The retail & consumer electronics segment has been very volatile over the past few quarters. This has been further exasperated by increased bad debt, and has increased operating losses for some companies. Moreover, one company has tried to remedy these issues, but their new efforts have only confused investors. This is why Conn’s Inc. (CONN) is the Zacks Bear of the Day.
This Zacks Rank #5 (Strong Sell) is a specialty retailer currently operating retail locations in Texas and Louisiana. It sells major home appliances, including refrigerators, freezers, washers, dryers and ranges, and a variety of consumer electronics, including projection, plasma and LCD televisions, camcorders, VCRs, DVD players and home theater products. They also sell home office equipment, lawn and garden products and bedding, and continue to introduce additional product categories for the home to help increase same store sales and to respond to their customers' product needs.
In their most recent quarter, Conn’s missed both the Zacks Consensus Earnings and Revenue estimates by a large margin. Management cited higher than expected provisions for bad debt was the major reason for the shortfall. The credit arm recently posted a segment operating loss of $18.1 million, as their 60+ day delinquencies were 10.2% up 20 basis points from last year and up a 100 basis points from the previous quarter. Moreover, bad debt expenses (as a percentage of the portfolio) rose from 14.8% last quarter to 15.7% most recently.
As you can see from the graph below, estimates have been going in the wrong direction for the last few years.
Declining Estimates
Due to the increase in bad debts and management’s new securitization efforts (which only seems to add complexity to their current models) estimates for Q4 15, FY 15, and FY 16 have all significantly declined over the past 30 days; Q4 15 fell from $0.49 to $0.29, FY 15 dropped from $1.62 to $1.21, and FY 15 slipped from $2.31 to $1.97.
Bottom Line
Increased delinquencies, and the overall credit segments large operating losses have made it difficult for management to fill their earnings shortfalls. This coupled with management’s new securitization efforts have increased skepticism from investors.
If you are looking to invest in this volatile segment, you would be best served to look into some other industries. The Retail/Consume Electronic segment currently has no company with a Zacks Rank of 2 or higher (buy). Therefore, it is best to sit on the sidelines while this segment fixes their issues.
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