CONN

Conn's, Inc. (CONN)

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Exchange: NASDAQ
Industry: Consumer Services
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Conns (CONN)

Q4 2013 Earnings Call

April 03, 2013 11:00 am ET

Executives

Theodore M. Wright - Chairman, Chief Executive Officer and President

Michael J. Poppe - Chief Operating Officer and Executive Vice President

Brian E. Taylor - Chief Financial Officer and Vice President

Analysts

Peter J. Keith - Piper Jaffray Companies, Research Division

N. Richard Nelson - Stephens Inc., Research Division

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

R. Scott Tilghman - B. Riley Caris, Research Division

Laura A. Champine - Canaccord Genuity, Research Division

Jordon Neil Hymowitz - Philadelphia Financial Management of San Francisco, LLC

Ian Dominguez

Evan Tindell

Gary Ribe

Daniel T. Binder - Jefferies & Company, Inc., Research Division

Presentation

Operator

Good morning, and thank you for holding. Welcome to the Conn's Inc. Conference Call to discuss earnings for the fourth quarter ended January 31, 2013. My name is Shannon, and I will be your operator today. [Operator Instructions] As a reminder, this conference call is being recorded.

The company's earnings release dated April 3, 2012, distributed before the market opened this morning and slides that will be referenced during today's conference call can be accessed via the company's Investor Relations website at ir.conns.com.

I must remind you that some statements made in this call are forward-looking statements within the meaning of 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.

Your speakers today are Theo Wright, the company's CEO; Mike Poppe, the company's COO; Brian Taylor, the company's CFO; and David Trahan, President of Retail.

I will now like to turn the conference over to Mr. Wright. Please go ahead, sir.

Theodore M. Wright

Good morning, and welcome to Conn's fourth quarter and fiscal 2013 earnings conference call. I'll start the call with an overview focused on our retail segment, then Mike will discuss our credit segment and Brian will finish our prepared comments.

Our strategy of providing a valuable credit offering to all customers is working. Slide 1 shows the percentage of sales from each of our consumer credit alternatives. Same-store sales for the fourth quarter by category are on Slide 2. Sales strength in appliances, furniture and mattresses and home office more than offset weakness in electronics. On Slide 3, you can see gross margins by product category for the fourth quarter. Product gross margin percentage is improved in all major categories along with average selling prices. Total gross margin percentage for the quarter was 36.9%, an increase of 720 basis points over the prior year.

Furniture and mattresses kept momentum benefiting sales and margins. The 1,100-basis-point increase in furniture and mattress gross margin percentages from the period a year ago is the benefit of higher average selling prices and better sourcing.

The company previously established a longer-term goal of 35% retail segment gross margins and exceeded that goal in the third and fourth quarters of fiscal 2013. Our margin goal is being revised to 40%. Pricing remains competitive in every major category except home office. We recently documented pricing comparisons for our highest volume appliance and electronics SKUs. Our pricing absolutely remains competitive, SKU to SKU, and we provide lowest price alternatives for our customers everyday.

Higher advertising spend in the holiday period didn't create the traffic we anticipated, and sales in the fourth quarter didn't meet our internal expectations. Because of this disappointment, we reevaluated our advertising spend in the first quarter. We concentrated even more of our spending on credit-based messages to consumers. The result has been a slightly lower spending rate, more traffic and higher quality traffic.

Preliminary February-March same-store sales were up approximately 15%. Same-store sales in all major categories except television were up by double digits. Furniture and mattresses increased about 50%. Appliance same-store sales were up about 10%. Electronics were down low-single digits and home office was up strongly. Higher traffic in February and March is the main reason for our increased guidance for same-store sales in fiscal 2014.

On the products side, sales of laptops with Windows 8 operating systems and tablets using Android are increasing. We now have availability of an assortment of touchscreen laptops to help show consumers the value of Windows 8. Smart television is becoming a more compelling product offering. LG's Google TV and Toshiba's new Cloud TV are just 2 examples of products that are demonstrating value in higher-featured, higher-priced television.

Manufacturers' UPP or unilateral pricing programs are helping us maintain margins in television. More vendors are moving to this pricing approach with more products. Electronic sales trends are definitely improving. Total electronics sales were positive in February and March, and same-store sales of electronics were up 1% in March. Total television units were positive in March as well.

Appliance trends are favorable. Combined same-store refrigeration and laundry sales in units have been positive since January. Our updated guidance for fiscal 2014 is for overall same-store sales increases of 3% to 8%.

Turning to Slide 4, sales floor execution is still getting better. Sales associate productivity improved to 60,000 per sales associate. Turnover was 58% in the quarter compared to 56% in the prior year quarter, but about half of the turnover in the current year fiscal 2013 was directed by the company as we worked to improve the productivity of our sales associates. Lower turnover and higher production is making Conn's a preferred employer for proven sales associates. We can competitively recruit experienced productive retail sales personnel. The earnings opportunity for productive associates at Conn's is our recruiting message as we enter new markets.

On Slide 5, you can see a 3-year trend in furniture and mattress sales. Furniture and mattress sales as a percentage of total sales are still increasing at a rapid pace. For the fourth quarter of fiscal 2013, furniture and mattress sales represented 21% of revenues and 31% of product gross margin dollars. Furniture and mattresses were our #1 category for gross margin contribution. March sales of furniture and mattresses presented over 25% of total product sales, and furniture and mattresses is now quite clearly our #1 category.

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