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Conn's Q1 Profits Fall, Outlines State Of Market

5/25/2011 10:50:56 AM Eastern

Beaumont, Texas -Conn's
reported a 31-percent decline in fiscal first-quarter profits and outlined
market conditions for key categories now and later in the year in a conference
call.

Net earnings were $4
million on a 4.3 percent decline in net revenues, to $189.3 million, for the
three months ended April 30. Comparable-store sales slipped 3.9 percent.

Product sales fell by 3.2
percent on weakness in the CE, major appliances and home office categories, which
was partially offset by a 25-percent spike in sales of furniture and mattresses.

In a conference call, retail
president David Trahan said comp sales fell 5 percent in CE, 8 percent in
majaps and 19 percent in home office during the quarter due to lower average
selling prices and consumer preference for entry-level products.

Indeed, Conn's customers are
choosing lower-priced plasma and LCD TVs, and top-load washers and top-mount
refrigerators, over costlier LED, 3D and connected TVs and front-load washers,
Trahan said.

Majap demand has also
been impacted by recently-implemented vendor price hikes, he noted. The
increases are averaging about 2.5 percent, and may be followed by another round
of increases in August, he said.

However, demand for fully-featured
TVs could improve this quarter when manufacturers begin providing promotional
support for their new 2011 lines, he added.

Chairman and interim CEO Theodore
Wright noted that the annual income of Conn's core customers is $36,000, and
that "price is a critical factor in their purchasing decisions." In response,
the company will continue to price-match competitors and mount aggressive,
albeit selective, promotions.  

During the call, Wright
also announced plans to expand the retailer's furniture and mattress business
by increasing its floor space and assortment, beginning with 15 stores. Gross
margins for furniture are 31 percent compared to 19 percent for CE, he noted.

Looking ahead, Wright
projected same-store sales declines in the mid- to high-single digits during
the current quarter due to lower average selling prices for TVs and laundry
products, as rising gas and food costs and high unemployment continue to
pressure customers.

Nevertheless, retail
gross margins will likely remain between 27 percent and 28 percent, he said, and
he was encouraged by the improved performance of the retail and credit
segments.

On the product front, the
company has begun adding tablet computers to its PC mix, and plans to have a
full assortment by the third quarter, Trahan said.

Tablets, along with TVs,
will also be used as bundled loss leaders in furniture package promotions.

 Trahan added that the crisis in Japan will
likely lead to shortages of digital cameras through the fourth quarter, but
should have no significant impact on TV and appliance availability. However, TV
sales would be impacted by a late or non-start of the football season.

During the quarter Conn's
closed one store, in Austin, Texas; will shut five additional stores
during the current quarter; and will allow leases to expire on two locations,
which will leave the chain with 68 stores in Louisiana, Oklahoma and Texas.

Wright said Conn's could
resume expansion in fiscal 2013 with five to 10 new stores, and is currently
evaluating new metropolitan markets and real estate. The markets would mirror
the company's highest performing stores, which have a higher concentration of
core customers, and the new stores would be expected to produce greater than
average sales volumes for the chain.

Elsewhere during the
first quarter, repair service agreement commissions declined 9.6 percent due to
lower product sales volume, and service revenues declined 18.3 percent as the
chain increased its use of third-party servicers "to provide timely product
repairs" to its customers, Conn's said.

Retail gross margin
increased to 28.4 percent from 28.1 percent during the year-ago period, but was
offset by the revenue decline and a 50 basis point increase in selling, general
and administrative expenses (SG&A).

The credit segment, which
finances about 60 percent of the retail sales, saw income before taxes fall 60
percent to $1.7 million after recording losses for the previous two quarters.
The decrease was due to continued declines in the total portfolio balance and
delinquency levels, and the higher cost of borrowing after Conn's
refinanced its debt in the fourth quarter.

Net income was also
impacted by $800,000 in employee severance expenses.

The company used cash
flow from operations to reduce its outstanding revolving debt balance
by $53.3 million to $226 million during the quarter, and said it will
continue to use cash flow to reduce its debt in order to lower the cost its
debt cost of capital.

 

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