Shares of Conn’s Inc. CONN rose 7.1% after the company posted its first-quarter fiscal 2016 results, wherein adjusted earnings of 44 cents a share came ahead of the Zacks Consensus Estimate of 42 cents. However, earnings slumped 80% year over year.
Conn's Inc. – Earnings Surprise | FindTheCompany
Including one-time items, earnings came in at 43 cents, down 44.2% year over year.
Consolidated revenue of this Zacks Rank #3 (Hold) company advanced 8.8% year over year to $365.1 million, though it fell short of the Zacks Consensus Estimate of $369.5 million. The year-over-year growth in revenue was primarily driven by store openings, partly offset by negative comparable store sales (comps).
The company has two operating segments, namely Retail and Credit. The performances of these two segments in the first quarter are discussed below.
Segment Discussion
Conn’s offers consumer durable products in the United States under the Retail segment, which includes home appliances, furniture and mattresses, home office as well as consumer electronics. During the first quarter, the company recorded improved revenues across all these sections excluding home office, which was greatly impacted by a fall in unit volumes.
The segment’s total revenue increased 7.5% to $298.5 million, backed by the opening of 12 net new stores, partially offset by a 4.3% fall in comps.
Retail gross margin for the quarter contracted 10 basis points (bps) to 41.3%, on account of unleveraged warehousing expenses.
However, adjusted operating income at the segment escalated 9.3% to $43.2 million, mainly backed by reduced store and facility closure and relocation expenses.
Revenues from the company's Credit segment jumped 15.9% to $66.4 million in the quarter, benefitting from higher average receivable portfolio balance outstanding. The customer portfolio balance soared 25.2% year over year to $1.4 billion at quarter end.
Portfolio interest and fee income yield on an annualized basis, contracted 100 bps to 16.6%, due to increased provision for uncollectible interest along with the introduction of new payment programs for select higher credit quality borrowers.
During the quarter, the company’s provision for bad debts increased by $25.3 million to $47.5 million. The rise was led by a 26.4% increase in average receivable portfolio balance, a 17.5% increase in balances originated in the quarter, a rise in delinquencies and higher anticipated charge-offs over the next one year as losses are being realized at a greater-than-expected rate.
The increase in provision of bad debts led the operating loss at the Credit segment to expand to $8.5 million.
The company’s delinquency rate (percentage of customer portfolio balance over 60 days), rose 40 bps year over year to 8.4% as of Apr 30, 2015. However, it witnessed a sequential decline of 130 bps, gaining from the adoption of tighter underwriting standards.
Further, management stated that its efforts to resolve the less than 60-day delinquency rate have been steady.
Liquidity Position
Borrowings outstanding under Conn’s asset-based loan facility as of Apr 30, 2015, were $473.8 million. The company has an immediately available borrowing capacity of $356.3 million. Additionally, the company may avail an additional credit facility of $48.8 million if its inventory and customer receivables increase to a certain level.
The company’s cash and cash equivalents stood at nearly $5 million as of Apr 30, 2015, while total shareholders’ equity stood at approximately $670 million.
Store Update
Conn’s opened three HomePlus stores during the quarter, while closing two, taking its total store count to 91 as of Apr 30, 2015.
The company expects to open 15–18 stores, and shutter two in fiscal 2016.
Other Announcements & Conclusion
The board of directors of Conn’s had authorized its management to properly explore, analyze and look for ways to improve shareholder value in Oct 2014. These actions could include the complete sale of business, slowing down the pace of store openings, or segregation of the company’s Retail and Credit segments.
After considering various options including the aforementioned ones, management stated that it has been granted the authorization for selling all or part of its loan portfolio, or refinancing the same. However, nothing has been finalized as yet and the company may or may not pursue this action.
Also, Conn’s is still in the process of looking for personnel to fill its additional senior leadership positions.
Further, on account of disappointing sales and product margins along with greater charge-offs from video game products, digital cameras and certain tablets in fiscal 2015, the company decided to discontinue the sale of these products from fiscal 2016.
Guidance
Following these announcements and the current scenario, the company reiterated its fiscal 2016 guidance. The company continues to envision comps in the range of flat to up low-single digits. Retail gross margin for the fiscal is expected in the band of 40%–41%.
For the second quarter of fiscal 2016, Conn’s anticipates percentage of bad debt charge-offs (net of recoveries) to average outstanding balance in the range of 11.5%–12.0%. Interest income and fee yield are expected to be in the range of 16.5%–17.0% in the second quarter.
Stocks to Consider
Better-ranked stocks in the retail sector include Aaron's, Inc. AAN, with a Zacks Rank #1 (Strong Buy), Casey's General Stores, Inc. CASY and Ross Stores Inc. ROST, each carrying a Zacks Rank #2 (Buy).
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