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A solid year-to-date return of over 157% and raised fiscal 2013 outlook on strong third-quarter financial results along with rising estimates aided Conns Inc. (CONN - Snapshot Report) to attain a Zacks #1 Rank (Strong Buy). This durable consumer goods retailer has consistently outperformed the Zacks Consensus Estimates in the last four quarters by an average magnitude of 16.7%.

However, one of the company’s peers, Best Buy Company, Inc.’s (BBY - Analyst Report) Zacks Rank has been downgraded to #5 (Strong Sell) after it posted a 94% decline in its third quarter 2012 earnings per share. The company’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 December 3, 2012, Conns posted adjusted earnings per share of 38 cents for its fiscal third quarter, beating the Zacks Consensus Estimate by 40.7%. Earnings improved substantially from the year-ago level of 2 cents.

Net revenue increased 10.6% year over year to $206.4 million, driven by a gain of 8.2% in Retail segment sales and a 22.6% increase in Credit segment sales. Same store sales increased 12.6%.

Retail gross margin was 35.5% in the quarter, up 1020 basis points year over year. Improved margins across all product categories, combined with growth in higher-margin furniture and mattress sales, largely drove the retail gross margin in the quarter.

Conns raised its diluted earnings per share guidance for fiscal 2013 to the range of $1.55– $1.60 from $1.40–$1.50 per share projected earlier. Growth in same stores sales are expected to be in 13%–16% range, while the company previously guided range was 10%–15%. It also plans to open as many as five new stores for the full year.

Additionally, the company came up with its guidance for fiscal 2014, projecting earnings per share between $2.05 and $2.15, with same store sales increasing 0% to 5%. New store openings for fiscal 2014 are expected at 10 to 12 stores.

Earnings Guidance Drives Estimates

Earnings estimates have been trending higher over the past 30 days on account of its raised fiscal 2013 forecasts as well as fresh fiscal 2014 projections. The Zacks Consensus Estimate for fiscal 2013 rose 4.6% to $1.59 per share, as 3 of 4 estimates were revised higher. This represents year-over-year growth of 130.4%.

The Zacks Consensus Estimate for fiscal 2014 advanced 8.4% to $2.06 per share over the same time frame, as 5 of 7 estimates were lifted, reflecting a year-over-year increase of 29.3%.

Valuation

Conns currently trades at a forward P/E of 19.05x, significantly above the peer group average of 8.09x. Also, on a price-to-book basis, the shares trade at 2.49x, reflecting a substantial premium of 102.4% to the peer group average of 1.23x. Given the company's strong fundamentals, the premium valuation is justified, and is supported by the long-term earnings growth projection of 15%, which is higher than the peer group average of 8.7%.

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 $980.7 million.

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