Conn's Inc (CONN) 2006 Q3 法說會逐字稿

Welcome to the Conn's, Inc. conference call to discuss earnings for the third quarter ended October 31, 2006. During the presentation all participants will be in a listen-only mode. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. Your speakers today are Dr. William C. Nylin Jr., Executive Vice Chairman and Chief Operating Officer of Conn's, and Mr. David L. Rogers, the Company's Chief Financial Officer. I would now like to turn the conference over to Mr. Rogers.

Thank you, Julie. Good morning, everyone, and thank you for joining us. I am speaking to you today from Conn's corporate offices in Beaumont, Texas. You should have received a copy of our earnings release dated November 30th, 2006, distributed before the market opened this morning, which describes our earnings and other financial information for the quarter and nine months ended October 31, 2006. If for some reason you did not receive a copy of the release, you can download it from our Website, at www.conns.com/investor relations.

I must remind you that some of the statements made in this call are forward-looking statements within the meaning of the Securities and Exchange Act of 1934. These forward-looking statements represent the Company's present expectations or beliefs concerning future events. The Company cautions that such statements are necessarily based on certain assumptions which are subject to risks and uncertainties, which could cause actual results to differ materially from those indicated today. Further information on these risk factors is included in the Company's filings with the Securities and Exchange Commission, including the Company's amended annual report on Form 10-K/A filed September 15, 2006.

I would now like to turn the call over to today's host, Dr. William C. Nylin Jr., Conn's Executive Vice Chairman and COO.

Thank you, David. Good morning, and thank all of you for joining us. I'll be standing in for our Chairman and CEO, Tom Frank, as he continues to recuperate from knee replacement surgery two months ago. He is doing very well and is fully engaged in the management of the Company.

I'd like to speak to our sales and financial performance, and then the performance and current status of our credit company, and then our outlook for the fourth quarter and our holiday selling season.

On performance, I'd like to remind everyone that we were up extremely large sales numbers generated last year after Hurricanes Katrina and Rita. So, we essentially had the anomaly of two years of growth in one year last year. Let me speak to performance of specific areas.

On sales, for the quarter -- last quarter performance, same-store sales were down 3.7% for the quarter, versus up 23.3% for the same quarter last year. Looking over that two-year period, we had essentially 9% compounded same-store sales growth over that timeframe. Our net sales for the quarter are down 0.4% for the quarter, versus up 33% for the same quarter last year.

Revenue -- our total revenue increased 0.6% for the quarter, and our net income decreased 19.2% for the quarter. David will expand on the components driving the decrease later in our presentation.

Our performance for the nine months ending October 31, 2006 is as follows. The same-store sales were up 6.5% for the nine months, versus 14.4% for the same period last year. The net sales are up 11.8% for the nine months compared up to 23.6% for the same period last year. Our total revenue is up 10.7% for the nine months.

I'd like to talk about the product categories and their performance. Our major home appliances are down 10.1% for the quarter versus last year due to the storm. In October alone, the refrigerator sales last year were 6.2 million higher than our October sales. So, in refrigeration alone as a result of it, it represented $6.2 million. That, of course, is hurting our same-store sales in that category considerably.

Consumer electronics are up 12.3% for the quarter versus last year. Flat-panels are selling well. In the month of October flat-panel sales exceeded all projection, which includes DLP and LCD projection, for the first time. There's a lot of interest in flat-panels, so I'd like to give a little bit more information on it.

For the third quarter of this year, the plasma sales were up 101% over the same period for the previous year, and LCD was up 195%, representing $20 million. If we look at the nine-month period, the plasma TVs were up 119% and LCD were up 307% for $52 million. This represents a key business shift, as all of you are aware of, in projection to the flat-panel technology.

Lawn and garden sales are down 16.7% for the quarter compared to last year, primarily due to weather conditions. Last year there was a delayed selling season that came in late in the year, which hurt the quarter's comparisons for this year. However, year-to-date sales are essentially flat, and I would note that last year, lawn and garden sales in 2006 were 75% higher in the quarter than the previous year. So, that helps explain.

Furniture and mattresses combined are up 64% for the quarter over the comparable period last year, with furniture up 112.5%. And again, we're looking at furniture with extremely good upside for us, and also good margin product as we continue to increase sales in that area.

Our markets -- Southeast Texas and Louisiana are down, as these markets compete again against last year's post-hurricane sales. All the other markets are increasing and performing as expected. But still there's a lot of upside that exists in all of our markets, especially in Austin and San Antonio. Dallas is performing within the expected range, but there's also room for considerable upside potential in that market.

New store growth -- we plan to add five to six stores this year; four are already opened, for a current total of 60. We opened a new store in Arlington, Texas, by Dallas, three weeks ago. It's already performing very well. So, we will have the 9 to 11% store increase this year.

The credit company. As we discussed in our earlier Webcast, the increased losses in the credit portfolio have had a negative impact on earnings. These losses did not abate as soon as we had expected. However, I can tell you that losses for the third quarter are down relative to the second quarter. And the net loss as a percent of the outstanding portfolio are now below 3%. It is below 3% this month and last month. And we expect them to stay below that level for the fourth quarter. So, we feel as though we're bringing those losses back into the traditional range that we have had them in.

Also, since we discussed [on] our last Webcast, we were rebuilding the number of and experience of our collectors. As a result of that, we made a conscious decision to place our more experienced collectors on the mandatory and next month mandatory collection buckets. That strategy allowed us to bring losses in line with our traditional performance sooner, but it did have an impact on delinquency. As a result of putting more experienced collectors in the back part of the portfolio, we have continued to bring new collectors online to improve the average caseload; that diluted the experience level. We have now brought our staffing level up to the expected range where we have the staffing back up, and we're getting more experience as they become more tenured. When we do that, we'll be able to take the delinquency and reduce it to a more historical level. And as we continue to allocate some of our more experienced people to these lower-delinquency buckets, then we'll be able to again move delinquency down. That's the first reason for the increased delinquency, is the performance issue because of the diluted workforce.

There are two other items also affecting our delinquency. One of them is the anti-dilutive effect of the slower-growing portfolio. For this nine months, the balances are only up 3% for the first nine months, compared to 14% at this time a year ago. The second reason is the percent of mix of the primary [CTC] portfolio and the secondary opportunity finance portfolio. [OFC] [as it's] higher delinquency has grown from 18% of the portfolio to 24%. That's a conscious decision by us. That's a very profitable piece of our business. These two items, though, with that mix and the slower-growing portfolio, accounted for approximately a 100 basis point increase in delinquency. As we pick up our growth in the coming year, that will be mitigated, because we will go back to some dilution relative to increased portfolio.

The credit projection for the rest of the year, we're looking at stable to improved losses as a percent of the portfolio, we're looking at improved delinquency, and again, (indiscernible) getting more experienced staff in caseloads and cure rates, and that is starting to improve. We can see that now. And we are expecting for the month of November with one day left to have a 30 to 40 basis point improvement in our delinquency.

I would also tell you that our Dallas site is fully functional, averaging 30 to 40 collectors in that site, and that's helping give us a lower caseload reduction in the Beaumont corporate headquarters. And so that is working. We have had it in place now for a little over two months.

Fourth-quarter expectations. We think that we're getting a good start to this quarter. The Black Friday sales were up 14.7% and were up 5.3% for the three-day weekend. Now, one of the things I need to point out -- it's difficult for us to say what sales will be for the fourth quarter, but at this point we do not believe that the growth will be positive when compared to last year. Again, we're up against extremely difficult comps.

Our inventory for the holiday selling season is in great shape. Availability of our flat-panel product is excellent, so we don't see any inventory difficulties. And we would reiterate an expectation of mid-single-digit same-store sales increase for the fiscal year.

Summary -- whereas we expect to have, again, difficulty with our fourth-quarter comparisons from last year -- and again, it will extend into the first quarter of next year -- we continue to be optimistic about next year and the future. None of our business fundamentals have changed. Conn's continues to be a very healthy, strong company. Since the first month of the fourth quarter ends today, not able to give you updated information for November, and I'm going to turn the meeting now back over to David Rogers, our CFO, to give you more detailed financial information.

Thank you, Bill. I'll talk first about the quarter. Total revenues were up 0.6% to $173.7 million, and were made up of an increase in finance charges and other of 9.1% and net sales decrease of 0.4%. As Bill said, (technical difficulty) sales were down for the quarter 3.7%, versus a 23.3% increase in the prior year. Net income decreased 1.7 million, or 19.2%, to $7.2 million, and earnings per diluted share decreased from $0.36 to $0.30.

SG&A expenses were up by $2.5 million for the quarter, which alone accounts for the drop in the EPS of $0.06. As a percentage of revenue, SG&A increased by 130 basis points. Contributing to the increases in SG&A expenses were occupancy cost, property and casualty insurance, and professional fees.

For the nine months, total revenues increased 10.7% to $548.1 million, as net sales increased 11.9%, or $51.9 million, and finance charges and other increased $1.1 million, or 1.9%. Same-store sales increased 6.5%.

Net income for the nine months decreased to $27.6 million from $28.3 million, or 2.4%. Earnings per diluted share decreased $0.04 to $1.14. As a percentage of revenue, SG&A decreased 20 basis points, and gross margin fell 150 basis points, due to poorer performance in finance charges and other, and a 50 basis point decline in product margin.

We provided $11.1 million of cash flow from operations for the nine months ended October 31, 2006, compared with cash provided of $51.8 million for the nine months ended October 31, 2005 -- a reduction of $40.7 million. If adjusted, however, 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 approximately $30 million.

Cash used in investing activities was $13.4 million, net of proceeds of $2.3 million from the sales of one of our properties, compared with $14.1 million a year ago, and primarily represented investments in property and equipment.

Net cash from financing activities increased $9.9 million from cash used of $8.6 million in the nine months ended October 31, 2005 to cash provided of 1.3 million in the current year. This resulted primarily from decreases in payments on various debt instruments of $10.5 million.

We continue to have no bank debt on our balance sheet and have lines of credit from banks of $48 million net of LOCs, and $8 million under an unsecured line of credit available to be drawn for working capital or capital expenditure needs. In addition, we have $39.4 million of cash invested.

We lowered our annual guidance of earnings per diluted share of common stock to a range of $1.55 to $1.65 from a range of $1.60 to $1.75 based on the third-quarter performance and our projections of the fourth-quarter performance.

All of the analysis that I just provided and much more is available in our Form 10-Q for the quarter ended October 31, 2006, to be filed with the Securities and Exchange Commission later today. That concludes my prepared remarks. Bill, if you are ready, we'll open it up for questions.

Yes, let's have questions. Thank you.

(OPERATOR INSTRUCTIONS). Rick Nelson, Stephens.

Bill, can you talk about the productivity of the new hires that you have in the credit operation? Are those individuals in fact accretive to EPS, or dilutive to EPS?

Initially they're dilutive to earnings per share. As they get more experience -- for example, if I look at today the average -- the total salaries as a percent of the portfolio, it is up from last year and the year before. So, as we bring them on line, I would expect that as they get more mature to reduce, and that as they get more productive, it would (technical difficulty) give us lower level of cost of total salaries in the credit company as a percent of the portfolio.

(multiple speakers)

How quickly -- how does that maturity curve look in terms of when they actually become -- the staff becomes productive in that regard?

They're productive, but they're not as productive. One of the things that happens as you move up through like a 30-day collector, a 60-day collector, let's say, to 120, to a mandatory collector, it takes experience and time for them to be able to move up to that level. So what happens is the experience that you have, in order to maintain the upper level, you wind up with a dilutive effect on the lower. So, one of the things that we're doing now is we're taking more of these more experienced collectors to move them to the lower level to help support and bring up the lower level of collectors. They are receiving a lot of training, and we have front-line managers that are very qualified assisting them as well. But it will take a couple of months period. I think that we will see the productivity increase as we move through this next fiscal year.

Thank you for that. I just want to clarify that segment information that you gave, the product category sales growth. Is that same-store, or is that total?

That was total.

Total, okay. And the Black Friday numbers you provided, was that same-store or was that total?

Total.

Any comment on same-store growth in November, or declines?

For November? Not at this point yet. We will -- obviously, the month is not over with yet quite, and so it will be a little while before we provide that information.

How about the Black Friday information that you provided? Can you put that on a same-store basis?

We don't have that available. Can we make that available and post it? We can make that available and post it, Rick. I don't have it in front of me.

From a credit promotion standpoint here in the fourth quarter, I see on your Website 24 months no interest. How would you characterize the overall credit promotions compared to a year ago at this time?

It's pretty consistent. I don't know that we have any major change in them. Now, there is one slight change that we're doing in that 24 month, is that we're putting more of the 24 month now on the IL accounts instead of on the revolving accounts. And as a result of that, we get a slightly better yield on it and better opportunity for credit insurance.

The IL account -- what exactly is that?

It's putting it on installment loan accounts instead of on revolving accounts.

Cory McCallum, SunTrust Robinson Humphrey.

Can you give us anymore color on the Dallas market and the outlook for achieving your performance goals there?

The Dallas market outlook we consider to be very good. The sales staff -- it's a relatively newer market, and so the sales staff is not as mature as in some of our other markets.

One of the other things -- we just opened our 13th store in the Dallas market. Dallas-Fort Worth is a huge area. And the Metroplex, as you know, is larger by 500,000 households than the Houston Metroplex. As we put more stores in, it gives more brand awareness within the market. And so we think that every store we put in, our brand awareness is increasing, which will help drive sales into all of the stores. So, right now, we have, I think -- Tommy Frank told you at the last meeting that within the entire market of the 12 stores, three of them were doing extremely well; three were probably a little lower than our expectation. The rest are in line with our expectations. But we think that we have a lot more upside in all of those stores in that market.

Have you detailed the total number that you see for that for the Dallas area, stores that you potentially see putting there?

I can say this. I think we have said in the past -- we have not detailed it completely -- but we have 20 stores in the Greater Houston market. Dallas-Fort Worth has 500,000 more households. The opportunity for store growth in that market is very good. We do have the distribution center in place that can handle the level of growth in that market that we would expect to see over the next several years.

One follow-up question here. Concerning the flat-panel pricing and the discounting going on in that area, is that about what you have expected here for Black Friday and for the holiday selling season?

Yes it is.

And do you believe that the discounts there and the volume -- I mean, the price level decreases are being offset. Are you successfully offsetting those with transaction volume and the attachments there?

Yes we are. The price decrease, we think, is beneficial to us, because it moves into price points that generate a lot more customer interest.

Great. Thanks, gentlemen. Good luck in the fourth.

Michael Mctighe, Nollenberger Capital.

I know you guys have somewhat loosened up your down payment requirements on some of your credit receivables. Can you tell me if you've had any -- I'm sorry -- your credit extension. Have you seen any impact from what you've done there, in terms of loosening up some of the requirements on the topline?

Are you talking about growth, sales growth?

Yes, on sales growth.

I think that it has -- it may have had a small amount of effect on it. But the down payment -- we did loosen up down payments slightly, particularly for existing customers, where they had open-to-buys. So, that would give us -- I can't give you a definite number where that may have affected sales, but it would have had a small effect on some customers that would not have been able perhaps to make the down payment or gone elsewhere. So, even with the requirement of the down payment, we would look at their open-to-buy so that we could be competitive with other, let's say, competitors that would have provided credit to them.

But you didn't start really doing that until towards the end of the quarter, correct?

That's correct. It would have been in the last probably month and a half. That is correct.

(multiple speakers)

When you look at the -- just looking out to next year, when you're looking at this business in terms of the comp growth, what do you -- can you give us in terms of what you think a steady-state comp growth rate would be, smoothing out all the impacts for the hurricanes? Are we looking at a business that you think will continue to grow in that high single-digit range?

What we've done in the past is said the mid to high single-digit range. And so we wouldn't -- we wouldn't go beyond a statement like that.

Just one last one. Any comment you can make on your store growth outlook for next year?

We've made no other statement other than we would continue in probably the 12%, 15% range at the most, square footage. So, we'd be looking again at five to six store openings next year.

(OPERATOR INSTRUCTIONS). Laura Champine, Morgan Keegan.

You commented that home appliance sales were down 10% in the quarter, but you have been seeing some pretty good pricing improvements in that category. What was the direction of prices for home appliances in the quarter?

One of the things that -- let's talk about laundry. What's happening in front-loader laundry, it's getting higher penetration, but the price range on them is spread. So, your lower entry ones have spread a lot from your higher. But I don't have that exact number for you -- we can get that and then post it for you -- on what the average price point change would be in those categories.

But in general do you see -- is the mix towards those front-loaders driving the average price higher, even if it's at the low end? Because I think those front-loaders are much higher-priced product.

Yes it is, Laura. It is driving the price points higher.

[Alexandra Jennings], Greenlight Capital.

A couple questions. Number one, can you review your comp guidance for the fourth quarter and the full year? Based on my calculations, you need -- at zero comp for the fourth quarter, you do not get to mid single-digits for the full year. Number two, in accordance with your increase in delinquencies that you've been seeing, how did your provision for loan loss embedded in the securitization change this quarter?

I'll take a stab at that. Relative to our comp projection for the year, it still remains in the mid single-digit area. I think your calculations are right; if we are flat for the fourth quarter, it is -- hovers right around the mid single-digit number. So, more than likely, we're not going to achieve anything higher than mid single-digits.

Relative to the loan losses and delinquency effect, we did not change our assumptions relative to our securitization calculations for the third quarter from the second quarter. If you'll recall, we had increased those in the second quarter, and in fact took a $1.5 million impairment charge as a result of increasing the loan loss expectations. When we did that, we had projected what we believed loan losses would be for the remainder of the year, and used that as a proxy for what we believed future loan losses would be. That was a hybrid kind of a calculation. It had a variable rate per month.

When we compare our actual loan losses that we incurred in the quarter month by month to our projection, we did slightly better than our projection. With that being the case, then, we certainly felt comfortable with the kind of assumption that we had used in our calculation, and therefore, did not have to raise it for this quarter. Obviously, we'll continue to monitor that. And if we were in need of changing that assumption in the fourth quarter, of course, we will do so.

Anthony Lebiedzinski, Sidoti & Co.

A couple of questions. Earlier in your comments you had mentioned that salaries as a percentage of your portfolio have gone up. Have you actually disclosed what that percentage is?

Have not.

Could you also comment as far as what you're seeing in terms of the promotional environment out there? And also, if you could just discuss what you think is the impact of a slowing housing market on your business.

Start off with the slowing housing market. Much of the appliances that we put in are not for new home construction; they are replacement products. And so, slowing -- obviously, the economy will affect our customers, like everyone else's. But new house growth doesn't affect us as much as you might think. Replacement appliance growth is much more where we are. And so, from that standpoint, we don't see a particular significant change. And the other question was --

Regarding the promotional environment, what you're seeing so far in this fourth quarter from your competitors.

It's aggressive. It's very aggressive pricing. We, of course, will be competitive and match the price. On Black Friday and that weekend pricing, some of our competitors had some items that were slightly below; we beat others on items. So, we will be competitive within the marketplace to the extent that we need to be. We do have a low price guarantee. And so, where we find pricing below our pricing, we will modify it immediately and be able to be competitive.

Do you think this promotional environment is more aggressive than it was a year ago?

Yes, we do.

Also, I noticed that you did buy back some stock during the quarter. How many shares actually did you buy, and sort of how do you look at the share buyback program that you have out there?

We bought back 33,800 shares. We have been in a blackout period. We haven't purchased any of that. We had a 10b-5 18, one or 18 -- one in place -- the Company -- we didn't purchase any with that. But as we open -- as we go into our open period next week, then we would be looking at a strategy to see whether or not then we will begin buying some more of the stock back, and restructure, perhaps, what we would have for the blackout period for the next time with a 10b-5-1. So, we will be looking at that. But to this point, there's been a nominal amount purchased.

Also, looking at perhaps next year, sort of on a more normalized level, what kind of same-store sales increase do you need in order to leverage SG&A expenses in a more normalized environment?

I would think along the lines that we've already expressed, Anthony; something in the mid to high single-digits. That really -- that kind of level of comp really has served us well this year when we were able to achieve that. If you will recall, SG&A as a percentage of revenue has decreased every quarter until this one. And I think you can see the impact of what comp has on that. And -- but, yes; we would need to have a comp in the area of mid to high single-digits in order to leverage our SG&A expense.

Lastly, what's your CapEx expectation for the year, and any early thoughts about next year?

I think CapEx will come in something similar to what we had last year, if not slightly lower. And we would expect something in the same range for next year.

(OPERATOR INSTRUCTIONS). Mr. Rogers, it appears that we have no further questions at this time.

Great. I appreciate everyone's comments. Bill, do you want to make a closing remark?

We just thank you for your interest. And we will have out -- the 10-Q will be out a little bit later today. So, if you have any questions relative to it, you do have the number for Mr. Rogers and can have some questions answered later relative to any particular point you would have in the Q.

Thank you very much.

Thank you.

That concludes today's conference call. Thank you for your participation, and have a great day.