CONN

Conn's, Inc. (CONN)

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Industry: Consumer Services
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Conn’s, Inc.

F2Q08 Earnings Call

August 28, 2008 11:00 am ET

Executives

Michael Poppe – CFO

Timothy Frank – CEO Designate, President, and COO

Thomas Frank, Sr. – Chairman of the Board and CEO

Analysts

Rick Nelson – Stephens, Inc.

Anthony Lebiedzinski – Sidoti & Company

[David Merris] – [BAM]

[Darren Maloney] – Mirador Funds

[Mike McConnell] – Walter Smith Capital

Claire Davis – Perennial Advisors

David Magee – Sun Trust Robinson Humphrey

[Scott Tohman] – [Hessed Square Research]

Alexandra Jennings – Greenlight Capital

Bryan Delaney – InTrust

Presentation

Operator

Welcome to the Conn’s, Inc. conference call to discuss earnings for the second quarter ended July 31, 2008. (Operator Instructions

Your speakers today are Mr. Timothy Frank, the Company’s CEO Designate, President, and COO; and Mr. Michael J. Poppe, the Company’s Chief Financial Officer. Additionally, joining them for the call is Mr. Thomas J. 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. Thank you, Teresa. 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 August 28, 2008, distributed before the market opened this morning, which describes our earnings and other financial information for the quarter ended July 31, 2008. If for some reason you did not receive a copy of the release, you can download it from our website at 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 Tim Frank, Conn’s CEO Designate, President, and COO. Tim.

Timothy Frank

Thank you, Mike. Good morning and thank you for joining us today. Mike, Tommy, and I are going to speak to our sales, financial performance, the current status of our credit and financing operations, the recently announced funding arrangements, as well as our outlook for the remainder of fiscal 2009.

Net sales for the quarter were up by 6.5% while some-store sales decreased by 1.4%. Consumer electronics, laptops, video game equipment, and GPS devices led the growth in our business while decreases occurred in appliances and lawn and garden. Appliance performance was negatively impacted by refrigeration, while we saw increases in room air and laundry.

In our electronics business for the quarter, LCD unit sales were up 97% and retail sell dollars for this category were up 130% over the prior year. We expect these trends to continue. We remain very price competitive in the market in part due to our national buying group NATM continuing special purchases from our vendors and improved product mix due to our training and in-store execution. We believe that the increase in major electronics is sustainable because of three factors: Price decreases, especially large screen sizes, the federal digital mandate in February, and increased investment in home entertainment tied to reduced travel.

Furniture and bedding for the quarter were up 8.3%. Product mix is improved and is having a positive impact, specifically the introduction of the Boyhill and Lane brands.

Land and garden sales were negatively impacted by reduced rain in the majority of our markets. The impact for the quarter was a reduction in these sales of 17.9% or $1.8 million. We did however receive rain in the form of a tropical storm, Edouard, which shut down four stores for two days in South Texas. Unfortunately, this included our top two stores. These two events, lawn and garden performance and the necessary shutdown of four of our top stores for two days, negatively impacted our same-store sales.

This quarter we opened four new stores, bringing our store count to 73. In addition, we relocated our third store. Our plans provided for the opening of three new stores for the remaining of this fiscal year. We continue to review our store opening plans for next year in light of the current financial market conditions and our conservative capital management.

Gross margin was down 100 basis points from 37.4% to 36.4%, primarily due to a very competitive retail market and an accounting fair value adjustment. Although we’re not happy with a decrease in margin, we are seeing an improvement as last quarter’s decreases was 320 basis points. Our earnings were impacted by $1.2 million fair value adjustment due to financial market conditions, not as a result of company performance. Mike will discuss this in greater detail later.

SG&A continued to improve over last quarter with a reduction of 180 basis points. These cost savings include reductions and personnel based on attrition on performance, advertising, and store operations. Cost reduction is an important part of our Company’s culture and is not impacted our ability to produce sales volume. We should continue to see SG&A expense reduction as compared to the prior year.

Our inventory for the quarter was up 18% with the addition of ten new stores from the same time last year and a volume increase of 6.5%. Several special purchases also impacted this increase in inventory. Today, month-to-date, our inventory is up 1% from the same period last year. We have this under control. We have improved our focus on inventory management in our merchandising department.

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