Conn's Inc (CONN) 2006 Q2 法說會逐字稿

Good morning, everyone, and welcome to the Conn's Inc. conference call to discuss earnings for the second quarter ended July 31, 2006. My name is Jamie and I will be your operator today. [OPERATOR INSTRUCTIONS] Your speakers today are Mr. Thomas J. Frank, Sr., Chairman and Chief Executive Officer of Conn's and David Rogers, the Company's Chief Financial Officer. I would like to turn the conference over to Mr. Rogers. Sir, please go ahead.

Thank you, Jamie. Good morning, everyone and thank you for joining us. I'm speaking to you today from Conn's corporate headquarters in Beaumont,Texas. You should have received a copy of our earnings release dated September 15, 2006, distributed before the market opened this morning which describes our earnings and other financial information for the quarter and six months ended July 31, 2006. If for some reason you did not receive a copy of the release, you can download it from our Web site at Conn's.com.

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. The 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. Now I would like to turn the call over to our host for today's call, Mr. Thomas J. Frank Sr., CEO and Chairman of Conn's Inc. Tommy?

Good morning and thank you for joining us and I think you realized by now, today's subjects cover a broader range of topics than we would normally be covering. We have intended to anticipate your questions and so we'll go through it rapidly to save you enough time to do a Q&A. The first topic that I would cover on my agenda would be our credit situation and where we are with that. If we look back a year ago, we were at a historical seven-year low at 2.7% losses against outstanding receivables.

That in and of itself was an anomaly and then the storm that we're all tired of hearing about came along and created an additional anomaly for us against that 2.7. We continue to have housing and labor shortages in the market that our headquarters are located on the Gulf Coast, and as a result you will recall that sometime ago, we began building a backup facility in Dallas, Texas and we indicated to you last month that that facility had been completed. We have since activated that facility and begun staffing that with additional credit people and at this point, we have about 45 individuals in training or operationally functioning in the Dallas market area.

That facility has the ability to house about 150 collectors. So as the shortage continues to be a problem for us here, we are counteracting that by activating our Dallas facility. This raises costs somewhat in the short-term, but in the long-term probably serves a better purpose to by dividing this facility for better management purposes and higher efficiency at the end of the day. So we're very excited about the fact that it's up, it's working, and that we have people there. Our losses are mitigating and we've seen -- while there are small decreases in the mitigation of the losses, we see the curve going in the direction we want it to go now and we do feel like those losses peaked some time ago.

Our expectations are that the losses will continue to be somewhat of an issue against last year's anomaly of 2.7 for about the remainder of this fiscal year and beyond that, then we would expect to return to a range of normalcy. What is that range of normalcy? It's not the 2.7 that was a seven-year low. Our expectations would be somewhere in the 3.0 to 3.2 to 3.3 range. But we do expect to continue to mitigate those losses and to continue to drive that in a positive direction.

As we look at store openings, we have successfully opened two stores in the Houston market already this fiscal year. We have a third store slated for opening in San Antonio at the end of this month. We have two additional stores slated for opening in Dallas, one additional store slated for opening in Houston at the latter part of the year. That would bring us to six total stores this fiscal year plus we're also have a large-scale relocation of one of our Houston stores, which we think would help our volume and so totally, that would be seven stores if you count the relocation.

Next year as far as store locations go, we're still looking in the five to six range store locations. So we look at our Dallas market, we presently have 12 stores open there. We have year-to-date, nice increases in that market and we're very pleased with the progress that we're making in that market with two more stores slated to open, that would bring 14 there, which would help us leverage warehouse costs in the Dallas market. If you look at the product margin, which you would note it shows a 40 basis point decrease for the quarter.

Included in the way you calculate product margin is your warehousing distribution costs. So the Dallas warehouse certainly has contributed to the reported product margin or calculated product margin being a little bit lower. As we pull that out and look at pure product margin, we think we're about flat and we don't really see an issue or a problem with product margin in and of itself. We look at the tough comps we're up against and I know that that's heavy on all of your minds, as it is ours. We have told you with guidance that we intended to end up or felt like we could end up our year in the mid-single digits with comp stores. We do feel like we're still on track to do that. We don't expect to comp store numbers in the affected storm areas that we had huge increases of 50 and 60 and 70% last year.

However, we do expect to have increases in other markets, especially our Austin and San Antonio markets, which we had previously reported to you were underperforming. We're seeing turns there and we're satisfied with the improving situation in both of those markets. We do have significant plans to combat those health comps as we go forward up against the next three to four months in both promotional activities and product offerings. We certainly would not disclose all those plans at this point, but we're very excited about the tools that we have at our disposal to work against those comps. If we look at a forward look at what we think the Christmas season might be looking like, we feel very good about it. We don't feel like the decrease in the price point of plasma or flat panel technology is an issue. We feel like that's still a positive for us in this market.

The industry indications are that most of these products that will be produced will be sold. We don't see an availability problem in our area or our company for procuring these products at this time. We also think digital audio and the MP3 player music type of product and digital cameras will continue to be very positive product offerings and that as the price points become lower on all three of these categories, we feel like that bodes well for us.

In the appliance business, high efficiency laundry continues to be a very exciting product for us with high price points for the Christmas selling season and furniture and mattresses will be, we feel like, growth categories during this holiday selling season. Mattresses in particular seem to go well during that last quarter of the year. So that sort of gives you a report on how we feel about this upcoming selling season for Christmas.

I guess the last thing that I would address is the logic behind our announcement of stock repurchase. If you look at all the ways you could use cash or the major ways you can use cash in our business, we could open new stores, we could update existing stores, we could grow our portfolio faster, we could experiment new product categories or we could invest in infrastructure and people. We feel like that we're spending adequate amounts of money in all of these areas and significant quantities are being spent to ensure the health of the company and as we do this, we continue to spin off cash and have large amounts of cash in reserve.

We have a strong company and a good model and we operate it conservatively while taking moderate risk and we have long history as a surviving company, more than 100 years. We faced flat and difficult times before and we've always succeeded. We've got a strong management team and for all of these reasons, we think that it's in the best interest of the stock holders that hold our stock that we utilize our excess cash in the most efficient way possible and at this time, we believe the use of that cash is by repurchasing stock that we feel is under valued in the marketplace. David, that concludes my opening remarks and I'll turn it over to you.

Thank you, Tommie. Before we go to the financial performance for the quarter and the six months ended July 31, 2006, I would like to make some brief comments about the restatement of prior periods. During the presentation -- preparation, rather, of our financial statements for the quarter ended July 31, 2006, we identified an issue in our accounting securitization income. Our review of that accounting revealed that we have incorrectly reduced securitization income of the value of our interest and securitized assets by the amount of certain charges recorded on the books of the qualifying special purpose entity known of the receivables.

It was determined that under FAS140, it was inappropriate to reduce our income by these charges and as such have restated our prior financial statements to reverse the charges and properly report securitization income and the value of our interest in securitized assets. The full affect of the restatement can be found in the amended form 10-KA for the year ended January 31, 2006, filed today with the Securities and Exchange Commission. The restatement is described in note 13 of the financial statements.

We also filed this morning an amended 10-QA for the quarter ended April 30, 2006. The income impact for the restatement in the first quarter of this year was $1.1 million, pretax. Rounding out our filing marathon this morning was of course the long-awaited filing of the form 10-Q for the quarter ended July 31, 2006. It was this filing that was delayed through automatic extension of the filing deadline to permit us the time to complete our review. We are grateful for the patience of our investors and the investment community as we dealt with this matter.

I'd like to comment on the material weakness. By definition, because the error resulted in a restatement, our internal controls over financial reporting are considered to have a material weakness. We believe we have enhanced our internal controls over financial reporting to mitigate the risk of future misstatements relative to this very complex accounting issue.

Now I'd like to deal with some of the financial performance for the quarter and the six months. For the quarter, total revenues were up 10.7% to $182.2 million, made up of net sales increases of 13.8% and finance charges and others decreases of 10.4%. The decrease and finance charges and other was due to higher than expected loan losses compounded by an impairment charge of $1.5 million as estimates of future loan losses increased from 3% to 3.6% for the next six months in the valuation assumptions. Same-store sales were up 7.2%.

Net income decreased $1.1 million or 10.9% to $8.5 million and earnings per diluted share decreased from $0.40 to $0.35. For the six months, total revenues increased 16.1% to $374.4 million as net sales increased 18.6% or $52.6 million and finance charges and other decreased $700,000 or 1.6%. Same-store sales increased 11.7% for the six months.

Net income rose to 20.4--excuse me, $20.5 million from $19.5 million or 5.3%. Earnings per diluted share increased $0.03 to $0.84. Relative to cash flow, we used $14 million of cash flow in operations for the six months ended July 31, 2006, compared with cash provided of $31.4 million, for the six months ended July 31, 2005, a reduction of $45.4 million. If, however, we 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 a positive $5 million. Past cash used in investment activities was $9.6 million compared with $10 million a year ago and primarily represented investments in property and equipment. Net cash from financing activities increased $10.8 million from cash used of $9.4 million in the six months ended July, 2005 to cash provided of $1.4 million in the current year.

This resulted primarily from decreases in payments on various debt instruments of $10.5 million. We currently have no bank debt on our balance sheet and have lines of credit from banks of $49 million net of LOCs and $8 million under an unsecured line of credit available to be drawn for our working capital or capital expenditures needs. In addition, we have $15 million of cash invested.

The portfolio balance grew 2.1% since year-end and 12.3% since the second quarter of last year. 60 days in over delinquencies decreased 13.4% since year end and increased 33.7% since the second quarter of last year. The 12-month charge off ratio was 3.1% at July 31, 2006 compared with 2.6% at year end. Our finance subsidiary completed the sale of $150 million of medium term bonds at a coupon rate of 5.75%. It also completed an increase in its revolving credit capacity from $250 million to $300 million. This increased capacity, both in fixed bonds and revolving credit improved the ability for the sub to purchase our receivables and provide for the scheduled amortization of $200 million of the original issuance of bonds which will commence in October at $10 million a month. This new bond -- these new bonds will reduce our exposure to interest rate volatility.

Today, we reaffirm our annual guidance of earnings per diluted share at a range of $1.60 to $1.75. All the analysis that I've just provided and much more is available in our form 10-Q for the quarter ended July 31, 2006, filed with the Securities and Exchange Commission this morning. I will now open this discussion up for questions and answers.

[OPERATOR INSTRUCTIONS] We will take our first question from Rick Nelson, Stephens Investment Bank.

Thank you and good morning.

Good morning, Rick.

Can you discuss how the recruiting is going in the credit department and what sort of time line you see there to become fully staffed and --?

Yes, Rick. It still continues to be extremely difficult as I alluded to in my opening remarks. In our home office area here. That's why we chose to open the Dallas facility that we had put together. We are very encouraged by what we see in the recruiting prospects in Dallas. We are still not fully staffed at either one of these locations and we do think that it's another 60-90 day process of getting fully staffed and trained to meet our needs.

How many people are you looking for?

I think the openings we have right now are in the range of 40-50.

40-50. And how do you see that affecting your costs going forward?

Well, it's certainly more efficient to have all of these people located in one building from a cross standpoint, but it also as we experienced during that storm increases our risk level when you don't have it separated, so we think short-term, to answer your question, it increases costs. Six months out, we think that our costs is a percent to our [inaudible] should level out to more traditional means.

And those 40-50, are those additional people , or those are replacing a similar number of people?

Those are additional people that we're adding to staff.

Okay. There was a modest revenue shortfall, I know this quarter, David versus what you had talked about, your preliminary estimates it looks like it's in the credit business. Just wondering what that is.

Yes, Rick. Since we opened the books up and had the restatement, one of the things that we did was --

Sorry about that, that's my phone.

That was you, okay. We started, we reclassed some information relative to the charge backs for our insurance sales on credit and reclassed that from the provision for bad debts, which we show on our income statement up to the finance charges and other. So it's a geography kind of issue. It did not affect the bottom line, but it does affect those two lines, provision for bad debts and finance charges and others. So that differed then from the guidance that we had given back in August, but it did not affect the bottom line.

Okay, thank you for that. I also noticed there's a line item in the income statement called other income. I hadn't seen that before.

Yes, and that is relative to a sale of property we made in the second quarter -- roughly about $600,000.

Okay, thank you very much.

All right. Take the next question, operator.

David Magee, Suntrust, Robinson and Humphrey.

Hi, good morning.

Morning, David.

A couple of things. First, it's good to hear that you are all happy with your furniture business. I know that's not being shared by a lot of folks out there. Can you talk a little bit about the profitability trends you're seeing with that business relative to say earlier this year?

We're very excited about it. The growth in that has been good. The margins are good. As the video technology changes from these large box products to flat screens that consumes less floor space in our stores and we design our stores for new product categories anyway and we see the furniture business being one avenue of being able to expand products and also grow same-store sales. So we like the category, we're getting more and more comfortable with it. We made six trips to Asia and we have a trip scheduled this next month back to Asia. So we have a good source of vendors lined up and we're very pleased with the product category.

And secondly, with regards to the finance business, I remember last quarter there was maybe a trend that some of your customers didn't need the credit maybe as much as in the past and what are you seeing right now with regard to the percentage of your customers that are using Conn's credit?

It's still about where it was, increased a little bit. We totally -- not totally sure what's going on. We're promoting it as we normally have. We do think as interest rates continue to rise, that people that are using their credit cards as opposed to our credit, what we have seen in the past is that they would save that open the buys on their own credit cards and use our credit cards. So with locking down these interest rates on a good portion of that off balance sheet debt that David referred to, we don't necessarily see the rise in interest rates as a bad thing for us. Traditionally, we've seen people save those credit cards and open the buys for other purchases as credit card companies raise their interest rates.

Thanks, good luck in the second half here.

We will go next to [Michael Mctighe] with Nollenberger Capital.

Good morning guys, How are you doing? Just can you guys maybe give a little more detail on what specifically you did in Austin and San Antonio to get those stores and those markets back online or are back online now?

Essentially, it's an execution issue and a management issue and we made significant management changes. We devoted more executive talent out there and put more emphasis on it, but essentially it's an execution issue and we take total responsibility, so as we brought stronger management in and changed the management, we continue to see improvement and I guess that's the bottom line, Michael.

Okay. Secondly, maybe could you give a little more detail on specifically what type of enhancements you're making internally in terms of your accounting controls?

Yeah, Mike. I think it has a lot to do with just our understanding of the impact of FAS 140 on our accounting. Let me tell you that we have been doing this same accounting that you could say got us in trouble -- we have been doing it that way since 1992. We have always been using this approach to account for our securitizations ever since we've had one.

That's not an excuse, it just gives you the facts that this goes way on back. I think that with some of the new interpretations that we're seeing, some of the things that we've become more aware of relative to FAS 140, the more we read about it as we understand the process better, we get a better picture of how to apply that very, very complex accounting rule to our accounting. As we have done that, the company is the one who figured out this was an error. We did bring it to the attention of our external accountants and discussed it with them and so it's really the process of our controls that were in place that discovered this error.

However, because we restated, it did represent a control weakness and so we have enhanced those controls to better describe how this accounting treatment affects our own application and we have -- as part of this restatement process, we have examined not only that piece but the other pieces of the securitization accounting to make sure that the application is proper. We believe that we now have those controls in place and those controls will be tested as part of our routine controls testing at your end.

Okay, great. Thanks.

We will go next to Brian Delaney, EnTrust.

Thank you for taking the call.

Hey, Brian.

I appreciate the clarity. Just to focus on the reclass between the change in the finance revenues and the bad debt provision, can you clarify that a tiny bit just so I can understand what caused the reclass, how it came about, and what the implementation is to the bad debt line on a go-forward basis?

Yes. What we had done is we had some charges for insurance charge backs and this is a sharing opportunity for bad debt that we had from our insurance subsidiary and those were being recorded as charges and provision for bad debts on the income statement. Those are now being shown in finance charges and other. That is a much more consistent geography for that kind of a charge. To give you an idea of the kind of impact that it had in the first quarter, it was about $1 million, in the second quarter, it was about $1 million. And so that's the kind of thing that you're seeing. When we gave guidance back in August on finance charges and other and then you see how it came in today when we put out our reports, it's roughly $1 million shy of what we said, and that's because of this reclass. Of course, it did not have an impact on the bottom line.

And on a go-forward basis, when we look at this line item on the income statement, it's to $300 $400,000, is that a good run rate going-forward on how we should think about the expense?

I believe roughly that's consistent. I think when you also look in the K, in particular, that was filed this morning, we did update the quarterly information that's in there, if you look at that going back for the quarters in the past, I think you'll see a much more consistent presentation now of the provision for bad debt and, yes, I would think the run rate would be somewhat consistent with what it's been the first two quarters.

Okay. At the end of the quarter, where did the allowances stand. I know at year end you had about $900,000 of allowance for bad debt and close to $14 million within the credit subsidiary. Could you talk to where the balances stand now relative to the receivables?

On the subsidiary itself?

Both on balance sheet and at the credit subsidiary.

Okay. There is no allowance for bad debts on the balance sheet of Conn's. Because of the accounting for these transfer of receivables to the subsidiary according to the FAS 140, we account for that on a fair value basis relative to the asset. We do consider future losses in that valuation, but there is no reserve for bad debts per se on the balance sheet of Conn's. However, on the QSPE, on its separate books, it does carry a allowance for doubtful accounts and it is in the $15 million range.

$15 million. And at year end I saw on balance sheet according to your schedule [inaudible] you had about $900,000, that is nothing to do with bad debt?

It does have something to do with bad debts. It had to do with an impairment charge that was run through the income statement of the parent to allow for future losses as I just discussed relative to the assumptions used in the valuation of the asset.

Okay. And turning to the guidance, $1.60 to $1.75, when you gave that guidance, I assume the gain on sales from the land was contemplated in that guidance?

Was not.

Was not contemplated. And nor was the restatements, I guess it added $0.02 in the first quarter and added something here in the second quarter.

It was basically flat isn't the second quarter.

So the land gain nor the restatement was contemplated in that original guidance?

Correct.

When I turn to the assumptions, am I understanding that you -- last summer we brought the loan loss assumptions from 3.5 down to 3%. On a go-forward basis, are you using now just for a six-month period 3.6% and then there on out, getting back to historical -- is it a blended rate that you're using right now, how should I understand how the loan loss assumption has changed when you're valuing these assets?

I think a blended rate is a good way to put it, Brian. It is a 3.6% for the six months, but that's kind of a bell curve. As you heard Tommy talk about what our expectations are relative to loan losses, we expect them to continue to be high but to fall off more towards the level of the 3% that we've historically run and the number that we've used in our assumptions in the past. We think that'sgoing to return to that, but for the next six months, we've used a blended rate in order to give us a more accurate picture of what loan losses are going to do. As Tommy mentioned before, this is somewhat of an anomaly, it's hard to apply our assumptions to it, so we have modified that somewhat to be more accurate.

But conceptionally when I think about the back half guidance, you've incorporated in the guidance the incremental cost associated with hiring these 40-50 people and it also sounds lake your assumption is that these hiring will improve the history we're seeing within the portfolio? Meaning that we've incorporated all the costs, but we're also assuming that this will improve the credit losses, the hiring will improve the credit losses and that's baked into this guidance and the assumption that loan losses will continue to trend back down.

Certainly all those things have to happen in order to hit those numbers that you've described, so with the crystal ball we're looking at, but that's our best estimate of what's going to happen.

And based in the current trends in loan losses, what do they imply?

I think that I talked about the current trends and I said that we were seeing those trends mitigate slowly downward in the direction that we would like to see. And all of that has to occur in order to hit those numbers that we've given you guidance on. So I think we've probably covered all these subjects, Brian.

Okay. And one last question, as it relates to the restatement. The net credit losses have changed as well as part of the restatement, just conceptionally, how did that happen? So I look back at what you have for net credit losses for the July '05 quarter relative to what you had reported in the past, those numbers have all changed. How does the restatement work through also the credit loss activity?

Yes. One of the things that changed, Brian, was that in the past, where we had been including a provision for bad debts as an application against securitization income, that has now been removed and we'll continue to have that benefit in the future.

And probably, Brian, in order to let other people have a chance, we'd like to move on, if we could. Next question, operator.

We will take our next question from Danna Getske, Morgan Keegan.

Good morning, guys. Just wondering if you could talk a little bit about sales trends you've seen since the end of the quarter, whether they are trending in line with your expectations or how that is going and in conjunction with that, what categories you're seeing standing out as leaders.

They're a little bit lower trending than what we'd like to see them. They're not an alarming message, but we're certainly not pleased with the trend that we see. Essentially, what we see is that the electronic sides are performing extremely good for us as most of the categories. Our appliance business is trending lower. And that at a time where we're seeing record high price point for laundry and refrigeration that we haven't seen for a long time. But it's also a national trend that's occurring.

Having said that, Danna, I have never bought into the idea that just because it's happening nationally that we shouldn't get our fair share. So we're pursuing that very aggressively to correct that trend that we're seeing in the appliance end. But across the board, we're seeing increases in most categories except the appliances we're seeing a negative trend there and we're seeing a flat to negative trend in our track, which is primarily driven by the computer business, which I think you've seen plenty in the news about that business also lately. Hopefully we answered your questions.

Sure, sure, appreciate it. And then just a following on that, actually, gross margin in this quarter was a little lighter than we had expected and just wondering how you foresee it playing out here in the back half of the year, looks like it was down about 280bps year-over-year and whether you see that kind of magnitude of decline in the back half of the year or what you see.

That gross margin is impacted significantly by credit losses. And as credit losses go up, the gross margin will go down. That 30-some odd percent that you see there in that differential of 280 basis points or whatever you quoted -- let me finish -- is primarily being caused by the fact that our credit losses are normally high over a year ago. As those credit losses mitigate and if we can hold product margin at the same level and as we leverage warehouse costs in the Dallas market, then we would hope to see improvement there, but there are a lot of moving pieces in that margin that aren't totally visible. But those are the primary pieces that's affecting the margin, right, David?

Yes.

Okay, okay. Great. Just a housekeeping question. On the tax rate, what do you foresee the tax rate, David in the back half of the year?

Probably going to run about like they did this quarter, it's going to be in the 36 to 37% range and the reason that we're up, Danna is, because in Texas we now have a margin tax that's just been added. We just started that in the second quarter and there is some more information about that in the Q that you can find.

Okay, thanks.

Thank you, Dana. Next question, operator.

We will go next to Anthony Lebiedzinski with Sidoti and Company.

Good morning. a couple of questions. I think on your last conference call, you guys mention that had you'd be typing your credit-granted criteria and was wondering if that's a permanent change in strategy or just temporary and whether if you do actually continue tightening your credit, do you expect to lose maybe some sales because of that and if you could just touch on that, that'd be very helpful.

Yes, I'll comment on it. I think the way we characterized it was not that we had tightened credit, but that we had probably tightened execution around credit-granting processes and that in turn may have led you to believe that we tightened credit. What we did do was look at housekeeping items on our credit department on the front end and in the way we were executing some of the programs we had and we tightening that. Yes, we think it had some minor impact on our sales volume. How much, we're not really sure, but we do think that we did not loosen credit and we're not going to chase volume with bad credit. We've been consistent in taking care of this credit portfolio and this was just more of the same of our philosophy of doing due diligence and watching very closely the credit portfolio.

I think the trend a lot of times is when people's volume begins to suffer is they try to lose some credit. And I think my comments in the last Webcast was directed towards reassuring people that we, in fact, have not loosened any credit. In fact, we're just doing the proper due diligence. I wouldn't really characterize it as a tightening. But it's impacted it somewhat.

Okay. And then last year you guys obviously benefited from the post-hurricane purchases, but those also an expense impact on the quarter last year, maybe if you could just remind us what that was.

Well, there was an expense impact and I've got to tell you, it's very, very hard to pull out. We did receive some insurance funds to offset it. I guess the real expense were hidden costs in that we had three or 400 people out of this building that couldn't operate efficiently. And that's the real cost. The book cost, I think, are pretty self-explanatory, but the real costs were the fact that our productivity went down dramatically, that we lost people, experienced people that were still paying the price for it today. That's the real cost, and there's hidden costs that manifest itself in loan losses today. So those were the real costs that we still continue to recognize today. We certainly think they're mitigating, but they're there. Dave, do you have a more specific answer?

Yes, it was about $9 00,000, Anthony, that actually hit pretax as a result of the storm after insurance and prepayments.

$900,000, okay. And Tommy, you mentioned the end of the year sales seemed a little bit lighter than what you expect so far. Can you be a little bit more specific as far as what current comp sales are that you're seeing, quarter to date?

Yes. I want to first -- I want to -- because we've said it in the past, I'll go ahead and comment on it further. I want to first say that again, we're in a period of an anomaly. We're talking about being one week away from when this storm hit our building and by that time, everything was in a state of confusion. So to say where we are now and where we're going to end up is really two different things. We're at mid-single digits right now and total volume and our comp stores are essentially a little above flat right now.

There are a lot of things that have to play out the rest of the quarter, not the least of which we lost -- we think, about five total selling days from about the 23rd on the way we calculate it a year ago. So we have some time to make that volume up. We also have tremendous promotional activity that is certainly we don't want to give our competition a leg up discussing it, but we feel very confident about those. Having said all that, I'll go back to my earlier remarks that we know we're not going to comp some of those numbers that we had 70 and 80% increases in stores in the affected storm area. Now, that was about 30%, 25-30% of our geographical area where the stores were located. And we do have a improving results in San Antonio and Austin and some of our other markets. It's really a mixed bag and it's really too early to draw any conclusions about this quarter. Sometimes I wish I had never started commenting about where we were quarter to date, but we have in the past, so I'd give you those are my thoughts that there's so many moving pieces right now, that it's really hard to draw firm conclusions. We still feel like we're going to end up at the end of the year at mid-single digit comps in the stores and that's what we told you in our guidance at the beginning of the year.

We will take our next question from Scott Tilghman, Hudson Square Research.

Good morning. A couple questions both related to the credit side of the equation. First, was wondering if you could comment on what you're seeing in terms of commercial credit from your markets. And if you expect to get any benefit from Wal-Mart's decision to stop layaway programs for consumer shopping there.

Well, we don't see anything unique or different happening in the way of credit promotions from our competition. It's really about the same, so that probably answers the first part of your question. I saw that on the news last night, a as you probably did about Wal-Mart. I would tend to view that when I saw it as a positive thing for us. We actually stopped that program ourselves some years ago because it didn't make a whole lot of sense. I don't know -- I think the question is, how much business was Wal-Mart doing on that layaway program, but I viewed that when I saw it last night, I viewed it as probably a positive thing.

It seems like, if anything, it would have a modest benefit to the secondary portfolio.

I think that's a good conclusion to come to, a modest benefit. I think that's a good conclusion.

That's it for now, thank you.

Thank you, Scott.

We will go now to Tyler [Burke], Trenton Capital.

Hi. I was hoping that you could comment on new store performance, because if I look at your disclosures for sales for stores that aren't in your comp base, it looks like the new stores are underperforming relative to the how the new stores used to perform.

I think it's all over the board. I think as an average, we're not unhappy with our new store performance. It takes some time to get these stores situated and our clientele built and seasoned salespeople to execute our program. It's one of the reasons we don't accelerate the opening of stores faster than what we do is that our model is a very sophisticated model that incorporates our own in-house delivery, our own credit operations and our own service department. And all of this factors in how quickly we can open stores. So I don't know -- I don't know that we've set down and measured the same way you're looking at it, but we are not disappointed on average where our new stores are performing.

Do we have some stores that are performing under where we hope they would be? Absolutely, but we also have some stores that are exceeding our performance expectations. So on a whole, we're not unhappy with these new stores. Sometimes it takes two to three years for one of these stores really to kick into high gear and other times it kicks in from day one. And we do all the demographic studies and all the due diligence we possibly can and generally it varies from our expectations one way or the other. So I don't see what you necessarily see, Tyler, as a deviation from prior historical results, myself.

Okay.

Our expectation is that it takes two to three years for those stores to mature. So our model, Tyler, is that we would not expect it to be at the level of our mature stores.

Right. I and I measure the new stores level to the mature sales to see what sales are doing and it has been trending down for three quarters. But if they're roughly meeting your expectations, I was thinking maybe there was a particular market or particular store -- and I know you've been distracted by not just the hurricane but a lot of other issues.

I think that's an accurate statement. On a whole, we're not unhappy. We're pretty hard on ourselves, so we always feel like we can do better, but we're not unhappy as an average on these new storm performance.

Okay, one last question. The insurance proceeds that you got, how much were they and which quarter were they booked?

Are you referring, Tyler to the reclass that we were talking about before?

The insurance, I guess, for business interruption?

Oh, I'm sorry. Yes that was in -- we received that in the third quarter. We booked it in the third quarter and it was right at $1 million.

Okay.

We had losses close to $2 million, we recovered $1 million of that, we booked to an expense of nearly $1 million.

Next question, operator.

We will go next to Vinny [Suthi] with Green Light Capital.

Hey guys, three questions. The first is I wanted to understand whether you were planning on increasing the annual store ramp from the five to six level you're at right now, the new store openings ramp. The second is, I noticed that the delinquency rate you talked about in the press release was 5.8%. This quarter for some reason, that seemed to be lower. It was like 50 basis points lower than the previously disclosed delinquency rate by Moody's. So I was wondering if you can explain that discrepancy. And the third question was you had disclosed about 23% of your installment contract balances are from people who owe you $3,000 or more. I was wondering if you could -- if you had made any progress on the commentary regarding legal action and things like that?

Well, I'll answer one and three and David can answer two. I think I've been pretty consistent all along that we intend to open 10-12% of our outstanding stores. So the 5-6 is a standing number. If we end up the year at 60 stores and 6 is 10-12%. We said five to six stores for this current year and we end up opening it looks like six plus one moved. So I think it's consistent. On item three, the -- we have stepped up our legal action and we have put a lot of additional resources into that area under Bill's Nylins direction and Rey De La Fuente and we have made significant progress and we expect to continue to make significant progress in that area, these large account balances. David, do you want to comment on two?

Yes, the delinquency is consistent with what we've been saying, and that is that we did encounter a spike in delinquencies around the end of last year due to the hurricane and due to some of these other things we've been talking about. And we showed in our press release today that at the end of the year, delinquencies were 6.8% at January 31. We're now at 5.8% and that is following the trend that we expect that it continues to improve. And it has been doing so since the end of the year.

I guess my question on the delinquency was why is it shown as 5.8% here, but at about 6.3% by Moodys, who follows I guess the securitization data?

A timing issue? I think it's a timing issue of what they probably were looking at with some June data. That was the data that we used when we did the offering recently. I'm only speculating. I'm not looking at what you're looking at.

The way -- what I'm looking at, they call it July 31. They call it the July 31, data. Their June data is exactly consistent with the numbers you had put out.

I can't tell you the difference, I don't know.

We'll research it and if you want to call David back, give us a couple of days and if you want to call David back, we'll try to answer the question for you. But I expect it's going to be a timing issue at the end of the day.

Okay, fair enough. I'll follow up on that, thank you.

It appears we have no further questions at this time. I would like to turn the conference back over to management for any additional or closing comments.

I would just like to thank all of you for joining us and staying with us on the Webcast and David and I are certainly available, as is Bill Nylin, if you have any additional comments or questions that we've commented on and can legally answer, we certainly are happy to elaborate on it. Thank you and that will conclude our conference for today. Good-bye.

Thank you. Once again, ladies and gentlemen, that concludes today's call. Thank you for your participation, you may disconnect at this time.