Conn's Inc (CONN) 2006 Q1 法說會逐字稿

Good morning, and thank you for holding. Welcome to the Conn's Inc. First Quarter Earnings Conference Call. [OPERATOR INSTRUCTIONS]. Your speakers today are Mr. Thomas J. Frank, Sr.,Chairman of the Board and Chief Executive Officer of Conn's, and Mr. David L. Rogers, Chief Financial Officer of Conn's. And now I would like to turn the conference over to Mr. David Rogers. Please go ahead, sir.

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. It outlines our operational and financial results for the quarter ended April 30, 2006. If for some reason, you did not receive a copy of the release, you can download from your website at www.conns.com/investorrelations.

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 Commission 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 subject to risks and uncertainties which could cause actual results to differ materially from those indicated today.

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 March 30, 2006. I would like to hand the call over to our host for today's call, Mr. Tom Frank, Chairman and CEO of Conn's, Inc.. Tommy?

Good morning, and thank you for joining us. By now you have received materials as released earlier this morning, which indicate that our net sales for the quarter were up 23.6%, our total revenues were up 21.5%. You may not have had a chance to drill down but in it we report that our same-store sales were up 16.1%, versus 7.3% last year.

If we remove the markets that were affected by the storm, then we would have reported to you a 12% increase in same-store sales in those markets outside of the affected storm area. There are some lingering effects of the storm, and I will try to identify those for you. What-- the first one would be there is a definite population shift from the New Orleans area east to Baton Rouge into geographical areas that we service with our stores. We view this as a plus, and while it's difficult to quantify the amount of people that have relocated and shifted in a permanent nature, it is definitely a benefit-- a continuing benefit to the locations of our existing stores.

Secondly, there is much rebuilding yet to be done. This storm was not cured-- the effects of this storm was not cured in 3 weeks or 3 months. There are many, many blue tarps remaining, many homes yet be restored and repaired and those homes need the products that we sell. There also is a lingering impact-- so that we view that as a positive.

There's also a lingering impact as it relates to the performance of our portfolio and it's certainly affected earnings in this quarter that we're reporting on now. We do feel like that the impact is diminishing, and that the further impact to earnings will be manageable in the future as we have added additional resources and refined our efforts in this area. We opened new new stores in the first quarter, one exceeding our expectations in producing extremely well above average by about 20% with a potential to grow even higher. There's a second store that we just opened that would appear that it's going to produce above average of our material stores, so two very exciting new openings to us, indicating that we chose sites well and put these stores where we can certainly maximize the opportunities that exist from the standpoint of growing our-- our business.

As we look at the ratio of the growth of the credit portfolio to sales as a percent, I think there are a number of factors that I would just like to comment on. David's going to drill into some numbers. Traditionally this period of time we see that ratio diminishing somewhat. It's caused by several things in my opinion. The traditional thing would be that people receive refunds from their tax federal tax returns and tend to pay off their accounts more often in this period of time than in other periods of time. Additionally, I think that that ratio was impacted because we are now reaching and touching a customer that is using their own credit card, and it happens to be a higher end customer that probably we have not previously reached.

Our margin decline-- and David will elaborate at length about our margin decline-- if you were to analyze that at a very high level, our product margin-- that margin consists of a number of components as-- as we report a percentage to you, but two of the components that impact that, one is our credit losses and the other one is our product margin. Our product margin year-over-year remains exactly at the same place that it was for the same period a year ago. The deterioration or additional losses we absorbed in the credit portfolio did have some impact, and David will elaborate further on it.

As we look at some positive things that happened during the quarter, the furniture and mattress business up 80% and 75% respectively, and yet, much potential remains in those two categories. However, in adding these two categories to our product mix, it did increase the costs and unusual costs of revamping our warehouse to handle products that we had not previously handled. Including the restructuring of shelving, adding additional material handling and the handling cost of the products themselves.

The further costs were absorbed in the-- this period to replicate this facility that we are presently in. Much has been made of this storm as and as you listen to newscasters day in and day out, they would suggest to you that we have a number of years yet of high intensity storm probability. We, of course, being located on the Gulf Coast and 400 of our associates in this building, and having experienced the effects of what a maximum storm can do have made a decision early on after that storm that we would replicate this facility in two geographical areas: one in Houston, Texas, and one in Dallas, Texas. I am happy to report to you today those two facilities have been replicated, they are now 95% fully functional, and about within the next three to five days we expect them to be 100% functional, and we would now be in a position to not lose any effectiveness as we did this past storm should another storm hit this coastline.

I would hasten to tell you that in 63 years of living in this city, that it was the first time that we had ever had an evacuation or a disaster of that magnitude. However, we have provided for contingencies to continue our business at the highest levels of support, and those contingencies are now in place and did impact our costs in my opinion during the period. As we look at new products that had the tendency to help us; flat panel televisions, certainly continue to be a very exciting product to people as price erosion occurs, that is a good thing. It has helped us sell more units.

The margins we continually-- are able to continue to maintain, and we're very pleased with the fact that the price of those product category has come down. We also like the improvement in high efficiency laundry that has cost on with the consumer. While the price points have dropped, there's still considerably higher than the average price point of a pair of laundry washer drier pair prior to the advent of high efficiency laundry. Then there are new refrigerator products that are beginning to catch on that certainly-- the homeowner likes, and we feel like this category has significant benefit for us on the plus side. You saw the tremendous growth in our mattress and furniture business.

We think that this is a definite way for us to continue the growth in our same-store sales and certainly as we more than double those numbers and get those huge percentage of increases and continue the growth and the potential growth that's out there we were very excited about that. While the lawn and garden business was flat, I would tell you that early indications from the first month of this first quarter is that we have resumed high double digit increases in that category. I think part of it was weather related. I think part of it was execution on our part, and I believe the weather has cooperated and our execution has improved. We continue to work on the improvement in the track sales which was considerably impacted by the sale of computers both laptop and traditional computers.

As we look at market areas, the Dallas market in particular, we now have 12 stores there, I know this is an area that many of you watch with a lot of intense interest, those stores continue on-- on a whole to perform about where our expectations were. I would now say that they are closer to the mid-range of where we would expect to be at this point with three stores performing below the norm and three stores performing above the norm. So much, much opportunity. I think the good news is there we have now established a foothold. We also, during this period of time, opened our distribution center in Dallas and spent much money in setting that distribution center up, and that also impacted our cost structure during this first quarter.

So all of the elements are now in place, and we're very excited about the potential for this market to grow and perform. While we would like to see the 3 underperforming stores performing higher, on whole I would say that-- that I'm excited about where we are in the upside potential relative to this market. We have three new stores, at this point that we see clearly being open during the remainder of this year, and those stores will probably be open during the third and the fourth quarter. I have normally comment similarly on the first month into the new quarter. I have got to tell you that it just ended last night. We're still striving to get all of the numbers in, but early indications are that our top line increase in product sales was somewhere in the neighborhood of-- of the low 20%, and that comp store increases were in the low teens increases. And so having said that, I'm going to turn the-- the meeting over to David, so that he can give you some detailed number information.

Thank you, Tommy, and from a financial perspective we also had a very good quarter. Before I get into the numbers, I need to say that on February 1, 2006, we adopted Statement of Financial Accounting Standards, number 123-R, share-based payment, and elected the modified retrospective application transition which calls for all prior periods to be adjusted to give effect to the fair-value based method of accounting for stock-based compensation. The effect on prior periods of adopting FAS 123(R) has been provided for in a separate press release dated May 31, 2006.

For the quarter ended April 30, 2006 compared to the quarter ended April 30, 2005, total revenues increased 21.5% to $192.1 million. Net sales increased $32.8 million or 23.6%, and finance charges and other increased $1.2 million or 6.1%. Of the $32.8 million increase in net sales, $21.8 million was attributable to same-store sales, $10.9 million to seven stores not open in both periods, and $102,000 due to other increases net.

Also of the $32.8 million increase in net sales, $31.2 million was due to product sales and $1.6 million was due to service maintenance agreement commissions and service revenues. Of the 32.-- I'm sorry of the $31.2 million increase in product sales, $18.2 million was attributable to increased unit sales and $13 million was attributable to unit price points. The increase in finance charges and other was due primarily to increases in securitization income.

Net income for the quarter rose $1.8 million or 18.8% to $11.4 million. Consolidated gross margin percentage decreased by 170 basis points, due primarily to changes in revenue mix, as product sales grew faster than higher margin revenue in securitization income and service maintenance agreement and insurance sales. Securitization income accounted for 70 basis points of the reduction, due primarily to higher loan losses and increased program costs. Another 70 basis points resulted from lower sales penetration of service maintenance agreements and insurance contracts. 30 basis points were due to other factors. As Tommy has already mentioned, product margin was flat with the previous year 's period.

Operating margin decreased 70 basis points due primarily to a 170-basis point decrease in gross margins, and an offsetting increase in SG&A as a percentage of revenue of 90 basis points. Interest expense net of interest income decreased by $539,000 due to the expiration of a $20 million hedge in the first quarter of last year and income from excess cash invested during the period. Earnings per diluted share increased $0.07, or 17.5% to $0.47 per share.

We used $8.4 million of cash flow and operations for the quarter ended April 30, 2006, compared with cash provided of 11.7 million for the quarter ended April 30, 2005, a reduction of $20.1 million. If adjusted for the approximately $19 million of temporarily deferred payments for payroll and federal taxes due to Hurricane Rita which were paid in February. Cash flow from operations would have been $10.6 million, and free cash flow would have been $3.6 million. Cash used in investing activities was $7 million, compared with $3.3 million a year ago, and primarily represented investments in property and equipment. Such expenditures are expected to be greater in the current year since some of our excess cash will be invested in real estate for store expansion. Net cash provided from financing activities increased $10.9 million from cash used of 9.8 million in the quarter ended April 30, 2005, to cash provided of $1.1 million in the current quarter.

We have no bank debt on our balance sheet and have lines of credit from banks of $56 million net of LOCs available to be drawn for working capital or capital expenditure needs. In addition, we have $22.2 million of cash invested. For the foreseeable future, we expect to fund our operations with cash flow generated from operations and external borrowings, including primarily bank debt extended terms provided by our vendors from inventory purchases, acquisition of inventory under consignment arrangement, and transfers of receivables toward our asset backed securitization facility.

Excess cash will be invested in real estate and customer receivables. The total managed portfolio balance is $521.5 million at April 30, 2006, compared with $444.5 million at April 30, 2005. And $519.7 million at January 31, 2005-- 2006. This represents a 17.3% increase since last April. 60-day plus delinquencies are 5.9% up from 4.2% a year ago, and down from 6.8% at year end. The increase in delinquencies is directly related to disruptions and collection efforts due though storm and is expected to be temporary in nature we experience chargeoffs this quarter due to bankruptcy filings as a result of the change in the bankruptcy law that went into effect in October 2005.

Loss expense from these chargeoffs was offset by reserves provided for such losses in the third quarter of last year. Losses due to charge-offs from delinquencies directly related to disruptions in collection efforts due to last year's storms were also partially offset by reserves provided for in the third quarter of last year. We have reserves totaling $300,000 remaining to apply to future charge-offs of such nature. As a result of increased charge-offs and accrued loss provisions the loan-loss ratio increased from year end by 10 basis points to 2.6%, but decreased from April of last year by 30 basis points.

We affirm our guidance that earnings for the current year will be in the range of 100-- I'm sorry-- will be in the range of $1.85 to $1.90 compared with $1.67 for the prior year. Same-store sales are expected to be in the range of mid to high single digits for the year. Conn Funding Two, a qualified special purpose entity, which purchases our customer receivables is expected to increase its funding capacity by offering $150 million of medium term bonds and expanding the capacity of its variable funding note sometime before the end of our second quarter.

The anticipated bond rates will be higher than the current rates experienced by existing series of medium term bonds. Additionally, we expect the average interest rate on Conn Funding Two's variable funding note, which is backed by commercial paper to also increase. Such higher rates will reduce our securitization income. Therefore, our projection of EPS for the current year includes a reduction of approximately $2 million in securitization income due to higher interest rates incurred by Conn Funding Two. By fixing the interest rates with bonds, we believe our earnings will be stabilized over time.

Tommy, that completes my comments. If you are ready to open it up for questions we will do so. Go ahead.

We would entertain any questions at this time.

[OPERATOR INSTRUCTIONS]. We'll go first to Rick Nelson with Stephens, Incorporated.

Thank you and good morning. Congratulations.

Thank you, Rick.

Tommy the gross margin pressures 170 basis points, how much of that do you attribute to hurricanes and-- and the bankruptcy law changes and sort of what-- how much is-- what-- what is the expectation on a go forward basis? Tommy the gross margin pressures 170 basis points, how much of that do you attribute to hurricanes and-- and the bankruptcy law changes and sort of what-- how much is-- what-- what is the expectation on a go forward basis, with the gross margin? Assuming product margins stay-- remain stable?

I think, David pointed out the categories and if you-- if I try to address-- I'll address part of it and then I'll also hand it off to David because you are asking for some-- what our expectations are. If-- if you look at-- at that decrease in margin, in the components that make up gross margin and the way the accounting profession causes you to report gross margin, a number of items go into the calculation of that, including warehouse and distribution costs and-- and a number of line items and David reported to you that-- that there was probably a-- and you might not have picked it up, there was probably a minimal impact because of the bankruptcy law changes.

However, there was a lingering impact that takes long time from the time that an account is implemented, it takes about six to seven months before that account would finally end up in a write-off condition. So that, we felt-- feel like we hit a peak during that period of time and he reported the combination of those two items being somewhere around the 70-basis point level. There were other factors in that margin decrease that were attributable, as I tried to point out in my report, to warehousing and distribution costs associated with the startup of new product categories, that handling of furniture and mattresses is an extremely different process in the storage and racking of those is an extremely different process than the handling of refrigerators and washers and dryers, so there were a number of components, some of which were cost issues that caused that deterioration including the performance of our credit portfolio.

We do feel like that the credit portfolio has hit its high as far as these losses are concerned, and I would also tell you that indications are that that high is still within-- as it has dropped down since it's hit that high, is within a four-year range, and I think we point that out, probably in our Q, to you, that that is still within a four-year range-- historical range. So given the magnitude of the disruption that we were against, we would look forward-- to answering the second part of your question-- to improving those pieces of the margin. Now could there be further deterioration in product margin, absolutely. Are we working to increase the percentage of improvement in product margin, absolutely. So there are a lot of moving pieces in that product margin and hopefully I'll shed some light on that and David would you care to comment further on that?

Yes, Tommy, I mentioned 70 basis points of the 170-basis point reduction in overall margin, being-- being a securitization income. About 50 basis points of that was losses, Rick. So that may give you some-- some feel for that part of the storm related expense, but as Tommy said, we had other expenses too, he mentioned the increased warehouse cost and-- and that-- that certainly is something we're experiencing. To offset that partially, we have, I think, Tommy, increased the delivery rate.

We have.

To try to address that that's one of the things we talked about is we're trying to address that. I think that clearly the product margin area is a-- a volatile one, as Tommy pointed out, but not only do we have the potential of a downside of that but we also have the potential of an upside in-- in product margin, as-- as Tommy as talked about our emphasis on furniture and mattresses, which are higher margin. So certainly, that's not something that's-- a bad thing. I think it's something that-- that we look hopeful-- hopefully for in the future. So both-- both of those, we looked for the opportunity to improve.

Thanks for that. The release talks about increased program costs. I think as it relates to the credit business. Is that higher funding costs or is that something else?

Repeat that, Rick.

The press release talks about increased program costs. Tied into that 70 basis points of reduction due to slower growth and securitization income.

Yes. Yes, that would be-- be higher interest costs.

That's higher interest costs. Okay. So if-- if product margin were stable, what-- what sort of gross margins deterioration should we be looking for, based on what you know?

I think-- you are saying if-- if product margin continues to be flat?

Yes.

Well, I think we would see-- we would hope to see an improvement in-- in this-- this other margin area as-- as losses may come back in-- into line at some point in the future, so we would expect some improvement there.

By improvement you mean less-- less year-over-year decline? Or actually growth?

I think what you are really starting to ask at what are the risks? What are the additional risks for additional deterioration in margin? And certainly they are in the cost structure part of the formula that calculates margin. That's where they exist and those costs include rising interest rates and we list those factors as risk factors in our Q, that includes rising interest rates, rising fuel costs, rising costs associated with taxes. We also report to you that the state of Texas just passed a new franchise tax or a new tax on businesses here. That's not in the margin but is in the cost, but the other factors are in the margin, so gas-- the dis-- warehousing-- whole warehousing distribution issue affects the margin costs the way that that margin is calculated.

So if you-- what you are really asking is what are those risk factors? And there's a number of those risk factors, any which of one can impact that margin, which we had several impacts from several different areas as we have already reported to you in this conference call during this past quarter. Do we see improvement in the areas that deteriorated during this quarter? It is our intent. It is our implementation of plans, and we are seeing some turns turning in those costs. We don't have enough information yet, we're so new the quarter, but yes, we would definitely-- we would definitely focused on the items that caused the decrease in the margin percent, while at the same time maintaining our eye on product margins so we can maximize any additional opportunities in that area.

You know, Rick, one of the things that-- that we talked about separate from the securitization income question was the penetration of insurance and SMA sales, and clearly that's-- that's something that we-- we're looking at to try to improve. So we certainly have some opportunities to improve margin, and as Tommy said, there-- there's also a lot of other factors and risks involved.

I guess that was 70 basis points of the decline to reduce penetration.

70 basis points.

70 basis points, right. And what-- what is the plan there to change the direction?

As far as the ratio of sales to SMA and insurance to product?

Yes.

We're looking at a number of factors there. We're evaluating whether the pricing on our video SMAs is-- is competitive as it should be. We may have lost some penetration there. We're evaluating that. We're-- one of the things that we know that will continue to happen as we continue to offer deferred interest free programs, the utilization of insurance on that type of sale when they use our credit is a less of a penetration than when it's a normalized credit transaction on an installment loan basis.

So that-- that's a-- an issue for us to address in terms of education and-- and we probably do not expect to fully recover that piece of it, but we do expect to-- that there are some expectations in improvement in the SMA situation. However, I will tell you that it's a lot more difficult and lot less opportunity to sell service maintenance agreements on mattresses and on furniture than it is on complicated refrigerators and complicated video products that we sell. The opportunities to have a higher percentage of penetration on those complex product categories is much greater than the mattresses and the furniture, so you get some dilution effect from that.

Yes, and I guess the other issue was credit insurance?

Well I think that I-- that I'm referring across the board. And I think I did address it, but I'll readdress it once again, that part of that decline in the ratio of credit penetration of sales is due to the fact that we have extended, no interest financing programs, and when we do that, we put that on a revolving charge card as opposed to a traditional installment loan closed in credit line. And the penetration on closed in credit is greater than the penetration on revolving charge. And the penetration with the customer that qualifies for that revolving charge in their utilization is less than the person that puts it traditionally on-- on a closed-in credit agreement.

Okay. Thank-- thanks for that. Store openings are now targeted at five to six.

I think that's correct.

I think you had previously targeted six to eight?

That's right.

And what-- what-- I guess is causing the slippage and will that be made up by next year?

I'm not willing at this point to comment as to whether we would try to attempt to make it up next year. I think we have some opportunities in execution frankly to improve in some market areas that, while we had nice store increases, we have several market areas that I would like to see the improvement in same-store sales coming out of those market areas.

I think that-- that we can open stores too fast and satisfy what maybe the investor would like to see or we can concentrate on the execution and maximization of the stores we now have open, and that has been my philosophy consistently from day one as we have talked to investors that we will open stores as quickly as I feel like we can absorb them into our organization, and maximize the earning opportunities and leverage in our costs without diluting the effects of our culture and the way we execute this business, and part of our success is the differentiation of how we execute versus other people and as you open stores too fast it's been my experience that that dilution then begins to impact earnings, so I would rather maximize our top line, maximize our earnings increase, and so-- so we have decided to take the lower end of the range that we gave you as the higher end, and we're making that adjustment today as I speak.

Good. Okay. Thank you.

And moving on we'll go next to Brian Delaney with EnTrust.

Good morning, gentlemen how are you?

Good. Thank you.

Can I start off with the overall competitive landscape in your markets? Trying to understand if I look at you relative to some of the other players, whether it be in the consumer electronics space or in the appliance space, how they are reacting with their extended no-interest credit programs? Are they becoming more or less focused on that as a competitive type of offering?

I think we see it all over the board if you want to know the truth. They traditionally, for the past three to four years have been extremely aggressive in their that area. As we have ramped up our own version of it, I think it has helped us from a competitive advantage to do so, we know it has. We have been able to measure that, and we know it-- know it has, but we see what I would call hot spots, where maybe they'll devote, if they feel like they are losing market share, they'll devote an increase in intensity in that area, and then we see the same run of the mill thing that we have seen for three or four years, so I think it's a mixed bag, and-- and I think it's really dependent on, how they view where-- what their own share is being affected -- how their own market share is being affected.

It's very difficult to analyze and measure the-- and quantify that-- the amount of increase that we see in-- in just a subjective evaluation to-- in answer to your question, I would say that while there is some level of increased intensity, I don't-- I don't see a significant level of intensity increase, and I'm getting-- I have got several of my key people in here in the merchandising and they are nodding their heads affirmative to answer to that and I'm sorry I took so much time answering that question I forgot the rest of it.

The first question was just in the aggregate, if you're seeing them become more aggressive, meaning the gap between the-- the period where your extended no-interest credit how it relates to them, whether they are closing that gap? And it sounds like in the aggregate, you are comfortable with how they are closing it and you still have that as an advantage.

That is a true statement.

Great. A couple of housekeeping items, you mentioned you have $300,000 remaining of allowance for the bankruptcy type risk that may be in the portfolio. Can-- can you comment in the aggregate what the allowances are against the $520 million of total portfolio and how that allowance in the aggregate compares to what you had as of year end and as of the prior year against the $444 million?

Well it's going to be consistent with what we had, before. What-- what we're doing in regard to providing the allowance for those receivables is-- is the same that we have always done. The difference in regard to these special reserves was that we knew back in the third quarter of last year that this was an exceptional kind of event, and that it wasn't going behave like that-- that huge portfolio balance, and that there were some increased delinquencies and those were going to push through and probably mature to-- to charge-offs, and so what we did was we set aside special reserves for that eventuality, and-- that's-- that's the kind of losses that we're seeing coming-- coming through today. So to answer your question, there has been no change there ratios are-- are very similar to what they were before and after the storm, but in addition to-- to that normal reserving methodology, we have also provided for this special reserve.

And what-- what is the absolute dollar amount that-- that you have set aside against the $520 million portfolio?

In the special-- what do you think?

About 13 million.

13 million and then what-- what was it at year end?

It was roughly about the same.

Okay. Okay. And then looking at the balance sheet, and just trying to go through the-- the cash flows, sequentially, the accrued compensation was down, north of $8 million and other accrued was down $3 million-plus. Were the sequential movements in those accounts all cash outflows or were there any type of change in accruals that-- that may have flowed through the SG&A line in the quarter that were non-cash in nature?

We're still--

I'm not aware of any.

So-- so-- the-- the sequential changes were all cash outflows. There's no change in estimates that favorably impacted SG&A in the quarter?

Not to my knowledge.

Okay. Thank you very much.

Thank you, Brian.

We'll take our next question today from David Magee with SunTrust Robinson Humphrey.

Hi, good morning, and good quarter.

Thank you.

Thank you, David.

A couple of questions one is , Tommy, the comment you had made earlier about appealing or being successful with the somewhat higher end customer, what is the-- I guess what is the trend there going forward? What might be causing that? Or are you-- by definition maybe having customers at the lower end drop off? I'm just trying to get a little more color on that-- on that statement?

Well the indication is that our-- our secondary portfolio is impacting growing balances, so that would indicate us to that there is no drop off on the lower end. Traditionally it has been difficult for us to reach people with these very high credit scores, above 700, because of the competitive pressures put on us by nationals that have had that as a tool to use. So we-- we know that we're acquiring that customer because we also have a growth-- remember we had three portfolios, we have a revolving charge, which much represents our higher end customer, we have this large center portfolio, which we call Conn's Credit and then we have our opportunity portfolio, which is the lower end credit portfolio.

So we see the higher end portfolio growing, and we see the lower end portfolio growing in outstanding receivables. So we-- we think that we're we're fairly sure, by the indication of these outstanding growth in receivables, that our strategy of promoting to the higher end credit core customer is working.

And if I understood your question right you said why is that working? Well certainly one is that ability to offer this extended no financing credit. Secondarily, I think the product mix that we have now put into our stores is more appealing to that customer, and thirdly, we have a new generation of store format that we have seven or eight of those stores up that if you walked into that store, you would think that we were a national as opposed to a regional.

The format has been extremely successful, and in those stores it seems we have attracted a higher end customer too, simply because of the format of the store, the way it's laid out, the appearance of the store, but also I would tell you the product mix in all of our stores has blended well to satisfy the needs of the higher end-- that higher end customer.

Thank you, Tommy. And secondly, the-- the 60-day ratio coming down sequentially, that obviously is a good sign. Do you-- is that occurring according to how you thought it would, and should we expect a further decline by the end of the second quarter?

Well it's-- it definitely is in general reacting like we thought. I personally would have liked to have seen a better drop quicker, being frank with you. We have added additional resources in terms of people assets and people resources, and additional external measurement to come in and beef that up. So good part of the answer as it relates to what our expectations are going forward is our ability to execute at a higher level, and I do think in my opinion, frankly, that there is the capacity for us to execute at that higher level.

If in fact we achieve the results of executing at a higher level, you would see that decrease at a better rate. If we failed to execute at that higher level, then certainly we could experience losses while they would not, in my opinion, exceed the losses that you have seen in this first quarter. They certainly could be higher than what any of us would desire, but our plan, our execution, our focus is all set towards reducing that to a more favorable situation.

And then lastly, with regard to the special reserves that you put in place last year in the third quarter, you mentioned I guess $300,000 remain? Was that the number I heard?

That's correct.

And is that a number, David that you feel is sufficient and good about, and I guess, what is your confidence about that?

Well I think-- I think what gives me comfort with it, David, is that we basically backed in to-- to that number. We had losses in the current quarter where we would have applied more of that reserve that we had set aside to those losses, but when we did the calculation about what is out in front of us, the number we came up with was 300,000, so we left that in place and charged income with-- with the losses in the current quarter. So from that perspective, I have comfort with it. I think according to what Tommy said, it does have a lot to do with our own execution. We expect, that to be sufficient, but we certainly learned in the first quarter that our expectations are not always met.

Great. Thanks and good luck guys.

Thank you.

Thank you.

We'll take our next question today from [Keith Cochran with Lonestar].

I just had a question on the cash flow. You pointed out -- it sounds like there was a one-time payment. I was just curious if you could elaborate a little bit on that?

What had happened that -- it was favorable to us. We got deferrals on both payroll taxes and on federal income taxes as a result of being in the area where hurricane Rita hit. And we were able to defer those payments that were due, in the-- in the fourth quarter, the third and fourth quarter to February. We disclosed that both in our K, and in our conference call, that we had last time, that we had about-- that what it did was, of course, it made, our cash flow look really great, in the fourth quarter, and but-- but we said that, 19 million of that was-- was due to these deferred payments, so that you really needed to discount that by that amount. So by the same token, that's why I more or less adjusted, if you will, the cash flow numbers for the first quarter, because, again, we had this flow-through really from prior periods in cash.

All right. Thank you.

Our next question today is from Michael Christodolou with Inwood Capital.

Good morning, gentlemen, a few elaborations if you would please. In terms of the store openings, Tommy, are any of those remaining three or four stores to be opened, are they going to be in the Dallas area?

Yes.

So the few stores reduced from the original guidance, were those in the Dallas area too, Are you kind of suggesting you want to see some more--

They-- they were not in the Dallas area.

Okay.

Let me qualify. One-- one was in the Valley. One was in about 120 miles from our home office here in a small community, that-- and-- and there was one in Dallas that-- it was not matter of strategy. It was matter of being able to bring the negotiations to a successful conclusion. There is the potential for that to occur, but we're not very encouraged at this point. It was a very, very difficult piece of property to acquire, and the number of owners and-- and then there was a separate person that was going to own the building, and the reason for removing that one, we considered an A plus location, but the complexity of it just got more than we cared to deal with, so that was the reason for deleting one in Dallas, no other reason.

So you are not backing away from your fill-in strategy given your infrastructure and warehousing that's in place up here?

No, sir.

Okay. And then you elaborate-- you talked bit about the reduced penetration of the service maintenance agreements and what percentage is furniture and mattress because clearly as you are suggesting, a customer is not buying an agreement for those types of items, what is these percentage of sales?

6%.

Where could that number go?

Where could it go as a percent to sale, mattress and furniture?

Yes.

I would tell you we're very bullish on it. We really don't know because it depends on how much we continue to grow the two major categories of home appliances and consumer electronics. However, if you look at the size of the markets as we understand it, home appliances is-- somewhere around $30 million a year market, consumer electronics somewhere around 120 or $130 billion market. Mattresses is somewhere around a 50 to $60 billion market, and-- and furniture, we don't really have the number on it, because we are actually selling selective SKUs. But if you look at the comparison or ratio-- and I would say lawn and garden is also a 50 to $60 billion market. I think you need to throw that in there, although it pertains to growth, but we do have a opportunity to sell service maintenance agreements on it.

But if you go back to your question, what I would like to answer it in is in terms of how can we grow those two categories from the base that we're presently at? And if you look at the chart we presented to you quarter over quarter we raised mattress growth from 3 million to 5 million and furniture from 3 million to 5.5 million. Well, what would I like to see? I would like to see those numbers 10 million apiece at this point next year. We have devoted significant floor space to both of these categories in the new format of our store, and we did it with the intent-- and we have sent people to China to make sure we stay in the forefront. We just had one individual return about 6 weeks ago, and so our intent and our expectation would be to continue to grow these categories at a faster rate than our two major categories.

As that would end up as-- to your original question as what percent could that be to the total? I think it would be difficult for me to speculate on it, but I can tell you we think all three of those categories bode well for us in the future.

I understand. Now you had talked a bit about the difference between the revolving charge card borrower and then the credit line borrower and their difference kind of in the tie-in rates to a service maintenance agreement. But as prices are coming down in flat panels and washer dryers as you cited, your gross margin is the came but the dollars of gross profit are reduced, and I'm wondering if there's any dynamic at work with salesmen compensation on the lower gross margin dollars in commission that may be at work that somehow is resulting in the lower attachment rates?

I don't think there's been any change in the past 2 years in their-- I know there has been no change in their commission structure. Their commission as a percent to product sales remains exactly about the same as it was, consistent-- pretty consistent year-over-year. And-- and on-- on a running basis. The second part of that question that you asked, as prices decrease does the attachment rate go down? I don't think that's the case. I think that what we have seen in the laundry category, is that these are extremely complex pieces of equipment that they are now building at higher price points.

What has happened with the erosion of those higher price points, maybe a better example would be 18 months ago, that laundry pair was 22 to $2,300 for a washer and drier. Today that same pair is in the 12 to $1,500 range. What happens is that makes that more affordable to more people and yet the complexity of the product has not decreased and as more people are able to buy more units of that, our attachment rate becomes greater. There-- there is one thing I would comment on relative to that, the ratio of the cost of that maintenance agreement to the price of that product has probably decreased as a percent, because on a $500 typical sale of a washer or dryer, a washer 2 years ago we got one fee for a maintenance rent was probably a higher percent so there is some dynamics going on there as far as-- as we continue to sell higher price point good there's some dynamics.

I would also tell you that one of the reasons that I want to see us execute better at the store level is the sales of maintenance agreements requires a highly trained sales staff so you don't become too pushy and that's a very fragile balance in the way that's merchandised. So I do think there's opportunities for us in the area of execution and training in the attachment of service maintenance agreements to a product sales.

And with gasoline back up near $3 again, and of course it happened last fall as well-- last summer, did you see any drop off? Is it possible-- are customers saying look I'll buy the product but that extra 30 or 50 for the contract, that's a tank of gas, so I'm going to pass? Are you seeing any correlation there?

I think it would be difficult for me to verify that there's a correlation there. Maybe it makes the justification of it on our salesmen's part more difficult, but-- but I have not-- I would not be able to correlate that with a decline there. I think it really goes back to the issues that I previously commented on, where I said that, as you-- you have a price for a washer on a maintenance agreement, and your average dryer washer pair was $600 two years ago and now it has raised proportionately higher because of this new technology, and yet the price of the maintenance agreement as a ratio to the price of the product did not go up as quickly as the-- as-- as that mix changed. So you have a mix problem thrown in there also.

Okay.

I also think it's a problem of-- as you open new stores of adding new people and their -- our ability to teach them how to sell the product successfully.

Okay. And my last question, you have cited the reduction in securitization income given higher funding costs, is there any possibility at all of raising the coupon rate maybe even to the second tier of credit customer?

We're-- we're presently at statutory maximum in both states we operate in.

Okay.

In-- in all portfolios so there is not any opportunity. Now, as rates do go up, and continue as prime and as the Federal Reserve continue to raise those rates, the states do adjust periodically the amount that we're able to raise that maximum, and we generally take advantage of that.

We'll take our final question today from [Sandy Braun with Builder, Gagnon, Howe].

Hi, just hoping you could just review, again, your store openings strategy, your plans for the next year or two? What it's going to be this year, and what did you have planned for 2007? Thank you.

Okay. Sandy, thank you. I think what I tried to say was we had three to four hard locations that we-- the-- the deals are signed, that we're willing to the sum phase of the development of those stores, and I see those opening n the third and fourth quarter. So what we did was lower our estimates from 6 to 8 to five to six new stores this year. As for next year, in-- traditionally what I said, and when I met with you, Sandy, in particular what I said was we hoped to open stores at the rate of about 10% of the outstanding stores out there, so we're at 58 today and so if we open five or six stores this year, that's 10% of our-- our store base.

As we look forward into the next year, would I reduce the number of store openings? Would we consider increasing the number of store openings? I would like to see us maximize-- better maximize our performance in several geographical areas that I think we're underperforming in presently before we continue to accelerate the opening of stores. I think that it-- that it's better to maximize what we have open than to open new stores just to hit some number.

As we would improve and certainly I'm seeing some improvements in the two areas that I would like to see improvement in, then certainly there is the possibility that we would be back to the six to eight stores, but I don't think anything has changed as far as 10% of the outstanding stores or 10% of the outstanding floor space. I think that's consistent with what we have said all along, and I believe we just don't want to get expectations too high up to that higher end, as I always said to you and others, I would rather undercommit and overperform. That's really what I would rather do.

Okay. Thank you very much.

Thank you, Sandy.

And that is all the time we have for questions today. Gentlemen I'll turn the call back over to you for any additional remarks.

She cut him off. Well, as-- as we are now out of time. I would like to thank everyone for joining, and especially those individuals that asked questions. There was one individual that we see on our screen that did not get to ask their question. If you call David or I, we certainly would answer any questions for you, as we are available.

Traditionally now we have set Wednesdays as the case that he and I will devote time and schedule time, but relative to this call, you can call in prior to Wednesday and we would be happy to answer your call. Thank all of you for your continued support of this Company and for us as individuals and the confidence you displayed in us. And with that, we will conclude our conference and hope each of you have a good day. Thank you.

Once again that does conclude today's conference. I would like to thank everyone for joining us.