Conns Inc. CONN, a Texas-based durable consumer goods retailer, posted weaker-than-expected results for third-quarter fiscal 2016, though both the top and bottom lines improved year over year. Concurrently, the company released positive sales data for November. Shares of Conns rose 3.2% following the announcement.
Quarterly adjusted earnings of 2 cents a share came in way below the Zacks Consensus Estimate of 23 cents. However, results fared better than a loss of 8 cents per share recorded last year. Including one-time items, the company posted a loss of 7 cents per share in the reported quarter.
Consolidated revenue of this Zacks Rank #3 (Hold) company advanced 6.8% year over year to $395.2 million, but fell short of the Zacks Consensus Estimate of $407 million. The year-over-year improvement in the top line was primarily driven by store openings and positive comparable-store sales (comps) growth, partly offset by store closures and an increase in credit revenue of the customer receivable portfolio.
Segment Discussion
Conns offers consumer durable products in the U.S. under the Retail segment, which includes home appliances, furniture and mattresses, home office as well as consumer electronics. During the third quarter, the company recorded improved revenues across Furniture and mattress along with Home appliance, while the Home office, Consumer Electronics and Other segments witnessed a year-over-year sales decline.
The segment’s total revenue increased 5.9% to $323.1 million, backed by the addition of 6 stores in the quarter. Comps for the third quarter remained flat year over year. The company had earlier decided to discontinue the sale of video game products, digital cameras and certain tablets from fiscal 2016. Excluding the impact from discontinuance of these products’ sales, comps jumped 3.8%.
Further, gross margin at the Retail segment improved 90 basis points (bps) to 41.5%, fuelled by favorable mix coupled with greater commissions on repair service agreements.
Revenues from the company's Credit segment jumped 11.2% to $72.2 million in the quarter, benefitting from higher average receivable portfolio balance outstanding. The customer portfolio balance soared 19.8% year over year to $1.5 billion at quarter end.
Portfolio interest and fee income yield on an annualized basis, contracted 110 bps to 15.8% due to discontinuation of charging customers with certain payment fees coupled 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 $13.9 million to $58.1 million. The rise was led by a 21.6% increase in average receivable portfolio balance, 15.9% growth in balances originated in the quarter, a rise in delinquencies and an increase in the balance of customer receivables treated as troubled debt restructurings.
The increase in provision of bad debts and fall in portfolio yield led the operating loss at the Credit segment to expand to $18.1 million.
The company’s delinquency rate (percentage of customer portfolio balance over 60 days), rose 20 bps year over year to 10.2% as of Oct 31, 2015.
Liquidity Position
During the quarter, Conns securitized $1.4 billion of retail installment contract receivables, amounting to net proceeds of roughly $1.08 billion. Also, the securitized portfolio generated a return of capital for the residual equity interest worth $7.6 million.
Apart from this, the company also repurchased 1.9 million shares for $51.6 million during the quarter, as part of the $75 million buyback program announced in Sep 2015. Moreover, on Nov 2, management authorized incremental buybacks worth $100 million. Year-to-date, Conns has repurchased 5.2 million shares.
Borrowings outstanding under Conns’ revolving credit facility as of Oct 31, 2015, were $269.5 million.
The company’s cash and cash equivalents stood at nearly $109.1 million as of Oct 31, 2015, while total shareholders’ equity stood at approximately $635.2 million.
Store Update
Conns opened 4 HomePlus stores during the quarter. The company expects to open a total of 15 stores in fiscal 2016. In the fourth quarter, Conns anticipates opening roughly 2 new stores with no store closures.
November Comps
Conns posted its sales data for the month ended Nov 30, 2015. Total retail sales for November advanced 12.4% year over year to $138 million. Moreover, driven by a solid Thanksgiving weekend, comps for the same period grew 3.1%, compared with a 0.5% rise in the year-ago period.
Conns’ comps were impacted by its decision to discontinue its video game products, digital cameras and certain tablets. Excluding the effect from the discontinuation of these products, the company’s November comps jumped 8%.
Also, the company reported its 60-plus day delinquency rate as of Nov 30, 2015, that expanded 10 bps year over year, but contracted to the same extent sequentially, to 10.1% during November.
Segment-wise, while Furniture and mattress posted comps growth of 18.8% in November, comps at the Home appliance, Consumer electronics, Home office and Other segments, declined 1.9%, 4%, 4.5% and 18.7%, respectively.
Guidance
Management stated that market sales trends have been soft due to continuous high oil industry concentration. Also, the company expects comps for the final quarter to be impacted by its decision to exit certain tablets, digital cameras and video games products by the extent of about 6%.
Following the aforementioned announcements and the current scenario, management reiterated its fiscal 2016 guidance. The company continues to envision comps in the range of flat to up low-single digits, and retail gross margin for the fiscal in the band of 40.5%–41.5%.
For the fourth quarter of fiscal 2016, Conns anticipates percentage of bad debt charge-offs (net of recoveries) to average outstanding balance in the range of 13.75%–14.25%, on an annualized basis. Interest income and fee yield are expected to be in the range of 15.75%–16.25% in the fourth quarter.
Stocks to Consider
Better-ranked stocks in the retail sector include Costco Wholesale Corporation COST, Ross Stores Inc. ROST and J. C. Penney Company, Inc. JCP, each with a Zacks Rank #2 (Buy).
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