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Bull of the Day

If you've watched the 3-year decline of "big box" appliance and electronics retailer Best Buy (BBY - Analyst Report), you may have thought that this is a business model to stay away from. I certainly thought so until I discovered Conn's (CONN - Snapshot Report), a family-built retailer with over 50 stores in Texas, 6 in Louisiana, and newer footholds in Oklahoma City, Albuquerque, and Tucson.

Conn's roots go back to 1890 where it started life as a plumbing company in Beaumont, Texas. In 1934, Carroll Wayne Conn, Sr bought the company and within a few years began selling refrigerators and gas ranges. He didn't become the Sam Walton of appliances, but his legacy built a brand that Texans have come to know and trust.

Now they sell just about everything durable for the home, including entertainment electronics, furniture, mattresses and lawn and garden equipment -- and they've built a loyal customer base doing it with a focus on service and satisfaction. The company was also an early innovator of the in-house financing model in the 1960s.

Sales and Profits Grow With Store Build-Out

Since coming public nearly a decade ago, Conn's has continued to expand, with quarterly revenues averaging over $200 million for the past 5 years. The recent Q4FY2013 sales result topped $250 million for the first time since 2008.

This sales growth is propelled by expansion with new locations built around their HomePlus store concept. Pricing power and margin improvement keep their earnings expanding as well.

The company declared strong results on Apr 3, 2013, with EPS of 54 cents a share that surged 58.8% from the 34 cents earned in the year-ago quarter. Comparable-store sales for the quarter climbed 7%.

And Conn's has outperformed the Zacks Consensus Estimate in 4 out of last 5 quarters, with an average beat of 13.4%.

Revenue from the retail segment increased 9.7% to $208.7 million and retail gross margins expanded 720 basis points to 36.9%. Credit card segment revenue soared 14.5% to $41.6 million.

Buoyed by healthy results, management now projects fiscal 2014 earnings between $2.40 and $2.50 with expected comparable-store sales growth of 3% to 8%.

Following this strong report, analysts have scrambled to raise estimates, taking the first and second quarters of fiscal 2014 (the next 2 quarters) up by 29% and 20% to 54 cents and 59 cents, respectively. For fiscal 2014, the Zacks Consensus Estimate has vaulted nearly 20% in the past two weeks from $2.08 to $2.48 per share.

Here's the visual on this reaction by analysts to catch-up with company growth...

One analyst writes, "Our new estimate assumes Conn’s will complete 15 store remodels and will open 12 new stores this year (+26% YoY growth in square footage). In addition, we now anticipate comps for the full year to be around the high end of the guidance range of 3%-8% versus our prior estimate of low single digits."

Big Box Retail 101: Service and Financing

C.W. Conn, Jr. joined his father's company in 1953 after serving in the Korean War. He recognized that customers needed dependable, quality service and founded Conn's repair service and maintenance company, Appliance Parts and Service, in 1962. In 1964 he co-founded Conn Credit Corporation, a consumer credit company, to provide financing to Conn's customers for the purchase of products they needed for their homes.

Mr. Conn, Sr. and Mr. Conn, Jr. were dedicated to their customers and to the idea that consumers should receive value for the dollars they spent on the products they offered in their stores. Their dedication was so strong that they often directed their employees to seek out dissatisfied customers to find what the company could do to make them satisfied customers.

The flexible in-house credit options offered by Conn's allows them to capture more customers, sell higher margin product to consumers with less than perfect credit, and also control approval rates and credit limits. Obviously the company can also capture fees and interest on accounts that are performing. The credit area is also expected to provide strong growth as new stores gain new customers.

Finally, CONN the stock has had quite a run in the past year, moving from $15 to nearly $45 and 7-year highs. And this has pushed the forward P/E to over 16X. While giant competitor Best Buy trades at only 11X, if you want quality, organic growth that builds customer loyalty as a top priority in a very tough business space, consider Conn's on any pullbacks because it can probably support a high teens multiple in an expanding economy with a spirited housing market.

Kevin Cook is a Senior Stock Strategist with Zacks.com

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