Conn's Inc (CONN) 2008 Q4 法說會逐字稿

Good morning, and thank you for holding. Welcome to the Conn's Incorporated conference call to discuss earnings for the fourth quarter ended January 31, 2009. My name is Audra, and I'll be your operator today.

During the presentation, all participants will be in a listen-only mode. After the speakers' remarks, you'll 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-Elect, President and COO; Mr. Michael Poppe, the Company's Chief Financial Officer. Additionally, joining them for the call is Mr. Thomas Frank, Sr., the Chairman of the Board of Conn's and its CEO.

I'd now like to turn the conference over to Mr. Poppe. Please go ahead, sir.

Thank you, Audra. 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 March 26, 2009, distributed before the market opened this morning, which describes our earnings and other financial information for the quarter ended January 31, 2009. 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-Elect, President and COO. Tim?

Thank you, Mike. Good morning, and thank you for joining us today. Mike and I are going to speak to our sales, financial performance, the current status of our credit and financing operations. In addition, we'll discuss the outlook for the first quarter of fiscal 2010. Tommy will also be joining us in answering questions.

Net sales for the quarter were up by 22.4% while same-store sales increased by 12.5%. Sales increased on flat-panel TV's, video game equipment, laptop computers and DVD players. LCD units were up 84% over the prior year while volume associated with these sales increased 61%. Total TV units were up 75% and total TV volume was up 44%.

Our furniture sales also did extremely well with a 28.5% increase and appliances were up 2.1%. It is important to note that the appliance industry in January, according to TWICE Magazine, is down 24%. We believe that one of the drivers of volume for this quarter was the uncertainty surrounding Circuit City's future.

During the fourth quarter, we opened two stores bringing our total new store count to 10 for the year with three of those being replacements. We have subsequently closed one store, a clearance location in San Antonio, bringing our total store count to 75.

We plan to expand our San Antonio credit collection center into this newly vacated space, allowing us to further expand our remote collection center which is further from the Gulf Coast and not as susceptible to hurricanes. We have not at this time determined how many stores if any that we will open this fiscal year in light of capital availability.

That being said, you can see our new, exciting website at Conn's.com. This new website adds significant new benefits for our customers as well as being integrated into our inventory and store systems. This new website has the opportunity to create good additional volume.

As we look forward to this new fiscal year, we see many other growth opportunities such as the Circuit City market share recently vacated in our existing markets. In addition, we have continued to invest in store refurbishing creating a much improved environment for sales in major electronics and furniture. These new looks are occurring in 30 of our stores with 13 of them already complete. The remaining stores are expected to be completed by the end of this Summer.

Gross margin was down 340 basis points to 33.3% from 36.7% primarily due to a non-cash fair value adjustment impacting gross margin by 100 basis points. Product gross margin did show a negative impact on total gross margin of 150 basis points. However, our trend is improving as product margins rose from the previous quarter by 150 basis points.

Future expectations for gross margin are difficult to estimate due to competitive pressures. That being said, it is our expectation is that with the second largest electronics retailer exiting the business we will see an easing of these competitive pressures over the course of the year.

SG&A as a percentage of revenues decreased by 220 basis points. Non-cash fair value impact reduced the decrease by 40 basis points. Expense reduction was driven primarily by the strong revenue growth, reduced payroll and advertising cost as a percentage of revenues. This represents the sixth consecutive quarter of SG&A expense reduction on a year-over-year basis as a percent of sales.

We will continue to drive costs out of our business model and believe that there are still opportunities in reducing expense. Our inventory for the quarter increased 17.8% with a volume increase of 22.4% and with seven additional store locations. Currently, inventory levels are down 10.2% primarily due to recent constrained availability in our electronics categories.

As we look at our credit performance, there was a net charge-off of 3.4% versus a 3.2% net charge-off in the fourth quarter of last year. The 60-day delinquency was 7.3% versus 7.6% for the same period last year and the percentage of the total portfolio reage was 18.7% at January 31, 2009, as compared to 16.6% at January 2008.

Although reage is up year-over-year, due to the effects of the hurricane this number has been trending down 100 basis points from last quarter and we expect to continue to see improvements. It is also important to note that our previous three year average for reage is 17.3%.

Credit underwriting has been tightened, down payments have increased and no interest programs have been reduced in recent months. We feel these changes are appropriate given the current market conditions and believe they have already led to recent improvements in delinquency. In addition to this, we've also seen improvements in our net loss trend in recent months. We feel that we maintain a competitive advantage in our credit granting process.

The retail environment has been very competitive with Circuit City's liquidation sale. Much of the product that was liquidated came through their Ardmore, Oklahoma distribution center located just 25 miles north of the Texas border which fed the southwest region of Circuit and was one of the largest in the country. This sale continued through March 8 and had an impact on our sales.

By shopping their stores on a regular basis, we confirmed that products shipped into our markets as late as early March. We do believe that the long-term opportunities in gaining market share outweigh any short-term slowdowns. Our opinion is that this sale had impact beyond March 8 as it brought consumers forward in their buying behavior due to the impression of savings.

There have been recent shortages in major electronics due to the cautious outlook on inventory levels by manufacturers during their product transition. Although we have had to temporarily consolidate our selection in TVs, we have continued to maintain sufficient inventory in key brands and screen sizes. We have now started to receive our 2009 models and believe this issue is behind us.

As a result of Circuit City's liquidation sale and inventory constraints, February total sales results were in the low single-digits and March is trending for mid-single-digit increases. Given these issues, we are pleased with the results achieved out of February and March.

On the upside we see a market where we are positioned well to capture additional share. Due to improved media inventory availability and less expensive printing costs we have been able to maintain our advertising expense while increasing our exposure. These price reductions in advertising may be a result of several factors including off-political season and some companies appear to have pulled back on their advertising.

Therefore, we have the opportunity to maintain exposure at our historical levels and use the cost savings to become more aggressive in product pricing. The Dallas market is performing at a much improved level with upside still existing.

In merchandising, we are finding opportunities in this challenging market. We've recently added Panasonic, Electrolux and Bosch to our product selection. At the same time we're adding brands we continue to review and evaluate SKU performance.

I'm now going to turn the program back over to Mike Poppe so that he can share additional financial information with you. Mike?

Thank you, Tim. Our outstanding performance during the fourth quarter capped a very strong year for the Company. As Tim discussed, we were able to take advantage of opportunities in the market during the quarter to drive strong sales growth which compounded with continued improvement in expense leverage resulted in a very strong operating performance.

Because of the continued turmoil in the financial markets we did record a large fair value adjustment during the quarter due primarily to an increase in the discount rate we estimated a market participant would require when valuing our residual interest in the securitized receivables portfolio. As a result, on a GAAP basis, our earnings per share declined by $0.01. However, excluding the fair value adjustments in both periods, diluted earnings per share rose 19% to $0.69.

We are very happy with this performance in these difficult economic times and it demonstrates the value and consistent performance of our model. The increase in net sales during the quarter was driven by strong demand for consumer electronics, furniture and mattresses.

Growth in finance charges and other through the quarter was driven by overall portfolio growth and lower borrowing costs for our QSPE. Remember that for the receivables transferred to our QSPE, finance charges and other includes its interest income and is reduced by its borrowing costs and net charge-offs while only interest income is included in finance charges and other for the receivables retained on our balance sheet.

Keep in mind that for the retained receivables the provision for bad debts and interest expense are reported below total revenues. If all receivables had been transferred to the QSPE, finance charges and other would have been reduced by approximately $632,000 of borrowing costs incurred to fund the retained receivables while related net charge-offs would have had a negligible impact.

The increases in finance charges and other were partially offset by higher net charge-offs on receivables held by the QSPE. Reduced retrospective profits earned under our credit insurance program as a result of higher claims due to the hurricanes experienced in September and a higher fair value adjustment related to our interest in securitized assets.

The fair value adjustment is primarily the result of an increase in the discount rate risk premium input used in the discounted cash flow valuation due to the continuing turmoil in the financial markets and is not the result of changes about the expectations for Company-specific performance.

As Tim mentioned previously, SG&A expenses declined by 220 basis points as a percentage of revenues before considering the 40-basis-point negative impact of the fair value adjustments. This decrease was driven primarily by the beneficial leveraging effect of the strong revenue growth and lower payroll and payroll-related expenses, advertising expense and other store operating expenses as a percentage of revenue.

As a result of entering into the new asset-based lending facility in August, we began retaining receivables on our balance sheet during the third quarter and funded them through the use of our invested cash balances and borrowings under our revolving bank facility. As such, we are now recording a provision for bad debts to reserve for future expected net credit losses on receivables held by us and not transferred to our QSPE. As a reminder, the net charge-off on sold receivables are recorded in finance charges and other.

During the three months ended January 31, 2009, we recorded a provision for bad debts of $879,000 as compared to $418,000 in the prior year. Approximately $600,000 of the current quarter expense was directly related to increasing the bad debt reserve for the new retained receivables.

Additionally, as anticipated we have borrowed $62.9 million under the credit facility to fund receivable growth on balance sheet resulting in an increase in net interest expense during the current year quarter. As previously noted, adjusted diluted earnings per share excluding the fair value impact in both periods was $0.69 in the current year quarter as compared to $0.58 in the prior year.

Also affecting the EPS comparison were higher credit insurance claims affecting our retrospective profit commission and the provision for bad debts on retained receivables which combined totaled approximately $1.1 million net of taxes, or $0.05 per share.

Our operating performance was strong over the past year. While GAAP diluted earnings per share declined $0.54 to $1.14 for fiscal 2009, adjusted diluted earnings per share, excluding the fair value impact in both periods, increased $0.03 to $1.84 per share this year compared to $1.81 last year.

Additionally, the current year was negatively impacted by approximately $0.09 due to hurricane-related expenses and reduced insurance retrospective commissions as a result of the hurricane, and an additional $0.09 due to the bad debt expense on the retained receivables while the prior year period benefited by approximately $0.06 per share due to $500,000 after taxes of gains realized on the sales of two properties and a $900,000 reduction in the provision for income taxes.

The total of these items ruts in approximately $0.24 in additional differences between the two periods further highlighting the strength of the underlying operations in fiscal 2009.

Turning to our liquidity and cash flow, we used $42.7 million of cash flow from operations for the year ended January 31, 2009, compared with cash used of $5.6 million in the prior year period. This change was not unexpected and does not reflect an unusual need for cash as the current-year period was impacted primarily by presentation differences resulting from the retention of receivables on balance sheet as opposed to transferring them to our QSPE.

The growth of the credit receivables portfolio on balance sheet from $9 million at the prior year end to $108 million at January 31, 2009, was funded by the use of invested cash balances and $62.9 million in borrowings under our revolving credit facility. The retained receivables balance growth is shown as a use of cash and cash flow from operating activities while the borrowings are included in cash flows provided by financing activities.

Historically, all eligible credit receivables were transferred to our QSPE and the increase in the credit portfolio minus the cash received from the QSPE upon transferring the receivables was reported net in cash flow from operating activities. The use of cash in the prior year period was driven by reduced accounts payable balances due to the timing of receipts of inventory and the effect of the QSPE's pay downs on the 2002 series of bonds which reduced the effective funding rate during that period.

Cash used in investing activities totaled $17.4 million in the current year period for investments in property and equipment. This compared with $10 million used a year ago as investments in property and equipment of $19 million were partially offset by proceeds of $8.9 million from the sales of property.

Financing activities provided $60.9 million in the current year primarily from borrowings under our revolving credit facility to fund the increase in receivables held on our balance sheet and proceeds of stock issued under employee benefit plans, partially offset by the costs incurred to complete the new credit facility, compared with cash used of $29.9 million in the prior year primarily for purchases of Treasury stock of $33.3 million and net of the proceeds from issuances of stock under employee benefit plans.

In reviewing our funding facilities, as previously reported, during the month of August we completed two significant financing activities. First, we entered into a $210 million asset-based loan facility to finance the growth of the Company and the credit portfolio.

Second, 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 which is renewable at our option until 2012 and the $150 million of medium-term notes that begin repayment in September 2010, give us $660 million of total financing commitments with $560 million of those commitments being long term in nature.

The QSPE's $100 million 364-day variable funding note is up for renewal in August 2009 and at this time, we expect that at least a portion of the note will not be renewed. Additionally, as you are probably already aware in February Moody's downgraded the QSPE's $150 million bond issuance outstanding despite the continued solid performance of the credit portfolio.

The downgrade does not impact compliance with any of our debt covenants and did not have a direct impact on the borrowing costs or any other requirements on the QSPE or the Company. At this time given the current facts and circumstances, we believe the QSPE and the Company have sufficient combined liquidity to fund our operations for at least 12 months before considering renewals or expansions of existing facilities for other debt or equity capital raising opportunities.

The sources of this liquidity as of January 31 include approximately $125.4 million of unused capacity under the Company's ABL facility, of which $31.3 million was available to be drawn at January 31 and the remainder will become available based on growth in the receivables portfolio held on our balance sheet, $10 million available under an unsecured line of credit.

And among other sources, we have future cash flow from operations, third party consumer financing programs, flexible inventory payment terms, the ability to sell or finance owned real estate, the ability to modify certain capital investment programs and other operating and financing alternatives. Given the initial indications that at least a portion of the QSPE's $100 million variable funding note will not be renewed this Summer we are reducing the volume of receivables transferred to the QSPE allowing it to pay down the $92.5 million owed under the note at January 31, 2009.

As a result, we anticipate reducing the balance of receivables held by the QSPE by approximately $140 million to approximately $500 million at August 2009 which will result in accelerated growth of the balance that's held on the balance sheet during that time period. Accordingly, the $92.5 million reduction in the QSPE's debt balance will be funded through increased borrowings under the revolving bank facility on our balance sheet, cash flow from operations, and other capital sources.

The Company is initiating guidance at a range of $1.75 to $1.85 per diluted share excluding potential fair value adjustments. As noted in the release, this includes the impact of the higher estimated bad debt expense we will be required to record to build the reserves for future losses as we continue to grow the balance of retained receivables especially in light of the growth expected as we reduce the balance of receivables transferred to the QSPE.

The higher expected bad debt expense required to build the reserves for future losses and comparison against the very strong performance during the first two quarters of fiscal 2009 make it likely that our earnings per share during the first two quarters of fiscal 2010, excluding potential fair value adjustments, will be lower than the fiscal 2009 results.

Much of this analysis and more is available in our Form 10-K for the year-ended January 31, 2009 to be filed with the Securities and Exchange Commission later today. Tim, that concludes our prepared remarks. If you are ready we'll open up the lines for questions.

Certainly. Let's open the lines.

Thank you. (Operator Instructions) We'll pause just a moment to assemble our roster. We'll go first to David Magee at SunTrust Robinson Humphrey.

Hi, this is Chris Rapalje on the call for David. Just a few questions. First, I was wondering if you have any sense of what the current pace of insurance money coming into the region is from the storms and if that has sort of tapered off or where that stands now?

Chris, this is Tim. I think that maybe we can give you a feel for it in relationship to the last storm. Certainly, it is not the same type of situation. Not as much devastation occurred so the need for insurance and government help is not at the same level.

Okay, and do you think, though, that the help that has been applied for has been already received by most people?

I think it's an ongoing process. The areas that were damaged, there's a smaller area that was damaged, but they had more significant damage because it was storm surge, and we continue to see impact in the storm in our appliance sales. Although I would caution that it's not to the same degree that it was with Rita.

Okay.

Hi, guys, this is David Magee here, too.

Hi, David.

Can you talk about your newer category last year of furniture, how it's performing still and what ideas might you have for this coming year with regard to new merchandising initiatives?

Sure. Furniture is a very exciting category for us and it fits well with our business model.

Furniture generally has to be explained by commissioned sales person. It has to be warehoused and it's something we do well. It has to be delivered and it's at a very good price point for financing so it plays well to our business model. As you saw by the release and certainly by what I just talked about a 28.5% increase occurred in furniture in that fourth quarter.

We expect that furniture will continue to be strong. It may not be that strong going forward, but it will continue to be strong. We're refurbishing 30 of our stores and when we refurbish these stores it creates a larger area for furniture to be displayed and it continues to be a good product category for us.

We talked about Panasonic. We're very excited about Panasonic being on board. Plasma is a huge part of their business and we think it's going to really help us grow that part of our business.

Bosch dishwashers are very well thought of and a very important SKUs and so we're excited about Bosch coming on. And, of course, Electrolux which has really taken off certainly in the last year and we're excited about Electrolux, continuing the partnership with Frigidaire and Electrolux by expanding that.

Thanks, Tim. And last question for Mike. Would you care to guess directionally where fair market value might be going this year? I know it isn't possible to say the amount, but is it fair to assume we'll see a number maybe a lot less than last year?

I don't know if I would say I would assume, David. I would be hopeful, but it's just going to depend on what the financial markets do over the next year. I wish I had that crystal ball to give a good read on that. Fortunately, it's a non-cash adjustment and has nothing to do with the core underlying operations of the Company.

If things kind of stay as they have been recently and maybe gradually improve later this year, is it fair to assume that you'll see a much lesser adjustment on the negative side anyway?

If things stabilize and to your point, if things improve, it's not out of the question that the adjustments could start going the other way. We'll just have to see what happens. As long as we continue to perform in the key assumption that's been the variable this year and the discount rate. If the markets stabilize or improve, we would hope to see a smaller adjustment or a reduction.

Great. Thanks a lot and good luck.

Thank you.

We'll go next to Anthony Lebiedzinski with Sidoti & Company.

Good morning, Anthony.

Yes, good morning. Just wanted to see if you guys could clarify that the first quarter trends that you spoke about for sales, were those same-store sales numbers or total sales numbers that you spoke about, the February and March increases?

Total sales numbers.

Okay, and can you give us what the same-store sales break down for those were two months?

Sure. Our operational reports, they get modified slightly by the time it goes through our accounting department but I would say that in February we were down 6% and March right now we're trending down about one point.

Got it. Okay. And as far as the product margins what are you seeing there?

Well, I think the trend quarter-over-quarter is actually pretty positive. Now, I know quarter versus last year's quarter it's not, but -- for the product -- but I really am hoping and our expectation is certainly that with Circuit being out of the market that there's going to be less price pressure, but of course Wal-Mart is the Number 2 retailer now and that could lead to price pressure.

I believe, though, that with our business model and with Circuit that we actually match up much better for the Circuit customer and so I believe that we'll see less price pressure this year but as you know that can change at any time.

Also was wondering how much of your fourth quarter credit sales came from first time customers of people who shopped at Conn's for the first time? Do you guys have any sort of metric?

We looked at that one time. Mike, do you remember? I know, we certainly picked up new customers and it was exciting to see and it was at a much faster pace than before.

Unfortunately, I do not have a hard number I can give you, but it was exciting to see and certainly with that kind of an increase you would expect that that had to come from new customers and I think that it makes sense giving Circuit going out of business. The expectation in the fourth quarter of Circuit going out of business drove a lot of new customers into our store. Now, February and early March when they actually had their liquidation sale, pulled customers.

Uh-huh, okay, also, was just wondering if you guys have any idea what the weighted average credit score is now of your customers?

The statistic we have traditionally printed, put in our 10-K, which will be filed later today, is a 608 average score which excludes bankrupt accounts and customers with no score.

Okay. Thanks a lot.

You bet.

We'll go next to Richard Linhart at Opus Capital.

Thank you, and congratulations on the great quarter.

Thank you, Richard.

Could you just quickly review, assuming the securitization market doesn't come back and you continue to put the receivables on balance sheet, what your total net funding requirement you expect to be for the year? How much of that is covered by the asset-based line and whether there are any, there's a funding shortfall that you're going to look to fill in other ways?

As I previewed in my comments, believe at this time that the existing asset-based lending facility will be adequate to fund our needs through this fiscal year.

How big is the line?

It's a $210 million total facility.

And typically, if that $700 million or $800 million of revenue, how much financing would you expect to extend?

We would generally expect to see the portfolio grow in the range of, over the years it's been in the range of, call it $60 million to $100 million, so some of that would be funded by operating cash flow and other working capital and some of that will be funded by the borrowing facility.

Okay, terrific. Thank you.

You bet.

And our next question comes from Neil McConnell at Walker Smith Capital.

Good morning, guys.

Good morning.

A question on the bad debt expense. It was down quite a bit sequentially. Is that a function of just the hurricanes in the third quarter or can you help me with that one?

It's just a function of whether, how we allocate the receivables between transferring them to the QSPE versus retaining them on balance sheet. And we transferred, you may recall in the third quarter as the QSPE had to pay off the $50 million balance, we basically ceased transferring receivables for the first two months of that quarter and so all new receivables generated in the first two months of the quarter came on balance sheet.

And then as that debt was paid off, we then have the ability to start transferring receivables again to take advantage of the principal payments that were being paid by customers in the QSPE. So we went back to, or we went to a different allocation with more receivables being transferred into the QSPE to take advantage of those principal payments coming from those customers and continued to use that funding source.

Okay. And so as we go forward over the year, as the availability in the QSPE comes down given your comments, we should expect that number to increase just as a function of funding more on balance sheet?

Absolutely, and as I pointed out in my comments we expect that to be at a more rapid pace in the first half of the year.

Okay. And then two quick ones. There was no comment on store growth for this year, is that just a function of the liquidity profile right now?

Yes, essentially as a short answer and the comment that was made was, at this time we're still evaluating that based on capital availability. I mean, I think when you look at the opportunities that we have with our capital, the credit vehicle, refurbishing the stores, it's very exciting that we have market share that we can go after that was recently vacated so I'm not sure that going after a bunch of stores right now is the right tact to take.

Okay. And then last thing, thanks for the time. The S-3 you filed it looked like it was a mid-shelf. Is any color you can give us on what your intention there is to the extent you try to use it?

The shelf registration previously filed just provides us with the flexibility to work with our bankers to take advantage of opportunities to raise debt or equity capital to fund our capital needs whenever the timing is appropriate and if needed.

Okay, great. Thank you very much.

Thank you, Neil.

We'll go next to Rick Nelson at Stephens Inc.

Hi, guys.

Hi, Rick

Hi, this is Eric Hollowaty actually on the phone for Rick. He's on the road. Two quick things. The first is you mentioned during your prepared comments about shortages in electronics inventory and I was wondering if you're able to quantify for the results for the first two months of the year how much if at all you believe those shortages may have contributed to the comps that you cited I think it was minus 6 in February and minus 1 so far in March?

Can't quantify it for you. We can do some more work on that, but I would tell you that it did have an impact. It was not the more significant impact was the liquidation sale and I'll go back to my remarks that this huge DC that Circuit had just 25 miles north of Texas, and I believe they had a strategy of dumping as much products as they could into the healthiest -- the liquidation company -- into the healthiest markets in the United States.

Well, that's in Texas. That's part of Texas so it came straight down to this corridor. We did shops on a regular basis, on a weekly basis and I mean right up until the end, they were dropping product off. In fact, I know of one instance where there were 900 TVs dropped off at a store in the first days of March.

Right. Great. Thanks for that detail and just to make sure I understood, you said you thought that there was going forward sufficient inventory in sort of the key electronics product categories, correct?

Absolutely, and there have been some specific vendors that stepped up for us.

Great.

Toshiba, Panasonic and we've had some people who really helped us out. It was a close call more than it really was as a detriment.

Got it, okay. And one more thing on the financing. I heard you say that you believe that you're going to have 12 months of liquidity.

Can you give any more color on how you're thinking about alternatives to the VFN, the $100 million facility, and what sort of options you might be considering and is there a preference for one over the other?

Certainly, Eric, the options are looking to expand our existing bank facility.

Uh-huh.

And that would be a preferred option as we find opportunities there. The other options we have are using more third party consumer financing and using a little bit less of our own financing option, we'll stretch out that capital. You know, and then certainly other debt and equity capital raising opportunities of something that makes sense presents itself.

Great. Thanks guys. Good luck.

Thank you.

We'll go next to Chuck Griege at Blue Lion Capital.

Good morning, guys. Good quarter.

Great, thank you.

Thanks, Chuck.

Just had a couple of questions on the portfolio statistics you provide in the back of the release. Just curious, what percentage, or could you give me the account break down between on balance sheet versus the QSPE?

You bet. The on balance sheet total balance is roughly $108 million.

Okay.

So there's $645 million off balance sheet in the QSPE.

Okay. And how about the number of accounts?

I don't have that for you. That's something we could pull together later but I don't have that in front of me.

You referenced that Moody's action that occurred in February and they cited, I think, over 474,000 accounts. Is that approximately the number for your fiscal year end?

That would certainly be in the ballpark, yes, sir.

So your on balance sheet accounts would probably be in the 64,000 range?

That should be about right.

And using a balance of $108 million, it looks like the on balance sheet balance per account is materially higher than the average. Can you just comment on that? I'm curious-- why that's growing.

Absolutely. I think that's an easy question to answer and that is because those are all essentially brand new accounts where the off balance sheet portfolio is a seasoned portfolio with accounts.

You remember, if they have up to 36-month terms and so you're averaging accounts that are brand new to accounts that have one month left to pay and so you would expect in the ABL facility for it, for the on balance sheet to be a reasonably higher balance because the oldest account is six months old at year-end so everything is relatively fresh.

So directionally is it, call it $1,680 to $1,700 an account, is that historically about what you guys have averaged for the new accounts for a balance? Or has it grown?

I'm not sure we've ever looked at it from a point of origination. Normally, we just look at the overall outstanding portfolio.

Because year-over-year it looks like it's grown about 10%.

That's probably right.

Okay. And you provided in a presentation you gave back in January at Cowen kind of some down payment statistics and things like that. Could you provide us with those for the fourth quarter?

You know, we don't have the fourth quarter number right in front of us, but Tim does have -- he can talk to recent trends.

One of the things we've been able to do is pick the down payments up from an average percentage of 7.53% at the end of December. At the end of February that was 10.33%.

Okay.

So our down payments are increasing.

Okay. And that's very helpful, and then you disclosed on an annual basis the percentage of revenues that are financed?

Yes, and that will be in the 10-K this afternoon. That will be this afternoon, but about 62% is where we ended up for this year.

And how does that compare with the previous couple years?

We were, it was high 50s two years ago and it was 61% or 62% last year.

Okay. And then I guess the last question I would have, as you start to put more of the receivables on your balance sheet rather than transfer to the QSPE, can you give us maybe some sort of mix, how that would break down?

Between?

What would come on balance sheet as we move through '09 versus go to the special purpose entity?

As I pointed out in my comments, we would expect for the off balance sheet portfolio balance to be reduced to around $500 million by the August time frame.

And it's at about, what did we say, $645 million right now, and then would maintain right around that $500 million mark, dependent upon how much of the 364-day facility is renewed, it could go slightly higher than that if we renew a portion of that.

And so the rest of the portfolio balance, wherever we end up at the end of the year, will be on balance sheet over and above that call at $500 million level.

Okay. And as you start to put more receivables on balance sheet, how should we think about your provisioning as a percentage of the loans outstanding? How do you think about that?

Given that our historical loss rate has been over the last couple of years has run in that 3% to 3.2% range, so that roughly that percentage times the growth in the balance will be the increase to the bad debt reserve for future losses.

Given the success you've had in your credit portfolio, why would Moody's raise their expected historical loss rate?

I think I'd point to the first line into their rationale in their research rating action which said Moody's has a negative outlook on the consumer loan and credit card sector and believes the current economic environment makes several elements of Conn's consumer installment loans and credit card programs vulnerable to significant performance volatility, and I would add to that if you go back to when they issued the report on Conn's, they issued the report on many other consumer credit portfolios and they all said essentially the same thing.

So it's kind of boilerplate?

It was a broad rating action on consumer credit.

And I would add that, again, as I stated earlier, our recent trend, which we haven't reported, but our recent trend is even more positive.

And then I guess the last question I would ask is can you just explain the reaging data you provided was -- I don't think I had seen that before. What exactly is your reaging policy?

The reaging policy varies from the stage of delinquency, but essentially, I believe, that the reage policy is you can be reaged once every six months, you have to have payments, but I hate to talk to this just off the top of my head. We always require some sort of payment associated with the reage policy and what we can do if you'd like is off line we can give you more information and reference to that.

Okay. That would be terrific. Thank you very much.

But the good news is that it's trending in the right direction and it's really getting closer to the more historical average. We've cut the distance in half.

We were 200 basis points essentially over the historical average of our reage and we're now about 100 basis points above it.

Okay, thank you. Appreciate it.

Sure.

(Operator Instructions) We'll go next to Jeff Blaeser at Morgan Joseph.

Good morning, Jeff.

Jeff?

Mr. Blaeser, you might have your line on mute.

I'm sorry. Sorry about that. Good morning. Thanks for taking my question. On the consumer growth, can you give us a feel for the Circuit City impact, strong execution and/or consumers tightening credit elsewhere, perhaps flocking some added consumers to the Conn's stores. Any feel from those three areas on the growth in the fourth quarter?

Certainly, we saw that in the fourth quarter and I think Rick Nelson and, both Rick and David Magee have done some excellent work in estimating how much of the Circuit City market share is, in the categories that we sell, is close to our stores and the estimates are right around $450 million, and certainly we did see that customer.

And even though we have done, I believe, a very good and appropriate job of tightening credit, increasing down payments, doing the things that we feel are necessary at this time, we still have a significant advantage over the other financing programs that are out there in the market. So, again, our expectation is that we'll be back on a growth trend here very shortly.

At what point last year did you think you started to see some of the Circuit City flow coming in? I think their comps were down pretty good in the fourth quarter as well. But did you see a little bit of that ahead of time?

Second half of November. In fact, when we got to Black Friday, we were hoping and expecting and planning for a strong Black Friday, but to go from $12.5 million to almost $20 million, we were very pleased to see that and that's really when I think consumers started to see that the value in coming to a strong regional as opposed to going to a national chain.

Okay, and I think you might have mentioned it. Did the liquidations negatively impact the margins recently or do you expect that could develop?

Well, the way that we really worked it at pricing is we didn't chase any crazy deals at the very end that were uncreated product essentially that were on the floor. Earlier on, in their liquidation, the situation was that the pricing really wasn't that aggressive.

They didn't have the same support, we believe, from the vendors that we were getting. But they created a buying frenzy, nevertheless, in their stores just from the theme of the sale, going out of business sale is a pretty good type of sale to have, so, again, as we stated earlier our expectation is that margins would moderate.

And your low price guarantee does not include liquidations, correct, so you didn't have to chase them?

That's correct.

Okay. And then just cash flow from operations, do you have a number if you take out the receivables impact? I could probably do that on my own, but--

Well, if you consider the receivables on balance sheet grew about $99 million this year, that's probably about -- the other way you could look at it, Jeff, is if everything was in the QSPE and that ABL facility was treated the same way, that would have been $63 million worth of cash in-flow that would have been reflected in operating activities had it been in the QSPE.

Okay, and then on the first half guidance does that include fair value adjustments from last year?

Excluding.

It's excluding?

Yes, sir.

Thank you very much.

You bet.

And next we'll go to Forrest Tempel with FlyLine Partners.

Thanks, you all. Appreciate the ability to ask the questions. I'm kind of new to the story.

Can you all walk me through, if I have a guy that comes in and he buys an appliance and he misses a payment, does that become, it looks to me, we're trying to put together the last couple of three quarters worth in the non-current receivables, I can't find it three quarters ago, but then it's $31 million last quarter and then $41 million this quarter.

That's not the net charge-off though, is that right? So a guy comes in and he buys an appliance, if you can walk me through, basically, the collection to where a guy is no longer -- where we write him off. How does that work?

Are you talking about our write-off policy?

Yes. I'm just saying, a guy comes in, let's say my wife and I come in and we buy an appliance from you all and we put it through your credit department and then we miss a payment.

Does that go into non-current receivables or when does it do that and then when does it get charged off or when does it get reaged because I don't understand the difference between the three so I thought if you could walk me through a transaction, basically actually walk me through a transaction to where we as a Company lose money. Or we don't collect on the guy, I guess we repo it.

I'll give it a shot and then Mike will probably chime in here as well.

Okay.

So if I'm seven months past due, and I haven't made a payment in the last four months, that is when I'm a candidate to be charged off.

So is that a non-current receivable?

Correct.

And that goes on to non-current receivables when?

The first day you're past due, now what we report here is 60-day delinquency, so once you get to the point where you're 60 days past due, and this is on a contractual basis, and you show up in the delinquency schedule. But as soon as you're one day past due, you have hit our delinquency reporting and the collection team goes into action to help get you back on track with your payments.

So as I watch non-current receivables on our balance sheet, that's one day past due? Goes to non-current receivables?

What number -- I'm sorry, what number are you --?

$21 million that's on the balance sheet?

No, that does not mean that they are -- are you looking at the press release? Help me understand the numbers you're looking at.

Yes, non-current accounts receivables' net.

I'm with you now. No, that is the portion of the balance that is expected to be collected in, not in the first 12 months. Because the contracts are 36-month contracts, from an accounting standpoint, we have to show the current portion and then the portion that's expected to be collected after 12 months. Contractually, this doesn't have anything to do with delinquency.

I'm sorry, I didn't understand. Okay, so this guy comes through and he misses a payment, your collection agency goes on it, and my understanding from the release is you guys are now expanding that group in San Antonio?

Let me -- and first, thank you, Forrest. I need to correct something. I said seven months past due. It's really if you're four months past due and you haven't made a payment in seven months. That's our real policy so I got that a little confused.

It's not so much that we're expanding. What we're doing as far as head count, FTE count, we're not doing that. But what we are doing is shifting some of the personnel into an area where, first of all it's much easier to hire people who have a background in collections, it's much easier to hire a bilingual collector which is very important, and again, it's an area that's not as susceptible to significant weather systems like we have here in the Gulf Coast.

Okay, so in other words the collection group is not expanding. You're just moving folks over?

Yes, that's correct and we're really watching that expense.

Okay. That makes sense to me. So this guy goes through, our collection agency starts to try and collect from him, and he comes in and I guess reading the Ks, about half to 60% of your folks actually walk in the store and make a payment?

Correct.

And then reaging, is reaging going to be defined in the 10-K today? I won't take time on the call with it if it is.

It is not, but if you'd like to call me later, Forrest, I'd be happy to help you understand what the definition of reaging is.

Okay, and then the BK accounts are not included in our statistics. Have you guys got some kind of a trend we can follow on the bankrupt accounts?

It's not a significant portion of the portfolio, Forrest . It runs 1% to 1.5% of the total portfolio balance are active bankruptcy accounts that we're in the process of receiving payments or collecting

Okay. I may give you a call after this call just to follow-up on some stuff. Thanks very much.

Perfect. Thank you.

Thank you.

We'll move next to Neil McConnell with Walker Smith Capital.

Hi, guys. I have one follow-up. Mike, you mentioned one of the potential solutions going forward would be to go to a third party credit company?

Yes.

Go ahead, I'm sorry.

Sorry, go ahead.

Well, I was just thinking through that. If that would be the case and I don't know that's something that is way down the list of options or not, but help us, me, understand what that does to the profitability of your P&L because it would seem like that would certainly change the dynamic of your business given how much income you receive and profitability you receive from the credit operations.

Neil, this is Tim. I want to clarify this and then Mike can go ahead and give you the financial information you're asking for. When we talk about a third party credit, what we're talking about is, in our ad that we would have 10 SKUs or eight SKUs that have a cash option that's supported by third party credit.

We've done this many times in the past and generally what happens is they will approve some of that and that will reduce our credit penetration a little bit. But it will also drive a higher score into our credit portfolio and the way that this happens is, and I'm going to use a fictional number, but let's assume their cutoff is at 680, that their FICO score cutoff is at 680, well, then we'll take a look at that customer and we'll say you know what?

For us with a down payment, a 680 score, 12-month cash option that makes sense. So that actually improves the quality of our portfolio. But the idea is that we would not have to fund as many of the cash options that we advertise in our circulars as we currently do now by using a third party such as GE.

And to Tim's point, you would expect then it wouldn't have a huge impact on profitability because those cash option programs are no-interest programs where we are, typically not, the customer is paying out in terms and we aren't earning any interest income on that account, but we're still achieving the product profitable product sale.

But what we're not talking about is turning over our entire credit portfolio to a third party provider. That's not what we're talking about.

This would be something to supplement our top end programs for our top end customers.

Got it, sorry. I guess I misunderstood.

No, it's a great question.

I'm glad you brought it up. If you had that question others did. We didn't do a very good job of explaining it.

Thanks. And then one more quick follow-up. On the earnings guidance for the year, $1.75 to $1.85, the midpoint of that is basically flat year-over-year and you said the last couple of months have been trending at least positive if not as strong as the end of the year.

Does that just take into account some conservatism going forward for the rest of the year or is there something else at play?

Well, the other thing it takes into account is as we were talking about as we grow that on balance sheet receivable balance and we have to provide the bad debt reserve for future expected losses, that wasn't and when we were everything was off balance sheet we didn't have that accounting, that is going to put some pressure on the reported earnings just as we build that reserve.

Sure. Okay, great. Thank you very much.

You bet.

That concludes today's question-and-answer session. At this time, I'd like to turn the conference back over to management for any closing remarks.

Well, thank you. In closing, I just want to say our transition continues to go very smoothly. We have a stable, very stable, well seasoned management team here and that is not going to change.

I'm happy to report that Tommy will continue to have a meaningful relationship with this Company. And finally our business model continues to weather economic as well as real storms as it has for many years in large part due to our very hard working associates and team members. Thank you for your time today.

That does conclude today's conference. Again, thank you for your participation.