Conn's Inc (CONN) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2005 Conn's, Inc. earnings conference call. My name is Chris (ph) and I'll be your coordinator for today.

At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. If at any time during the call you require assistance, please press star, followed by zero and a coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Bill Frank, Conn's Executive Vice President. Please proceed, sir.

Thank you, Chris, and good morning to everyone. And thank you for joining us.

By now you should have received a copy of our earnings release which was distributed before the market opened this morning. It outlines our operational and financial results in the first quarter of fiscal 2005. If for some reason you did not receive a copy of the press release, you can download it from our Website at www.conns.com on the Investor Relations tab. In addition, certain financial and statistical information that will be discussed during this conference call is also provided on that same Web site as "Supplemental Information."

Finally, I must remind you that some of the statements made in this call are forward-looking statements within the meaning of the Securities and Exchange Act of 1934. These forward-looking statements represent the company's present expectations or beliefs concerning future events. The company cautions that such statements are necessarily based on certain assumptions which are subject to risks and uncertainties which could cause actual results to differ materially from those indicated today.

These risk factors include but are not limited to the following items; the company's growth strategy and plans regarding opening new stores and entering new markets, the company's intentions to update or expand existing stores, the company's estimated capital expenditures and cost related to the opening of new stores or the update or expansion of existing stores, the company's cash flow from operations, borrowings from its revolving line of credit and proceeds from securitizations to fund operations, debt repayment, and expansion, growth trends and projected sales in the home appliance and consumer electronics industry and the company's ability to capitalize on such growth, interest rates, weather conditions in the company's markets, changes in the company's stock price, and the actual number of shares of common stock outstanding. Further information on these risk factors is included in the company's filings with the Securities and Exchange Commission, including our 10-K, which was filed on April 16, 2004.

At this time, I would like to hand the call over to our host for today's call, Tommy Frank, our Chairman and CEO.

Good morning and thank you for participating in this call with us this morning. Our first quarter in review was a very outstanding quarter.

We had record revenues for this first quarter of 134.9 million. That's an 11.7% increase quarter-over-quarter from a year ago. We also realized record profits of 7.8 million after, tax which represents a net increase of income available for distribution to common shareholders of 72%. Same-store sales grew at 3.5%. Two new stores were added in the Dallas/Ft. Worth market area. We continue to have successful growth in our track area with an increase of revenue of 19% over the prior year and an increase in gross margin dollars of over 40%. Our bedding revenues were up 56% which contributed to gross margin dollar increase of 350%. And our lawn and garden revenues were up 17.3% with an increase of gross margin dollars of 47%.

As we look at the impact of the Dallas/Ft. Worth market, it represents about 8% of our total sales volume currently, and we're at about 87% of optimum sales performance or based on what we consider to be optimum sales performance. That represents about 50% above our break-even point, if you adjust downward for the additional advertising dollars we're spending in that market. The additional stores that we intend to open in that market will be later this year and it would come somewhere in the fourth quarter.

As we look at same-store sales performance in the first quarter up 3.5%, there were a number of drivers. I think the most significant one was the execution of our employee associates. We're very pleased with what we were -- the results we were able to deliver and continue our upward trend again in same-store sales. We had increases across the board in product categories. Our electronics business -- large electronics -- was up 11%, our appliance business was up 5.5%, our track business 12%, bedding up 42, and lawn and garden up 12%.

As we look forward into this current quarter, we're looking at mid-digit growth same-store sales. A lot of this quarter depends primarily on the heat that's incurred in this region of the country. Through May, it was moderately cool. However, the heat has begun to change somewhat in our favor and we feel that this will help us as the quarter progresses.

As we look at our continued growth strategy in the Dallas/Ft. Worth area, we will open the two additional stores hopefully by the end of the -- somewhere around the fourth quarter. We also will be opening a store in the McAllen area, which is on the Texas/Mexico border, and this would lead us to our fulfillment of somewhere between five and six store openings in the current year.

Merchandising issues to be encountered, we think there really are nothing but opportunities out there at this point. The new micro-technology for video products has created excitement in the marketplace raises price points. We think that availability could become an issue. However, our vendors tell us that if we forecast properly that there should be enough product available, but that also is a variable that at this point we may not totally understand.

And then the last thing I would say to you is that as we continue to grow as a public company in understanding, we continue to cope with the Sarbanes-Oxley law and particular meeting the requirements of Section 404. Most of our procedural requirements are done and we're finished with, and we've begun the internal control evaluation process. At this point, it appears that we should be able to be completely compliant within the retired timeframe.

Also as you're aware, the stockholders voted to increase our Directors from seven to eight on our Board of Directors, and I'm happy to welcome Scott Thompson (ph) as a fifth independent Director to our Board. He's well qualified and has served on other public boards. So that composition of our board now becomes five independent directors and three affiliates.

I'll turn the conference over to Bill Frank now who will give you some additional data, and then we'll open it for questions.

Thank you, Tommy.

Once again, we had a strong quarter from an operating and financial standpoint. We substantially increased our pre-tax income line by about 54% over the prior year. Net income available for the common shareholder increased almost 73%, and diluted earnings per share increased over 22%. And if you assume that the shares of stock that we issued in our IPO were outstanding for the entire 2004 fiscal year, pro forma diluted earnings per share would have increased 50%.

For the quarter, total revenues were up 14.1 million, or 11.7%, from 120.8 million in the quarter ended April 30, '03 to 134.9 million for the quarter ended April 30, 2004. This increase resulted primarily from the following. Net sales increased 11.9 million, or about 11.1%, and that included a same-store sales increase of 3.5%. Finance charges and other increased 2.2 million, or about 15.8%. Excuse me.

During the quarter, we continued to experience a reversing trend in price point deterioration as increases in sales volume at the retail level resulted from approximately 4.4 million in volume increases and approximately 6.9 million from increases in average unit price points. And a price point change was primarily due to changes in mix, but the good news is that this is the second quarter in a row that we have seen that price deterioration somewhat soften.

The combination of the credit portfolio of the QSPE and those accounts that are retained on our balance sheet increased over 18% from April 30 of '03 to the current period '04. During the quarter, the earnings associated with the operations of the QSPE increased approximately $900,000.

Again, for the quarter, gross margins increased from 35.2% to 36.3%, primarily resulting from our ability to drive store sales in the current quarter using promotional credit rather than deep price discounts which took place in the previous year. Product margins actually increased from 21.7% to 22.8%.

For the quarter, SG&A expense increased by 3.2 million, or 9.8%, going up from 31.7 million in the first quarter of fiscal 2004 to 34.9 million in the first quarter of fiscal 2005. As a percentage of revenue, SG&A expense actually decreased from 26.3% to 25.9%. Much of the slowdown in SG&A expense growth resulted from increased vendor participation in our grand opening celebration which benefited advertising expenses as we saw a decline in that expense of about $600,000 over the prior year.

Our operating margin for the quarter improved from 7.8% in fiscal 2004 to 9.4% in fiscal 2005. This increase reflects the increase in the gross margin as well as the slower growth in SG&A expense. We do expect, however, that our operating margin will begin to stabilize more in the 7.5 to 8.5% range as SG&A expenses return to a more normal level during the next three quarters of this fiscal year.

Interest expense decreased for the quarter by $900,000, or 62.3%, going from 1.5 million in the first quarter of fiscal 2004 to 0.6 million for the first quarter of 2005 fiscal year. Most of this decrease resulted from the payoff of balance sheet debt, the reclassification of amounts previously recorded in other comprehensive income, the application of FAS 133, and the expiration of $80 million in interest rate swap agreements.

As we look at our balance sheet, significant changes since January of '04 include increases in interest and securitized assets, increases in inventory and fixed assets, and a decrease in accrued expenses which is primarily a timing issue in terms of payment of various expenses.

On January 31, 2004, we previously notified you that we had adopted the provisions of FASB Interpretation No. 46 relative to "Consolidation of Variable Interest Entities." The impact to our balance sheet at April 30, 2004 as a result of FAS -- of that Interpretation No. 46 was an increase of about a million dollars in cash, $16 million in fixed assets, $14.3 million in current and long-term debt, and $1.8 million in minority interest. The impact on our operations was really very minimal, as we had only a shift in small dollars from our SG&A line down to the interest expense line.

Our credit portfolio continues to perform in a very consistent manner. Some of the key statistics regarding the combined credit portfolio at April 30, 2004 are presented out on our Web site under "Supplemental Information." But to give you some comparables just from January of '04 to April of '04, our total accounts increased from just under 300,000 to about 304,000 accounts -- about a 1.3% increase, total outstanding balance increased from 349.5 million to 361.4 million -- about a 3.4% increase, our average outstanding balance went up from $1,166 per account to $1,190 per account, or about 2.1% increase, and we actually experienced a nice decrease in our 60-day delinquency, going from about 18 million down to 15 million, and that represents a drop of -- from 5.2% delinquency to 4.2 at April 30 of '04.

I would point out to you, however, that that is somewhat an aberration in that we have some dollars in the 30-day delinquency rate. As they age their way through the system, we would expect that delinquency rate to return more into the 5% level, which is where it has been in the past. Gross bad debt writeoff remained pretty stable at 3.5% and our reserve as a percentage to outstanding balance continued at about 3.5%.

From the cash flow statement, you will note that we have somewhat of a decrease in cash flow provided by operations -- approximately $3.3 million. It's basically impacted by three or four different items. First of all, we actually have a positive of the increase in net income of about 2.8 million, but we have negatives from the prior period relating to our payment of payables and accrued expenses of about a half a million dollars.

Inventory increased as a result at about 2.7 million and our receivables growth resulted in about 2.9 million, so overall about a $3.3 million decline from the previous year. Most of that we think is somewhat a timing difference. As we move through the next three quarters, we do expect the cash flow generated from operations to return to that $3.5 to $4 million per quarter level.

Finally, I will provide for you, or refer you to our press release where we gave you updated EPS guidance, and we have actually increased our guidance for the second quarter to 26 to 28% -- or, excuse me, 26 to 28 cents per diluted share, and then the guidance for the entire year has now been raised to $1.21 to $1.25 range on a diluted basis. And this would include comparable same-store sales increases in the low to mid-single digit range.

So, with those comments, Chris, I guess we can go ahead and open it up to questions.

Thank you, sir. Ladies and gentlemen, if you wish to ask a question, please press star, followed by one on your touch-tone telephone. If your question has been asked or you wish to withdraw your question, please press star, followed by two. Questions will be taken in the order received, and please press star, one to begin. Please stand by while we comprise the list of questions.

And your first question comes from Mr. Rick Nelson of Stephens, Inc. Please proceed.

Good morning. Congratulations, guys.

Thank you, Rick.

Thank you.

Question or clarification on the store openings -- you're talking about two to three stores now in -- over the remainder of the year. In the April press release, you had talked about three to five store openings. Is -- are some of those prospective store openings falling out? Or what --

Well, I think that we said all along we would open five to six stores during the fiscal year. We've already opened two in the Dallas/Ft. Worth market, so if we open two more in that market and one in McAllen, that gets us to five. There's a possibility that some others might fall in line, but at this time I think that it's realistic to stay with that number that we've told you.

Four to five openings?

No, I think it's five.

Well, if you've opened two and you're planning two to three --

I think if we've opened two, Rick, and we have two more in Dallas/Ft. Worth -- that's four. And then one in McAllen -- that's five.

OK, five. OK. Question on the guidance -- 26 to 28 cents for the second quarter represents a drop-off from the 33 cents you reported in the first quarter. And historically, you know, we haven't seen that type of drop-off in EPS from the first quarter to the second quarter. Is there anything you're seeing in the business, or is it just conservativeness on your part?

I think the problem, Rick, is the -- is the outstanding number of shares. And as you kind of walk through a comparison on a GAAP basis, we do -- we will see a decrease in earnings per share. And a lot of it has to do with the number of shares that are outstanding, but I think it's also somewhat of a timing issue. To the extent that we get heat, Tommy will tell you that'll have a significant impact on our second quarter earnings, but at this point, it just hasn't come.

Well, also, you know, I think it goes back to the shares issued because if you look at a pre-tax basis, what our expectations are, about a 18-20% increase in pre-tax profit. So, I think that's a significant number.

What is your share count assumption for the second quarter?

What did he say?

He wants share count assumption -- 23,800,000.

OK. And you were at 23.7 for the first quarter?

Right. So, in terms of actual dollars, you're probably correct. We will have less dollars in this second quarter than we projected in the first quarter or that we actually achieved in the first quarter.

OK. Question about merchandise inflation -- are you still seeing a moderation in the rate of inflation or deflation?

Yes, I think that what's happening is this new micro-video technology products I alluded to is causing almost a reversal in that trend. And Bill's got some numbers -- you've got some numbers that showed that. I mean --

I'm sorry. I missed the question (inaudible).

Well, he's asking about the fact that, you know, the unit count --

Oh.

-- and the price per unit is increasing a little bit.

Yes, we actually, Rick, in terms of total for the quarter, we saw about a 4.6% increase in units and we were up, as we said, about 11.7% in actual product revenue. And we saw increases, as Tommy mentioned previously, in the consumer electronics area, certainly in the home office equipment area which is part of the track, and then lawn and garden and bedding were other areas where we saw nice increases. In the bedding area, we actually saw a decrease in units sold, but a significant increase in actual dollar volume, and I think that's part of what we were saying or suggesting to you before. We're seeing some of that price deterioration soften substantially from what we had before.

Great. Thank you.

Thank you, Rick.

And your next question comes from Frank Brown of SunTrust Robinson Humphrey. Please proceed.

Hi. Good morning, gentlemen. A follow-up question on that product margins -- product margins were up about 110 basis points, and you just touched on this a little bit with the micro-video versus the other mix like bedding and garden or lawn and -- I mean lawn and garden or bedding. Can you break out how much of that would be mix change as opposed to, you know, improvement in product margins within a category?

I'm not sure that I can give you specifics over the phone because I don't have the data readily available to me, but perhaps, you know, we can attempt to respond a little more definitively after the call and get you some additional information.

But I think just kind of reviewing the changes again in the sales area, you know, we saw -- we saw about a 6.3% total increase in our appliances, about a 9.6% total increase in our electronics, you know, 40% or so in the home office equipment, which would really translate into most of the track, and we were up about 17% in lawn and garden and about 55% in bedding. Now, one of the things that -- the big thing that has taken place in that track area is that while not only did we see large increases in revenues, but we saw even larger increases in margin dollars as a result of that. Go ahead.

Well, I just wrote Bill a note, and I think that if you asked us to -- our best estimate would be as a feel only, and I'm qualifying it, it's probably around half and half, Frank.

OK. (inaudible) --

(inaudible) both sources to your point.

OK. Yes, the micro-video -- that sounded pretty good that that could go on awhile. As I recall, you all hadn't sold a whole lot of those units, say, three month ago. So that's a new trend?

That's correct. And we do look for that trend to continue as a percentage of the video business. And those products typically are above the $2,000 price point, whereas the older technology is typically below the $2,000 price point.

Frank Brown And what's going on in bedding? Did you say units were down and the gross margin dollars are up 55%?

Yes, what we did was a year ago we had sold a -- we had promoted an awful lot of low-end bedding, and we didn't see the need to do that this time. And actually by changing the strategy in that area, it fell through to the bottom line.

Are the targets that you have for Dallas/Ft. Worth for the eight to ten stores -- would you say that's still intact, or have you looked at that market and felt like a couple less stores could be in order?

Help me understand what you're asking, please. When you say eight to ten, I don't recall that -- are you referring to this current fiscal year or what are you referring to?

Long-term that, you know, --

Long-term I think that it's much greater than that. Long-term I think the number that we have been saying all along is somewhere in the 15 to 20 store range, and I still think that's very valid. I'm not -- I'm not sure where the eight to ten came from. We think that we should have seven stores open by the end of this fiscal year in that market, and certainly there's -- you know, again, that market's about 25 to 30% more populous than the Houston market, and we have 17 stores successfully operating in the Houston market. So, you know, you try to draw some kind of parallels from the experiences of the two.

OK, that's just my confusion. On the advertising, I think you all mentioned that there was a grand opening timing difference versus last year. I thought I heard something like 600,000 in advertising expense that probably helped the expense ratio in this first quarter.

I don't think it was a timing difference, Rick. I think what we're saying is that we had actually reduced advertising expense in the current quarter compared to last year as a result of increased vendor participation in our grand opening celebration.

So the gross spend would be the same, and it's just on a net basis after netting out their contribution?

The gross would be the same as a percent --

Yes.

-- of the retail sales volume.

It might even be a little bit higher because of --

Yes.

-- Dallas.

That's right. Probably was higher.

OK. And when you went through the cash flow discussion, the receivables were up. I just wanted to make sure I understood why the receivables were up. Is that just a function of sales?

Absolutely. And, you know, there's two areas obviously there. One is the interest in securitized assets which represents that part of the receivable that we hang onto in order to provide the credit enhancement to the off-balance sheet financing.

And then there's a separate section which includes those accounts that are not transferred to the QSPE that -- and that's something that we've started in the last -- oh, six or eight months of actually funding a number of those accounts on our balance sheet rather than transferring it to the QSPE. And it quite honestly helps us keep our funding percentage at a level that we're interested in.

But it doesn't have to do with eligibility of those accounts that you're holding onto?

It does. It does. And I -- and I think, you know, we are probably very conservative in terms of how we define that eligibility so that some of what may have been eligible to transfer we're hanging onto on our balance sheet.

OK, thank you very much.

Thank you, Frank.

And sir, at this time you have no further audio questions.

OK, if there are no other questions, then I guess we either did a good job or didn't have too many participants.

OK, well, we'd like to thank everyone that did dial in, and this concludes our presentation.

Ladies and gentlemen, thank you for your participation. This concludes your presentation. You may now disconnect.