Conn's Reports Q2 Loss; Eyes New Markets

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Nearly $15 million in onetime pretax charges pushed Conn’s into the red during its second fiscal quarter, ended July 31.

But despite a $3.4 million loss for the period and a 13.5 percent decline in sales, to $184.4 million, the multiregional CE, majap and furniture chain reported plans to expand beyond its three-state base of Texas, Oklahoma and Louisiana. Adjacent markets under consideration include Arkansas, Arizona, Kansas, Mississippi and New Mexico, the company indicated during an earnings call.

Comparable store sales fell 12.8 percent for the quarter, reflecting a 20 percent drop CE dollars and a 27 percent decline in units; an 18 percent decline in computer revenue and a 28 percent decrease in units; and dollar declines of 10 percent in majaps, 8.9 percent in extended service revenue, and 5.2 percent in extended-service commissions.

In contrast, furniture and mattress dollar volume was up 11 percent year over year.

Retail gross margin increased 320 basis points to 28.9 percent thanks to an increased mix of highermargin furniture and mattresses, improved gross margins in the CE, majap and home office categories, and increased sales of extended-service contracts.

Conn’s retail president David Trahan said the company was able to achieve higher average selling prices (ASPs) by focusing on more fully featured TVs in larger screen sizes, by adding better products to the majap mix such as French door refrigerators and highefficiency laundry, and by expanding the furniture and mattress assortment. ASPs were up 7.2 percent for CE, 5 percent for appliances and 7 percent for computers, he noted, while second-quarter gross margins were 14.8 percent for home office, 19.4 percent for CE, 22.8 percent for majaps, and 33.9 percent for furniture and mattresses.

Conn’s said it recorded a pretax charge of $11.1 million for the early repayment of a $100 million term loan, and a pretax charge of $3.7 million for closing three stores with unexpired leases. Excluding the charges, the company’s adjusted net income was $5.5 million.

The store closings bring to five the number of locations exited during Conn’s current fiscal year, leaving the chain with 71 showrooms. Based on an analysis of the store closings, additional locations may be shuttered going forward, Chairman Theo Wright said.

The company also plans to open five to seven new locations next year in both current and new states, Wright told analysts, which may require a new distribution center to support them.

The new markets can provide a larger pool of potential retail and credit customers he said, compared with the five Conn’s locations that were closed this year. The shuttered stores cannibalized other Conn’s locations, and the areas’ average household incomes were well above the company’s core demographic, he explained.

Other growth engines at Conn’s include an expanding rent-to-own business, which rose 4.4 percent in sales during the second quarter; a store-remodeling program that dedicates increased floor space to the higher-margin furniture and mattress categories; improved sales execution; and increased use of online credit applications, which has helped drive traffic and sales, Wright said.

Operating income within the company’s credit segment increased 78 percent to $13 million, as the 60-plus day delinquency percentage declined to 6.1 percent. Nevertheless, continued declines in the total portfolio balance and delinquency levels resulted in lower interest earnings and reduced servicing costs, the company said.

“We are pleased with our progress on improving margins and reducing our cost of capital,” Wright said in a statement. “While softer industry conditions resulted in sales slightly below our expectations, the changes made to date position us to drive improved profitability.”

Looking ahead, Conn’s is projecting flat compstore sales for the last two quarters of its fiscal year, with the third quarter expected to be positive and fourth quarter expected to be slightly negative.


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