Conn's Inc (CONN) 2005 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the fourth quarter and year ending January 31st 2005 earnings conference call for Conn's Inc. This call will be in a listen-only mode.

We will be facilitating a question and answer session following the end of the presentation. 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.

At this time I would like to introduce your speakers, Mr. Thomas J. Frank, chairman and chief executive officer of Conn's and Mr. David Rogers, chief financial officer. Mr. Rogers, you may begin, sir.

Thank you, Sean. 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 for the fourth quarter and the year ended January 31st, 2005. If for some reason you did not receive a copy of the release, you can download it from our Website at www.conns.com/investorrelations.

In addition, certain financial and statistical information that will be discussed during this conference call will also be provided on the same Website.

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 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 costs 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 will be filed on April 5th, 2005.

I would now like to hand the call over to the host of today's call, Mr. Tom Frank, chairman and CEO of Conn's Inc.

Tommy?

Good morning and thank you for joining us. I think in order to not be redundant with numbers as maybe we have been in the past, I want to give you a quick overview of my assessment of our performance and then late David drill down into the numbers. I'll be giving you some numbers but for the most part I think in the past we've been redundant so in appreciation of your time we'll try to be more concise today.

I want to comment on our last quarter first. The fourth quarter of this past fiscal year. The nine tenths of one percent same store increase I consider an extremely fine showing and I'd like to tell you why. If you roll the clock back to a year ago, we have 11.7% same store sales increase for that quarter and a 21% increase overall increase in that quarter. A year ago we had three events that drove huge increases in that quarter that we did not have this quarter of this year.

The first one was that the Super Bowl was held in Houston, Texas. Secondly - which definitely impacted our television business extremely positive in the state of Texas. The second event was that LSU - which is another large market for us - was playing for the national championship in January as the Super Bowl was also held in January and the third event was that we were ending the cycle of analog television production and widescreen television sets and there were huge discounts going on out there that tended to drive a lot of business, coupled with these two football events.

So the fact that we had huge increases and we were able to not only maintain that increase without these three events but we were able to increase and I was extremely pleased with that and certainly LSU wasn't in the nationals this year and the Super Bowl did roll into February and has impacted February's business positively.

As we move to the year to date, the year performance, our same store sales versus a year ago, 3.6 versus 2.6 and the contributing factors really were the track primarily but lawn and garden was up and bedding was up and we were able to grow our electronics business and also our clients' business so not where we would like for it to be yet but certainly an improvement over the 2.6 in the previous year.

The thing I know that is most prevalent on everyone's mind is Dallas-Fort Worth market so let's go ahead and talk about it. We now have eight stores open there. We think we'll get four more open this current year. We like the market. It continues to perform in about the mid range of volume that we would hope to get out of those stores as a whole. We think there is tremendous up side. I know that the next question that you're going to ask about Dallas-Fort Worth is how can you succeed and Ultimate close ten stores and I don't want to comment on Ultimate, I want to comment on Conn's and what I know about succeeding in these new markets.

I think success is about execution and I think that when these stores are opened too quickly that people allow their execution to slip. And that, as we shopped the competition in that market, that's what we observed about maybe some of the competitors there that had opened stores too rapidly so our strategy of opening these six to eight stores a year profitably, profitably, I think continues to pay off for us as you saw in our earnings report.

So we're not at all discouraged, we think that the Ultimate situation helps us. Certainly they were taking some share of that market there. Also I think if you contrast Ultimate with Conn's, that they were primarily an electronics house and again, I think it speaks well for our diversification of products on our floor that we have things to sell other than the electronics, so hopefully that adds some sense of understanding, at least from our standpoint of why we're still very excited about the Dallas-Fort Worth area.

The next thing about Dallas-Fort Worth is that we are definitely looking at expanding that distribution center there, and whether it happens in the second quarter or the third quarter, we're unsure but that process continues to be worked on and continues to be a need as we open more stores there.

We did open a second store on what we would consider the Valley or the Border in Mac Island (ph), Texas, which is very close to the Mexican border. We're extremely pleased with the performance of that store, now opened about a little - it's in its third month. It has exceeded our expectations. We continue to like that part of the geographical part of our nation and we think there's good opportunity to exceed the norm of growth per store or volume per store along that geographical area.

As we look forward to - so we ended up opening six stores, five in Dallas and one in Mac Island or on the border for the year. As we look forward for the new year we still think six to eight stores makes sense. Probably about four in the Dallas-Fort Worth area, the other two could be in Valley, could be under the umbrella of the Dallas distribution and advertising umbrella, which, as we get these additional stores up in Dallas it certainly helps us leverage expenses relative to distribution and advertising. While we'll see some increases in distribution expense then it's our intent to leverage that by the additional volume we would get out of those additional stores.

The thing that I think that I - the other thing you might be wondering about is the Sears/K-Mart situation. We have always enjoyed competing with Sears. We don't have a crystal ball so we don't know what that new animal looks like but we like competing with Sears and they're a fine organization, they sell high end products and we don't see that as a situation that should harm our growth or our continued expansion.

I am happy to report to you that Conn's, being a new entrant to the public markets, in the opinion of our auditors at this point, and they've yet to issue their final release yet, but in the opinion of the auditors at this point, this company has successfully complied with and completed the Sarbanes-Oxley section 404 work and I believe that's a tribute to our staff that we've been able to do that and to the discipline that we have within this organization.

And so with - having said all that I would like to turn it over to David Rogers so he can get into some specific numbers with you and then I would be happy to discuss any strategies that you would want to ask me about after David's numbers thing.

Thanks, Tommy. Once again, we had a strong quarter from an operating standpoint. We had a substantial increase in our pretax income line by approximately 16.8% over the prior year. Net income available for common shareholders increased 12.6% and diluted earnings per share increased a penny, mostly due to the fact that we had additional stock issued in the IPO. If you assume that the shares of stock that 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 8.3%.

For the quarter total revenues increased $18.7 million or 13% from $144 million in the quarter ended January 31st, 2004 to $162.7 million for the quarter ended January 31st, 2005. This increase resulted from the following. Net sales increased $13.2 million or 10.3% including the same sales increase, as Tommy mentioned of 0.9%.

Finance charges and others increased $5.5 million or 35.3%. The combination of the credit portfolio of the QSPE and those accounts retained on our balance sheet increased 22.7% from $349.5 million at January 31st, 2004 to $428.7 million at January 31st, 2005.

During the quarter the gross securitization income associated with the operations of the QSPE increased approximately $5.1 million and is reflected in the line "finance charges and other."

For the quarter, gross margins increased from 36.1% to 36.5%, due primarily to changes in product mix and fewer selling discounts. For the quarter, selling general and administrative expense increased by $5.2 million or 13.7% from $37.6 million in the fourth quarter 2004 to $42.8 million in the fourth quarter fiscal 2005. As a percentage of revenue SG&A expense increased from 26.1% to 26.3%. The increase was due primarily to occupancy and payroll costs related to new stores and is consistent with the increases of revenue when viewed as a percentage of revenue basis.

Operating margin for the quarter increased from 9.1% in the fourth quarter fiscal 2004 to 9.2% in the fourth quarter fiscal 2005.

Interest expense was flat when compared to the same quarter a year ago, primarily due to the proceeds from the IPO being used to pay off debt early in the previous year's fourth quarter.

For the year, pretax income increased approximately 25% over the prior year. Net income available for the common shareholder increased approximately 35% and diluted earnings per share increased a nickel to $1.27 per share. If you assume that the shares of stock that we issued in our 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 approximately 18% from $1.08 to $1.27.

On an annual basis, total revenues increased $67.8 million, or 13.6% from $499.3 million for the year ended January 31st, 2004 to $567.1 million for the year ended January 31st, 2005. This increase resulted from the following. Net sales increased $53.3 million or 12.1%, including same store sales increase of 3.6%. Finance charges and other increased $14.5 million, or 24.8%.

The combination of the credit portfolio of the QSPE and those accounts retained on our balance sheet increased, as I said earlier, 22.7%. On an annual basis, the earnings associated with the operations of the QSPE increased approximately $11.7 million.

For the year ended January 31st, 2005, gross margins increased from 34 - I'm sorry, 36.4% to 36.6% due primarily to changes in product mix and fewer selling discounts. On a year to date basis, SG&A expense increased by $17.7 million, or 13.1%, from $135.2 million in fiscal 2004 to $152.9 million in fiscal 2005. As a percentage of revenue, SG&A expense decreased from 27.1% to 27.0%.

As in the quarter, SG&A expenses increased primarily due to payroll and occupancy costs associated with new stores and on a percentage of revenue basis was consistent with increased sales.

Our provision for bad debts increased $1 million or 21% for the 12 months ended January 31st, 2005 over the prior year which is consistent with the increase in the portfolio for the period. Interest expense decreased for the year ended January 31st, 2005 by $2.2 million due to the payoff of debt with the proceeds from the IPO in December 2003 and the lower balance outstanding and rate swaps. The remaining $20 million of rate swaps will expire on April 15th, 2005.

As we look at our balance sheet, significant changes since January 31st, 2004 include increases in accounts receivable, interest and securitized assets, inventories, accrued expenses and retained earnings, with decreases in net property and equipment, due primarily to the deconsolidation of SRDS according the vin (ph) 46 and a decrease in debt.

Cash flows generated from operations decreased by $2.12 million due to investments in accounts receivable as a result of increased promotional credit programs and response to competition and due to the lowering of our funding percentage from our ABS program as a function of dilution associated with various criteria.

It is our belief that the trend in aggressive promotional credit programs in the marketplace may be waning, but we have provided for in our fiscal year 2006 forecast roughly the same level of our investment and promotional receivables as in the year ended January 31st, 2005.

Relative to funding rate dilution we believe it will not only reverse but we may recover a portion of the cash unfunded in the previous year.

Relative to guidance for the coming year we project earnings per share in the range of $1.40 to $1.46 before giving effect to the adoption of FAS 123-R. Our credit portfolio continues to perform in a consistent manner. Some portfolio statistics, and these are available on our Website as supplemental data for the year ended January 31st, 2005 compared to the year ended January 31st, 2004, the total number of accounts in the combined portfolios increased 17% and are at 350,251 accounts.

The total outstanding balance increased 23% from 349,470 to 428,700. Average outstanding balance per account increased 5% from $1,166 to $1,224. Sixty day delinquencies increased from 18,267,000 to 23,143,000.

Percent delinquency increased from 5.2% to 5.4%. Bad debt write-off percentages net of recoveries decreased from 3.1% to 2.9%. The reserve for bad debt as a percentage of the total balance decreased from 3.4% to 2.9%.

I would like to follow up on the remarks that Tommy made in regard to Sarbanes-Oxley section 404. The company has completed its assessment stating that internal control of our financial reporting is effective. We expect that Ernst & Young will complete their work early next week and anticipate that they will assign their audit of our assessment of internal control over financial reporting on April 4th, 2005. We have no reason to believe at this time that their report will be anything other than unqualified for both 404 and the financial audit.

We expect to file our annual report on form 10-K on Tuesday, April 5th, 2005. One other issue that has been prevalent in the press recently has been in regard to lease accounting and its effect on retailers' books. We have conducted a thorough review of our accounting for leases and determined that we had no significant adjustments to make. Our outside auditors concur with our conclusion.

Tommy, did you have any other remarks to make before we open up for questions?

I think we're going to open it up for the questions.

All right. We're ready for questions.

Thank you. Ladies and gentlemen, at this time if you wish to ask any questions, please dial star followed by one on your touchtone telephone. If your questions has been asked or answered and you wish to withdraw, please dial star two. Again, dial star one for any questions.

And your first question comes from the line of Rick Nelson with Stephens, Inc. Please go ahead.

Hi guys. This is Joe Franger for Rick.

Hi, Joe.

I have a couple of questions. The first, inventory was up 16% year over year versus a 10.3% sales increase. Could you comment on inventory levels and whether or not that difference is related to the timing of the store openings?

It's driven by two factors, Joe, the first one is the additional stores that we open, as you open those new stores, generally speaking it takes about 3-400,000 minimum just to stock the store and then you put another couple hundred thousand in the back room, so you can do the math. But that definitely impacts that inventory level.

The second driver was the advent of the LCD products and the plasma products. In order to get into that business we certainly had to increase - We spent a lot of money bringing those products onboard and at the same time did not decrease our widescreen inventory because that business here in the South is still a very viable business.

So I think those are the two drivers that are driving it. Additionally, our computer business grew considerably over the past six to eighth months and those are high-priced units that tend to drive inventory up, too.

OK. And my second question, I know you mentioned you didn't want to comment on Ultimate but their closeout sales begin in about a week and a half and I wanted to find out if you could comment on what the near term impact may be for Conn's in the second quarter and then going out further how much of that revenue you could capture in the Dallas and Austin markets.

Let me make sure I understood your question, Joe. The first was, I think, Is the discounting by Ultimate ...

Yes.

... is that going to affect us, I think is your first question.

You know, yes and no. And sometimes the effect is positive. What it does do, it gets people into the marketplace that maybe might not have been previously interested and what happens when you do that is you get some cross shopping. There certainly are people that are going to buy those close-out prices but also what tends to happen is that someone decides they're going to take a second look at another store, and if we get that opportunity then generally we're able to close it.

It's generally the second guy that gets to close the sale on those big ticket items is sort of what our experience has been so I think relative to that issue is that it's a mixed bag. We certainly are prepared with promotional activities to anticipate those moves.

The second question was - what was it?

After they close, how much of the market share can you grab from Ultimate in the Dallas and Austin markets?

You know, and again, we're estimating what they were taking out of that market. If you look at the players that are out there playing in that, Circuit, Best Buy, Sears, CONNS, it's just I think hard to quantify. I think it really depends on our execution. I'm not sure what their total volume is but I think to the point that you're asking, we should, if we execute properly, pick up a substantial part of that business and certainly our promotional activities are geared towards that objective.

I am just extremely hesitant to give you a number, but it does represent an opportunity for us, indeed.

OK. And my last question is housekeeping related. Depreciation and amortization for the fourth quarter and the full year? Can you supply that?

Are you asking what those numbers are, Joe?

Yes.

I don't have those in front of me. Hang on just a minute.

I'll tell you what, Joe.

Do you have it there?

Yes, I do. And you just want the raw numbers Joe or ...

Sure, that's fine.

Depreciation for the year was $8,719,000 compared to $6,653,000 in the prior year. Amortization was $243,183, compared to $304,325.

OK. And that is all. Thank you very much.

Thanks.

Than you, Joe.

And your next question comes from the line of Frank Brown with Conn's.

Good morning, gentlemen. I'm actually from SunTrust Robinson-Humphrey, I think you know.

That's a great quarter. I was particularly impressed. I think Tommy you said that the C.E. category was up despite the factors that you mentioned in the prior year having had a positive impact that you had to comp against. Can you give us any more color in terms of consumers' response to plasma and LCD and other aspects that was able to let the consumer electronics comp higher year over year?

Definitely the mix is shifting, Frank, without a doubt. As the new flat panel technology and the new DLP which is half flat panel and half the large size in terms of thickness. As that technology continues to evolve and as the price points drop, while they're dropping relative to their previous price points, it's an increase for us over the prices we were able to get for that standard, big, ugly looking box.

So as that mix changes, as we continue to sell more of this new technology product at a higher price point than the old technology, that certainly is impacting our price per unit, if you will, going up. So I think that had an impact on it. I think we got probably smarter with some of our displays. I think also that the computer business impacted our electronics business positively. We like that business because we make money out of it.

David, do you have anything to add to that? Or do you think I pretty well covered the basics?

I think you pretty well hit it on the head.

Would you care to share with us what the percentage of the video business is comprised by that flat panel type, or new technology video?

No, I don't have that number, Frank, but it's a good thought that we could provide that for you. I would tell you that it's still a smaller portion and I'm going to tell you and I'm going to qualify my answer in advance, that is probably still less than 20% of that total category and again, I'm qualifying that, I don't have a hard number in front of me but what that tends to do, those units, even though they've come down in price, are still quite expensive and David and I were talking before the conference.

You know, we sell a 19 inch television for $121. We sell a 19 inch flat panel screen for $699. So it doesn't take a large percentage to skew that in an upward mode. I'm sorry that we have not broken it out that way but maybe in the future we could give a little more insight. It is a dynamic thing that's changing daily, we would tell you, as the technology continues to improve and as the price points continue to come down and availability also has ceased to be an issue.

Hopefully I answered your question for ...

You certainly did. It sounds like there's a lot of opportunity in front of you still in the video category. You also mentioned in the press release that major appliances, your position in the market was strengthening there. Could you add some more color on that, please?

Well, I think that we just got some increases as a percent and we've got some number but we definitely increased our percentage of appliance business. That market, as you know, is influenced by several factors. One is the manufacturers themselves in the USA versus offshore product now coming in. It's also being influenced by the big boxes, and frankly the big boxes tend to act as discounters to that product and what I think we were able to do was to - We're showing about a 6.1% increase in our appliance volume year over year.

So what we were able to do as a strategy, I think, is compete at the lower end with the big boxes in a more favorable basis in the latter half of the year. I think we did a great job all year long in the mid section price range which is where we're probably the strongest. But I do think we increased our performance at the low end, which does give you an opportunity to do add-on sales and keep the customer in your store.

Frank, I think one of the things, too, is there's been some excitement created in regard to appliances with the higher technology areas like in laundry, you've got your high efficiency units. In cooking, you've got a lot of things happening there. Even in refrigeration you've got some new products that I think are creating some excitement that - that category isn't always one that just excites people but there's some things happening there that are creating some excitement, I think, in the marketplace and we've seen that.

It doesn't have the same impact that the LCDs and the flat panels I think are having in consumer electronics but it does - you are seeing these higher ticket sales on appliances that I think are results of consumers desiring, to some extent, the higher technology products.

That's great. David, you also made a comment that there was a possibility that the use of promotional finances in the marketplace is waning. Is there anything in particular you could point to?

No, nothing empirical, Frank, other than just our observations, what we're seeing and how we react to what competitors do. I certainly don't think we can take anything to the bank at this point. It's way too early.

Sure.

But it is something that we watch on a weekly basis, trying to measure what's happening out there in the market and we're hopeful that we're seeing that kind of a change.

However, we have provided for in our forecast and in our plans to continue to offer the promotional credit to whatever extent is necessary to compete.

One thing is for sure, Frank, the increase in the rate by the Federal Reserve tends to make it more expensive for people to offer these kinds of programs so in the past that has tended to work in our favor and not against us.

OK. And just one last question if I may. On the finance charges and other part of your business, as we see the rates increase, as you mention, from the fed, and I saw some swaps are expiring here in April. Could you just maybe update us in terms of how much of the funding for the SPE is fixed rate and what the potential impact would be at the net income like from, say, some kind of a move upward in rates?

We would expect to see an impact, Frank. Of course, we've got $200 million of that ABS that are fixed and then we've got $117 million that is variable and that's as of January 31st and it's that variable piece that would be impacted by increasing rates. However, I would hasten to say today that the variable rates are still lower than our fixed rates so we've got some room there before we get what we believe to be a negative impact.

However, our forecast, or what we believe is going to happen is something in the order of 140, 150 basis point increase. It is that kind of increase that we have cranked into our forecast and is a part of the guidance that we gave you. That's the kind of thing that we're looking at. Clearly if they were to go up more than that there would be more of a negative impact on us.

But I think the 140 basis points you can see as a conservative - we're certainly being conservative in how that impacts our pretax number.

Absolutely. It looks like it accounts for that to me. Thank you all very much. Congratulations on a very nice quarter.

Thank you, Frank.

And again, ladies and gentlemen, please be reminded that it is star one to ask any questions.

I am showing no further questions at this time, gentlemen.

And we would like to thank all the participants for joining us today and we would ask you to conclude the Webcast, Sean.

Thank you. Ladies and gentlemen, you may now disconnect your lines.

Have a great day.