The consumer durable product specialty retailer,
), yesterday delivered terrible second-quarter fiscal 2015 results
and lowered its outlook for fiscal 2015, which caused its shares to
plunge about 30.9% during the day's trading session.
The company reported adjusted earnings of 50 cents per share
that dipped sharply compared with the Zacks Consensus Estimate of
74 cents per share and fell 3.9% year over year. The decline
resulted from higher delinquent debt rates that weighed on the
company's profits despite an outstanding performance from the
Conn's, Inc - Earnings Surprise |
Consolidated revenues for the quarter increased 30.4% year over
year to $353.4 million, primarily driven by solid performance at
the company's retail segment and the new store model. Moreover, it
surpassed the Zacks Consensus Estimate of $352.0 million.
The company has two operating segments, namely Retail and
Credit. The second-quarter performances of these two segments are
, Conn's offers consumer durable products in the United States,
including home appliances, furniture and mattresses as well as
consumer electronics. The segment's total revenue for the quarter
rose 28.9% to $288.3 million from $223.7 million in the comparable
year-ago quarter, primarily aided by the opening of new stores and
the solid comparable-store-sales performance.
Same-store sales (comps) for the quarter registered a whopping
growth of 11.7%. The furniture and mattress category displayed a
30.3% increase in comps, benefiting from the company's focus on
expanding product offerings and store base. Right behind furniture
and mattress were the home appliance and home office segments,
recording comps growth of 19.4% and 14.2%, respectively. Meanwhile,
the consumer electronics category registered comps growth of
Retail gross margin for the quarter improved 250 basis points
(bps) to 40.8%, primarily driven by solid sales performance of the
higher-margin furniture and mattress category as well as gross
product margin expansion in each of the company's key product
During the quarter, the company incurred $6.6 million toward
operating expenses related to the opening of 8 stores in the second
quarter. Of this expense, nearly two-thirds is accounted for in
selling, general and administrative (SG&A) expenses while the
remaining forms a part of cost of goods sold.
Revenues from the company's Credit segment grew 37.8% year over
year to $64.3 million, mainly backed by higher average receivable
portfolio balance outstanding. The customer portfolio balance
increased 39.9% to $1.8 billion from the prior year.
During the quarter, the company's provision for bad debts rose
$18.3 million to $39.6 million, resulting in a 330 basis points
increase in annualized provision rate to 13.9%. The rise came on
the back of a 41.1% increase in average portfolio balance driven by
24.9% higher loan originations compared with last year and an
unexpected rise in delinquency and future charge-offs.
Further, Conn's witnessed a rise in delinquency rate (percentage
of customer portfolio balance over 60 days), which increased to
8.7% as of Jul 31, 2014, from 8.2% a year ago and 8.0% in the
previous quarter. Moreover, the company noted that the
delinquency rate (percentage of customer portfolio balance over 60
days) as of Aug 31, 2014, increased further to 9.2%.
Consequently, the Credit segment posted an operating loss of
$0.2 million in the quarter recording a $7.7 million decline from
the year-ago quarter.
Borrowing outstanding under the company's asset-based loan
facility as of Jul 31, 2014 was $361.2 million, while it has an
immediately available borrowing capacity of $395.5 million.
Furthermore, the company may avail an additional credit facility of
$121.6 million if its inventory and customer receivables increase
to a certain level.
On Jul 1, 2014, the company issued $250.0 million of 7.25%
senior unsecured notes due 2022, which resulted in proceeds of
$243.4 million. Further, the company sold and leased back three
owned properties in July, bringing in net proceeds of about $19.3
million. Combined, these proceeds were used to reduce borrowings
under the company's $880 million asset-backed credit facility.
Fiscal 2015 Guidance
Disappointed by the rise in delinquency rates in the second
quarter despite tightening underwriting standards and improving
collections, the company lowered its earnings guidance for fiscal
2015. It now expects adjusted earnings in the range of $2.80-$3.00
per share compared with its previous forecast of $3.40-$3.70 per
share. The mid-point of the company's revised guidance for the full
year assumes EPS growth of 12% and a 17% return on
Comps are anticipated to grow in the range of 5% to 10%. Retail
gross margin is expected in the band of 40%-41%. Moreover, the
company expects to open 18 stores, while it plans to close about 10
stores. Credit portfolio interest and fee yield will be
approximately 17.5%-18%, while provision for bad debts is projected
to be in the range of 11% to 12%. SG&A expenses as a percentage
of sales is guided at 28.5%-29%.
Other Stocks to Consider
Currently, Conn's carries a Zacks Rank #4 (Sell). Other stocks
that are well placed in the retail space include Citi Trends Inc. (
), Foot Locker Inc. (
) and Zumiez Inc. (
). While Citi Trends sports a Zacks Rank #1 (Strong Buy), Foot
Locker and Zumiez carry a Zacks Rank #2 (Buy).
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