CONN

Conn's, Inc. (CONN)

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Industry: Consumer Services
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Conn’s, Inc. (CONN)

Q3 2008 Earnings Call

November 26, 2008 11:00 am ET

Executives

Michael Poppe – CFO

Timothy Frank – President & CEO Designate

Thomas Frank, Sr. – Chairman & CEO

Analysts

David Magee – Sun Trust Robinson Humphrey

Anthony Lebiedzinski – Sidoti & Company

Rick Nelson – Stephens, Inc.

Jeff Blaeser – Morgan Joseph

Alexandra Jennings – Greenlight Capital

David Silverman – Unspecified Company

Presentation

Operator

Welcome to the Conn’s, Inc. conference call to discuss earnings for the third quarter ended October 31, 2008. (Operator Instructions) Your speakers today are Mr. Timothy Frank, the Company’s CEO Designate, President, and COO; and Mr. Michael Poppe, the Company’s Chief Financial Officer.

Additionally, joining them for the call is Mr. Thomas Frank, Sr., the Chairman of the Board of Conn’s and it’s CEO. I would now like to turn the conference over to Mr. Poppe; please go ahead, sir.

Michael Poppe

Good morning, everyone and thank you for joining us. I’m speaking to today from Conn’s corporate offices in Beaumont, Texas. You should have received a copy of our earnings release dated November 26, 2008, distributed before the market opened this morning, which describes our earnings and other financial information for the quarter ended October 31, 2008. If for some reason you did not receive a copy of the release, you can download it from our website at www.conns.com.

I must remind you that some of the statements made in this call are forward-looking statements within the meaning of the Securities and Exchange Act of 1934. These forward-looking statements represent the company’s present expectations or beliefs concerning future events.

The company cautions that such statements are necessarily based on certain assumptions which are subject to risks and uncertainties which could cause actual results to differ materially from those indicated today.

I would now like to turn the call over to today’s host Timothy Frank, Conn’s CEO Designate, President, and COO.

Timothy Frank

Thank you Michael, good morning and thank you for joining us today. Michael, Thomas, and I are going to speak to our sales, financial performance, and the current status of our credit and financing operations.

In addition we will discuss the impact of hurricanes Gustav and Ike on our credit and sales performance and on the outlook for the remainder of fiscal 2009.

Net sales for the quarter were up by 2.3% while same store sales decreased by 5.8%. Sales were negatively impacted by two hurricanes and mandatory evacuations for most of the Gulf Coast. These storms necessitated two mandatory evacuations for employees located at our corporate office and many of our stores within a 13-day time period.

August and October both showed positive comp store growth while September resulted in a negative 20.4% comp store impact. The storms resulted in 144 store days lost in the month of September. In addition sales velocity slowed as soon as the storms entered the Gulf of Mexico and remained negatively impacted until many days after landfall.

Taking the storms into consideration our sales performance was within our expectations. Strong growth in consumer electronics, flat panel TVs, laptop computers, DVD, and Blu-ray players and GPS devices led the growth in our business while decreased occurred in appliances.

In the month of October we did see growth in our appliance business, up 9.6%. Much of this increase appears to be storm-related. In our electronics business for the quarter, LCD unit sales were up 63% and retail sales for this category were up 69% over the prior year.

We expect these trends to continue due in part to an extremely price competitive market and holiday season driving even more demand for this exciting product. Our markets continue to show stronger economic health then the majority of the country with Texas enjoying an unemployment rate of 5.6%, well below the national average.

We continue to remain very price competitive in the market due in part to our national buying group NATM, continuing special purchases from our vendors, and improved product mix due to our in-store execution. Production capacity and product availability especially in flat panel TVs continued to drive a competitive marketplace.

Furniture sales for the quarter were up 3.9% in a very challenging market segment. Generators and window air conditioning sales increased by 60.8% as our customers prepared for the two hurricanes.

This quarter we opened one new store in Oklahoma. In November we added the last two stores for this fiscal year bringing our store count to 76 which completes our store-opening plan. The stores in November were opened in North Irving, and Oklahoma. In light of the current financial market conditions and our conservative capital management we have no new store opening planned at this time.

Instead we plan to focus on remodeling and updating many of our stores allowing us to better display a broader selection of product to drive same store sales and leverage our existing infrastructure.

Gross margin was down 690 basis points from 36.4% to 29.5% primarily due to a non-cash fair value adjustment impacting gross margin by 430 basis points. Product gross margin did show a negative impact on total gross margin of 270 basis points.

We expect the competitive nature of the market to continue and we are dedicated to both profitability and market share growth. We will continue to price product as necessary to achieve these objectives.

SG&A as a percentage of revenues increased 120 basis points due to the non-cash fair value impact on revenues and hurricane expenses. Non-cash fair value impact on revenues was responsible for 200 basis points of the increase.

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