sales by
product category in each period, including repair service agreement
(“RSA”) commissions and service revenues, expressed both in dollar
amounts and as a percent of total net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, |
|
|
|
% |
|
Same Store |
(dollars in thousands) |
2021 |
|
% of Total |
|
2020 |
|
% of Total |
|
Change |
|
Change |
|
% Change |
Furniture and mattress |
$ |
109,259 |
|
|
31.5 |
% |
|
$ |
80,984 |
|
|
29.0 |
% |
|
$ |
28,275 |
|
|
34.9 |
% |
|
22.0 |
% |
Home appliance |
135,444 |
|
|
39.1 |
|
|
107,682 |
|
|
38.5 |
|
|
27,762 |
|
|
25.8 |
|
|
17.8 |
|
Consumer electronics |
48,413 |
|
|
14.0 |
|
|
47,384 |
|
|
16.9 |
|
|
1,029 |
|
|
2.2 |
|
|
0.1 |
|
Home office |
17,986 |
|
|
5.2 |
|
|
14,979 |
|
|
5.4 |
|
|
3,007 |
|
|
20.1 |
|
|
10.4 |
|
Other |
9,143 |
|
|
2.6 |
|
|
5,113 |
|
|
1.8 |
|
|
4,030 |
|
|
78.8 |
|
|
71.3 |
|
Product sales |
320,245 |
|
|
92.4 |
|
|
256,142 |
|
|
91.6 |
|
|
64,103 |
|
|
25.0 |
|
|
16.7 |
|
Repair service agreement commissions
(1)
|
23,700 |
|
|
6.8 |
|
|
20,164 |
|
|
7.2 |
|
|
3,536 |
|
|
17.5 |
|
|
13.6 |
|
Service revenues |
2,840 |
|
|
0.8 |
|
|
3,430 |
|
|
1.2 |
|
|
(590) |
|
|
(17.2) |
|
|
|
Total net sales |
$ |
346,785 |
|
|
100.0 |
% |
|
$ |
279,736 |
|
|
100.0 |
% |
|
$ |
67,049 |
|
|
24.0 |
% |
|
16.4 |
% |
(1) The total change in sales of RSA commissions includes
retrospective commissions, which are not reflected in the change in
same store sales.
The increase in product sales for the three months ended July 31,
2021 was primarily driven by an increase in same store sales of
16.4% and by new store growth. The increase in same store sales
reflects an increase in demand across all of the Company’s
home-related product categories. The increase also reflects the
impact of prior year proactive underwriting changes and industry
wide supply chain disruptions, each of which was the result of the
COVID-19 pandemic.
The following table provides the change of the components of
finance charges and other revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
July 31, |
|
|
(in thousands) |
2021 |
|
2020 |
|
Change |
Interest income and fees |
$ |
65,003 |
|
|
$ |
83,599 |
|
|
$ |
(18,596) |
|
Insurance income |
6,371 |
|
|
3,385 |
|
|
2,986 |
|
Other revenues |
224 |
|
|
196 |
|
|
28 |
|
Finance charges and other revenues |
$ |
71,598 |
|
|
$ |
87,180 |
|
|
$ |
(15,582) |
|
The decrease in finance charges and other revenues was primarily
due to a decrease of 22.7% in the average outstanding balance of
the customer accounts receivable portfolio. The decrease was offset
by an increase in the yield rate, from 23.2% for the three months
ended July 31, 2020 to 23.3% during the three months ended July 31,
2021 and an increase in insurance commissions.
The following table provides key portfolio performance
information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
July 31, |
|
|
(dollars in thousands) |
2021 |
|
2020 |
|
Change |
Interest income and fees |
$ |
65,003 |
|
|
|