The Woodlands, Texas — Surging retail sales and operating income couldn’t overcome setbacks in Conn’s in-house credit operation in its second fiscal quarter.
Net earnings declined 7.9 percent, to $17.6 million, for the three months ending July 31, as customers fell behind in their finance payments.
“Delinquency unexpectedly deteriorated across all credit quality levels, customer groups, product categories, geographic regions and years of origination,” said chairman/CEO Theo Wright, suggesting that the economy has yet to recover for Conn’s core lower-income customer.
Fully 77 percent of the company’s retail sales are paid for by in-house financing, and the average income of a Conn’s credit customer is about $40,000.
Wright said the company has responded to the higher delinquency rate by tightening its underwriting, cutting back on zero-percent financing offers, raising the interest rates in some markets, and increasing the provision for bad debts from $21.3 million to $39.6 million year over year.
Meanwhile, net sales surged 30.4 percent to $353 million, on strength in Conn’s retail division, as the company opened 14 stores over the past five months. These included the new markets of Nashville, Tenn.; Jackson, Miss.; and Las Vegas, where it is going head-to-head with former buying group mates Electronic Express, R.C. Willey and Cowboy Maloney’s of the NATM Buying Corp.
But even excluding the new locations, same-store sales rose 11.7 percent, on top of a tough 18.4 percent year-ago comp.
Leading the charge was furniture and mattresses, whose comps grew 30.3 percent as furniture unit sales rose 49 percent and the average selling price of mattresses increased 24.7 percent. Together the two categories accounted for nearly 31 percent of total product sales and 42 percent of the total product gross profit in the second quarter.
Appliance comps increased 19.4 percent, with laundry sales up 41 percent, refrigeration up 31 percent, and cooking ahead 27.4 percent, more than offsetting room air’s 1.6 percent decline.
Even CE saw robust business during the quarter. Category comps increased 23.6 percent as TV sales rose 16.2 percent on 0.8 percent comp growth, home-theater sales rose 36.6 percent, and sales of gaming hardware grew more than 500 percent.
Within home office, comps increased 14.2 percent, representing a 56.2 percent spike in computer sales and a 27.7 percent decline in tablet revenue.
Sales of miscellaneous products fell 62.4 percent, reflecting Conn’s exit from the lawn equipment category. Excluding the $9.3 million impact of the move, total comps would have increased 17.1 percent, vs. the 11.7 percent reported, the company said.
Retail operating income rose 33.3 percent, to $34.2 million, as gross margin grew from 38.3 percent to 40.8 percent year over year.
Going forward, Conn’s will reduce the pace of new store openings, with a total of six planned in the third fiscal quarter and two scheduled to open in the fourth fiscal quarter. It currently operates 89 stores in 10 states.