I last wrote about appliance, electronics, and furniture
retailer Conn's (CONN) as a Zacks #1 Rank Strong Buy in April after
another solid quarterly report confirmed the growth that the Street
was still underestimating.
Guess what? They did it again in early June and the stock has since
made new all-time highs above $50. In fact, Conn's has consistently
been a Zacks #1 Rank (Strong Buy), #2 (Buy), or #3 (Hold) since
January 2011 when it was trading under $5!
Delivering consistent earnings beats -- averaging a 17.5% upside
surprise for the past four quarters -- means the story is still
rolling and has analysts scrambling to keep up.
Aren't Big-Boxes Just for "Show-rooming" These
If you've watched the 3-year decline of "big box" appliance and
), you may have thought that this is a business model to stay away
from. I certainly thought so until I discovered
), a family-built retailer with over 55 stores in Texas, 6 in
Louisiana, and newer footholds in Oklahoma City, Albuquerque, and
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. Bright, clean stores
increase the appeal as well.
Sales and Profits Grow With Store Build-Out
Since coming public nearly a decade ago, Conn's has forged a steady
expansion, with quarterly revenues averaging over $200 million for
the past 5 years. The recent two quarters sales results both 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, with mattresses
and furniture a big contributor this year to double-digit
same-store sales improvements.
Some analysts predict that the growth opportunity here for Conn's
as they expand out of Texas to other regions of the country could
see a quadrupling of its 70 stores over 10 years.
Does the Growth Story Warrant the Parabolic Price
CONN the stock has had quite a run in the past year, moving from
$15 to $55. And this has pushed the forward P/E to nearly 20X. To
some investors, this chart might tell a story of the stock getting
ahead of the earnings.
But with EPS growth of over 60% projected into fiscal year 2014 and
over 30% for FY15, growth investors are willing to bank on a strong
US consumer justifying the Conn's story.
Besides the square-footage growth of nearly 20% per year,
same-store sales have been roaring on the back of an expansion into
furniture and mattresses, product areas with substantially higher
profit margins. Consensus estimates for FY15 of roughly $3.50 per
share put the valuation multiple under 15X at $52.
If such a parabolic price run concerns you, I wouldn't blame you.
The key is to buy it "on sale" during pullbacks as we did for the
FTM portfolio in April in the low $40s. If the Conn's growth
strategy and execution stay on course, this is probably a $60 stock
by Christmas and a $70 stock by the holidays of 2014 as it begins
to trade on the following year's 25% growth estimates.
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.
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 near $50 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
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