Conn's Inc (CONN) 2008 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 ended July 31, 2008. My name is Teresa and I will be your operator today. During the presentation all participants in 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 Mr. Timothy Frank, the Company's CEO designate, President and CEO, and Mr. Michael J. Poppe, the Company's Chief Financial Officer. Additionally, joining them for the call is Mr. Thomas J. Frank, Sr., the Chairman of the Board of Conn's and its CEO. I would now like to turn the conference over to Mr. Poppe, please go ahead, sir.

Good morning. Thank you, Teresa. Good morning, everyone, and thank you for joining us. I'm speaking to you today from Conn's corporate offices in Beaumont, Texas. You should have received a copy of our earnings release dated August 28, 2008 distributed before the market opened this morning which describes our earnings and other financial information for the quarter ended July 31, 2008. If for some reason you did not receive a copy of the release you can download it from our website at Conn's.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 risks 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, Tim Frank, Conn's CEO designate, President and CEO. Tim?

Thank you, Mike. Good morning and thank you for joining us today. Mike, Tommy and I are going to speak to our sales, financial performance, the current status of our credit and financing operations, the recently announced funding arrangements, as well as our outlook for the remainder of fiscal 2009.

Net sales for the quarter were up by 6.5% while same-store sales decreased by 1.4%. Consumer electronics, laptops, videogame equipment and GPS devices led the growth in our business while decreases occurred in appliances and lawn and garden. Appliance performance was negatively impacted by refrigeration while we saw increases in room air and laundry.

In our electronics business for the quarter LCD unit sales were up 97% and retail sale dollars for this category were up 130% over the prior year. We expect these trends to continue. We remain very price competitive in the market in part due to our national buying group, NATM; continuing special purchases from our vendors; and improved product mix due to our training and in-store execution.

We believe that the increase in major electronics is sustainable because of three factors -- price decreases, especially large-screen sizes; the federal digital mandate in February; and increased investment in home entertainment tied to reduced travel.

Furniture and bedding for the quarter were up 8.3%; product mix has improved and is having a positive impact, specifically the introduction of the Broyhill and Lane brands. Lawn and garden sales were negatively impacted by reduced rain in the majority of our markets. The impact for the quarter was a reduction in these sales of 17.9% or $1.8 million.

We did, however, receive rain in the form of a tropical storm, Edward, which shut down four stores for two days in South Texas. Unfortunately this included our top two stores. These two events -- lawn and garden performance and the necessary shutdown of four of our top stores for two days -- negatively impacted our same-store sales.

This quarter we opened four new stores bringing our store count to 73. In addition, we relocated our third store. Our plans provided for the opening of three new stores for the remainder of this fiscal year. We continue to review our store opening plans for next year in light of the current financial market conditions and our conservative capital management.

Gross margin was down 100 basis points from 37.4% to 36.4% primarily due to a very competitive retail market and an accounting fair value adjustment. Although we are not happy with the decrease in margin we are seeing an improvement as last quarter's decrease was 320 basis points. Our earnings were impacted by a $1.2 million fair value adjustment due to financial market conditions, not as a result of company performance. Mike will discuss this in greater detail later.

SG&A continued to improve over last quarter with a reduction of 180 basis points. These cost savings include reductions in personnel based on attrition and performance, advertising and store operations. Cost reduction is an important part of our company's culture and has not impacted our ability to produce sales volume. We should continue to see SG&A expense reduction as compared to the prior year.

Our inventory for the quarter was up 18% with the addition of 10 new stores from the same time last year and a volume increase of 6.5%. Several special purchases also impacted this increase in inventory. Today, month to date, our inventory is up 1% from the same period last year. We have this under control. We've improved our focus on inventory management in our merchandising department.

We have not purchased any more stock this year and our Board has terminated the stock repurchase program. This decision is based on our conservative cash management philosophy.

As we look at our credit performance, there was a net charge off of 2.8% for the quarter consistent with our previously announced expectations. We expect to achieve another year of net write offs at or below 3%. Delinquencies were up at 7% from the 6.5% reported at July 31, 2007. However, they were down at 7% from the 7.6% reported at year end January 31, 2008.

Due to the increased cost of capital from our new financing arrangements we are revising guidance to $1.80 to $1.90 excluding any fair value adjustments. Mike, again, will give further insight into our guidance shortly. I'm now going to turn the program over to Mike Poppe so that he can share additional financial information with you. Mike?

Thank you, Tim. The performance of our core operations this quarter gives us three consecutive solid quarters despite the challenging economic environment. Our ability to deliver a 19.5% increase in adjusted diluted earnings per share, excluding the impact of fair value in both periods, was due to our ability to control expenses and good performance from our credit operations.

Relative to SG&A expenses, excluding the fair value impact in both periods, we delivered a 180 basis point decrease in SG&A as a percent of revenues this quarter consistent with the 170 basis point improvement we saw in the first quarter, enabling us to drive a 100 basis point expansion of our adjusted operating margin over the second quarter of last year excluding the fair value impact in both periods.

In addition to our strong operating performance, we were very pleased to be able to complete our new three year $210 million asset-based loan facility and renewal of our QSPE's $100 million 364-day variable funding note through August 2009 in the face of the ongoing credit crisis and Moody's downgrade of the QSPE's $150 million medium-term notes. I would note that the downgrade did not result in any defaults or events of default under any of the Company's or the QSPE's financing facilities.

We are also very appreciative of the support and efforts of our long-term banking partners that enabled us to get this important financing transaction completed. Total revenues were up 7.4% to $218.5 million made up of an increase in net sales of 6.5% and an increase in finance charges and other of 13.7% including a $1.2 million fair value charge.

As Tim mentioned, net sales growth was driven by strong sales in consumer electronics, especially LCD televisions, computers and videogame equipment. Finance charges and other increased despite the fair value adjustment. The growth in the portfolio and lower short-term borrowing costs partially offset by higher charge-offs drove the total of servicing fees received, gains on sales of receivables and interest earned on our retained interest up 18.3%.

The fair value adjustment is primarily the result of an increase in the projected short-term interest rates used in the discounted cash flow valuation as we have not changed our expectations about the future performance of the credit operations in general. As a result of this adjustment the fair value of our interest in securitized assets is now only approximately $900,000 greater than our cost basis.

The solid credit portfolio performance experience this quarter resulted in an annualized net credit charge-off rate of 2.8%, up from an unusually low 2.3% for the prior year. That brings our year-to-date charge-off rate down to 3%. Also, the 60-day delinquency rate was 7%, up 60 basis points on April 30, 2008 versus a 50 basis point increase during the same period last year. The percent of the portfolio re-aged at July 31st is still at the lower end of our historical range and was 15.9% as compared to 16.6% at year-end and 16.4% last July.

Our total gross margin declined by 100 basis points this quarter versus the prior year period. This was primarily due to a 160 basis point reduction in product gross margins which drove 120 basis points of the total gross margin decline. Additionally, the fair value adjustment was responsible for another 20 basis points of the decline. Offsetting these decreases was an increase in finance charges and other as a percentage of total revenues.

The drop in our product gross margin versus the prior year period was primarily due to the highly competitive retail market we operated in during the quarter. As I mentioned previously, excluding the fair value impact in both periods SG&A expenses declined by 180 basis points as a percentage of revenues.

This decrease was driven primarily by lower payroll and payroll-related expenses in absolute dollars and as a percent of revenues as well as lower advertising expense and other store operating expenses as a percent of revenues. As Tim indicated, we do expect to be able to maintain this new cost structure.

GAAP net income showed an increase of 5.7% while adjusted net income, excluding the fair value impact in both periods increased 10% from $10 million to $11 million. Prior year net income also benefited by a $900,000 one-time reduction in the provision for income taxes. GAAP earnings per diluted share increased 12.5% to $0.45 while adjusted diluted earnings per share, excluding the fair value impact in both periods, increased 19.5% to $0.49.

As the trends for the quarter and the six-month period are generally the same I will just hit the high points. GAAP diluted earnings per share was down 2.1% for the six months while adjusted diluted earnings per share, excluding the fair value impact in both periods, increased 9.5% to $1.04 per share on strong expense control and growth in finance income partially offset by lower product gross margins. The prior year period benefited by approximately $0.06 per share due to $500,000 after-taxes of one-time gains realized on the sales of two properties and a $900,000 one-time reduction in the provision for income taxes.

Turning to our liquidity and cash flow, we generated $46.2 million of cash flow from operations for the six months ended July 31, 2008 compared with cash used of $6.8 million in the prior year period. Both periods were impacted by the timing of inventory receipts and payments -- and payments by the QSPE on its 2002 series of bonds.

The current year period was impacted by the receipt of inventory later in the period and our taking advantage of longer vendor payment terms available which increased payable balances and decreased investment in accounts receivable due to the QSPE's pay off of its 2002 series of bonds. The payoff of the bonds resulted in an increase in the effective funding rate since January 31st as additional collateral became available for borrowing under the QSPE's variable funding note facility. The prior year period was negatively impacted by the timing of receipts of inventory and the effect of pay downs on the 2002 series bonds which reduced the effective funding rate during that period.

Cash used in investing activities totaled $10.8 million in the current year period for investment in property and equipment. This compared with $657,000 provided a year ago as proceeds of $8.9 million from sales of property offset $8.2 million invested in property and equipment.

Financing activities provided $331,000 in the current year from proceeds of stock issued under employee benefit plans compared with cash of $6.8 million in the prior year primarily for purchases of treasury stock of $8.7 million and net of the proceeds from issuance of stock under employee benefit plans.

We have no bank debt on our balance sheet at July 31st. However, after the recent completion of our new $210 million asset-based loan facility we expect to begin showing increased Accounts Receivable and debt balances on our balance sheet by the end of the third quarter.

On July 29, 2008 the QSPE had approximately $50 million outstanding under the $150 million 364-day facility that expired that day. That balance is being repaid out of the principle collections of the receivables held by the QSPE and is expected to be fully amortized by the end of September.

In order to obtain the capital needed to continue to grow our business, during the month of August we completed two significant financing activities. First, effective August 14th, we entered into a $200 million asset-based loan facility to finance the growth of the Company and the credit portfolio.

Second, today we announced the completion by our QSPE of the renewal of its $100 million 364-day variable funding note. These facilities, in addition to the existing $200 million variable funding note committed until 2012, and the $150 million of medium-term notes that begin repayment in October 2010, give us $660 million of total financing commitments with $560 million of those commitments being long-term in nature, up from $450 million of long-term commitments before the completion of the ABL facility.

Additionally, the ABL facility gives us a presence in the second debt capital market helping us diversify our funding sources and mitigate our exposure to a credit crunch in a specific market as we have experienced in the securitization market. Our borrowing costs under the new ABL facility will be based on LIBOR plus a spread between 225 basis points and 275 basis points. And after completion of the renewal of the variable funding note today the QSPE's borrowing cost under the $300 million variable funding note facility will be based on commercial paper rates plus 250 basis points.

Given the 19 plus percent yield on the receivables and approximately 3% loss rate after borrowing costs we still have a very attractive net interest-earning spread. The effective advance rate under both facilities is expected to be between 65% and 70% over time. At July 31st the QSPE's outstanding borrowings were approximately 73% of total receivables.

At this time we believe the QSPE and the Company have sufficient combined liquidity to maintain consistent operations for more than 12 months. The sources of this liquidity as of today include approximately $185 million of unused capacity under the Company's new ABL facility subject to meeting borrowing base requirements, and among other sources we have future cash flow from operations, flexible inventory payment terms, the ability to modify certain capital investment programs and other financing alternatives.

At a 15% growth rate we would use approximately $100 million of our future cash flow from operations and available funding capacity to fund growth in the portfolio over the next 12 months. As Tim discussed, as a result of the completion of our ABL facility and renewal of our securitization facility this quarter, we revised our EPS guidance for fiscal year 2009, excluding already recorded and potential fair value adjustments, to a range of $1.80 to $1.90 per diluted share, a reduction of $0.05 from the guidance we gave at the beginning of the fiscal year.

This adjustment is not a change -- is not a result of changes in our expectations about the performance of our core operations, but rather is due to the impact of higher borrowing costs under our new and renewed financing facilities and the difference in accounting that is required for the receivables that will be financed by the ABL facility and reported on our balance sheet as compared to the accounting for our off-balance-sheet receivables.

We do not expect the cash flows or credit performance of the receivables held on balance sheet to vary significantly from the receivables transferred to the QSPE. However, as the on balance sheet portfolio grows we will be required to record non-cash charges to create an appropriate bad debt reserve on the balance sheet. Much of this analysis and more is available in our Form 10-K for the quarter ended July 31, 2008 to be filed with the Securities and Exchange Commission later today.

Tim, that concludes our prepared remarks. If you are ready, we will open up the lines for questions.

Let's take some questions.

(Operator Instructions). Rick Nelson, Stephens.

Thank you and good morning. Can you talk about sales momentum during the quarter, how it transpired and what you're seeing August to date?

Sure, Rick. As we look at the same stores sales, the first month, May, was very strong at a positive 5.6, June we had a negative 5.5% same-store and then July we had a negative 6%. And when you look at June I believe that the primary driver of that, we did see a slowdown in the government stimulus checks. In July I explained certainly, and I think this also impact to June, the lawn and garden performance was an issue.

And this storm -- you know, sometimes they help us and sometimes they hurt us. In this case it hit some of our best performing stores and we feel like the impact was about $2 million that we lost from the storm. And then month to day it looks like that we're probably going to be flat on same stores sales, so we are seeing an improvement in that performance.

Have there been any changes here in the last month in terms of promotions to drive the improved sales performance?

I wouldn't say any changes; I mean we're always very aggressive with our cash options that we offer. So I would not say that there's been any significant changes -- other than responding to a very aggressive market.

And can you talk about gross margin decline in the period? Maybe taking a look at the appliance category as a stand-alone and consumer electronics as a stand-alone, how the margins compare there, is that mix that's driving the decline?

I think that when you look at appliances that there are increases in costs and some we are able to pass on and some we are able not to pass on. But I don't think that the major impact in margin is coming from appliances. Electronics is a very competitive environment and if there's a shift in mix it's more from appliances to electronics. Electronics traditionally have lower margins than appliances.

(Operator Instructions). Anthony Lebiedzinski, Sidoti & Co.

Just following up on the question regarding the product margin. So there was quite a bit of a drop-off from last year's product margin. Do you see that really as a function of really competitors getting more aggressive with pricing or is it more of a mix shift? Can you just discuss that a little bit more and what's your outlook for product margins for the remainder of the year?

I would say that the primary driver is a competitive market and us being as aggressive as we can. And then a secondary is the mix. As I just explained, there has been a shift in our business as electronics continues to grow at more than a double-digit pace. And (inaudible) we're flat right now with appliances, as you saw in the release.

Okay. And then as far as the credit portfolio, can you give us a sense as to what the breakdown was between your -- what percent of your portfolio was from your primary portfolio versus your secondary portfolio and also if you have the average credit score of your customers?

I just want to make sure I understand the question. You want balance?

When you look at the total portfolio what is the percentage breakdown between primary portfolio and your secondary?

Anthony, this is Mike. It's still running in the 23% to 24% range. That mix has not changed dramatically. And as far as current credit scores, I don't have that information available right now, but we might be able to update that for you at a later time.

Okay. And lastly, as far as the press release that you put out just half an hour ago regarding the renewal of your securitization facility, it now bears an interest rate of commercial paper plus 250 basis points. What was it previously?

Commercial paper plus about 80 basis points.

Okay. So quite a bit higher here, okay. Okay, thanks for your help.

David Maris, BAM.

A couple questions. I guess I have to limit it to two, so let me try. Want to better understand the profitability. So if we took financing out of the mix, and I'm not saying that it's not valuable, it's obviously very valuable, but what was the operating profit of just the retail side?

We believe that the retail operations and the credit operations both contribute roughly equally to our operating profitability.

Then did financing as a percentage on a per sale basis increase or decrease during the quarter and what sort of trend are you seeing there?

It's certainly a slightly higher percentage of our revenues for the period. Some of that is due to the portfolio is growing at a slightly faster rate than topline sales, it's growing at about a 15% rate. And then the lower short-term interest rates in the market right now have helped keep borrowing costs down and that has helped also expand that financing income.

All right. And if I can sneak one third one in -- I apologize for breaking the rules. But you mentioned the share buyback program, but I missed the exact reasoning for the cancellation of it. So is this a temporary cancellation or what were the discussions like surrounding this?

This is Tommy speaking. The philosophy was as stated, that these new loans that we've just executed have various covenants in them. We want to be conservative, as we always have been, in operating our business. We purchased most of the $50 million that was authorized and I think that number was somewhere around $40 million.

And we just think that prudence and being conservative tells us that at this point in time, with the financial markets still unstable as they are, that we want to conserve as much cash as we have. And we don't see the need to be purchasing stock back when we can turn the operating results that we just did this past month.

It was a phenomenal month we just turned in, especially when you take into consideration that we had accelerated earnings a year ago during this same quarter due to the sale of real estate and tax advantages. So we just don't think it's necessary and we think that our banking partners did a phenomenal job of supporting us and we want to use the money as wisely as we can to grow the business.

Fair enough. Thank you very much. And also, you provide the financial covenants in your K. I haven't had a chance to look at your 8-K today. Are there any changes to those with the new loans or are those in the 8-K?

They are. There's still leverage and a fixed charge coverage ratio. There are some portfolio ratios in the new deal because a big piece of the borrowing base will be receivables. But when the -- we filed an 8-K a couple of weeks ago that actually has the loan document in it and then our 10-Q later this afternoon will actually have how we fared, what our covenant calculations came out to for the quarter.

But the net worth covenant is the same or has that changed?

Yes, the net worth covenant did not change.

[Darren Maloney], [Mirador] Funds.

Thanks for taking the call. I just wanted to clarify; there's been a lot of changes obviously with the ABL and the ABS facilities. Under the ABS facilities that you have outstanding today, what is the total capacity available. And with the -- I guess I'll call it the extension of the $100 million, that looks to me to be kind of a reduction from the original amount. Are there any other cross facility amortization or paydown requirements as it pertains to 2002a or 2006a?

No, there are not any cross price payment requirements. We have total capacity under those -- under the ABS facilities, it's $450 million. As you may recall from our last call, we did say that we did not expect to renew the -- there was a $150 million 364-day commitment that we did not expect to renew and it, as expected, was not renewed; it expired on July 29th with $50 million outstanding. And it will be paid down out of principle collections on the receivables in the QSPE's portfolio and we expect that paydown to be completed by the end of September.

Okay. And the second -- I looked at the inter-credit agreements in the 8-K that you filed on the 20th, it looks like there's essentially a change in your servicing model with segregated accounts and a third-party collection agent added, specifically being Bank of America. Can you quantify the costs related to the change in your servicing model?

Absolutely. While she queues up the next caller I will tell you there is no change in our servicing model or our servicing cost. This is just when you put together two separate financial structures like this financing the portfolio; this is just a documentation of how the relationships are going to work. But there is no change in the way we service today or our cost.

[Neil McConnell], Walker Smith Capital.

Good morning. Mike, could you help us understand as you -- you mentioned that some portion of sales would be financed with the ABL this quarter, is that correct?

Yes, sir.

So when you have a have a receivable come in how is the decision made which facility it goes to?

There will be a couple of factors. The primary decision is going to be which facility has available funding capacity to buy receivables. And right now, as you probably figured out, the ABS facility is fully utilized. And so until it receives enough principle reductions from its existing receivables to pay down the outstanding balances and provide free cash flow for purchasing new receivables, a large percentage of the receivables we generate will go on balance sheet and be financed by the ABL facility.

As you also would probably understand, the $50 million that is in paydown on the QSPE, since we expect that to be paid down by the end of September then it will start -- at that point it will be generating, the QSPE will be generating cash flows to be able to begin purchasing more receivables again.

Okay, and that's inclusive -- when you said that it's fully utilized, that's inclusive of the new $100 million extension?

Correct.

Okay. And when you are using the balance sheet could you help us with the -- and I realize the cash flows are the same, but how does the accounting presentation differ? Will that just be a net interest -- I guess net interest income recognized below the line or how does that work?

There will be two things. One is a presentation difference and that is right now in securitization income, the interest income, the borrowing cost and the bad debt losses are all represented in finance charges and other in revenues for the sold receivables.

For the receivables that will be on balance sheet, we will have financing income that will still be in revenues and finance charges and other, the borrowing cost will be in interest expense, and the bad debt losses will be in cost and expenses right below SG&A on the face of our financial, which drives the second change and that is we will be -- as I mentioned in my comments, we will be required to provide a bad debt provision for those receivables for future expected losses as that portfolio grows over time.

And that will roughly equate your net charge-offs?

Neil, this will be the last one we answer. I apologize, but we want to make sure that we can get to everyone. So if you could queue up the next caller and, Mike, go ahead and answer that.

It will be a provision for expected charge-offs. And if you have further questions on that feel free to call me later.

Claire Davis, Perennial.

Just to follow up on that, are you in a position to quantify what you expect that bad debt provision to look like? You're indicating it's not going to be consistent with your charge-off rate in the past.

I expect it to be consistent with the charge-off rate. So if our historical charge-off rate is in the 3% range I would expect the bad debt provision reserve to run in the neighborhood of 3% of your receivables that are on balance sheet.

Okay. On your last quarterly call you indicated that you intended to review your store growth plans for next year. And it looks like you came in, I guess maybe just due to the timing of bringing stores online, you came in one light this year. Can you give us any guidance to what store growth will look like going forward?

This year we're doing seven new stores and three relocations for a total of 10 stores which is within certainly the guidance we've given in the past. And we just did this large financing arrangement and so currently we're reviewing what we're going to open up next year and we should be able to give you more specifics in the next call. But we want to make sure that we've essentially got all of our ducks in a row before we do that.

Okay. And if I could, I just had one more follow-up and then I'll jump off. Could you explain -- you mentioned there were some new portfolio covenants and I saw that one of them was highlighted in your 8-K, that you had a new re-aging limit of 15%, which I believe is a bit below where your current historical levels have been. Is the implication of this that you'll have to stop re-aging to get immediately under this level or how do you intend to address that?

Actually that limit is already in place relative to the 2006a bonds and it does not, in that covenant calculation, in the ABS facility, it already -- accounts re-aged over 12 months are excluded and so that 15% is for accounts that aren't excluded. And within the ABS facility we're actually at a 10% relative to that 15% limit. So we do not expect to change our re-aging policy or procedures.

So that specifically applies to less than 12-month-old accounts?

Correct.

Okay, thank you for that clarification.

David Magee, SunTrust Robinson Humphrey.

Good morning, guys. Just a couple of questions. First, with regard to the guidance in the second half of the year and the gross margin assumption that we might use, are you assuming that we had a pricing environment like last year going into the holidays or one that would be as bad as say two years ago? What is your thinking on that?

Every time we go into the holidays I always take the mindset that it's going to be a very aggressive environment and certainly I think that we'll see that again this year. We have certain large companies out there that are struggling and they're certainly going to fight for every sale that they can get and we're going to fight for every sale that we can get. So I would say it's going to be competitive.

But maybe a step worse than last year?

No, hopefully not. It's just -- it's very difficult to call, I guess is what I'm saying, and it's a competitive environment.

Secondly, could you just, maybe just hit on why you all are better positioned now for any hurricanes entering your region a few years ago?

We've taken many steps. We've actually set up a call center in San Antonio. We have about 140 associates there for our credit facility. In addition, we have a dialer system and inbound call center system that's set up in Dallas that's ready to go. In fact, we've got a group up there testing it as we have a system out there in the Gulf. And every time we do we test this equipment that can handle another 150 to 200 people. And we've set up and made arrangements with hotels -- and in Houston we also have a third facility.

And because of Katrina and Rita we are pretty well versed in how we would handle this situation. And so, yes, I think we've taken appropriate actions necessary -- including busing salespeople to stores and setting up generators. We were the first in this market to be open against all the nationals when this hurricane hit us three years ago. I'm sorry, Tom, go ahead.

Well, we also, in addition to that, which we did not have in place at that time, we now have a secured off-site backup computer system in Houston, Texas which is in the north part of Houston that's secured from this side also. So there have been a number of measures we have taken. We do not ever want to relive what we went through with Rita. And we can assure you that we are fully prepared for any kind of emergency. And Rita was the first time this city had been evacuated in my 68 years on earth. So that was an anomaly. We're prepared for the worst anomalies today.

Thanks a lot.

Scott Tilghman, Hudson Square Research.

Good morning. Nice job on the quarter. Most of my questions have been answered, but I had a couple quick follow-ups. One, I think this is what David Maris was getting at earlier. Can you give us a sense as to the number of customers currently using the credit program, has that changed materially?

We're still at 59%, aren't we, Mike?

Our penetration rate runs in the 59% to low 60% range and we continue to be consistent there.

And then secondly, this came up a little bit on the last call, but just to beat another dead horse -- the TV supply issues that have been circulating around the CE marketplace, have you seen any material shifts there with additional supply coming down the pike pressuring prices at all?

If I understand your question correctly, we feel very comfortable with our supply lines and our vendors have been very supportive in keeping us in stock. And we partner very specifically with key vendors to make sure that we have adequate product through the fourth quarter and have not run into a significant issue.

Let me rephrase because it's not so much the adequacy of product, but there had been some discussion within the industry that supply might accelerate beyond demand in the back half of the year and into early next year. Have you seen any signs of that happening?

I have not. And to be honest, I'm not sure that's a bad thing anyway with the federal mandate in February. I think that when I look at penetration of this type of product I think there is tremendous capacity out there as somebody may have one flatscreen product or one digital product in their home, but the average American home has three to four TV sets in it, so there's a lot of capacity yet for this product.

Some programs we have do have price protection in the event of a decline on pricing.

That's all I had. Thank you.

Alexandra Jennings, Greenlight Capital.

Hi, guys. Thanks for taking the call. First of all I just want to make sure that the right earnings for the first half that have been reported, that are consistent with the $1.80 to $1.90 guidance, is a $1.04, right?

Correct.

Okay. All right, now how do I think about the further fair value adjustments that you all are expecting for the second half?

You know, Alexandra, since so much of it is driven based on market conditions, if you have an expectation of what risk premiums in the market are going to do or what interest rates are going to do, then that would give me an indication of how to think of future fair value adjustments. And that's why we really moved this press release to talk about guidance and our reported earnings on an exclusive of fair value basis so that people can get a better understanding of our core operations and cash flow from the Company.

But how does the announcement today of extending the tranche of the QSPE at a higher interest rate factor in? Is that something for which you might have to take a fair value adjustment?

And while we queue up the next caller -- I'll take your third question here and then we'll queue up the next caller. That has already been incorporated into our fair value, so there will be no further adjustment related to the announcement today.

Brian Delaney, EnTrust.

Good morning, guys. Thanks for the call. Big picture, are you guys ready to start talking about how we should think about next year just from a perspective of next year versus this year, big changes are, we're going to be funding more of the receivables on balance sheet through the ABL, the increased borrowing costs full year versus I guess a quarter impact this year, the changes in how you guys articulated before in terms of where the bad debt has to be on your P&L, and the potential changes around square footage? The Street has earnings going up 10%, 11%, 12% next year. When we're thinking about that should we keep in mind whether or not that's realistic relative to some of these changes?

I think Tim already commented that we are reviewing our store opening plans in light of capital market conditions and capital availability. I think we have pretty good information now; everybody has pretty good visibility on what our financing facilities and cost of financing are going to be.

But as far as really speaking in detail to our expectations for next year's earnings, we are not prepared to have those discussions yet. We want to focus on driving strong performance for this year and we'll be more prepared to talk about next year's earnings when we get closer and have more visibility into what's going to happen next year.

Okay. But would you be willing to talk about directionally how we should think about the finance charges and other line this year versus next year given these changes?

Finance charges and other? I guess what I would say, Brian, and one thing that's going to make it a little more complicated is as you move the bad debt write-off down to cost and expenses and you move interest expense down below operations, finance charges and other are naturally going to expand because all of the interest income is going to be recorded in revenues, but the cost that we currently record net in revenues for the securitization income are going to move below revenue line item.

Right, but offsetting that then, the gain on sale of receivables directionally will be going the other way as well as a result of more staying on balance sheet. Is that conceptually the way I should think about it?

Yes, the gain on sale might decline a little bit, Brian. But as you probably noted in my comments, the write-up is really insignificant to now at this point relative to our cost basis in the asset and the front-end gain that we book at date of sale is not a significant piece. A lot of what's driving the gains is because the assumptions are based on what a market participant would use and thus are more conservative than our actual operating performance.

We end up realizing better earnings than we estimate in that day one fair value calculation. The thing that will be a bigger impact I think is when you think about earnings is what are short-term interest rates going to do. That is a bigger variable in kind of core earnings considerations exclusive of kind of market impact on valuation for fair value.

Okay, great. And congratulations on getting the renewal done.

Thank you very much.

That does conclude the question-and-answer session today. At this time, Mr. Frank, I will turn the conference back over to you for any additional or closing remarks.

Thank you. Tommy, do you have any comments?

No, Tim.

Well, overall we're very pleased with our recent success in obtaining the capital vehicles necessary to operate our credit division. I will tell you execution is improving even with a reduction in expenses that you're seeing through SG&A. And although we're operating in a challenging economic environment, we are still in one of the best markets in the United States and feel many of the issues that impacted same-store sales are behind us. Our expectations are that we are positioned very well for the remainder of this year. Thank you for your time today.

That does conclude today's conference. Thank you for your participation. You may now disconnect.