Conn's Inc (CONN) 2006 Q4 法說會逐字稿

Welcome to the Conn's, Inc. conference call to discuss earnings for the fourth quarter ended January 31, 2007. My name is Sherlon Williams and I will be your operator today. During the presentation, all participants will be in a listen-only mode. After the speakers' remarks, you will be invited to participate in a question-and-answer session. As a reminder, this conference is being recorded.

Your speakers today are 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. Please go ahead, sir.

Thank you, Sherlon. 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 March 29, 2007 distributed before the market opened this morning, which describes our earnings and other financial information for the quarter and 12 months ended January 31, 2007. If for some reason you did not receive a copy of the release, you can download it from our website at conns.com.

I must remind you that some of the statements made in this call are forward-looking statements within the meaning of the Securities and Exchange Act of 1934. These forward-looking statements represent the Company's present expectations or beliefs concerning future events. The Company cautions that such statements are necessarily based on certain assumptions which are subject to risk and uncertainties, which could cause actual results to differ materially from those indicated today.

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. Bill?

Thank you, David. Good morning, and thank you for joining us. I will be standing in for our Chairman and CEO, Tom Frank. Tom is tending family medical emergencies not associated with him and regrets not being able to be here. He personally is continuing his recovery from knee replacement surgery and is fully engaged in the management of the Company.

You may have seen our press release announcing David Rogers's retirement next January 31, 2008, and the appointment of his replacement. David has been with Conn's for 10 years and done an outstanding job as controller and then CFO. He has expressed a desire to retire next year. We hate to see such a talented individual leave the Company, but we understand and are honoring his wishes.

His replacement will be Michael Poppe, our Controller and Assistant CFO. Mike is a superbly-qualified replacement and will be able to a year's transition with David. I would refer you to the press release to review Mike's background and qualifications for this important position.

By now, you were able to receive our press release specifying our earnings for the quarter and year ending January 31, 2007. David and I are going to speak to our sales and financial performance and current status of the credit operation, and our outlook for the first quarter of fiscal year 2008.

First, the sales performance. As reported in our release this morning, net sales for the quarter ended January 31, 2007 were up 2.3% as compared with the quarter ended January 31, 2006. We consider this an excellent performance which has previously disclosed the fourth quarter of the previous year was positively impacted by Hurricanes Katrina and Rita. A strong holiday season also boosted our sales and help.

Net sales for the year ended January 31, 2007 increased 9.1% to $276.9 million over the previous year. The Company experienced approximately 4% and 15% increases in its core categories of major appliances and electronics respectively, and also saw strong percentage increases in the mattress and furniture categories of 35% and 118% respectively. As a percent of total product sales, appliances and electronics represent approximately 34% and 32% of our sales respectively.

Combined mattress and furniture sales currently comprise 8% of our total product sales. And note that our net sales represent net product sales, delivery charges, service revenues and commission from service maintenance agreement sales. Revenues from finance charges and others for the quarter were reported in the Company's press release, and David will expand on them following my presentation.

Same-store sales for the fourth quarter, and those would be sales recorded in stores operated for the entirety of both periods, decreased 2.2%. However, I would like to note again that same-store sales for the quarter ending January 31, 2006, the previous year, were up 22.6% having been positively impacted 700 to 900 basis points by Hurricanes Katrina and Rita. Same-store sales for the year were a solid 3.6%, and we thought that was very good results.

Our category performance for the quarter. Appliances were down 10.9%, again primarily due to the previous store's comps. Consumer electronics were up 10.1%. The gross margins on flat-panel TVs were negatively impacted due to heavy discounting during the holidays. We have seen this trend return to the pre-holiday levels.

Furniture was up 146% overall and 132% for same stores for the quarter versus the previous year, and furniture is a great growth opportunity for us. We are increasing the square footage allocated to furniture. As you know, it has higher margin. It also has higher distribution costs, and we are modifying our warehouses to be able to do more rack storage to take care of that furniture.

Our lawn and garden, driven primarily by weather conditions, was down 36%. This is not a huge category, comprising less than 2.5% of our net sales.

Another category performance that would be working with four of these categories in the first quarter, our sales floor execution. We have done a lot of secret shopping tapes, have been looking at our performance in our stores, and we think there are quite a few steps we are going to take to improve that execution. Some of those will be increased staffing, additional focus on training and closing rates in those stores, and we believe that we will be able to improve this and that will be a good upside for us.

Our first-quarter sales, we had a very strong grand opening celebration in February, so we had good strong sales in that. It is difficult to say what the sales are going to be for the full quarter, but at this point we believe same-store sales are expected to be flat when compared to last year. And again, last year the first quarter, the same-store sales were up 16.1%. So that would be a strong statement being able to hold that flat.

Industry appliance sales are projected to be negative to low mid-single digits range for this next year. However, we expect to outperform industry averages as we have traditionally as the year progresses. Our furniture sales as noted continue to be very strong. We are investing resources in floor space and warehousing infrastructure to support, again, this higher-margin product and putting a lot of resources into it.

If we look at our markets, we saw that Southeast Texas and Louisiana are down as these markets again compete against last year post-hurricane sales. If we look at the other markets, they are increasing in performance as expected, but we still have much upside existing in the markets, especially in Houston and San Antonio. Dallas is performing within our expected range, but we also think there is considerable room for upside potential there.

The three stores we currently have in the Texas Valley are continuing double-digit growth, and we will be adding more stores in that valley in the coming year. If we look at last year, we added six stores. We added in Houston, we added them in the Dallas area. We added again in South Texas for a total of the six stores, and we now have 62 stores that gives us an increase last year of 11%.

We are planning, and if you would remember, we had projected five to six stores for last fiscal year. We are projecting to add six to eight stores in fiscal year 2008, and that would be a 10% to 13% increase in our floor selling space. And if we look to see where we put those in new versus existing markets, we are not excluding the idea of new markets, but also we have a lot of ability to fill in stores under existing infrastructure that we already have in place.

We are looking for the new stores at a new store design, and the design of these new stores will increase the furniture space 30% to 40%. As this category grows, as I stated earlier, we are going to modify our store formats to be able to take advantage of this higher-margin product for us.

Going to the credit portfolio, we continued to see improvement in the portfolio during the fourth quarter. It grew 6.6% during the quarter and 9.5% for the year. The growth rate in the fourth quarter was an improvement over the first three quarters, and we continue to see decent to good -- probably good -- portfolio growth.

Our securitization income is up 10.3%. If we look at our charge-off rates, for the fourth quarter it was flat with the previous quarter. Now charge-off rates are consistently under 3%. We have had -- we are five months now of consistent net charge-offs below 3%. The delinquencies are down to a more traditional range for the portfolio and, of course, they spiked after the hurricane. But we now have brought those back into in this last quarter a traditional range of where they were pre-hurricane.

The projection that we have for the credit company is maintaining a stabilized loss trend, stabilized delinquencies, and in this we are improving. We improved the staffing, I think the cure rates and caseloads for our collectors, which will allow us to maintain the credit portfolio as we have traditionally.

The Dallas call center that I mentioned in our last webcast is still operating. We are maintaining 30 to 40 collectors in that Dallas call center, but we have also opened a call center in San Antonio. And in San Antonio, we currently have 10 to 12 collectors. They are focusing on -- in that market, they are focusing on first-payment defaults and also on bilingual collections. We have a site that we have currently under lease that will be ready to move into within probably 90 days, during the beginning of the next quarter. That site will be able to be expanded and we can continue to grow a call center in San Antonio.

We have had again for this quarter, the first quarter of the year, historically strong collections due to tax refunds during the first quarter, so we are continuing to see good improvement. And our February numbers showed additional improvement in delinquencies, so we have a good start for this quarter. There is a lot of interest and news relative to subprime, and our secondary portfolio is a more challenged portfolio than our primary. It only represents 25% of our total portfolio and is a very profitable segment of our business.

And I would note that traditionally, our net losses are near those in the primary portfolio because we do additional underwriting criteria and collections effort in that portfolio. We had an increase and a spike in that portfolio 18 months ago after the hurricane, and through the first two quarters of last year, we had very much higher than we usually have loss rates in that.

We have gone over the difficulty in that portfolio and have shown that we can control it, and brought it back in already into the traditional ranges that we have had prior to the hurricane. Any other impact of subprime we have not seen in our portfolios any other deterioration relative to that issue.

As we discussed before in an earlier webcast, increased losses in the credit portfolio had a negative impact on earnings during fiscal year 2007. Because now those net losses, the percent of outstanding portfolio, are below 3%, and we expect them to continue or maintain at that level. We think that the lower level of losses will have a positive effect on our earnings during fiscal year 2008.

On credit projections for the next year, we expect to continue to see stable to improved losses, improved delinquency through improved and experienced staffing, caseloads and cure rates. And again, I have mentioned that Dallas and San Antonio sites that we have that are having a positive impact.

I would like to note that relative to our stock repurchase which we had announced before, through Wednesday, yesterday of this week, we have repurchased approximately 275,000 shares and spent 6.5 million of our $50 million authority, and we will continue that program.

In summary, whereas we expect to have difficulty meeting our first-quarter comparisons from last year because of the residual extraordinary increases we had as a result of the storm, that that should continue into the second quarter. We believe we will continue then after that to see improvements in the third and fourth quarters over those safe same comp comparisons.

We would project an expectation of low to mid single-digit same-store sales increase for the fiscal year that we are in now. We continue to be optimistic about the current year and the future. None of our business fundamentals have changed, and we continue to be a very healthy, strong company.

With that, I'd like to turn the meeting back over to David Rogers, our CFO, to give you detailed financial information.

Thanks, Bill. Given that we are comparing to a prior-year quarter that was significantly benefited by the effects of Hurricanes Katrina and Rita, we are very pleased with our performance this quarter. Total revenues were up 3.2% to $212.6 million, made up of an increase and finance charges and others of 10.3% and a net sales increase of 2.3%. As Bill said, same-store sales were down 2.2% versus a 22.6% increase in the prior year.

Finance charges and other increased primarily due to strong portfolio growth during the quarter, as the charge-off rate stabilized and was consistent with the prior-year period. Our gross margin declined by 90 basis points, primarily due to a 160 basis-point drop in product gross margin. SG&A expense increased only $230,000, and as a percentage of revenue decreased by 70 basis points, offsetting most of the decline in gross margin.

The SG&A decrease as a percentage of revenues was driven primarily by reduced employee-related expenses. Net income decreased $120,000 or 1% to $12.7 million, and earnings per diluted share were consistent with last year at $0.52. For the 12 months, total revenues increased 8.5% to $760.7 million as net sales increased 9.1% or $56.2 million. And finance charges and other increased $3.3 million or 4.1%.

Same-store sales increased 3.6%. Net income decreased to $40.3 million from $41.1 million or 1.9%. Earnings per diluted share decreased $0.05 to $1.66. As a percentage of revenue, SG&A decreased 30 basis points and gross margin fell 130 basis points, due to poor performance in finance charges and other; and an 80 basis-point decline in product margin, most of which came in the fourth quarter. We provided $28.7 million of cash flow from operations for the 12 months ended January 31, 2007, compared with cash provided of $64.2 million for the 12 months ended January 31, 2006, a reduction of $35.5 million. If adjusted for the approximately $19 million of temporarily deferred payments for payroll at federal taxes due to Hurricane Rita which were paid in February 2006, cash flow from operations would have been an approximately $47.7 million in the current year and $45.2 million in the prior year.

Free cash flow is approximately $30 million on an adjusted basis. Cash used in investing activities was $16.1 million, net of proceeds of $2.3 million from the sale of one of our properties compared with $18.5 million a year ago, and primarily represented investments in property and equipment.

Net cash used in financing activities decreased $6.5 million from cash used of $7.6 million in the 12 months ended January 31, 2006, to cash used of $1.1 million in the current year. This resulted primarily from decreases in payments on various debt instruments of $10.5 million net of $3.8 million of cash used for purchases of our own stock.

Through March 27th, we had purchased 275,000 shares of our stock and have approximately $44 million remaining under our authorization to repurchase shares. We intend to continue purchasing shares under this plan, dependent upon market conditions and share price. We 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 $51.3 million of cash invested.

Today we are in initiating guidance for the fiscal year ending January 31, 2008, in a range of $1.75 to $1.85. All of the analysis that I have just provided and much more is available in our Form 10-K for the year ended January 31, 2007, to be filed with the Securities and Exchange Commission later today.

Bill, that concludes my comments. Are you ready to open the lines up for questions and answers?

Yes, thank you, David. We are ready for questions now, Sherlon, if you would open those.

(OPERATOR INSTRUCTIONS). Paul Swinand, Stephens, Inc.

It's Paul Swinand from Stephens. I am speaking for Rick who is on vacation this week, Rick Nelson. First question was on the inventory. It was up 17.7% and sales were up 9%. Can you give us a little more color there? I am assuming that might be due to some of the increase in the new stores in DC, but can you give us any more color there?

Well, clearly, there has been some increases obviously in new stores and also the DC's. But it is essentially a temporary thing, Paul, and we have seen that has come down some as we have moved through the new year. But I would point out something to you, and that is that Bill had talked about the furniture line. That category, of course, is growing for us and there is clearly a greater capacity issue for furniture in inventory, and so that is inflating inventory somewhat. We have a greater need for carrying that line.

Understood. So you are saying in the first quarter, you have seen it come down a little more. Excluding the business increase for the furniture you know the furniture lines, you would expect it to be in line with normal levels; is that fair?

It certainly is. That is what our expectations would be.

Okay. And then I just wanted to go over the credit statistics improvement, just so that we are all clear here. In the first quarter you are expecting sequentially better -- you said through February, you were doing sequentially better. But can we assume for the first quarter you would be sequentially better in both the charge-offs and the delinquencies?

We'd expect delinquency to be substantially better and for charge-offs to be consistent.

To be consistent with historical levels or with.

With the third quarter level. But I would like to point out that the fourth-quarter levels are, in fact, back in line with historical charge-off numbers.

Understood. So for the full year since that is in line, you are expecting the delinquencies to be flat or stable or slightly better for the year?

I am expecting them to be stable for the year. At this point at the end of February, the delinquencies are within the traditional range that we had prior to the hurricane, and we are expecting that to continue.

Understood. And then if we dig a little deeper into the operating type statistics in the credit department, so your cure rates are back to historical levels; is that correct?

That is correct.

And also there was a little bit of an issue as you hire new inexperienced collectors at various levels and just their efficiency in touching the customers was not up to more experienced ""collectors' levels. Are you seeing that the people that you have hired are now getting the touch rates that they should be?

That is correct. As they get experienced, those touch rates are improving. So we see that improvement. We are able to hire more collectors with the increase of the hiring in these other markets as well, particularly even like the bilingual one. We think that will have a very good impact on collection for us.

So again, you would expect sequential improvement in the first quarter and then some continued improvement throughout the year.

Within the first quarter, we are back already to traditional levels. So maintaining those traditional levels throughout the year would be keeping it stable. I won't say that we will have significant improvement in delinquency over the first quarter, because the first quarter is going to put us back in the range that we have traditionally been in.

Understood. Fair enough. And I know you did address the question of subprime and, you know, I just want to go over that one more time. You said that your subprime portfolio is now performing where it was prior to the hurricane issue, and that the deterioration you saw was only due to the lack of collections that you experienced after the hurricanes.

That is what I said, although I did not say that it was subprime. I said our secondary portfolio, the second portfolio that has more credit challenged individuals and people who are building new credit. But that is true that that performance and that portfolio is now within the range traditionally before that time, and so the other issues and press that we are seeing relative to, let's say, subprime or low-level portfolios, at this point we are not seeing any degradation in that portfolio.

Can you just give a little more color, because I think it is important that people understand the difference between the fact that it is just a second portfolio and it is not a subprime mortgage in Miami. And can you also go over some of the differences in underwriting and collections operations that you do in order to collect to get that great experience that you are getting?

Yes, I will be glad to. On the underwriting side, we require a minimum of 20% down payment in that portfolio. We differentiate depending upon if they are buying major appliances, electronics or other product categories. So part of our underwriting model includes the risk of the product they are purchasing. We also require validation on income. We require a validation on address. We get references and validate phone numbers on the front of that portfolio.

Then in collections, we began collections one day late. If they are one day past due, a collection effort begins. So we can train these individuals to become accustomed to paying us at the beginning of the month and give them a behavior that would do that. We work with these customers. We have a very strong collections staff. The collections staff for this secondary portfolio is different from our primary portfolio, and we have outside collectors that will also go to their homes if they need to. And as a result of this aggressive collection effort, and it is not just aggressive it is a matter of collecting but retaining the customer.

We work with them so that they can continue to buy product which they need, and are able to pay us in that portfolio. As a result of the increased standards in underwriting and of the collection effort, we do have net losses in that portfolio that will fall below traditionally the 3% range. And if we could, Paul, if that answered that question, I think we need to allow some others to begin asking some questions too.

David Magee, SunTrust Robinson.

Just a couple of questions, please. First with regard to the guidance this year, Dave, can you tell me what you expect at this point with regard to the pricing environment this year in the fourth quarter? Do you expect it to be better than last year?

With the what? Say it again, David.

Just the pricing environment on the TDs, the upcoming fourth quarter. Do you expect a significantly better environment or the same or how do you view that?

It's hard to say. You know, Bill mentioned that we did have that uptick during the holiday season in the fourth quarter. We were not expecting that, but it does seem like that has been mitigated and has returned to somewhat normal levels, whatever normal means. Because as you know, those prices have been falling over time for some time now. There seems to be some stability today, but that doesn't speak to what could happen tomorrow.

What we have done, David, is that we have done our very best to project what we believe the margins are going to be relative to that product line. It is somewhat conservative, but it is certainly not as conservative as the experience that we had in the holiday season, because we don't expect that to be the case for the full year.

As far as the other prices go, again, we continue to have extremely aggressive competitive pressures. I think we are seeing some of that in our product margin. But we are out there every day competing and our prices will be comparable to others. So again, it has a lot to do with the marketplace.

We think that we have, to the best of our ability, considered that in our projections, and I think we will see as the year goes on how that bears out. Obviously, if we see some major change that is different from what our projections are, we are going to announce that.

Okay. So it sounds like you are expecting some additional pressure maybe as you're just later, but not like we saw last year. Is that fair?

I think that is fair. I think we would again see the toughest pressure coming again around the holiday season like it did this year, but it is certainly not -- we don't have dire predictions about what prices are going to do.

And then I guess a similar question with regard to your projected future for earnings growth. I guess the -- they're starting to assume that the chargeoff rate if it remains at historical levels throughout the coming year, that's going to be a source of earnings growth as well?

Certainly, that is our expectation. You know, to me the story for 2007 was credit losses. I believe that the story probably for 2008 is going to be credit losses in the opposite direction. That is certainly our anticipation. I think that as Bill pointed out, that is the direction we are going in. We are very pleased with what has happened in the credit operations. Some of these problems that have plagued us during this past year seem to be improving. That is certainly what we are seeing; that is our expectation.

And then lastly on FAS155, I guess you have now had a chance to kind of look at that, and that is embedded now in the guidance for the coming year. Is that fair?

I don't know if that is completely fair, David. Clearly we have looked at it, and I would think that at this point we don't believe that 155 is going to adversely impact us. That having been said, clearly the biggest I think obstacle in 155 is the volatility that could be present from period to period. Not overall, not going to make some big change in anything over time, but it could cause, depending on how we adopt it, it could cause some volatility quarter to quarter, maybe even year to year.

Our wisdom is not perfect on that yet. We are still looking at that with those that advise us, and we will have more to say about it later. But I would tell you that in that guidance, there is no weight given to 155. That isn't to say it isn't considered but it just hasn't been cranked into that number.

Good luck this year, guys.

Thank you David.

Anthony Lebiedzinski, Sidoti.

Good morning. A couple of questions. First in regards to your SG&A. It was relatively flat year-over-year despite you opening several new stores and adding more people to your credit staffing, and you mentioned briefly during your remarks that you reduced your employee related expenses. Can you just discuss what those were and whether or not this level of SG&A improvements are sustainable, or is this just a one-time adjustment?

Well, I would tell you that it is hard to say that it is a one-time improvement because we have essentially been running like this for some time. We have had good experience in SG&A. We are gaining some economies of scale as we continue to grow. That is what one would expect, and we are indeed receiving (technical difficulty) that. But it is primarily in the employee area, and I think that is where we would expect to see the economies of scale.

So was there something unusual in last year's fourth quarter that drove those expenses up higher?

Of course, we had the losses on the storm in the prior year. They were not all that significant, but they were certainly there. That was a player for sure.

Can you quantify what that loss was on the storm?

It was $1.1 million net of our recovery from insurance proceeds.

Got it, okay. Also, in regards to your credit portfolio, I think you said that currently 25% of your total portfolio is tied to the secondary portfolio; is that right?

That's correct.

Okay. And I think that last year it was around 19%. Do you see that continuing to increase, or are you looking to keep that at that 25% level?

Our expectation is for it to continue to moderately increase over time. It is a very profitable portion of our business, and we are able to maintain it to control it. It is our expectation is for that piece of it to continue to increase.

And also --.

(indiscernible) at a moderate level on that.

Got it. Also, I was wondering if you have available what the average credit score of your customer (technical difficulty) was at year-end?

We did, and you will see that in the K that will come out this afternoon, Anthony. We do have a figure in that that is very consistent with the numbers that we published in the 8-K back in the summer. 600.

604.

604 is the average.

Okay. So it's the exact same number.

Well, that is the number that we have. There is no change.

Okay. And also, I was wondering if you had any commentary -- one of your competitors yesterday announced a cost-cutting restructuring plan. Any thoughts on that subject?

Well, we wouldn't discuss their internal operations at all, but we would hope to be able to pick up some quality sales associates in some of our markets.

And lastly, what was the stock options expense this past year, and also what are you projecting for that to be in your current guidance for this fiscal year?

One second. Hang on just a minute. Anthony, it was up $1.7 million in the current year, and we are projecting something on the order of $2.4 million in the coming year.

Laura Champine, Morgan Keegan.

David, what is the average spread on the financing portfolio that your new guidance for 2008 contemplates?

Tell me again. I'm sorry.

I am looking for what your expectations are in fiscal 2008 for the average spread on your financing portfolio, what you have got cooked into the guidance.

It is roughly the same, Laura, as we had this year. We expect a slight improvement in the spread due to improvement in loan losses, as Bill has talked about today. But, of course, we think that we will also experience a slightly higher debt service on the funding of that, which I think will offset somewhat. So it is not greatly different than what we have been running.

And I heard in Bill's comments something about being down in Q1. I also heard flat comp in Q1. Did I hear correctly that Q1 should be down, and if so, was that earnings or where were you looking for results down year- over-year?

I think what you heard Bill say was that relative to same-store sales since the quarter a year ago was 16.1% which was pretty healthy, still being affected by the storm sales, we are up against tough comps which we have been talking about for some time. And I think Bill said in his comments that we are looking at probably flat, something like that, for the first quarter.

Same store.

Same store.

Michael McTighe, Nollenberger Capital.

Back just a bit on the issue of product margin, when you say that they are back to pre-holiday levels, would it be fair to assume that they are now trending closer to flattish? Because I think that is what you had said last year, and before the holiday that is kind of where they were trending.

I am not sure I am understanding what your statement is.

Are product margins when you look at them year-over-year, would it be fair to say that they are trending flattish year-over-year?

Probably not. I wouldn't characterize it as that. I think we continue to see some deterioration in product margin. We had considerable deterioration in the fourth quarter, and that has been mitigated somewhat, but we still believe that there will continue to be pressure on product margin in the current year.

Now, that having been said, Bill talked extensively about what we are looking at relative to furniture and the increases that we have in that category. Our expectation is that that category is going to continue to grow, and that category has a lot of upside potential for us that is different than some of our other categories, because it has greater margin.

So while there will continue to be pressures probably, we think, in appliances and electronics, we expect to get a lift from our increased sales in furniture, which we believe will help product margin. Along with that, with our loss improvement, our credit loss improvement, that is going to help gross margin. So certainly, we expect a slight improvement in gross margin for the year.

Okay, thanks. And when you look at the gross margin components, how much of that would you say is a function of product margin and then how much is kind of like the loan loss credit business?

In the prior year or in the coming year?

Both.

In the prior year, a huge part of it was the credit losses and gross margin. And I think the reverse is true in the coming year. I think we will have -- our biggest improvement in gross margins will come from loss improvement and not from product margin.

Okay. And I'm assuming in terms of the category breakout, most of the deterioration you're seeing in the product margin is coming from the consumer electronics business, you know, flat-panel TVs and such. How are the margins holding up on the appliance side? I think you just said that you were seeing some pressure there as well, but I know back as early as last year you said that margins were holding up in that business. Can you give us a sense as to how those margins are trending in that category?

Still doing good, about the same as we talked about before.

Brian Delaney, EnTrust.

Good morning, guys. David, I want to congratulate you on your retirement and wish you good luck. Hope you enjoy it.

Thank you very much.

A couple of quick follow-up questions, one on the FICO score. If you go back to that 8-K that you guys put out back in August, that 604 excludes probably 10% of the base that is not rated, which means it's I guess sub 500?

No, not at all. That is interpreting that completely wrong. What that is, what we have got is we have got a lot of our customers, long-term customers that we have had that we don't require a FICO score on because we have our own internal experience to work off of. And then the other thing is that in that number would be first-time credit users who don't have a credit score.

Our experience has been that those turn out to be very good customers for us and eventually turn into extremely good-paying customers. So it would be wrong to interpret those that are left out of that calculation are anything lower than the average.

That's fair. Thank you. When you talk about only 25% of the portfolio that is subprime, what is the FICO score that you are using for that comment?

Again, I would say that I have not used the term subprime. What we are doing is we look at the customers and those are manually evaluated by underwriters on opportunity finance. Their average FICO score would be in the 550 something range, but we look at them and then we mitigate it with all the additional due diligence that we do to bring them in.

So there is not an automatic cutoff from one to the other till we say this FICO score would move them to the secondary portfolio. It would be a combination of the product which they are purchasing and their overall creditworthiness, because they actually look at their bureau. We would also mitigate that with down payments as well.

Scott Tilghman, Hudson Square Research.

I wanted to touch base on a couple of things. First of all, you had talked about some of the tax pressures in past quarters. Just wondering what tax rate you have embedded in your guidance for the year?

Right at 36%.

And secondly, on the store opening timing, assuming sort of the midpoint of that range maybe seven stores, which quarters do you expect those to open in?

We have not opened any thus far in the first quarter, but I think you will see if you want to just split the year in half, you will probably see it fall fairly evenly. However, if you will recall in the year that we just finished, half of the stores that we opened came in the fourth quarter. And I would think that just because of logistics and scheduling and things like that, that we will have a goodly number of six to eight also coming in the fourth quarter.

The fourth quarter is very important to us. We do try to get stores open for the holiday season, and so there is a lot of advantage for doing that. So you will probably see -- of that eight, you will probably see three or four in the quarter.

Going back to third-quarter comments, I don't remember the exact wording, but there was actually a comment made that square footage could increase as much as 15% this year. Are you sticking pretty hard and fast to that six to eight unit number, or is there potential for getting another couple open during the course of the year?

There is always potential. You know, we have talked about this before. You know, we find the right space that suits our needs that is already there and we don't have to build it and stuff like that. We can move into it very quickly. There is a lot of advantage to doing that. If we find the right real estate, that certainly improves our situation, and we would take advantage of that if we found that.

The problem is that in the markets that we are in, we are finding that the real estate is pretty tight. So what we are doing with the six to eight is some of these we have had on the drawing board for some time. It takes a while to bring them up. So again, it just has to do with that.

I think the thing that you need to realize, too, is that these stores that we are building today are larger stores than our average in the base. And so as we add stores, the square footage is increasing more rapidly than the number of stores.

On the G&A front, the discussion of secret shoppers and looking to improve through some staffing and training initiatives, is that likely to have much pressure on G&A this year, or is it marginal at best?

You know, I think it is marginal.

It seems like based on what you've told us today, your guidance is fairly conservative for the year. So we like to hear that.

That's right.

Next question.

Todd Brooks, Alydar Capital.

Just wanted to ask a quick question. What is baked into the guidance as far as further share repurchase this year?

As I stated, we will continue to repurchase shares as the price is right and the market is attractive. We have, as I have stated in my comments, we have been authorized by the Board of Directors to repurchase up to $50 million worth of shares. We have to date repurchased $6.5 million, so we have certainly got some dry powder there. So we will continue to do it.

It is something that we examine relative to how quickly we do it all the time, but we have got -- in our forecast we have something along the rate that we have been running at here for the fourth quarter and now into the first quarter.

Okay. I mean, I look at just how pristine the balance sheet is, the cash balance that's there, the cash flow generation and the fact that the stock is trading less than --.

That is not lost on us either.

Okay. I didn't know if it was something strictly programmatic or if there is an opportunistic mentality that at this type of valuation, you could certainly be getting more aggressive with the repurchase.

The latter.

Okay, great. And then secondly, within the product mix you kind of hinted at furniture growing, that there is a margin mix benefit to that that offsets some of the pressure on the product margins in the other categories. Where do you think furniture mix goes this year? I think combined furniture and mattress, you were talking that was 8% of the business last year.

That's correct. I think it could -- you know, it's hard to say when. It it's hard to say when it is going to happen, but you know, we certainly don't think that anything in the range of 12% to 15% is unreasonable. We are clearly focused on that product category. We are doing things to increase those sales, and we are just very optimistic, very excited about it.

And at the category level, how advantaged is the gross margin in furniture relative to the other categories? I mean, I have heard before kind of 20 points of better margin relative to electronics and other categories. Are the margins that good? I am just trying to size in my head what the offsetting lift is from more furniture in the mix.

Certainly in that range, Todd.

Bill Baldwin, Baldwin Anthony Securities.

Good to hear your voices.

How are things in Dallas?

Wet today, but that is good. We have been dry up here. In terms of your store openings for the coming year, have you identified kind of the regions maybe of your territory you're going to be putting them in as far as the Valley, Houston, San Antonio, Dallas, as far as those warehouses are concerned?

Bill, you just came up with a pretty good analysis of some of them. We expect that we may put more in Louisiana, maybe another one in Louisiana, perhaps in East Texas, but certainly in Dallas. We are planning to put two more in the Valley, so that is certainly true; some additional fillout in Houston. So I think we would be looking at support areas around our existing markets that we already have in identifying stores. Now, not to say that we wouldn't do some others or consider some others, but right now filling in under those existing distribution networks that you are talking about would be for sure most of them.

So pretty well -- really pretty well spread out throughout your system then.

I think that is a fair statement.

Thank you much.

Tyler Burke, Trenton Capital.

I wanted to go ahead and beat the horse a little bit more -- I don't think he is quite dead yet -- and drill down a little bit on the finance business.

Okay.

I was wondering if you could discuss your re-aging policy for receivables, because that can tend to make delinquencies look better than they are and can come back and bite you later. So I was just curious as to what your policy is there.

We have and we do re-aging of the policy. I think the good news is that if we look at the last few months, that certainly the last month amount of re-age is below the traditional level of the re-aging that we have done. So the drop in delinquency that I was referring to is not as a result of re-aging. It is as a result of good collection. And so the months, the start of this year for the first month, the average -- the percent of re-age -- is under 2%. In fact, it is below any of the averages for the preceding seven years at the beginning of this year. So we have an excellent start to it.

Okay. So when you say 2%, is that 2% during the month that were re-aged?

That is correct.

And what is your policy on re-aging?

What we do on re-aging is we will -- on certain customers, there are specific policies that we have in place. But we will allow a customer to re-age an account by paying essentially the financing charge on it, and then that would extend out the payment schedule which they have. So they would pay the interest, and then we would extend them say from 36 to 37 months as a result of that.

And part of what we have done historically and we continue to do, and I might add have been very successful at, is to work with our customers to help them through specific periods to make those payments, so they can continue to pay and continue to be our customer. And that has worked very well for us.

Due to time constraints, we will have our last question from Clair Davis, Perennial Advisors.

I think I will actually follow up on that. Do you have any sense of what percentage of your receivables have been re-aged in the past six months or maybe 12 months?

Total percent of re-age? I don't have that number. We look at a total percent on some re-age that we have, but the current within the last six months, I don't have that number. But we can do a follow-up with you and get that to you, Claire.

Okay. I would appreciate that. Thank you.

At this time, we have no further questions in the queue. We will turn the conference back over to Mr. Nylin for any additional or closing remarks.

Thank you. Thank everyone for the being present to it and then for the questions, and at this stage we have no further comments. David is typically available later for any follow-up financial questions, and with that, we will sign off.

That does conclude today's conference. You may disconnect at this time. We do appreciate your participation.