Conn's Inc (CONN) 2007 Q2 法說會逐字稿

Good morning and thank you for holding. Welcome to the Conn's Inc. conference call to discuss earnings for the second-quarter 2007 conference. My name is Millicent. 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, today's conference is being recorded.

Your speakers for today are Dr. William C. Nylin, Jr., Executive Vice Chairman of the Board of Directors; and Mr. David L. Rogers, the Company's Chief Financial Officer. I would now like to turn the program over to Mr. Rogers. Please go ahead, sir.

Thank you, Millicent. 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 August 30, 2007 distributed before the market opened this morning which describes our earnings and other financial information for the quarter ended July 31, 2007. If for some reason you didn't 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 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 upon 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 today's host, Dr. William C. Nylin, Jr., Conn's Executive Vice Chairman. Bill?

Thank you, David. Good morning and again, thank you for joining us. David and I are going to speak to our sales and financial performance, the performance and current status of our credit operation and our outlook for the remainder of our 2008 fiscal year.

First of all, I would like to speak to the sales performance. Overall net sales for the quarter were up a strong 9.4%. In addition, our same-store sales continue to improve. They were up 5% for the quarter over the previous year and this was on top of the 7.2% increase for the same quarter last year. Remember that reported same-store sales were down 0.3% in the first quarter this fiscal year and overall sales were up 6.8% so we are continuing to improve.

As we look at different product categories, consumer electronics was up 15.1% overall and 9.9% at same-store sales for the quarter over the previous year. Plasma and LCD dollar sales are up approximately 90% from the prior year. This is more than offsetting two [of] projection TV declines in this area.

Appliances are up 1.3% and although this number does not seem impressive, it is the first the category is up since the strong sales refrigeration following the storms of Rita and Katrina. And you may remember that all the refrigeration sales that we had following that hurricane, gave a huge spike in our same-store sales and so we now have been able to comp and recover from those sales and show positive same-store sales.

The laundry is up due to price point increases, increased penetration of the high-efficiency laundry particularly although total units are down. However, that is not an industrywide phenomenon.

Lawn and garden are up 30.1%, primarily due to higher than normal rainfall and improved merchandising. That has a higher [ZPR] mix of tractors. Extreme rainfall in Texas and Oklahoma has affected us in other areas as well. For example, on air conditioners, same weather conditions that aided the lawn and garden sales created unseasonably cool weather for our part of the country, impacting window air conditioner sales. For the quarter, A/C sales were down $915,000, and for the six months they were down $1.7 million. In August, air conditioner sales have improved, and are slightly up from August of last year.

Our furniture business continues to grow and is up 34% over the previous year. We have added additional product and are devoting more floor space to that category and it continues to be very successful for us. However, looking overall at furniture, the mattress category is down 13.7% as we are moving to a multi-vendor strategy from an exclusive one-year relationship. We expect this to be a temporary portion and then have that pick up again.

Finally, our track area is up 4% with higher laptop computer sales even though portable electronics are down. Also in electronics, we expect to see continued increases in flat-panel TV sales this fall, driven by continued price erosion. This price erosion could transcend to increased sales in larger screen size particularly plasma and above 50-inch and the supply is expected to be tied to the holiday season as our sources have indicated that production is pacing close to 2% higher than projected demand, although we do expect to have product.

Gross margin is up 30 basis points to 33.8% from 33.5% in the prior year due to primarily involved credit operations that we'll talk about later. But product gross margins have declined. They've declined because we had strong margins in prior year on replacement refrigerator sales that we talked about. That gave us a very good margin on those sales after hurricane. Also it is a very competitive retail market in the current year especially consumer electronics.

We are not projecting an increase of product margin for the rest of fiscal year because we can't predict market conditions, and we will be price competitive in the markets that we are in.

Looking at our sales for the third quarter, we are off to a good start. We have August sales increase of 8% through the 29th. This is just the first month with a positive same-store sales increase as well. I've already spoken a little bit about electronics and what we expect to have for sales this fall in flat-panel televisions. We are also looking at industry appliance sales are projected to be negative to low mid single digit range. We again expect our furniture to do well this fall and we are excited about that new category.

I'd like to speak about our new store additions. We had projected earlier this year up to seven to 10 new store through January 31 of 2008. The bulk of these stores were to come on late in the fiscal year, third and fourth quarter. So far this year we have added that a new store in the second quarter, San Antonio Clearance Center. We did a relocation of a second store of a store in the second quarter in Houston. And as I alluded to earlier, the severe rainfall in our market as well as other factors have slightly delayed construction, and some of the stores may follow in the first quarter of next year.

Let me give you an example. In July because of the heavy rains in the Texas Valley, construction crews could only work three days during the month at our Brownsville store. That having been said, we still plan to add 10 to 12 stores over the next 12 months with 15 to 18 by January 31 of 2009. Two of those will be relocations of existing stores.

The stores that we're planning to have on fourth quarter because of this delay, some of them may be moved -- one or two of them may be moved -- into the first quarter of next year. That does not mean that the same number of stores we are looking at will not be coming on line within the next 12 months. We fully expect them to.

We are moving into Oklahoma. We've already leased one store which we are currently renovating and have a cross dock facility under lease already in Oklahoma City. So we are moving forward into Oklahoma. However, most of the new stores we are talking about will fill in existing markets.

One of the other exciting things that we are doing in merchandising is prototyping a new store design which gives more emphasis to furniture. A new store format, we have one opened in Houston which is a relocation in Southwest Houston with more floor space and it gave us a 40% sales increase in that first month. And so we like that design in our existing stores even because of the consolidation and more efficient use of space relative to flat panels, it allows more floor space for furniture.

I'd like to speak to the credit portfolio. It is continuing to have excellent performance. The net charge-off rate for the quarter was only 2.3%, very low. And if you remember that 1.5 years ago, less than 1.5 years ago, the first quarter of fiscal '07, the year-to-date net charge-off rate -- excuse me -- it was 3.8%. So that is a substantial reduction and so far the year-to-date net charge-off rate is only 2.5%. So we are extremely pleased with that.

Delinquencies are up over the last several months, which is typically the case in the second quarter of a nonstorm year -- a typical year. However, I would point out that our 30 plus day delinquency at the end of July is consistent with that of the previous year at 9.4%.

The total re-aged portion of our portfolio -- and we spoke to this at the last conference call -- and this would be any credit account that ever had an extension for a month or was re-aged, the total amount of those that still exist within the portfolio no matter when that re-age would happen to take place was at 16.7% at the end of the quarter. And if you remember at the last conference call, we reported that number was 17.1%. So we have dropped it 4/10 of a point. And a quarter before that it was 18.1%.

So we are very, very pleased with this metric and I think that it shows that we're not decreasing losses by increasing aged accounts. So that is a very good metric for us.

We have now opened a credit call center in San Antonio. We had talked about our intent to do so. It opened this month. It is already staffed. We have 47 trained associates on the site already. They have a high percentage of bilingual skills. We found that we are able to get experienced collectors in the market at very good salaries. And so we are excited about that. We have strong management at the site already. We expect to continue to growth that site to give additional strength to our collections efforts. We have a little under 20,000 square feet allocated for growth in that site.

Our expectations for the remainder of the fiscal year relative to credit is a continuing to keep our net loss rate below 3%, stabilizing delinquencies. And one of the things that we are continuing to add is after the store -- again you remember that we talked about, we had a very large loss of people that reduced the tenure, and we are rebuilding that tenure and the experience of them. And so we think that is going to be very good for our portfolio.

There has been a lot of discussion and a lot of people have talked to us about subprime mortgage issues and the impact it could have on our portfolio. And let me go through several points. First, we have not seen any deterioration or losses as a result of subprime mortgage issues. The second thing that we did is that we did a study of every account that we had and looked at all of those that had existing home mortgages. And what we found is that approximately 29% our borrowers have an active mortgage.

Even if 10% of those mortgages went bad, it would only affect 3% our portfolio. So we think that it is de minimus relative to our entire portfolio. We are looking at it. We are making sure that -- well, we are looking to see what the percent of it is and we found that is not substantial. If we were to look at the portfolio overall, the primary portfolio is about 29%. The secondary portfolio only has 21% homeownership and the very highest end of our customers are in the 44% homeownership. And if we were to take them out of it, with no difficulty we would be looking at less than 26% of our customers having a mortgage.

Even with that, if customers would still -- even if they changed, refinanced, moved to another location, they would still need the refrigerator and a large screen television at their residence, and we would expect to continue that relationship with the customers.

And David, with that, that concludes my prepared remarks and I will turn it back over to you.

Thank you, Bill. First I would like to discuss the financial performance for the quarter. We delivered a very solid quarter with comp store sales increase of 5% and an increase in diluted earnings per share of 14.3% with strong credit portfolio performance in spite of the challenging retail environment.

Total revenues were up 11.7% to $203.5 million, made up of an increase and net sales of 9.4% and an increase in finance charges and other of 32.1%. Finance charges and other increased as the net charge-off rate sales fell significantly from the prior year period to 2.3%. We expect the net charge-off rate to be 3% or under in future quarters.

As you will recall from our first quarter earnings call, we adopted several new accounting principles during the first quarter that impacted the accounting for our securitization transaction resulting in changes in fair value of our interest in securitized assets being reflected in current earnings in the line finance charges and other. Previously these changes were recorded in other comprehensive income.

For the second quarter, finance charges and other and pretax income were negatively impacted $471,000 as a result of these changes. While the ultimate earnings to be realized under the securitization transaction will not be impacted, this change in the way that we account for it could produce more volatility in future reported earnings due to changes in the assumptions used to value our interest over time.

Our total gross margin improved by 30 basis points primarily due to a 30.7% drop in net credit charge-offs benefiting finance charges and other. Offsetting the increase in finance charges and other was a drop in our product gross margin of 150 basis points versus the prior year period due primarily to higher competitive retail market we operated in during the quarter.

SG&A expenses increased as a percentage of revenues by 30 basis points, offsetting the increase in gross margin. The SG&A increase as a percentage of revenues was driven primarily by higher compensation and employee related costs and higher occupancy costs. The compensation costs were lower in the prior year period as we struggled to rebuild our credit collection staff after the hurricane. Additionally, 10 basis points of the SG&A increase was driven by professional fees incurred to obtain certain tax related benefits.

The provision for income taxes was positively impacted by $900,000 from the benefits of a corporate entity reorganization completed during the quarter that resulted in a onetime elimination of previously accrued Texas margin taxes. We incurred professional fee expenses of approximately $100,000 to complete the reorganization, and it is included in SG&A. We expect our effective tax rate to return to the 36% to 37% range in future quarters.

As a result of the increased sales and tax benefit, net income increased $1.2 million or 13% to $9.7 million and earnings per diluted share grew 14.3% to $0.40.

The performance for the six months included total revenues increasing 9.2% to $408.8 million as net sales increased 7.5% or $25 million and finance charges and other increased $9.4 million or 24.1%. Same store sales increased 2.1%.

Net income increased to $22.6 million from $20.5 million or 10.3%. Earnings per diluted share increased $0.10 to $0.94. The trends in credit losses, gross margin and SG&A were similar to those discussed for the quarter.

And now turning our attention to the balance sheet and cash flow, we used $6.8 million of cash flow and operations for the six months ended July 31, 2007 compared with cash used of $14 million for the six months ended July [31], 2006. Both periods were negatively impacted by the timing of payments on accounts payable and accrued expenses. The current period was impacted heavily by the timing of receipts of inventory, which was down 3% from year-end and increased investment in accounts receivable. The prior year period was impacted by the repayment of amounts that had been deferred as a result of the hurricane.

The increased investment in accounts receivable was driven by an increase in our retained interest and sold receivables as a result of a decrease in our effective funding rate due to the effect of the pay down of the 2002 series of bonds, the increase in the balance of the variable funding notes, and other collateral requirements. The lower funding rate negatively impacted operating cash flows by approximately $22.2 million.

We expect the funding rate to improve, and much of this negative cash flow impact to reverse once our QSPE is able to issue a new series of fixed rate term bonds and after the 2002 series of bonds are paid off. I will talk more about our planned bond issuance in a minute.

Cash from investing activities provided $700,000 in the current period as proceeds of $8.9 million from sales of properties exceeded amounts spent on investments and property and equipment. This is compared with $9.6 million used a year ago which primarily represented investments in property and equipment.

Financing activities used (technical difficulty) million dollars in the current year primarily for purchases of $8.7 million of treasury stock compared with cash provided of $1.4 million in the prior year primarily from proceeds from issuance of stock under employee benefit plans. Through August 28, we had purchased 750,000 shares at $18.4 million of our stock that have approximately -- and have approximately $31.6 million remaining under our $50 million authorization to repurchase shares. We intend to continue purchasing shares under this plan dependent upon market conditions and share price.

We continue to have no bank debt on our balance sheet and have lines of credit from banks for $49 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, at July 31, 2007, we had $37.9 million of cash invested.

And now to talk about our planned bond offering. Our QSPE is currently in the process of marketing a new series of fixed rate term bonds. Given the current upheaval in the credit markets, we are not certain as to when the contemplated transaction can be completed. However, we believe the QSPE and the Company have sufficient combined liquidity to maintain consistent operations for at least 12 months.

The sources of this liquidity at July 31, 2007 include $107.5 million of available capacity under the QSPE's existing variable funding notes; $37.9 million of invested cash available to the Company; $57.1 million available under the Company's revolving credit facilities; $13 million due to excess collateral at July 31 on the 2002 series of bonds currently that will be recaptured as they are paid off over the next ten months. The current balance outstanding on the bonds is $100 million. This totals $215.5 million in funding capacity before considering the $100 million paydown required on the 2002 series of bonds.

In addition to this amount, we have future cash flow from operations including the ability to modify certain capital investment programs, though we do not expect that these actions will be necessary.

It should also be noted that the QSPE's $100 million, 364-day portion of its $300 million variable funding facility was recently renewed until July 31, 2008. The remaining $200 million commitment matures in 2011. We hope to have more to say about our funding arrangements soon.

We are confirming EPS guidance for the fiscal year 2008 at $1.75 to $1.85 per diluted share. All of the analysis that I have just provided and much more is available in our Form 10-Q for the quarter ended July 31, 2007 to be filed with the Securities and Exchange Commission later today.

Bill, that concludes my remarks and if you're ready for questions, we will open it up.

William C. Nylin, Jr. Yes. I think we're ready for questions.

(OPERATOR INSTRUCTIONS) Rick Nelson, Stephens Inc.

When you talk about the securitization market, how it looks today and when you begin the marketing, any thought as to when it might be wrapped up?

I don't think we have a definite idea of when it will be wrapped up. We are in the process of assembling those bonds for marketing, Rick. I guess part of the question that you are asking is what is the credit market like and my take on it is probably as good as anybody else's or as bad as anybody else's. I think at best it is internal right now. So we're watching it very closely.

One of the reasons that I took the time to point out the liquidity that we have, we don't have to be in a hurry on this. We are not up against the wall or anything about going out and getting this funding done. We have plenty of capital resources. So we're watching the market. We are not going to rush through the market to the detriment of ourselves and the portfolio. We're very confident that this can be done and as I pointed out, we have certain matters under way that we hope to be able to speak to before too much longer.

Thank you for that. You don't sound too concerned about the rise in delinquencies. I'm wondering if you could address that?

Yes, the delinquency is at the same level that it was last year. And whereas typically you get at the end of the second quarter, the second quarter you do have a rise. It rises some parts of the year and then goes down some other portions of the year. But one of the things that gives us some confidence is the ability that we've just set up this new call center in San Antonio which allows us to decrease the case loads of the collectors that we have. And also to get collectors with very good experience.

So please feel confident that even though the delinquency has risen slightly, that it is not out of line with what we've seen in the past and have been able to modify and control it because most of that delinquency is in that 30-day bucket. It is the very low end of it, and we are putting a lot more collectors in place. And it's pretty similar with what we did last year and I think you can see the results that came (technical difficulty) year and so we have that same expectancy this year.

Okay and then one final question if I could? The margin pressures especially in the electronics category, are those getting more intense in Q2 relative to Q1? And what is the expectation there for the back end of the year?

Yes, it is more intense in Q2 than it was Q1. And of course, we don't know yet whether it's going to be the second latter part of the year. But we expect that it will continue to have very strong competitive environment and that there will be a lot of pressure on margin particularly in those large electronics -- small and large electronics at the end of the year.

And I think, Rick, that the uncertainty about that as well as the uncertainty about the credit market is one reason that we had no change in our guidance. If we plug things in the way they are today, we still fall within our guidance, and so we think that is the prudent thing to do at this point.

So your guidance incorporates even more (inaudible) margin pressure?

I would say the kind of margin pressure that we've been experiencing.

Okay. Thank you.

Brian Delaney, EnTrust.

Thanks for taking the call. Thanks for going through the detail on the QSPE and kind of the state of the market right now. I'm just curious, if you were to go out and do the deal at current market rates, what would be the impact to your EPS guidance?

I don't think there would be much of an impact to our EPS guidance as a result of that.

If we assume the current market rate, though, your guidance assumes -- I know in the text you said that you -- we had a $500,000 impact partly driven by higher projected borrowing costs. So that assumes the current market rate, with the current bond deal that you'd be trying to do?

Yes, there are so many variables, Brian, relative to our fair value calculation that some of those are going to be a positive impact and some are going to be a negative impact almost no matter what we do. But we don't know right now what the impact would be. We are monitoring on a daily basis, looking at both what the rates would be and what the spread would be and those are changing rather dramatically as we watch them. And that is why since we are not in a hurry, we are probably going to take our time and let the thing stabilize somewhat.

What we have seen of late is that we believe that our cost would be somewhat increased if we did it today. And our expectation is that if we let it ride for a little while that it is possible that that would improve. So we've got the time. We are going to take the time to watch that. And as I said, we've got maybe some more news on that to talk about some time before too much longer.

Okay and in the text you also said that that was an adverse impact to the fair market value but you made a comment saying that there were other changes impacting the valuation assumptions on the positive side. What were the other valuation assumptions that helped the mark-to-market adjustment in the quarter?

Yes, and you are right, there is a number of them, and they vary. All of this of course will be in the Q that we file this afternoon. But in the quarter if you look at the effect that we had in the quarter as a result of these changes, the biggest impact was due to our expected borrowing cost increasing. But we also had -- the portfolio grew, and that was a positive impact. So there is a number of things that are happening there.

I think an interesting thing is that you've even got some lower interest costs that are positively impacting fair value. But I would direct you and others to the note in our financial statements and our Q that list and reconcile all of the changes in the fair value.

Okay, and one last question as it relates to just the capacity. If you run out of capacity in the [SBE] and you have to start then bringing some of these receivables on balance sheet using a line of credit and such, what happens to the earnings power of the Company then when we don't have the gain on sale benefit within the P&L? And this is under a disaster scenario but let's say that we have to start bringing these receivables on balance sheet and use some of the other sources of liquidity you mentioned, how should we just think about the earnings power at that point?

At this point I would think about it as not impacting us that much. But you are talking about a whole different can of worms there. We are nowhere close to being at the point where we would bring those -- start having to put those receivables on our balance sheet. But my take on it at this point, not knowing everything that would have to take place in order to do that right now is that it would be basically a push.

Okay, great. And then on August, you said total sales are up 8% or that was the August comp?

That's total sales.

Total sales, and with a positive comp relative to last year embedded in that total 8%?

Yes sir.

And one last question. As it relates to your customer base, do you have any idea when you look at the industries your customer base operates in for example what percent of your customers are in the construction industry or in the mortgage industry? Just so when we understand when we are looking at big picture some of the turmoil that is happening in the housing market and some of these construction layoffs, do you have a lot of exposure to those types of job basins?

I don't believe that we do. Texas is continuing to grow and in a pretty full labor economy here and so the percent of people that are working in the mortgage industry I would consider to be a very small percent. The percent of the people in the construction industry again, would be -- I can't give you what that percent is but we don't see that as a significant impact whatsoever relative to the credit underwriting we are doing or the portfolio.

Great. Okay and then the last question, lawn and garden you cited as a strong point. If you listen to Scott's and Central Pet and Garden and some of these other guys, they said that the rain in Texas was actually adverse for the lawn and garden business for them. What are you seeing differently than they are seeing?

The grass is growing like crazy. You have to cut it twice a week just about where we live. So the lawn mowers are out there all the time. It is a very positive influence on lawn and garden because it rains so much you have to -- I mean the grass is just growing like crazy.

Okay. Thank you very much. I appreciate it.

David Magee, SunTrust Robinson Humphrey.

If we could just follow that line of thought from the previous question in terms of the worst-case scenario with regard to the receivables and having it on the balance sheet, could you attach a time span to when that could happen just giving your current rate of business? And once you go through the other forms of financing that you described on the call earlier, at what point in time would be -- say two years from now just given what was happening and the pace right now that that would take place?

Based on what I talked about, the lines of credit and all that we have available as we speak today, we certainly have enough to get us well past 12 months. In fact, with our current securitization, we have capacity to take us nearly that long all by itself without us tapping any of these other resources.

So it sounds like to me that 18 months to 24 months perhaps before -- (multiple speakers) contemplate that?

I think that with all that I talked about, clearly that could be the case.

Secondly, when you talked about the CE promotions during the quarter, that seemed to escalate, is it similar to last holiday season where a lot of it was vendor driven as they were trying to compete for market share or was there any softening in demand for flat panels that you've seen over the last several months? Can you give us a little more color about that?

I don't we've seen any softening at all. I think it is very, very aggressive out there relative to the flat-panel business. That is continuing to grow. I think Bill gave some numbers on that. But as far as what we are seeing relative to the price competition, it is somewhat similar to the holiday season although I don't think -- If I can use a technical term -- nearly as crazy. But it is just very aggressive. We are seeing that day in and good day out both with vendors and then with the major retailers. Everybody is being very aggressive in pricing.

And let me add a little bit to that. Remember I said that it was up 90% in dollars for the quarter. If we actually looked at units considering that we are also getting the prices are dropping for the first half of the year, our LCD flat-panel is up 124% in units, and the plasma is up 150% in units. So whereas there will be pricing pressure on it, as those prices drop, we expect to sell many, many more of those televisions as the price points go within more consumers' range.

It sounds like maybe all retailers aren't experiencing the same demand as you all are seeing so therefore having to be more promotional and I guess you all feel compelled to have to match them?

We do have to match.

And lastly, could you touch on what is happening on the promotional credit side?

Yes, I would be glad to. On the promotional credit side right now if we look at the percent that we have, we are at 21.6% of the portfolio is involved in promotional credit. That is down -- that is pretty close to where it was exactly at the end of the last quarter at 21.4%. So there is a little bit more promotional credit. But again, it's very consistent in that low 20% range. We also have our capacity is 30% underneath our QSPE. So we are utilizing it competitively, but we are not increasing it beyond where it has been over the last six months.

Thank you and good luck.

Anthony Lebiedzinski, Sidoti & Co.

Just getting back to the delinquency rate, you had mentioned it was consistent with last year, but looking at your press release, it was at 6.5% versus 5.8% last year. So maybe you could just clarify that.

That is on a 60-day as opposed to the 30-plus day. And so when you look at them, we looked at all of those buckets, the 30-plus day is consistent. The 60-plus day is a little bit higher. And so what we do is we utilize our resources that we have, the total resources to try to balance those over time. The 60-plus day means that, of course, that we're a little bit further along in that. And so we have to adjust resources to bring that back in line with the total.

The total portfolio is what I was talking about. And so they will shift a little bit within it as we get some bubbles in it. But overall, Anthony, we believe that all of it will be manageable. Some portions will be a little higher. Some will be a little bit lower.

Let me add one other thing, as well, just to point it out that that extremely low charge-off rate that we had -- as of some of these kind of like a higher area or a lower area move to the portfolio they can affect the charge off rate on a month basis or a two-month basis. And so that unusually low number does not mean that it is going to stay at that level because that was an unusually low dip. Over time, those will level out but on a month-to-month basis, you can have it up 50 basis points or down 50 basis -- not for the charge-off but any one of those buckets within the portfolio on total.

Okay, got it. And then as far as your store openings, some of those I understand will be delayed until next year because of the weather. So as of the end of this year, how many stores do you expect, and how many of them will be in Oklahoma?

We will have in Oklahoma -- let me just give you this real quick. We have three stores that were scheduled for around January to be opened. One of those was Oklahoma -- it was our first Oklahoma store that was scheduled to be in in January. There is a possibility again that that could move to February. There is one in Dallas that might be able to move a little bit. We are expecting the six -- five to six stores. But depending upon those conditions at the end of the year, they could move over into the beginning of the year. But that is not affecting the ones that we plan to open for next year. We will still be on track to open those, Anthony.

Okay and so what is your CapEx budget now for the year?

$21 million.

Got it. Okay and you mentioned that your same-store sales are modestly positive it sounds like so far in August. So what does that compare to August of 2006?

It's higher.

It's higher.

I know, but what were the -- let me rephrase the question. What were the comp sales trends in August of 2006?

We have it for the full quarter of 2006, and hold on just a moment.

You will recall, Anthony, that last year that it was negative.

Negative 3.7 last year, Anthony.

Okay. All right. Thank you.

Michael McTighe, Nollenberger Capital.

I just wanted to clarify on that last question in terms of the comp progression last year, do comps get easier as the quarter goes on this year?

We talk about it getting easier, Mike, because they were negative last year. But if you take -- if you really look at what's going on --.

On a month-to-month basis, though.

On a month-to-month basis, I think you've got somewhat of a peak that occurs in late third quarter and then probably improves.

Okay. Now in terms of the SG&A, and I thought you guys had said in the past, you typically would look to see some leverage about a 5% comp. I know you had some additional expenses to kind of beef up your staffing. How should we be looking at that going forward in terms of where we should start to see some leverage in terms of your expense line?

I think you are seeing some leverage there, Mike. As I pointed out in my comments, when you compare it to this same period last year, we actually had SG&A expenses lower than what you would expect them to be. And I really think that if you take essentially how we performed with SG&A in the current period and projected that, that is about what we think is going to happen.

I did point out that we'd had some extraordinary items in this quarter in SG&A. But the way that works is that you typically have those kinds of things -- may not be the same ones. But you typically have some onetime costs in any period. And so I would expect that SG&A would run something about like it did this quarter.

Okay and now finally in terms of the results that you guys put up for the first half of the year, could you give some idea as to where you are based on your internal expectations versus -- I'm just trying to kind of reconcile where you are for the first half of the year relative to what your guidance says. Where are you as far as plan versus guidance?

As you recall, we don't give guidance by quarter. But I think that by doing what we've done relative to guidance, what we are saying is that we are on track. We're about where we thought we would be. At the end of the first quarter when our performance according to others seemed to be better than expected, people were saying why aren't you raising your guidance.

Well, because when we looked at it, it looked like to us that we were basically on track. And I think that today when we look at the same thing, we still believe that is where we are. We are on track to do what we though would happen. And that within the framework that we continue to have this aggressiveness in the marketplace and this uncertainty in the credit markets, not our credit portfolio, but in the bond markets.

So I think with all that said, I believe our guidance is very good. And we can stand behind it confidently.

Okay. Thanks, guys.

Jeff Blaeser, Morgan Joseph.

One quick question on the credit side. Have you adjusted any internal metrics for customer credit requirements? Can the same customer get credit today that couldn't have got it last year?

Yes, I think that our underwriting standards -- we have depending on what level they are at some is automated, some are with -- some are manually done and a large portion of ours are actually looked at by underwriters and so the underwriters are looking at the bureau. If the bureau in fact deteriorates then they would not grant the credit to them.

So basically our structure has not changed in the underwriting standards, but again, we are looking at the bureau. So if they have mortgage and they have -- are not making a payment on a house or having some difficulties, we will not be granting credit to those individuals.

Okay, great. And on the SG&A side, I know last quarter there was about a 90 basis point impact to increase advertising spend. Was there any impact this quarter and any expected impact going forward? I think you mentioned 10%. If you had that in sales, you may ratchet it down a bit?

Advertising is right in the place where we would like for it to be. It is somewhat lower than it was in the first quarter and we expect it to be there the rest of the year. The caveat of course on that is again dependent on the marketplace. It may be a requirement of ours to promote more and that is certainly one of the tools that we would use to do that. So right now it is right in our comfort zone. And we would expect that to continue, but certainly that could change.

Great. Thank you very much.

[Ike Bortel], Morgan Keegan.

Good morning. I'm actually calling in for Laura Champine who is traveling today. A few quick questions. First, what drove the 32% growth in finance charges in the quarter?

Primarily it was lower loan losses as we spoke to that. And we had good portfolio growth. Both of those things improved finance charges (inaudible).

Also I know you touched on this a little bit. I was wondering if you could shed just a little bit more light, what about the changes in the valuation assumptions that were made that offset that $0.5 million decrease?

Ask the question again.

What changes in your valuation assumptions were made that offset the $0.5 million decrease?

The net was almost a $0.5 million decrease but I pointed out earlier that higher borrowing costs were primarily the drag on that that caused the lower fair value.

Okay. Thank you very much.

[Neil McConnelly], [Ramus Capital].

Good morning, guys. David, I was confused -- did you say on the current facility on the Series A that you have 18 months of capacity left? Did I here that right?

Say it again. I don't know that I commented on that, but go ahead.

I thought I heard you say that on the current facility, that there is around 18 months left. I know you said in total there is 12, but that with your total availability you had about a year. But I thought I heard 18 months in there, and that's what I was trying to clarify.

Okay, what I was getting at was that on the current facility you have almost 12 months. You can squeeze out of that. And then David Magee I think concluded that with the rest of the things we were talking about that he said it sounded like 18 to 24 months, and I agreed with him. I think that is the case.

Okay so can you help me with the math here? At the end of the first quarter, it looked like there was $142.5 million in remaining capacity.

That's correct.

And then you said there is $107 million as of the end of the second quarter.

Yes.

So you burned $35 million?

Yes, and here's the thing. We've got ten more months of this pay down on the 2002 series bonds at $10 million a month. When we complete that, then we don't have near as much requirement for capacity that we do while we are in pay down. So that is why that does not seem to follow because our burn rate gets a lot less 10 months down the road.

Okay. Thanks. Then could you also help me understand -- you said that lower funding rate contributed to a -$22 million in CFO for the quarter.

Yes.

Can you help me just help me -- how does a lower rate contribute to a negative cash flow?

Because what goes on there is that we received cash from the sale of these receivables, and it is based on a formula that has several variables in it. But nevertheless, we receive cash at a particular rate at a funding rate. And there are several things right now that contribute to that funding rate being lower. And when that is lower, we receive less cash and therefore we have to invest our cash in those receivables.

So that is what makes up that $22 million is cash that we what would have received had the funding rate been higher. But since it's not, we had to invest it ourselves. What I went on to say was that much of that $22 million should return to us as we complete the new bond issue and as we finish the paydown of the 2002 series bonds.

Okay, so is the right conclusion to draw if you are not able to -- if current conditions stay the way they are and you are not able to do a new deal that dynamic will continue?

That dynamic will continue to an extent. Certainly we would continue to have a lower funding rate as we continue to add receivables to the variable funding note, which has a lower funding rate than the bonds do. That would continue. However, once we do complete the 2002 series bond paydown, we would recover some of our cash that we've had to invest for that.

Okay. Switching gears, on the product gross margin, I know you said that implicit in your guidance was a kind of continuation of the trend. As we look to model that, where can that bottom out? What is the level where that plateaus?

Will you repeat the question please?

I'm just wondering how low product margins can go before they stabilize?

That's a good question and I don't know that I know the answer to that. Again, that is a strictly determined by a marketplace. And we would hope that it doesn't get much more competitive than this. But we have no control over that. We have a promise to our customers that we will match prices. Not only that, we shop the competition on a weekly basis to make sure that our prices are at least as good as the competition. So again, that bar is set by what's going on in the market.

We are not going to be undersold. We compete in the retail market. And we are going to do that.

A couple of the other things, too, is that the furniture helps offset that margin at this point. So that helps us, and we have a broad array of products that we sell that even if -- let's say electronics or flat panels margins go down very, very low, we will still sell major appliances, furniture, other items which would have a larger margin to help us with it.

The other thing is that we do buy well, and so we are buying well, and so we are -- even though the margins get very tight on that in some categories because of the breadth of products that we have, no one category dominates.

That's good.

Great. Thanks for the time.

And at this time, that would conclude our question-and-answer session. I would like to turn the program back to our speakers for any additional or closing remarks.

I have no further remarks. Certainly do appreciate everyone joining us today. We appreciate the good questions that we got. And Bill and I will be available to discuss these matters further if you would like to give us a call.

Thank you, David. And thank all of you for joining us.

Thank you everyone for your participation on today's conference call. You may disconnect at this time.