Conn's, Inc. Reports Second Quarter Fiscal 2019 Financial Results

First Quarter of Positive Same Store Sales in Three Years

Record Retail Gross Margin of 41.4%

Credit Segment Benefitting from Record Quarterly Revenues, Strong Credit Quality, and Lower Funding Costs

Record Second Quarter GAAP Earnings per Diluted Share of $0.53, an Increase of 279% over the Prior Year Period

THE WOODLANDS, Texas, Sept. 04, 2018 (GLOBE NEWSWIRE) -- Conn's, Inc. (NASDAQ:CONN), a specialty retailer of furniture and mattresses, home appliances, consumer electronics and home office products, and provider of consumer credit, today announced its financial results for the quarter ended July 31, 2018.

"We achieved many operating and financial milestones during the second quarter of fiscal year 2019, highlighted by significant growth in earnings to a second quarter record of $0.53 per diluted share.  Second quarter financial results were driven primarily by positive same store sales, the contribution of new store growth, record retail gross margin, and continued improvement in credit segment performance.  The initiatives to drive retail growth are starting to take hold and second quarter same store sales increased for the first time since the second quarter of fiscal year 2016, while total retail sales were up 3.5% over the prior year period.  The momentum in our business is encouraging and we continue to believe fiscal year 2019 will be a strong year," stated Norm Miller, Conn's Chairman and Chief Executive Officer.

Second quarter of fiscal year 2019 highlights include:

  • First quarter of positive same store sales in three years, with total revenues up 3.5% over prior year period
  • Record retail gross margin of 41.4%
  • Credit spread of 750 basis points, the best second quarter credit spread in four years
  • Record quarterly credit segment revenues of $88.2 million
  • 60+ day delinquency rate of 9.0%, representing the fourth consecutive quarter that the rate has declined year-over-year and the first decline from the first quarter rate in seven years 
  • Second consecutive quarter of positive credit segment operating income
  • Interest expense of $15.6 million, compared to $20.0 million for the same period last fiscal year
  • GAAP earnings of $0.53 per diluted share, an increase of 279% over prior year period to a second quarter record
  • Adjusted earnings of $0.57 per diluted share, an increase of 119% over prior year period

Second Quarter Results

Net income for the three months ended July 31, 2018 was $17.0 million, or $0.53 per diluted share, compared to net income for the three months ended July 31, 2017 of $4.3 million, or $0.14 per diluted share.  On a non-GAAP basis, adjusted net income for the three months ended July 31, 2018 was $18.3 million, or $0.57 per diluted share, which excludes the loss on extinguishment of debt from the early retirement of our Series 2017-A Class B and C Notes and a contingency reserve related to a regulatory matter.  This compares to adjusted net income for the three months ended July 31, 2017 of $8.2 million, or $0.26 per diluted share, which excludes charges and credits and the loss from extinguishment of debt related to the early redemption of our Series 2015-A Class B Notes.

Retail Segment Second Quarter Results

Total retail revenues were $296.4 million for the three months ended July 31, 2018 compared to $286.5 million for the three months ended July 31, 2017.  The increase of 3.5% was primarily driven by new store growth and an increase in same store sales.  For the three months ended July 31, 2018 and 2017, retail segment operating income was $39.2 million and $31.3 million, respectively.  On a non-GAAP basis, adjusted retail segment operating income for the three months ended July 31, 2018 was $39.5 million, after excluding a contingency reserve related to a regulatory matter. On a non-GAAP basis, adjusted retail segment operating income for the three months ended July 31, 2017 was $32.8 million, after excluding severance costs related to a change in the executive management team.

The following table presents net sales and changes in net sales by category:

               
  Three Months Ended July 31,       %   Same Store
(dollars in thousands) 2018   % of Total   2017   % of Total   Change   Change   % Change
Furniture and mattress (1) $ 97,066     32.8 %   $ 95,297     33.3 %   $ 1,769     1.9 %   (2.3 )%
Home appliance 91,471     30.9     89,085     31.1     2,386     2.7     0.4  
Consumer electronics (1) 55,654     18.8     52,946     18.5     2,708     5.1     5.3  
Home office (1) 19,289     6.5     17,862     6.2     1,427     8.0     8.5  
Other 3,699     1.2     4,403     1.5     (704 )   (16.0 )   (18.2 )
Product sales 267,179     90.2     259,593     90.6     7,586     2.9     0.6  
Repair service agreement commissions (2) 25,662     8.6     23,519     8.2     2,143     9.1     (1.9 )
Service revenues 3,472     1.2     3,301     1.2     171     5.2      
Total net sales $ 296,313     100.0 %   $ 286,413     100.0 %   $ 9,900     3.5 %   0.3 %
                                               
(1) During the three months ended July 31, 2017, we reclassified certain products from the consumer electronics and home office product categories into the furniture and mattress product category. Net sales of these products reflected in the consumer electronics and home office product categories for the three months ended July 31, 2017 were $2.6 million and $0.8 million, respectively. The change in same store sales reflects the current product classification for both periods presented.
(2) The total change in sales of repair service agreement commissions includes retrospective commissions, which are not reflected in the change in same store sales.
 

The following provides a summary of the same store sales performance of our product categories during the three months ended July 31, 2018 as compared to the three months ended July 31, 2017:

  • Furniture unit volume decreased 4.3%, partially offset by a 2.5% increase in average selling price;
  • Mattress unit volume decreased 13.8%, partially offset by a 11.8% increase in average selling price;
  • Home appliance average selling price increased 7.4%, partially offset by a 6.5% decrease in unit volume;
  • Consumer electronic unit volume increased 2.2% and average sales price increased 3.0%; and
  • Home office unit volume increased 13.7%, partially offset by a 4.5% decrease in average selling price.

Credit Segment Second Quarter Results

Credit revenues were $88.2 million for the three months ended July 31, 2018 compared to $80.1 million for the three months ended July 31, 2017. The 10.1% increase in credit revenue was primarily due to the origination of our higher-yielding direct loan product, which resulted in an increase in the portfolio yield rate to 21.3% from 18.7%, and a 1.5% increase in the average balance of the customer receivable portfolio. The total customer portfolio balance was $1.51 billion at July 31, 2018 compared to $1.48 billion at July 31, 2017, an increase of 1.9%.

Provision for bad debts was $50.5 million for the three months ended July 31, 2018 compared to $49.3 million for the three months ended July 31, 2017, an increase of $1.2 million.  The change reflects a greater decrease in the allowance for bad debts during the three months ended July 31, 2017 as compared to the three months ended July 31, 2018, partially offset by a year-over-year reduction in net charge-offs of $3.0 million.

Additional information on the credit portfolio and its performance may be found in the Customer Receivable Portfolio Statistics table included within this press release and in the Company's Form 10-Q for the quarter ended July 31, 2018, to be filed with the Securities and Exchange Commission.

Store Update

The Company opened two new Conn's HomePlus® stores in Texas during the first half of fiscal year 2019.  In August, the Company opened one additional store in Virginia, bringing the total store count to 119 in 14 states. During fiscal year 2019, the Company plans to open a total of seven to nine new stores in existing states to leverage current infrastructure.

Liquidity and Capital Resources

As of July 31, 2018, the Company had $366.6 million of immediately available borrowing capacity under its $650.0 million revolving credit facility, with an additional $19.4 million that may become available under the Company's revolving credit facility if the Company grows the balance of eligible customer receivables and our total eligible inventory balances under the borrowing base. The Company also had $4.4 million of unrestricted cash available for use.

Outlook and Guidance

The following are the Company's expectations for the business for the third quarter of fiscal year 2019:

  • Change in same store sales between negative 5% and 0%:
    • Markets not impacted by Hurricane Harvey between negative 2% and positive 2%; and
    • Markets impacted by Hurricane Harvey between negative 12% and negative 5%;
  • Retail gross margin between 40.5% and 41.0% of total retail net sales;
  • Selling, general and administrative expenses between 30.5% and 32.5% of total revenues;
  • Provision for bad debts between $44.0 million and $48.0 million;
  • Finance charges and other revenues between $90.5 million and $94.5 million; and
  • Interest expense between $16.5 million and $17.5 million.

Conference Call Information

The Company will host a conference call on September 4, 2018 at 10 a.m. CT / 11 a.m. ET to discuss its three months ended July 31, 2018 financial results. Participants can join the call by dialing 877-451-6152 or 201-389-0879. The conference call will also be broadcast simultaneously via webcast on a listen-only basis. A link to the earnings release, webcast and the second quarter fiscal year 2019 conference call presentation will be available at ir.conns.com.

Replay of the telephonic call can be accessed through September 11, 2018 by dialing 844-512-2921 or 412-317-6671 and Conference ID: 13682980.

About Conn's, Inc.

Conn's HomePlus is a specialty retailer currently operating 119 retail locations in Alabama, Arizona, Colorado, Georgia, Louisiana, Mississippi, Nevada, New Mexico, North Carolina, Oklahoma, South Carolina, Tennessee, Texas and Virginia.  The Company's primary product categories include:

  • Furniture and mattress, including furniture and related accessories for the living room, dining room and bedroom, as well as both traditional and specialty mattresses;
  • Home appliance, including refrigerators, freezers, washers, dryers, dishwashers and ranges;
  • Consumer electronics, including LED, OLED, QLED, 4K Ultra HD, and smart televisions, Blu-ray players, home theaters, portable audio equipment, and gaming products;
  • Home office, including computers, printers and accessories.

Additionally, Conn's HomePlus offers a variety of products on a seasonal basis.  Unlike many of its competitors, Conn's HomePlus provides flexible in-house credit options for its customers in addition to third-party financing programs and third-party lease-to-own payment plans.

This press release 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, and proceeds from accessing debt or equity markets; 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, 2018, Part II, Item 1A, Risk Factors, in our Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 2018 to be filed with the SEC 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 press release.  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.

CONN-G

S.M. Berger & Company
Andrew Berger (216) 464-6400

       
CONN'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(dollars in thousands, except per share amounts)
       
  Three Months Ended July 31,   Six Months Ended July 31,
  2018   2017   2018   2017
Revenues:              
Total net sales $ 296,313     $ 286,413     $ 572,069     $ 565,698  
Finance charges and other revenues 88,307     80,234     170,938     156,775  
Total revenues 384,620     366,647     743,007     722,473  
Costs and expenses:              
Cost of goods sold 173,627     172,306     340,216     344,256  
Selling, general and administrative expense 120,690     111,632     235,568     218,169  
Provision for bad debts 50,751     49,449     94,907     105,379  
Charges and credits 300     4,068     300     5,295  
Total costs and expenses 345,368     337,455     670,991     673,099  
Operating income 39,252     29,192     72,016     49,374  
Interest expense 15,566     20,039     32,386     44,047  
Loss on extinguishment of debt 1,367     2,097     1,773     2,446  
Income before income taxes 22,319     7,056     37,857     2,881  
Provision for income taxes 5,308     2,783     8,114     1,188  
Net income $ 17,011     $ 4,273     $ 29,743     $ 1,693  
Income per share:              
Basic $ 0.54     $ 0.14     $ 0.94     $ 0.05  
Diluted $ 0.53     $ 0.14     $ 0.92     $ 0.05  
Weighted average common shares outstanding:              
Basic 31,652,017     31,093,746     31,597,225     31,033,880  
Diluted 32,242,463     31,434,501     32,210,759     31,292,305  
                       
       
CONN'S, INC. AND SUBSIDIARIES
CONDENSED RETAIL SEGMENT FINANCIAL INFORMATION
(unaudited)
(dollars in thousands)
       
  Three Months Ended July 31,   Six Months Ended July 31,
  2018   2017   2018   2017
Revenues:              
Product sales $ 267,179     $ 259,593     $ 516,493     $ 510,955  
Repair service agreement commissions 25,662     23,519     48,525     48,215  
Service revenues 3,472     3,301     7,051     6,528  
Total net sales 296,313     286,413     572,069     565,698  
Other revenues 98     92     112     172  
Total revenues 296,411     286,505     572,181     565,870  
Costs and expenses:              
Cost of goods sold 173,627     172,306     340,216     344,256  
Selling, general and administrative expense 83,003     78,667     160,755     152,614  
Provision for bad debts 243     165     503     395  
Charges and credits 300     4,068     300     5,295  
Total costs and expenses 257,173     255,206     501,774     502,560  
Operating income $ 39,238     $ 31,299     $ 70,407     $ 63,310  
Retail gross margin 41.4 %   39.8 %   40.5 %   39.1 %
Selling, general and administrative expense as percent of revenues 28.0 %   27.5 %   28.1 %   27.0 %
Operating margin 13.2 %   10.9 %   12.3 %   11.2 %
Store count:              
Beginning of period 118     115     116     113  
Opened     1     2     3  
End of period 118     116     118     116  
                       
       
CONN'S, INC. AND SUBSIDIARIES
CONDENSED CREDIT SEGMENT FINANCIAL INFORMATION
(unaudited)
(dollars in thousands)
       
  Three Months Ended July 31,   Six Months Ended July 31,
  2018   2017   2018   2017
Revenues:              
Finance charges and other revenues $ 88,209     $ 80,142     $ 170,826     $ 156,603  
Costs and expenses:              
Selling, general and administrative expense 37,687     32,965     74,813     65,555  
Provision for bad debts 50,508     49,284     94,404     104,984  
Total costs and expenses 88,195     82,249     169,217     170,539  
Operating income (loss) 14     (2,107 )   1,609     (13,936 )
Interest expense 15,566     20,039     32,386     44,047  
Loss on extinguishment of debt 1,367     2,097     1,773     2,446  
Loss before income taxes $ (16,919 )   $ (24,243 )   $ (32,550 )   $ (60,429 )
Selling, general and administrative expense as percent of revenues 42.7 %   41.1 %   43.8 %   41.9 %
Selling, general and administrative expense as percent of average total customer portfolio balance (annualized) 10.1 %   8.9 %   10.0 %   8.8 %
Operating margin %   (2.6 )%   0.9 %   (8.9 )%
                       
   
CONN'S, INC. AND SUBSIDIARIES
CUSTOMER RECEIVABLE PORTFOLIO STATISTICS
(unaudited)
   
  As of July 31,
  2018   2017
Weighted average credit score of outstanding balances(1) 594     589  
Average outstanding customer balance $ 2,503     $ 2,375  
Balances 60+ days past due as a percentage of total customer portfolio balance(2) 9.0 %   10.4 %
Re-aged balance as a percentage of total customer portfolio balance(2)(3) 24.3 %   16.0 %
Account balances re-aged more than six months (in thousands) $ 84,148     $ 75,694  
Allowance for bad debts as a percentage of total customer portfolio balance 13.5 %   13.7 %
Percent of total customer portfolio balance represented by no-interest option receivables 20.9 %   24.1 %
           
  Three Months Ended  July 31,   Six Months Ended  July 31,
  2018   2017   2018   2017
Total applications processed 295,564     297,587     579,050     587,914  
Weighted average origination credit score of sales financed(1) 610     609     609     608  
Percent of total applications approved and utilized 31.4 %   32.8 %   30.9 %   32.1 %
Average down payment 2.6 %   3.0 %   2.8 %   3.3 %
Average income of credit customer at origination $ 43,700     $ 42,300     $ 43,700     $ 42,200  
Percent of retail sales paid for by:              
In-house financing, including down payment received 70.5 %   72.6 %   70.3 %   71.6 %
Third-party financing 16.4 %   17.2 %   15.7 %   16.2 %
Third-party lease-to-own option 6.4 %   3.8 %   6.9 %   5.7 %
  93.3 %   93.6 %   92.9 %   93.5 %
                       
(1) Credit scores exclude non-scored accounts.
(2) Accounts that become delinquent after being re-aged are included in both the delinquency and re-aged amounts.
(3) The re-aged balance as a percentage of total customer portfolio as of July 31, 2018 includes $41.6 million, or 2.8%, in first time re-ages related to customers affected by Hurricane Harvey within FEMA-designated disaster areas.
 
       
CONN'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands)
       
  July 31,
 2018
  January 31,
 2018
Assets      
Current Assets:      
Cash and cash equivalents $ 4,435     $ 9,286  
Restricted cash 51,657     86,872  
Customer accounts receivable, net of allowances 622,009     636,825  
Other accounts receivable 87,797     71,186  
Inventories 195,728     211,894  
Income taxes recoverable 704     32,362  
Prepaid expenses and other current assets 13,831     31,592  
Total current assets 976,161     1,080,017  
Long-term portion of customer accounts receivable, net of allowances 647,494     650,608  
Property and equipment, net 142,631     143,152  
Deferred income taxes 23,086     21,565  
Other assets 7,129     5,457  
Total assets $ 1,796,501     $ 1,900,799  
Liabilities and Stockholders' Equity      
Current liabilities:      
Current maturities of debt and capital lease obligations $ 1,149     $ 907  
Accounts payable 85,001     71,617  
Accrued expenses 93,070     66,173  
Other current liabilities 22,763     25,414  
Total current liabilities 201,983     164,111  
Deferred rent 85,255     87,003  
Long-term debt and capital lease obligations 916,081     1,090,105  
Other long-term liabilities 23,535     24,512  
Total liabilities 1,226,854     1,365,731  
Stockholders' equity 569,647     535,068  
Total liabilities and stockholders' equity $ 1,796,501     $ 1,900,799  
               
       
CONN'S, INC. AND SUBSIDIARIES
NON-GAAP RECONCILIATIONS
(unaudited)
(dollars in thousands, except per share amounts)
 
RETAIL SEGMENT OPERATING INCOME, AS ADJUSTED
       
  Three Months Ended  July 31,   Six Months Ended  July 31,
  2018   2017   2018   2017
Retail segment operating income, as reported $ 39,238     $ 31,299     $ 70,407     $ 63,310  
Adjustments:              
Facility closure costs     122         1,349  
Securities-related regulatory matter and other legal fees 300     34     300     34  
Employee severance     1,317         1,317  
Retail segment operating income, as adjusted $ 39,538     $ 32,772     $ 70,707     $ 66,010  
Retail segment total revenues $ 296,411     $ 286,505     $ 572,181     $ 565,870  
Retail segment operating margin:              
As reported 13.2 %   10.9 %   12.3 %   11.2 %
As adjusted 13.3 %   11.4 %   12.4 %   11.7 %
                       
       
NET INCOME, AS ADJUSTED, AND DILUTED INCOME PER SHARE, AS ADJUSTED
       
  Three Months Ended  July 31,   Six Months Ended  July 31,
  2018   2017   2018   2017
Net income, as reported $ 17,011     $ 4,273     $ 29,743     $ 1,693  
Adjustments:              
Facility closure costs     122         1,349  
Securities-related regulatory matter and other legal fees 300     34     300     34  
Employee severance     1,317         1,317  
Indirect tax audit reserve     2,595         2,595  
Loss on extinguishment of debt 1,367     2,097     1,773     2,446  
Tax impact of adjustments (397 )   (2,232 )   (444 )   (2,803 )
Net income, as adjusted $ 18,281     $ 8,206     $ 31,372     $ 6,631  
Weighted average common shares outstanding - Diluted 32,242,463     31,434,501     32,210,759     31,292,305  
Income per share:              
As reported $ 0.53     $ 0.14     $ 0.92     $ 0.05  
As adjusted $ 0.57     $ 0.26     $ 0.97     $ 0.21  
                               

Basis for presentation of non-GAAP disclosures:

To supplement the condensed consolidated financial statements, which are prepared and presented in accordance with accounting principles generally accepted in the United States of America ("GAAP"), the Company also provides the following non-GAAP financial measures: retail segment adjusted operating income, retail segment adjusted operating margin, adjusted net income (loss), and adjusted income (loss) per diluted share.  These non-GAAP financial measures are not meant to be considered as a substitute for, or superior to, comparable GAAP measures and should be considered in addition to results presented in accordance with GAAP.  They are intended to provide additional insight into our operations and the factors and trends affecting the business. Management believes these non-GAAP financial measures are useful to financial statement readers because (1) they allow for greater transparency with respect to key metrics we use in our financial and operational decision making, and (2) they are used by some of our institutional investors and the analyst community to help them analyze our operating results.

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