Conn's Inc (CONN) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Conns, Inc. third quarter earnings report. My name is Steven and I'll be your coordinator for today.

[OPERATOR INSTRUCIONS].

I would now like to turn the presentation over to your host of today's call, Mr. David Rogers, Chief Financial Officer designate.

Thank you, Steve. And good morning, everyone, and thank you for joining us. You should have received a copy of the earnings release distributed before the market opened this morning that outlines our operational and financial results in the third quarter of fiscal 2005.

If for some reason you did not receive a copy of the release, you can download it from our web site at www.conns.com in the Investor Relations tab. In addition, certain financial and statistical information that will be discussed during this conference call will also be provided on the same web site.

Finally, I must remind you that some of the statements made on 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 risk and uncertainties which could cause actual results to differ materially from those indicated today.

These risk factors include but are not limited to the company's growth strategy and plans regarding opening new stores and entering new markets, the company's intention 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, relationships with the company's key suppliers, the results of the company's litigation, 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. I would now like to hand the call over to the host for today's call, Mr. Tom Frank, Chairman and CEO of Conn's, Inc. Tommy?

Good morning and thanks to each of you for joining us this morning. As we look at the quarter in review, David will go into the numbers in detail with you in a few moments, but I would like to just make a few comments as I always do.

We continue to have good performance in same store sales growth - positive growth in the quarter just ended - as opposed to a year ago. We continue to grow in our Dallas/Fort Worth market. And we entered a new market, McAllen, which has been a very successful store opening for us which is located on the Texas/Mexico border. We're excited about that entire area there because we think it represents a very large opportunity for our company.

We continued in the past quarter to have good growth in the track area and in bedding, which are areas that we rely on to help grow same store sales in some of these older existing stores. As we look further and drill down a little further into the Dallas/Fort Worth market area, at end of quarter 10/31 we had six stores open in that market.

Last week we opened our seventh store in that market and we will open our eighth store in that market if all goes as expected around January the 15th, '05. So, that will give us a total of six stores in this fiscal year.

The sales volume in that market continues to be a little above the normal expectations. We have a range here of what our hopes are and I'd say we're just a little bit above the average of what that range is. We continue to see improvements in our people and in our execution and performance in that market.

We have made a decision at this point to at least delay for some time the distribution capabilities by building a new distribution center in the Dallas/Fort Worth area in that we really do have 36,000 feet there as has previously been said. And we have a major appliance manufacturers that have regional distribution facilities there that we rely on heavily.

Also, the difference from our Houston distribution facility to the Dallas/Fort Worth market area and the efficiencies we've picked up in transporting that merchandise has aided us in deferring further out the opening of that larger facility there.

So, we're still evaluating just exactly when we would open it. But I think we previously told you we were looking at the first quarter of the new fiscal year, where I think now we're looking at the latter quarters of that year.

As we look at same store sales being up year to day, 4%, you know, what are the drivers? Primarily the track, the bedding and the lawn and garden. Track up 22%, bedding up 68%, and lawn and garden up 22%. What are our expectations going forward?

I think we're still looking at low to mid single digit sales growth for the year in same store sales volume. Certainly, overall volume should be higher than that. Our strategy will continue to be, as we look forward, to concentrate on this Dallas/Fort Worth market. We're looking at other markets that we could explore. And we should also finish this fiscal year with a count of 50 stores.

I think you can expect our annual store growth. We previously indicated that would be in the range of six to seven stores. I think at this point I would like to tell you it'd be in the range of six to eight stores. About 10% of our total retail space at this time. And hopefully we can worked towards the upper end of that range, but six to eight is certainly a very reasonable number that we're looking at this point.

If we look at any merchandising issues that occurred last quarter or that we might expect to occur, I would tell you that our same store sales volume and our overall volume was impacted somewhat by the fact that stainless steel products with one of our major manufacturers was - there was a shortage of about six weeks. And that was a very large category for us.

So, that issue has been corrected now, but it did impact us somewhat during the last quarter. Six weeks was a lot of time to take out of the quarter with that one manufacturer that had problems furnishing us with stainless steel products. Presently, as we look forward into the December quarter or the Christmas selling season quarter, at this time we don't see any product availability issues.

Of course, that's sort of a situation that can change. But at this time, we think we have the inventory available to get our projected numbers. I would like to give you my assessment with the Sarbanes-Oxley 404 compliance issues. We have finished our internal control evaluation and documentation process. And we think that was successful. E-wise (ph) about 50, Ernst and Young our auditor is about 50% complete with their testing of our work.

At this point, we don't see any major issues in us complying fully with the law, even though maybe the Congress has chose to extend the deadlines for some companies. We don't see any major issues in us meeting the original deadline, which I think is a compliment to our people and to our systems.

I would tell you that in my opinion, that the cost of complying with that was about two cents a share in the quarter just ended. Now, that would include indirect and direct cost. Some of that cost would be reoccurring. Some of it would not be. But I do think it impacted earnings at two cents a share at a minimal amount this past quarter.

I know the question is going to come up so I'll just go ahead and answer it now. How is November? While I'm not - wish at this time to comment on specific numbers due to the fact that all our numbers are not yet in, I will tell you that it was a very satisfying month for us. We were very, very pleased with our same store sales and our increases overall.

And I would also tell you that the weekend after Thanksgiving was the largest weekend that this company has ever had and that we had exceptionally nice double digit increases across the board Thursday, Friday - Friday, Saturday and Sunday after Thanksgiving. So, having said that, I'm going to turn the call over to David Rogers. And we do have Bill Frank here to assist us if we need some help. And then we'll open it up for questions. David?

Thank you, Tommy. Well, once again we had a strong quarter from an operating standpoint. We've substantially increased our pretax income line by approximately 14% over the prior year. Net income available for common shareholder increased 33% and diluted earnings per share decreased a penny due to the additional stock issued in the IPO.

If you assume that the shares of stock we issued in the IPO were outstanding for the entire 2004 fiscal year, and that we used the proceeds of the IPO to pay off debt retrospective to the beginning of the year, pro forma diluted earnings per share would have increased 12.5%.

For the quarter, total revenues increases $15.5 million or 13.2% from $117.4 million in the quarter ended October 31st, 2003 to $132.9 million for the quarter ended October 31st, 2004. This increase resulted from the following: net sales increased $12.1 million or 11.8%, including a same store sales increase of 1.5%, finance charges and other increased $3.4 million or 23.4%.

During the quarter, we continued to experience an improving trend and price points as increases in sales volume at the retail level resulted from approximately $8 million from increases in average unit price points and approximately 3.4 million in volume increases. Much of this average unit price increase resulted from product mix changes primarily in our track area.

The combination of the credit portfolio of the QSPE and those accounts retained on our balance sheet increased 24.3% from $322.3 million at October 31st, 2003 to $400.5 million at October 31st, 2004. During the quarter, the earnings associated with the operations of the QSPE increased approximately $2.9 million. For the quarter, gross margins decreased only slightly from 37.2% to 37.0%, due primarily in changes in product mix and increased selling discounts.

For the quarter, SG&A expense increased by $4.3 million or 13% from $33.4 million in the third quarter fiscal 2004 to $37.7 million in the third quarter fiscal 2005. As a percentage of revenue, SG&A expense decreased from 28.5% to 28.4%. Much of the slow down in SG&A expense growth resulted from lower payroll costs that were offset by higher professional services cost, employee related costs, and general insurance cost.

The higher professional services cost was due primarily to SOX 404 cost. Our provision for bad debts increased $158,000.00 for this quarter ended October 31st, 2004 over the prior year. This bad debt expense includes write-offs and the provision for those accounts that are not transferred to the QSPE and are in line with the growth in the credit portfolio.

Operating margin for the quarter decreased from 7.7% in fiscal quarter - decreased 7.7% in the third quarter fiscal 2004 to 7.6% in the third quarter fiscal 2005, reflecting primarily the decrease in gross margin.

Interest expense decreased for the quarter by $174,000.00 or 22% from $789,000.00 in the third quarter fiscal 2004 to $615,000.00 this quarter. Most of this decrease results from the payoff of balance sheet debt partially offset by the consolidated interest expense of SRDS according to FIN 46.

For the year to date results, for the nine months ended October 31st, 2004 we increased our pretax income line by approximately 29% over the prior year. Net income available to the common stockholder increased approximately 47%. And diluted earnings per share increased three cents to 88 cents per share.

If you assume that the shares of stock we issued in our IPO were outstanding for the entire 2004 fiscal year and that we used proceeds of the IPO to pay off debt retrospective to the beginning of the year, pro forma diluted earnings per share would have increased approximately 19% from 74 cents to 88 cents.

On a year to date basis total revenues increased $49.1 million or 13.8% from $355.3 million for the nine months ended October 31st, 2003 to $404.4 million from the nine months ended October 31st, 2004. This increase resulted from net sales increases of $40.1 million or 12.8%, including a same store sales increase of 4%.

Finance charges and other increase $9 million or 21%. During the nine months ended October 31st, 2004 we continued to experience an improved trend in price points as increases in product sales volume at the retail level resulted from approximately $22 million from increases in average unit price points and approximately $15.8 million in volume increases.

As in the quarter, much of the increase in average unit price points resulted from product mix changes, particularly in the track area. The combination of the credit portfolio of the QSPE and those accounts retained on our balance sheet increased 24.3% from $322.3 million at October 31st, 2003 to $400.5 million at October 31st, 2004.

On a year to date basis, the earnings associated with the operations of the QSPE increased approximately $6.6 million. For the nine months ended October 31st, 2004 gross margins increased from 36.5% to 36.6%.

On a year to date basis, SG&A expense increase by $12.5 million or 12.9% from $97.6 million in fiscal 2004 to $110.1 million in fiscal 2005. As a percentage of revenue, SG&A expense decreased from 27.5% to 27.2%. As in the quarter, much of the slowdown in SG&A expense growth resulted from lower payroll cost offset by higher professional services cost primarily due to SOX 404 cost.

Our provision for bad debt increased $619,000.00 or 18.2% for the nine months ended October 31st, 2004 over the prior year. As a matter of practice, we review reserve balances relative to total outstanding receivables and adjust the reserve the provision on a monthly basis using prior write-off experience as a basis for the calculation.

In the quarter ended July 31st, 2003 we actually recorded a $300,000.00 reversal of bad debt expense based on prior experience. Consequently, much of the increase in the current year percentage was driven by the prior year reversal.

As we look at our balance sheet, significant changes since January 31st, 2004 include increases in interest and securitized assets, inventories and fixed assets, and increases in accounts payable and accrued expenses, both primarily due to timing of payments, and an increase in long term debt due to increased working capital requirements, and a decrease in income taxes payable due to the timing of tax payments.

Since July 31st, 2004 we have experienced a decrease in accounts receivable due to the inclusion in our asset backed credit facility of long term promotional credit receivables that were previously ineligible. This is the result of an amendment to that facility date October 29th, 2004, which now allows partial funding of such receivables.

Our credit portfolio continues to perform in a consistent manner. I will now discuss some statistics from that combined credit portfolio as of October 31st, 2004. This is based on supplemental data that can be found on our Web site as we explained earlier.

That data includes statistics for the years ending January 31st, '03 and January 31st, '04 as well as the periods ending October 31st, '03 and October 31st, '04. It is those last two periods which I will address my comments.

From the time of October 31st, 2003 to October 31st, 2004 the total accounts in the portfolio increased from 285,228 to 331,941 or 16.4%. The total outstanding balance increased from $322.3 million to $400.5 million or 24.3%. The average outstanding balance increased from $1,130.00 to $1,207.00 or 6.8%.

The 60 day delinquency increased from $17.4 million to $21.5 million or 23%. The percent delinquency at 5.4% had no growth. The gross bad debt write-off percent decreased from 3.5% to 3.4% as did the reserve as a percent to balance 3.5% to 3.4%. I think the interesting thing, as I see here, is that while outstanding balances increased, as we said, 24.3% that the delinquencies only increased 23.0% with no growth.

I would like to summarize the performance for the quarter as increased sales, increased profits, expenses under control and no surprises on SOX 404. Tommy, did you have other comments to make before we open it for questions?

I think we should open it for questions.

All right. We're ready for questions now.

[OPERATOR INSTRUCTIONS].

And our first question comes from Rick Nelson of Stephens, Inc.

Thank you and good morning.

Good morning, Rick.

Hi, Rick.

How do you think this issue - supply issue with that major appliance vendor. What sort of impact did that have on sales? Anyway to quantify that and what the comp might have been without that issue?

We didn't go back and quantify the number, but I can tell you that it was considerably disruptive. What we had got in the practice of doing was packaging stainless steel products - a dishwasher, a cook stove, and a refrigerator as a three-in-one package.

And in the three-in-one package we had three price points. A low end, a midpoint and a high end. So, we were essentially were selling three units for one. The vendor that was unable to supply us with the products due to a stainless steel shortage was our entry price low end producer.

So, we didn't quantify it, Rick, and we did make the adjustment. But that was a pretty severe adjustment we had to make. But we did get it made and at this point, we're out of the woods. I probably would hesitate to quantify it. I would just say this, that it definitely cost us some opportunity, in my opinion, on our top line.

Question on balance. You mentioned that sales were slightly above the midpoint of your anticipated range. I'm wondering about profitability. Are you getting the leverage in expenses that you had anticipated? And the advertising effort - have you been able to, you know, back off at all from the really aggressive pace that you went into the market with?

Well, you asked about three questions. Let me see if I remember all three. One of them is are we leveraging cost any better? Certainly, as the volume continues to grow we're seeing some leveraging of cost. Is it at the maximum point? No. We still have some additional leveraging we're going to get out of that market. Ten to 12 stores, I think you're going to see significant leverage occurring.

Relative to the advertising costs, there's been some diminished reduction in cost of advertising as a leverage and as a fixed number. But it's minimal and probably at this point not impacting or contributing to earnings. And I think I answered all your questions, but if I didn't, ask me what I left off.

Yes, maybe on pricing and balance. Is it consistent with where you are in other markets? Are you still - I know you went into that market with really aggressive prices.

I think our margins are consistent at this point. We have been able to bring those price points more closely to our norm. I won't say that at any given time we might do promotional activities out there that might differ. But I think it's closer to being more consistent with the norms in the other markets.

And the six to eight stores for next year. How are you looking at that in terms of Dallas and then along the Texas/Mexico border? The opportunities there?

Well, I think that's something strategically that we're taking a real hard look at. If you look at what we have planned for Dallas or committed or maybe let's use a little softer language. If you look at opportunities that are before us right now, we're probably around four additional stores in the Dallas market.

That could be adjusted on way or the other. Along the Texas/Mexico border I think you're looking at a minimum of one, possibly as many as two or three additional stores. We're also looking towards the east of our existing market within the state of Louisiana. We think there's some opportunities there. So, really we have about three different directions we can grow with store openings.

And the 12 month plus financing program that became more prevalent last quarter. I'm wondering if that expanded also into the third quarter?

Well, you've got the numbers, there?

Yes. Rick, I think you'll recall that in the second quarter we had about $13 million in that long term promotional credit receivable. This quarter we only added about 10.8 million - I say, only. It's roughly the same, but about what we would expect the growth to be.

All right. That's 10.8 million in additional sales?

That's correct.

Over and above the 13 million.

Over and above the 13. That's an increase in receivables.

I guess the interesting thing about that, Rick, is that we were able to obtain some funding for that which we had not previously received. And we would also continue to tell you that those promotional activities in our assessment and our internal measurements 50% of that business driven in by that type of promotion are customers we have not seen in our stores previously.

And the credit quality of those customers?

Absolutely just guild-edge. We have a measurement standard and we use a beacon score, and we only take the top end on those programs.

Thank you.

Thank you, Rick.

And our next question comes from Frank Brown of SunTrust.

Hi, good morning.

Good morning, Frank.

Good morning, Frank.

Just a clarification to start off. You said double digit comp on the Friday, Saturday, Sunday following Thanksgiving. That was a comp store not a total sales gain?

I don't know that I said that was comp store. I think what I said was that we had double digit increases. That we're extremely pleased with the results that we saw. That it was the best three day period we've ever had and that all of our numbers not in to sufficiently give you hard data.

OK. Could you characterize the best, you know, results that you've ever had? I'm curious, is that in margins, or?

Well, I guess what you're asking me to do is further clarify the statement of best.

Yes, please.

Well, I talk about two things. I talk about total volume is what I am specifically referring to as a percent of the previous time or as a fixed number. I mean, we grew that in excess over those three days of - in the high teens. So, you know, that's a phenomenal result for those three days. So, it impacted our month very, very favorably.

As far as margin goes, we didn't give up any margin to do it. At this point, it doesn't appear we gave up any margin to do it.

OK, great. Talking about Dallas/Fort Worth and, you know, the postponement of your distribution capacity in that market. Could we infer that maybe - you also mentioned that maybe there's only three or four stores that would be left in that market to add. Is there anything you see there in terms of the competitive environment that would make you be more conservative in that market?

Well, I want to clarify how I said that three or four stores. And I don't remember saying three. I remember saying four stores this next fiscal year. All along I think we have said that we feel like that market and the surrounding areas should accommodate somewhere in the neighborhood of 18 to 25 stores. Nothing has changed. Absolutely nothing has changed to alter my view of that count.

I just think that there are a number of opportunities out there that were some pretty low hanging fruit if you will on the border and also on the east side. And it's a matter of how much and how quickly you want to harvest it, in my opinion.

Now, if you we go back to Dallas, I think that also opening four stores there gives us time to let our people get seasoned and to let our infrastructure to continue to develop in that market. So, nothings changed. We're very, very enthusiastic about that market. It continues to perform just exactly where we hoped it would do.

The delay of the distribution center is a direct result of improvements in our execution and ability to get product to those stores without installing a huge plant there before it's needed. That's what the driver of that decision is.

I apologize. I think I get confused on that every time. Let's see - could you talk a little bit about bedding? You all had a change in strategy in the summer in terms of vendors. Could you say how that's going?

Yes. We had previously used three vendors and we had a strategy of good, better, best product mix with the prior three vendors. As you know, bedding was a new category for us. And admittedly, it was a category that we felt like that could add a lot of volume, a lot of gross margin dollars and fit with our financing strategy and philosophy.

We did not have the past experience in bedding that we had in some of our other product categories. A very, very strong vendor came to us or we were able to form an alliance with a very strong vendor that has a national presence that we felt like brought to us a knowledge and a strategy that would help us accelerate our growth in that area.

And so, we elected to become exclusive Serta dealers. That decision has proved to be very, very good for our top line and our gross margin dollar line. I believe the number we reported was 68% in that quarter, was it not? The bedding was up 68%?

Sixty-eight on the year, 60% for the quarter.

For the quarter. And yet, the gross margin dollars - and that was really the first quarter and we had some transitional costs in getting rid of the former three lines. You know, marking it down and selling it out. And even with all that, we improved our gross margin dollar. So, the decision was based on - we felt like this alliance, the one alliance, would help us move this product category along at a faster pace then what we were moving with the three individuals. And this manufacturer also gave us a low end, midline and a high end. So, we were able to cover all our bases plus get a lot of help in merchandising expertise.

OK. I also wanted to ask you about the Sears/Kmart transaction. You know, Sears has been one of your major competitors. Do you have any comments in terms of how that might impact, you know, the competitive environment in Texas and Louisiana in terms of, you know, if a Sears product gets moved out into Kmart stores?

Well, from a general standpoint, I don't have any comments. I have some thoughts, generally, but I don't have any comments generally speaking. Relative to the second part of your question, in our particular markets we compete with Sears. You know, some markets in the country don't have as many Sears stores per 100,000 population as we might have here.

So, we compete with Sears in every market that we're in. And Sears does a very, very good job in every market we're in. Regardless of what anyone may think of Sears, Sears still owns an enormous share of the business that we operate in. The numbers that we get in our markets are somewhere around 35%. They own over a third of the business.

We like to compete with Sears. We think Sears is a good competitor. They give good value to their customers. They sell high end products. They don't mark their products down and sell the lowest entry piece they can get. It's a main core product for Sears.

It's not a ancillary product. It's not like the lumber yards where they don't really have to sell these products so they just put the lowest piece in there at the lowest price. It's a core business for Sears. So - and Sears has, as we all know, a very high operating cost relative to the lumber yards.

So, you know, if you ask my personal opinion, how does it effect us? We just need to concentrate on our execution on controlling costs and getting our piece of the business. In some areas my understanding is that, you know, there will be more opportunity for Sears to open these Kmart locations than it is in our geographical areas because they're already saturated our areas with their stores.

We actually are in former Kmart locations. And I want to qualify this, but I think it's at least three Kmart locations - former locations - that we're in. So, you know, I guess the question is, how much does this new organization - how many storefronts do they need and what is capacity and what is excess?

And you know, when I look at the markets that we're in, I guess that question, you know, how many additional locations could it support? But I don't view it as an unfavorable move. We like to compete against Sears. We think they're good business people. And I don't view that transaction as being unfavorable to Conn's or its business model or our strategy.

Great. That's a very helpful detail. If I could slip in one last question. I think the 60 days plus delinquency rate, I think David said it was 5.4% and I think it was 5.1 in the second quarter. I would guess that has something to do with the extended term finance. Do you see a level where that would stabilize for us?

Well, I don't think he gave you - the 60 day number that we have on our sheet is 5.4 in both periods.

Versus last year?

Yes.

OK. I was looking at ...

And let me say this, Frank. That's the numbers we're showing - 5.4, '03 in that quarter, 5.4, '04 this past quarter.

OK, fair enough.

All right, but let me say this, because I think that we created some confusion the last quarter when we reported those - this credit is extremely high end credit. These people that come in and apply for these extended credit programs, they don't get offered that. Even though they apply for it, we put them on our regular program unless they hit a very, very high beacon score.

And also, they also - unlike many programs of this nature, our customers are asked sometimes to make a down payment and they always make payments. I mean, there are no deferred payments in these programs. They're making payments from month one.

So, these programs, in my opinion, should tend to improve the quality of the portfolio not diminish the quality of the portfolio. So, there should be - there should be no degradation of performance, based on the fact that we're doing no interest programs for 24 or 36 months. If there is a deterioration, it's going to be on execution on our part, not because we chose to put on high end credit that we've never seen previously.

OK. Thanks for the air time and good luck in the holidays.

Thank you, Frank.

[OPERATOR INSTRUCTIONS].

It appears there are no further questions, sir.

Well, I would just like to thank everyone for participating in the conference call with us this morning. And thank you for your continued support out there of your position of ownership in our stock. And this will conclude our conference today. Thank you very much.

Thank you for your participation on today's conference. This concludes the presentation. You may now disconnect. Have a good day.