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Conns' (CONN) Q3 Loss Narrower than Expected; Stock Up
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Shares of Conn's, Inc. (CONN - Free Report) rose nearly 8.9% after the company posted narrower-than-expected loss for third-quarter fiscal 2017. Also, this Zacks Rank #3 (Hold) stock has surged 35.7% in the past six months and outperformed the Zacks categorized Retail–Consumer Electronics industry growth of 31.1%.
The company recorded adjusted loss of 8 cents per share in the quarter, narrower than the Zacks Consensus Estimate of a loss of 19 cents. However, in the year-ago quarter, the company had reported adjusted earnings of 2 cents per share.
Including one-time items, the company posted a loss of 12 cents per share, against earnings of 7 cents in the year-ago quarter.
Total revenue fell 4.7% year over year to $376.8 million and also came in below the Zacks Consensus Estimate of $392.8 million. Further, the refinements made to the underwriting model impacted fiscal third-quarter comparable store sales (comps) by nearly 1000 basis points (bps).
Segment Discussion
Conns offers consumer durable products in the U.S. under the Retail segment, including home appliances, furniture and mattresses, home office as well as consumer electronics. During the fiscal third quarter, the company witnessed a year-over-year sales decline across Furniture and mattress, along with Home appliance, Home office, Consumer Electronics and Other segments.
The Retail segment’s total revenue decreased 4.5% to $308.4 million, mainly due to lower comps, partly offset by the introduction of new stores. Also, sales were adversely affected by underwriting changes made in fourth-quarter fiscal 2016 and fiscal 2017. Comps for the reported quarter declined 10.1%. Excluding adjustment for the recent underwriting refinements, it edged down 0.1%.
Further, gross margin at the Retail segment expanded 40 bps, both on a year-over-year and sequential basis, to 37.5%. The rise was attributable to higher warehouse and delivery charges, along with improved product assortments.
Moreover, adjusted operating profit at the Retail segment came in at $35.9 million, down 6.8% year over year, on excluding the net charges of $2.0 million, mainly related to impairments from disposals, legal and professional fees. In addition, operating margin contracted 20 bps to 11.7%.
Revenues from the company's Credit segment fell 5.2% to $68.4 million in the quarter. This was due to declining credit insurance commissions and lower average rates, along with an 80-bps contraction in the yield rate to 15.0%, partially mitigated by average balance growth of 3.9% in the customer receivable portfolio. At quarter end, total customer portfolio balance improved 2.2% year over year to $1.5 billion.
During the fiscal third quarter, the company’s provision for bad debts decreased by $6.8 million to $51.3 million. This was led by a marginal improvement noted in the allowance for bad debt, attributable to sluggish portfolio growth and underwriting refinements, partly compensated by higher net charge-offs. Additionally, the provision for bad debts gained from improved performance of the portfolio, which fell 11.4% year over year. This, in turn, highlights the first provision reduction in the last four quarters, on a yearly basis. Consequently, as a percentage of the average portfolio balance, the fiscal third-quarter provision came in at 13.3%, versus 15.6% delivered in the year-ago quarter.
Moreover, slower portfolio growth, along with the shift in long-term no-interest programs to Synchrony, hurt the 60-day delinquency rate in the reported quarter. At the end of the fiscal third quarter, the 60-day delinquency rate, after adjusting these items, came in at 10.9% of the total outstanding loan balance.
Liquidity Position
As of Oct 31, 2016, the company had cash and cash equivalents of nearly $59.1 million, long-term debt and capital lease obligations of $1,259.0 million, and total shareholders’ equity of approximately $516.7 million.
Borrowings outstanding under Conns’ revolving credit facility of $810 million, as of Oct 31, 2016, were $146.0 million. The company also had $59.1 million free cash available for use.
Store Update
During the reported quarter, Conns introduced one new Conn's HomePlus store in North Carolina, raising the company’s total store count to 113. With this, the company has opened 10 new stores in fiscal 2017 and plans to open no additional stores in the rest of the fiscal year.
Going forward, Conns expects to open three stores in fiscal 2018.
Other Developments
Conns’ has been witnessing improvements from its credit business as evident from its fiscal third-quarter notable reductions in initial stage delinquency and first pay defaults. Further, it completed the implementation of its Texas direct loan program before the scheduled time. Notably, it started its operation across all 55 Texas locations by October end. Consequently, it improved APR more than 27%, increasing over 500 bps, as compared with the month of September. Going forward, management expects the loan program to produce nearly 600–900 bps.
Also, Conns disposed the 2016-A Class C Notes at a premium and completed its third ABS transaction since Sep 2015, during October.
Meanwhile, the company’s retail business has been performing well amid the tough retail environment and remains on track to improve the performance of its credit business and thus overall profitability. Also, its turn-around strategic initiatives are likely to impact the company's financial results, going forward.
Guidance
For fourth-quarter fiscal 2017, the company expects comps to decrease nearly 10.0%. For November, its comps declined nearly 8% due to the underwriting refinements.
Further, retail gross margin is anticipated between 37.0–37.5%, and selling, general and administrative expenses, as a percentage of total revenues, in the range of 27.75–28.75%.
Conns also projects the provision for bad debts to be in the band of 16.75–17.75% of the average total customer portfolio balance. Also, other revenues and credit segment finance charges are estimated between 18.75–19.25% of the average total customer portfolio balance. Interest expenses are anticipated in the range of $25.5–$26.5 million.
Best Buy, with a long-term earnings growth rate of 11.9%, has jumped 54.1% year to date.
The Children's Place, with a long-term earnings growth rate of 10.3%, has gained 93.3% year to date.
Tilly’s, with a long-term earnings growth rate of 15.5%, has surged a whopping 138.1% in the past six months.
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Conns' (CONN) Q3 Loss Narrower than Expected; Stock Up
Shares of Conn's, Inc. (CONN - Free Report) rose nearly 8.9% after the company posted narrower-than-expected loss for third-quarter fiscal 2017. Also, this Zacks Rank #3 (Hold) stock has surged 35.7% in the past six months and outperformed the Zacks categorized Retail–Consumer Electronics industry growth of 31.1%.
The company recorded adjusted loss of 8 cents per share in the quarter, narrower than the Zacks Consensus Estimate of a loss of 19 cents. However, in the year-ago quarter, the company had reported adjusted earnings of 2 cents per share.
Including one-time items, the company posted a loss of 12 cents per share, against earnings of 7 cents in the year-ago quarter.
Total revenue fell 4.7% year over year to $376.8 million and also came in below the Zacks Consensus Estimate of $392.8 million. Further, the refinements made to the underwriting model impacted fiscal third-quarter comparable store sales (comps) by nearly 1000 basis points (bps).
Segment Discussion
Conns offers consumer durable products in the U.S. under the Retail segment, including home appliances, furniture and mattresses, home office as well as consumer electronics. During the fiscal third quarter, the company witnessed a year-over-year sales decline across Furniture and mattress, along with Home appliance, Home office, Consumer Electronics and Other segments.
The Retail segment’s total revenue decreased 4.5% to $308.4 million, mainly due to lower comps, partly offset by the introduction of new stores. Also, sales were adversely affected by underwriting changes made in fourth-quarter fiscal 2016 and fiscal 2017. Comps for the reported quarter declined 10.1%. Excluding adjustment for the recent underwriting refinements, it edged down 0.1%.
Further, gross margin at the Retail segment expanded 40 bps, both on a year-over-year and sequential basis, to 37.5%. The rise was attributable to higher warehouse and delivery charges, along with improved product assortments.
Moreover, adjusted operating profit at the Retail segment came in at $35.9 million, down 6.8% year over year, on excluding the net charges of $2.0 million, mainly related to impairments from disposals, legal and professional fees. In addition, operating margin contracted 20 bps to 11.7%.
Revenues from the company's Credit segment fell 5.2% to $68.4 million in the quarter. This was due to declining credit insurance commissions and lower average rates, along with an 80-bps contraction in the yield rate to 15.0%, partially mitigated by average balance growth of 3.9% in the customer receivable portfolio. At quarter end, total customer portfolio balance improved 2.2% year over year to $1.5 billion.
During the fiscal third quarter, the company’s provision for bad debts decreased by $6.8 million to $51.3 million. This was led by a marginal improvement noted in the allowance for bad debt, attributable to sluggish portfolio growth and underwriting refinements, partly compensated by higher net charge-offs. Additionally, the provision for bad debts gained from improved performance of the portfolio, which fell 11.4% year over year. This, in turn, highlights the first provision reduction in the last four quarters, on a yearly basis. Consequently, as a percentage of the average portfolio balance, the fiscal third-quarter provision came in at 13.3%, versus 15.6% delivered in the year-ago quarter.
Moreover, slower portfolio growth, along with the shift in long-term no-interest programs to Synchrony, hurt the 60-day delinquency rate in the reported quarter. At the end of the fiscal third quarter, the 60-day delinquency rate, after adjusting these items, came in at 10.9% of the total outstanding loan balance.
Liquidity Position
As of Oct 31, 2016, the company had cash and cash equivalents of nearly $59.1 million, long-term debt and capital lease obligations of $1,259.0 million, and total shareholders’ equity of approximately $516.7 million.
Borrowings outstanding under Conns’ revolving credit facility of $810 million, as of Oct 31, 2016, were $146.0 million. The company also had $59.1 million free cash available for use.
Store Update
During the reported quarter, Conns introduced one new Conn's HomePlus store in North Carolina, raising the company’s total store count to 113. With this, the company has opened 10 new stores in fiscal 2017 and plans to open no additional stores in the rest of the fiscal year.
Going forward, Conns expects to open three stores in fiscal 2018.
Other Developments
Conns’ has been witnessing improvements from its credit business as evident from its fiscal third-quarter notable reductions in initial stage delinquency and first pay defaults. Further, it completed the implementation of its Texas direct loan program before the scheduled time. Notably, it started its operation across all 55 Texas locations by October end. Consequently, it improved APR more than 27%, increasing over 500 bps, as compared with the month of September. Going forward, management expects the loan program to produce nearly 600–900 bps.
Also, Conns disposed the 2016-A Class C Notes at a premium and completed its third ABS transaction since Sep 2015, during October.
Meanwhile, the company’s retail business has been performing well amid the tough retail environment and remains on track to improve the performance of its credit business and thus overall profitability. Also, its turn-around strategic initiatives are likely to impact the company's financial results, going forward.
Guidance
For fourth-quarter fiscal 2017, the company expects comps to decrease nearly 10.0%. For November, its comps declined nearly 8% due to the underwriting refinements.
Further, retail gross margin is anticipated between 37.0–37.5%, and selling, general and administrative expenses, as a percentage of total revenues, in the range of 27.75–28.75%.
Conns also projects the provision for bad debts to be in the band of 16.75–17.75% of the average total customer portfolio balance. Also, other revenues and credit segment finance charges are estimated between 18.75–19.25% of the average total customer portfolio balance. Interest expenses are anticipated in the range of $25.5–$26.5 million.
CONNS INC Price, Consensus and EPS Surprise
CONNS INC Price, Consensus and EPS Surprise | CONNS INC Quote
Stocks that Warrant a Look
Some better-ranked stocks in the retail space include Best Buy Co., Inc. (BBY - Free Report) , The Children's Place, Inc. (PLCE - Free Report) and Tilly’s Inc. (TLYS - Free Report) , all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Best Buy, with a long-term earnings growth rate of 11.9%, has jumped 54.1% year to date.
The Children's Place, with a long-term earnings growth rate of 10.3%, has gained 93.3% year to date.
Tilly’s, with a long-term earnings growth rate of 15.5%, has surged a whopping 138.1% in the past six months.
Confidential from Zacks
Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>