Conn’s Profits Off, But Beat Expectations

By Alan Wolf -- TWICE, 4/5/2010

BEAUMONT, TEXAS — Conn’s, the multiregional appliance, electronics and furniture chain, said net income declined 48 percent during its fiscal fourth quarter and fell 70 percent for the full year.

But results surpassed analysts’ estimates, and Conn’s was rewarded with a 30 percent hike in share price in the hours following the earnings announcement.

The 76-store retailer attributed its performance to weak demand, falling flat-panel prices, and higher charge-off and delinquency rates for its in-house credit operation, which finances about 61 percent of Conn’s sales.

Net sales for the three months, ended Jan. 31, fell 30.3 percent to $171 million and comp-store sales declined 31.7 percent. Total fourth-quarter revenue decreased 25 percent to $202.3 million.

Net sales for the full fiscal year slipped 10.2 percent to $722.8 million and compstore sales decreased 13.8 percent. Total fiscal year revenue dipped 6.1 percent to $836.7 million.

Net income for fiscal fourth quarter was $6.5 million, and adjusted net income, excluding the positive impact of a non-cash fair value adjustment and a tax benefit stemming from a litigation settlement, was $1.9 million.

Net income for the full fiscal year was $7.7 million, and adjusted net income, including a $4.9 million litigation settlement and a $9.6 million goodwill impairment charge, was $12.4 million.

Conn’s said the nearly 32 percent drop in fourth-quarter comp sales was caused by a mix of challenging economic conditions in its trading areas, difficult yearover- year comparisons stemming from brisk replacement sales following the September 2008 hurricanes, declines in unit sales and average selling prices of flat-panel TVs, a highly competitive retail environment, and tighter credit underwriting standards that the company implemented last year.

In a conference call, president/CEO Tim Frank said CE revenue fell 38.5 percent during the fourth quarter on a 19 percent decline in TV unit volume, while majap revenue decreased 21.7 percent, also on a falloff in unit sales.

Nevertheless, Conn’s managed to increase gross product margin to 20.2 percent, from 18.5 percent for the prior quarter, and Frank cited “strong improvement in product gross margins since December” that was largely achieved through a more profitable product mix.

Comps are also rising, he said, having improved 13 percent in February year over year.

On the product front, Frank reported “some challenges” from tight TV supplies, as well as industrywide shortages in appliances after majap makers pulled back the production reins amid weak demand. Conn’s merchants are working very closely with video vendors to secure inventory, he said, while appliance makers have “stepped up” to ensure that the retailer is well positioned to take advantage of the Energy Star rebate program when it enters Conn’s markets this month.

The $300 million rebate program has been “very favorable for other dealers,” Frank noted, “and we expect to see significant numbers. We have planned for that and have purchased for that.”

Frank said early indications also point to a positive short-term impact from 3D TV. “It’s really taking off,” he observed less than one week after the TVs hit Conn’s stores, with attachment rates of 3D Blu-ray Disc players outpacing A/V cables 3-to-1.

As previously reported in TWICE, the company recently amended its credit facilities with lenders. The modifications eased the covenants but increased the cost of borrowings, reduced the credit line, and shortened the maturity date by a year, to Aug. 2011. As of Jan. 31, the total amount immediately available for borrowing under all of Conn’s credit agreements was $47.7 million, reduced from $52.1 million as of Oct. 31, 2009.

The chain opened two new stores last fall and closed two clearance centers, bringing the total store count to 76. No new store locations are planned for the immediate future.