On Dec 11, 2015, Zacks Investment Research downgraded Texas-based consumer durable goods retailer, Conns Inc. CONN, to a Zacks Rank #5 (Strong Sell).
Why the Downgrade?
Conns recently posted third-quarter fiscal 2016 results, wherein both the top and bottom lines fell short of expectations despite improving year over year. Also, the company witnessed a year-over-year rise in its delinquency data for both the third quarter as well as the month ended Nov 30, 2015.
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 advanced 6.8% year over year to $395.2 million, but missed the Zacks Consensus Estimate of $407 million.
The benefits from strong revenue growth were somewhat offset by a considerable jump in provision for bad debts, attributable to an increase in average receivable portfolio balance, a rise in balances originated in the quarter, an increase in both delinquencies and the balance of customer receivables treated as troubled debt restructurings.
Apart from the earnings announcement, the company also released its November sales and delinquency data, wherein its 60-plus day delinquency rate as of Nov 30, 2015, expanded 10 basis points year over year to 10.1%.
Though comparable store sales (comps) and total retail sales for November witnessed year-over-year improvement, results continued to be affected by Conns’ recent decision to discontinue video game products, digital cameras, and certain tablets.
Further, management stated that market sales trends have been soft due to continuous high oil industry concentration. Looking ahead, the company expects comps for the fourth quarter to be impacted by its decision to exit certain tablets, digital cameras and video games products by the extent of about 6%.
We believe that all the aforementioned factors led to downward revisions in Conns’ earnings estimates as analysts have become less constructive on the stock’s future performance. The Zacks Consensus Estimate declined about 5% to $1.53 for fiscal 2016 and 16.7% to 40 cents per share for the fourth quarter, over the past 7 days.
Stocks to Consider
Better-ranked stocks in the retail sector include Casey's General Stores, Inc. CASY with a Zacks Rank #1 (Strong Buy), Ross Stores Inc. ROST and J. C. Penney Company, Inc. JCP, each with a Zacks Rank #2 (Buy).
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