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A solid year-to-date return of 136% along with strong third-quarter fiscal 2013 preliminary results and rising estimates aided Conns Inc. (CONN - Snapshot Report) to attain a Zacks #1 Rank (Strong Buy) on November 9, 2012. This durable consumer goods retailer has consistently outperformed the Zacks Consensus Estimates in the last three quarters by an average magnitude of 8.7%.

However, one of the company’s peers, Best Buy Company, Inc.’s (BBY - Analyst Report) Zacks Rank has been recently downgraded to #5 (Strong Sell) after it posted a 94% decline in its third quarter 2012 earnings per share. Best Buy’s earnings of 3 cents a share also missed the Zacks Consensus Estimate of 12 cents.

The Rank Drivers

Strong same-store sales momentum, continued share gains, the pricing power, margin improvement and unit remodeling are the rank drivers for this stock.

On November 8, Conns reported preliminary sales, same store sales and gross margin results for its fiscal third quarter. Net sales went up 8% year over year to $167.3 million in the quarter, primarily driven by robust same-store sales growth.

Same store sales increased 12.6% during the quarter, marking the fifth consecutive double-digit same-store sales growth for the company. The upside in retail sales was the result of higher average selling prices, increased furniture and mattress offerings and growth in home office sales. This was offset by a decline in unit volume due to the previously closed stores.

The retail gross margin stood at 35% in the quarter, up 970 basis points year over year. A favorable sales mix across all product categories, combined with an expanded furniture and mattress business, were primarily responsible for the improvement.

During the second quarter earnings release, the company raised its diluted earnings per share guidance for fiscal 2013 to $1.40–$1.50 per share from the range of $1.30–$1.40 projected earlier. Growth in same stores sales is now expected to be 10%–15%, compared with the company’s previously guided mid- to high-single digit growth. Conns also plans to open as many as five new stores during the year. Of these, the company has so far opened two stores, one each in Texas and New Mexico.

Conns is scheduled to release its complete fiscal 2013 third quarter results on December 3, 2012.

Preliminary Results Drive Estimates

On the heels of the preliminary results, earnings estimates have been trending higher in the past 30 days. The Zacks Consensus Estimate for fiscal 2013 climbed 2.7% to $1.52 per share, as 4 of 7 estimates were revised upward. This represents year-over-year growth of 120.3%.

The Zacks Consensus Estimate for fiscal 2014 increased 3.3% to $1.90 per share over the same time frame, as 4 of 7 estimates climbed up once again, reflecting a year-over-year increase of 24.8%.

Valuation

Conns currently trades at a forward P/E of 18.09x, significantly above the peer group average of 8.34x. Also, on a price-to-book basis, the shares trade at 2.34x, reflecting a substantial premium of 78.6% to the peer group average of 1.31x. Given the company's strong fundamentals, the premium valuation is justified, and is supported by the long-term earnings growth projection of 13%, which is higher than the peer group average of 9.1%.

Company Description

Founded in 1890 and headquartered in Beaumont, Texas, Conns is a retailer of durable consumer products in the United States. The company deals in home appliances, furniture and mattresses, consumer electronics and home office products. Additionally, the company offers a variety of products on a seasonal basis, including lawn and garden equipment. The company also provides flexible in-house credit options for its customers, in addition to third-party financing programs and third-party rent-to-own payment plans. The company has a market cap of $895.84 million.

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