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Q2 Earnings Dip: What Went On At Conn’s?

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.

Still feeling the aftershocks of The Great Recession, the company’s core lower-income customers fell behind in their finance payments, which took a toll on profits in late spring and early summer.

Net earnings declined 7.9 percent, to $17.6 million, for the three months ending July 31, as the percentage of the customer portfolio balance greater than 60-days delinquent was 8.7 percent compared to 8.2 percent last year, and rose to 9.2 percent by the end of August.

“Despite tighter underwriting, lower early-stage delinquency and improved collections staffing and execution, delinquency unexpectedly deteriorated across all credit quality levels, customer groups, product categories, geographic regions and years of origination,” said chairman/CEO Theo Wright. “Tighter underwriting and better collections execution did not offset deterioration in our customer’s ability to resolve delinquency,” and the company is now expecting future 60-plus day delinquency to increase to levels above its historical highs in the third and fourth quarter of fiscal 2015.

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.

Those changes should bolster credit performance, he said, although the business “may not return to credit loss rates of prior years.”

Nevertheless, Wright said he remains confident in the Conn’s business model. “As it has been for half a century, our combined retail and credit business model proved its strength and resiliency,” he noted, with expanding retail sales and profitability cushioning the volatility of sub-prime consumer credit.

Indeed, net retail segment sales surged 29 percent to $288.3 million, as the company opened 14 stores in 11 markets over the past five months without missing a beat. These included the new towns 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.

Conversely, 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 said it will reduce the pace of new store openings, with six planned for the current quarter and two scheduled to open in the fourth quarter, for a total of 18 new locations in the current fiscal year.

At the same time, the company expects to close 10 stores, for a net increase of eight locations this year.

The goal next year is to open 15 to 18 new stores in existing markets, as well as a new distribution center. The chain currently operates 89 stores in 10 states, including four stores that opened in Denver, Colo., Greenville, S.C., Lubbock, Texas, and Tucson, Ariz., in August.