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Conn’s Q2 Sales Up 14%; Earnings Outlook Lowered

Beaumont, Texas — Regional white- and brown-goods specialty chain Conn’s reported a 13.8 percent hike in net sales to $19.9 million for its second fiscal quarter, ended July 31, as same-store sales rose 7.2 percent.

Despite the solid showing, management lowered its earnings outlook for the second half based on slowing sales growth, tough year-over-year comparisons, the cost of new remote corporate facilities and the impact on its credit operation of higher interest rates and greater hurricane-related defaults.

The new corporate facilities, located in Dallas and Houston, were built after Conn’s hometown of Beaumont was ravaged last year by Hurricane Rita. Although the company’s headquarters infrastructure withstood the storm, the facility was inaccessible due to area flooding.

“We are pleased with our sales relative to last year’s strong sales performance,” said chairman/CEO Thomas Frank. Although second-quarter sales did not keep pace with first-quarter performance, particularly within the San Antonio and Austin, Texas markets, the company continues to project same-store sales growth for the full fiscal year ranging between the mid- to high-single digits.

Nevertheless, the NATM dealer lowered its annual guidance for earnings per diluted share to a range of $1.60 to $1.75 from a range of $1.85 to $1.90.

“At this point last year we were enjoying the benefit of very positive tail winds including robust sales increases and the best credit-loss performance in a decade,” Frank said. “This year we are facing considerable head winds as the company faces tough comps from last year, higher interest rates and the effects of last year’s hurricanes. In discussing the previous year, I have often characterized its phenomenal performance as ‘a year-and-a-half in one year.’ That’s the kind of year we are up against.”

To address the earnings squeeze, Frank has reallocated manpower and assumed direct responsibility for the retail operation on an interim basis; implemented stringent cost control measures; reorganized Conn’s credit operation; and hired three new senior managers, including a veteran CE merchant and a former GE appliance merchandiser. Frank declined to identify the new hires by name during a conference call.

In a symbolic move, Frank has also slashed his salary by 98 percent, to $12,000 a year, while executive vice chairman/COO Bill Nylin has taken a 33 percent pay cut.

Frank acknowledged that some might consider the measures extreme. “The company’s not broken,” he assured investors, “but it needs additional fine tuning.”

Net sales for the six months, ended July 31, rose 18.6 percent to $335.4 million, aided by the addition of four new stores during the year-ago period, while comp-store sales grew 11.7 percent. The company’s majaps and CE businesses rose 20 percent during the six months and now account for 36 percent and 32 percent of total net sales, respectively. Conn’s also enjoyed “strong” percentage increases within its mattress and furniture categories, the company said.

Conn’s opened its 58th store during the second quarter, in West Houston, and expects to open five or six new locations in total during the current fiscal year, which ends Jan. 31, 2007. The company has also fully deployed its new 150,000-square-foot distribution center in Dallas.