In a series of strategic moves designed to shore up its ailing consumer finance business and restore investor confidence, Conn’s has changed chief executives, sold off $1.4 billion in customer credit receivables, and will use the proceeds to pay down debt and repurchase stock.
Assuming the corner office as president/CEO is Norman Miller, who previously served as president of both Sears Automotive and DFC Global, a financial services firm that provides credit to high-risk consumers and small businesses.
He succeeds Theodore Wright, the company’s one-time savior, who will serve as executive chairman through the end of the company’s fiscal year before transitioning to non-executive chairman.
Wright took the company’s helm five years ago when it was on the brink of bankruptcy and returned it to profitability in one year by overhauling operations, focusing on furniture and remodeling stores.
He then embarked on an ambitious geographic build-out that extended the Texas chain’s reach from Colorado to the Carolinas within two years.
While the company’s retail business has largely thrived under the plan, about three-quarters of its sales are paid for with credit from its in-house financing operation, an historic cornerstone of Conn’s. That segment, however, has suffered successive losses — including a $9 million operating loss in the last quarter — as more of its core lower-income customers fall behind in their payments.
Countermeasures including tighter credit terms and increased provisions for bad debts have only crimped sales and added to the losses while failing to curb rising delinquency rates.
The announced actions stem from a soup-to-nuts reevaluation of the business begun last fall. Counseled by an independent financial advisor, the company’s board considered a number of strategic alternatives including a spinoff of the credit segment or a sale of the company.
Instead, Conn’s is securitizing $1.4 billion of its retail installment contract receivables, representing about 77 percent of the outstanding customer receivables portfolio balance, at an all-in cost of 9.1 percent.
The move removes bad debt from its books while providing a cash infusion that will be used to pay down the entire balance of its revolving credit facility and repurchase up to $75 million worth of company stock.
The lenders are a consortium of banks that includes Bank of America, JPMorgan Chase, Regions Bank and MUFG Union Bank.
Separately, the board described its appointment of Miller as the culmination of a “long-planned leadership succession,” which also included the naming of Thomas Moran as chief financial officer in July.
In his new role, Miller “will work with senior management and the board to develop strategies to further strengthen Conn’s strategic position,” the company said, with a focus on strengthening its credit and risk function.
In a statement, Miller, a former U.S. Army officer, said Conn’s has a “tremendous opportunity to scale once we set the foundation right to support its growth.
“Given my own modest beginning in life, I have a deep connection to the purpose of Conn’s mission in serving the unbanked consumer and look forward to leading our like-minded employees while meeting our shareholders’ goals.”
The second-quarter operating loss, for the three months ended July 1, was attributed to higher provisions for bad consumer debt. Profits were also trimmed by $1 million in legal and advisory fees stemming from securities-related litigation and the company’s year-long strategic reassessment.
On the retail side, operating income increased 29.2 percent, to $46.1 million, on a 12.8 percent spike in revenue to $325.6 million, reflecting the net addition of nine new stores during the trailing 12 months.
Broken out by product category:
• Average selling prices (ASPs) for consumer electronics increased by 18.1 percent, offset by a 13.7 percent decrease in unit volume.
• TV sales increased 11.4 percent and comps increased 3.4 percent on a 17.5 percent hike in ASPs, offset by a 5.2 percent decrease in unit volume.
• Home office ASPs increased 12.9 percent, offset by a 15.2 decrease in unit volume. Excluding the impact from dropping certain tablet lines, home office comps increased 3 percent.
• Excluding the impact from exiting gaming, imaging and the tablet lines, comp sales rose 6.7 percent for the quarter.
• Majap unit volume increased 21.2 percent, offset by a 4.6 percent decrease in ASPs. Refrigeration sales increased 14.9 percent, laundry sales increased 9.6 percent, and cooking sales increased by 23.7 percent.
• Furniture unit volume increased 28.3 percent, offset by a 3.1 percent decrease in ASPs.
• Mattress unit volume increased 26.7 percent, offset by an 8.3 percent decrease in ASPs.
• Commissions from service contracts rose 34 percent, reflecting increased retail sales and higher retrospective commissions. The latter drove a 100-basis-point increase in retail gross margin, to 41.8 percent.
During the quarter Conn’s opened four new HomePlus stores in Colorado, Georgia and the Carolinas, and presently operates about 95 big-box showrooms across 12 states.