Conn's Q2 Profits Fall 11% On Credit Woes
By Alan Wolf -- TWICE, 9/25/2006
Beaumont, Texas — Conn's net income fell 10.9 percent to $8.5 million during its second fiscal quarter, ended July 31, largely due to loan losses stemming from higher delinquencies for receivables in the company's credit portfolio.
Conn's attributed the higher delinquency rate to the impact of 2005's Hurricane Rita on its trading area and credit collection operations, which ultimately affected securitization income received from the company's credit subsidiary.
The regional white- and brown-goods chain is unique in that it provides flexible in-house credit options for its customers, and has historically financed about 57 percent of retail sales on average. Customer receivables are financed substantially through an asset-backed securitization facility, from which the company derives servicing fee income and interest income. The company transfers receivables, consisting of retail installment contracts and revolving accounts for credit extended to its customers, to a qualifying special purpose entity in exchange for cash and subordinated securities represented by asset-backed and variable funding notes issued to third parties.
In a conference call with analysts, chairman/CEO Tom Frank said the company has addressed the issue by launching credit operations out of a new corporate facility in Dallas which currently has 45 collectors and is looking to add an additional 50.
By contrast, total revenues for the three-month period rose 10.7 percent to $182.2 million, including a net sales gain of 13.8 percent and 10.4 percent decrease in finance charges and securitization income. Comparable store sales rose 7.2 percent on strength in CE, which compensated for “negative trends in major appliances” and flat to negative comps in the PC category.
Frank said same store sales have been running “a little above flat” this quarter, although he is still projecting mid-single digit comp gains for the year based on “extremely good performance” in CE. “We feel good about the Christmas season,” he said, citing higher unit CE volume as prices on flat-panel TV, MP3 players and digital cameras continue to decline. “That's a positive for us.”
Going forward, the company plans to open a third store in San Antonio, Texas, by month's end, and will add two more stores in Dallas this year, bringing that market's store count to 14. Conn's will also open another store in Houston, the third to open there this year, and plans to open five to six stores next year.
The release of the company's second quarter earnings report had been delayed due to a restatement of its financials for fiscal years ending Jan. 31, 2006, 2005, 2004 and the quarter ended April 30, 2006. Conn's said the restatement was necessary to correct for an error in recording securitization income and valuing its retained interest in its sold receivables portfolio, which resulted in a cumulative understatement of $14.7 million of securitization income and interest in securitized assets since the inception of its securitization program. Conn's “believes that the controls relating to the accounting for securitization have been enhanced to mitigate the risk of future misstatements,” the company said.
