Conn's Surges on Earnings and Sales Beat - Analyst Blog

The consumer durable product specialty retailer, Conn's Inc. ( CONN ), yesterday delivered robust first-quarter fiscal 2015 results with its shares surging 6.93% during the day's trading session. The company reported adjusted earnings of 80 cents per share that soared 31.1% year over year and came ahead of the Zacks Consensus Estimate of 73 cents per share. The improved bottom-line results were mainly driven by strong top-line growth.

Consolidated revenues for the quarter increased 33.6% year over year to $335.4 million, primarily driven by solid performance at the company's retail segment, the new store model as well as its credit operations. Moreover, it surpassed the Zacks Consensus Estimate of $325.0 million.

The company has two operating segments, namely Retail and Credit. The first-quarter performances of these two segments are discussed below.

Segment Discussion

Under the Retail segment, 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 32.6% to $277.6 million from $209.4 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 15.6%. The furniture and mattress category displayed a 33.2% increase in comps, benefiting from the company's focus on expanding product offerings and store base. Right behind furniture and mattress were the home office and home appliance segments, recording comps growth of 22.9% and 20.5%, respectively. Meanwhile, the electronics category registered comps growth of 3%.

Further, the company highlighted that the comps growth trend continued into May recording a 13% comps growth for the month.

Retail gross margin for the quarter improved 110 basis points (bps) to 41.4%, primarily driven by solid sales performance of the higher-margin furniture and mattress categories. Margins also benefitted from the superior promotional assistance provided by certain vendors in the first quarter of every year.

During the quarter, the company incurred $3.8 million towards operating expenses related to the opening of 9 stores in the second quarter. Of this expense, nearly 55% 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 38.9% year over year to $57.4 million, mainly backed by higher average receivable portfolio balance outstanding. The customer portfolio balance increased 42.7% to $1.1 billion from the prior year. However, operating profit for the segment declined 3.4% to $11.3 million against $11.7 million in the year-ago quarter. The decline is attributable to $8.4 million rise in the provision for bad debts to $22.2 million.

Interest and fee income yield from the portfolio contracted 40 bps year over year to 17.6% in the quarter due to a rise in provision for uncollectible interest and lower fee income. Further, Conn's witnessed a rise in delinquency rate (percentage of customer portfolio balance over 60 days), which increased to 8.0% from 7.8% a year ago but was down from 8.8% in the previous quarter.

Liquidity Position

Borrowing outstanding under the company's asset-based loan facility as of Apr 30, 2014 was $516.8 million while it has an immediately available borrowing capacity of $183.8 million. Furthermore, the company may avail an additional credit facility of $178.0 million if its inventory and customer receivables increase to a certain level.

Fiscal 2015 Guidance

The company has reiterated its earnings guidance range for fiscal 2015. It continues to expect earnings in the range of $3.40-$3.70 per share in the fiscal while diluted share outstanding will be approximately 37.4 million. Currently, the Zacks Consensus Estimate for the fiscal stands at $3.57 per share.

Comps are anticipated to grow in the range of 5% to 10%. Retail gross margin is expected in the band of 39%-40%. Moreover, the company expects to open 17 and 20 stores, while it plans to close about 10 stores. Credit portfolio interest and fee yield will be approximately 18% while provision for bad debts is projected to be in the range of 8% to 10%. SG&A expenses as a percentage of sales is guided at 28%-29%.

Other Stocks to Consider

Currently, Conn's carries a Zacks Rank #2 (Buy). Other stocks that are well placed in the retail space include Aarons Inc. ( AAN ), Citi Trends Inc. ( CTRN ) and Build-A-Bear Workshop Inc. ( BBW ), all of which carry a Zacks Rank #1 (Strong Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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