Conn's Inc (CONN) 2009 Q1 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 first quarter ended April 30, 2009. My name is Amber. I'll be the operator today.

During the presentation all participants will be in a listen-only mode. After the speaker's 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 L. Frank, the Company's CEO and President, and Mr. Michael J. Poppe, the Company's Chief Financial Officer.

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

Thank you, Amber. 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 June 4th, 2009 distributed before the market opened this morning, which describes our earnings and other financial information for the quarter ended April 30th, 2009. If for some reason you did not receive a copy of the release, you can download it from our website at conns.com.

I must remind you that some of the statements made in this call are forward-looking statements within the meaning of the Securities and Exchange Act of 1934. These forward-looking statements represent the Company's present expectations or beliefs concerning future events.

The Company cautions that such statements are necessarily based on certain assumptions which are subject to 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 and President. 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, and the current status of our credit and financing operations. We continue to gain market share in our key categories of electronics, appliances and furniture, despite the current challenging economic environment.

This is evidenced by our elevation in national ranking among consumer electronics retailers from the 40th to the 32nd position, as reported by TWICE magazine. Additionally our LCD unit sales during the first quarter increased by 45% over the prior year, and plasma units increased 72%.

Our appliance and furniture business has continued to exceed industry performance. Our appliance business was up 3.5%, and furniture and mattresses were up 6.4%, and we believe these categories were down in their respective industries. I'm very excited about the long term growth opportunities for our business.

We face economic challenges today, but we believe they are temporary. We have a long track record of success through economic cycles and consistently delivered increasing sales and profitability since our founding. We believe our unique value proposition and excellent customer service differentiate us from our competitors, and we expect to continue to capture share in existing and new markets.

Mike will discuss in more detail, later how we strengthened our capital and liquidity position during the quarter. As a result, we are restarting our new store growth with plans to open three to five new stores by the end of this year. We delivered solid performance for the first quarter, a 5.8% growth in total revenues, improved credit portfolio performance and earnings consistent with the expectations we previously set.

We achieved these results despite the short term headwinds caused by the liquidation sale of a key competitor in our markets, Circuit City and shortages of certain television products. Net sales for the quarter rose by 2.6%, as same store sales declined 4.6%. The net sales growth was driven by a 6.4% growth in consumer electronics, 3.5% increase in appliances, and a 7.6% growth in furniture and mattresses.

We experienced some weakness in our track category during the quarter. We have taken specific measures to address this by expanding the brand selection in computers and our promotional activities. We believe our sales growth is driven by aggressive promotional activity, our consumer credit advantage, and a more effective merchandising layout in our remodeled stores.

The same store sales performance was adversely impacted by Circuit City's liquidation sale during the quarter. Shortages in certain television products, and the previously mentioned performance in our track category. I should note that we continue to see tight supply of television inventory, and are working closely with our vendors to ensure we have adequate supply of the products we need to drive our business.

In addition to completing our store remodeling plan this summer, we are developing plans to open three to five new stores by the end of the year in our existing markets that will allow us to continue to leverage our current infrastructure and advertising dollars. Our gross margin increased during the quarter as compared to the prior year, primarily as a result of the favorable non-cash fair value adjustment. We did see product gross margin stabilize at 21.1%, relative to the last couple of quarters in the prior fiscal year. Though it was down from the 22.7% achieved in the first quarter of last year.

A change in the revenue mix, partially offset the decline in product margins, as a result of the higher growth rate experienced on finance charges and other. SG&A expenses were relatively flat as a percent of revenues, excluding the non-cash fair value adjustments, despite the decline in same store sales. We were able to achieve this performance primarily through reduced advertising expense, but without reduced coverage.

We will continue to pursue opportunities to remove costs from our business, and believe there is still room for additional reductions. Our inventory decreased from $1.3 million per store at the end of the prior year quarter, to $1.2 million at the end of the current year quarter, due in part to constrained availability in the electronics category. As a result, inventory increased only 1.3% year over year, with an increase in the store count from 69 stores to 75 stores.

We were able to reduce the net charge-off rate to 3% during the first quarter, as compared to 3.4% in the fourth quarter of last year and 3.2% in the first quarter of last year. Additionally 60 day delinquency was 6.9%, versus 7.3% at January 31st, 2009, and 6.4% at the same time last year. The percent of the portfolio re-age was flat as compared to year-end at 18.8%, though it was up from 15.5% at the same time last year, although, in absolute dollars the balance of re-aged accounts has declined since year-end.

I would remind you that this increase was the result of our targeted program assisting customers impacted by hurricanes Gustav and Ike. The re-age programs have been effective in achieving our goal of assisting these customers in staying on track with their scheduled monthly payments when they experienced hardships as evidenced by this delinquency and net charge-off performance.

As you may remember from the previous conference call, we had tightened our underwriting standards due to the then existing economic conditions, and the total outstanding balances in our credit portfolio decline. Given the solid performance of the credit portfolio, we have returned to our credit underwriting standards to our historical guidelines and expect the credit portfolio will return to tracking the overall growth of the business.

With respect to the recent Texas Attorney General lawsuit filed last week, we will cooperate fully with the Attorney General's office and look forward to discussing the issues raised. We were proud of our 118 year history of delivering outstanding service to our customers, and are committed to continued customer service improvement.

Looking forward, we are going to continue to grow our business through strong merchandising, consumer credit availability and excellent customer service. We were able to give customers the ability to purchase the products that they need, when they need them, through our consumer credit, at highly competitive prices when others simply cannot.

Guaranteed low prices, our in-stock guarantee, professional sales associates, next day delivery, flexible credit and in-house service, give us unique competitive advantages.

Our business model continues to produce results during these economic times. Our sales results for the month of May showed improved trends in the business with net sales up in the low single digits. 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. We are very pleased with the performance we delivered during first quarter, despite the headwinds of a challenging economy, the Circuit City liquidation sale, and shortages of certain television products.

As Tim discussed, this performance was driven by the strength of our consumer electronics, furniture and mattress sales, and strong credit portfolio performance. As a result, we delivered GAAP diluted earnings per share of $0.51, or $0.47 excluding the favorable non-cash fair value adjustment of $1.4 million. This performance is consistent with the guidance we provided in our last earnings call.

Additionally, as a result of our solid operating results and the reduction in the managed receivable portfolio balance and related debt balances, we were able to grow our capital available for future growth by approximately $50 million during the quarter. We are very happy with our performance in this challenging environment, and it demonstrates the resilience of value and consistent performance of our model.

Total revenues grew 5.8% on a net sales increase of 2.6%, a 12.2% increase in finance charges and other, and a favorable non-cash fair value adjustment. Growth in finance charges and other for the quarter was driven by a higher average total managed portfolio balance and lower borrowing costs for our QSPE.

The increases in finance charges and other were partially offset by higher net charge-offs on receivables held by the QSPE, and reduced retrospective profits earned under our credit insurance program as a result of higher claims by our credit customers due to the hurricanes experienced in September, 2008. The favorable non-cash fair value adjustment was primarily the result of a 250 basis point reduction in the discount rate risk premium input used in the discounted cash flow valuation.

SG&A expenses declined by 50 basis points as a percentage of revenues, before considering the 50 basis point positive impact of the fair value adjustments. Excluding the fair value adjustments, we were able to hold our SG&A expenses flat as a percentage of revenues despite the decline in same store sales.

Since we began retaining receivables on our balance sheet during the third quarter of the prior fiscal year, we have been required to provide a provision for bad debts to reserve for future expected net credit losses on receivables held by us and not transferred to our QSPE. During the three months ended April 30th, 2009, we recorded a provision for bad debts of $1.4 million, as compared to $259,000 in the prior year.

Approximately $900,000 of the increase in the current quarter expense was directly related to increasing the bad debt reserve for the growth in receivables reported on our balance sheet. Because we were not retaining receivables on our balance sheet during the first quarter of the prior fiscal year, and as a result had no debt outstanding, net interest expense was higher during the current fiscal year.

To protect against rising interest rates over the next 24 months, the Company entered into interest rate swaps to lock the interest rates on $30 million of its variable rate borrowings, under the revolving credit facility. $15 million of the hedges expire in one year, and the remaining $15 million expire in two years. Adjusted diluted earnings per share, excluding the fair value impact in both periods, were $0.47 in the current year quarter, as compared to $0.56 in the prior year. This is consistent with the guidance we provided in our year-end conference call.

Also affecting the EPS comparison was the provision for bad debts on retained receivables, which totaled approximately $600,000 net of taxes, or $0.02 per share. Turning to our liquidity in cash flow, the Company and its QSPE's financing facilities provides $660 million of total financing commitments, with $560 million of those commitments being long term in nature.

As a result of our ability to reduce the total portfolio balance since January 31st, 2009, we were able to reduce the total debt outstanding on our balance sheet by $3.2 million, while the QSPE reduced its total debt outstanding by $46.5 million. Combining our strong operating performance and reduction in the customer receivable and related debt balances of the Company and the QSPE, we increased our capital available for future growth by $49.7 million during the quarter.

Given the current facts and circumstances, we believe the QSPE and the Company have sufficient combined liquidity to fund our operations for at least 24 months before considering renewals or expansions of existing facilities, or other debt or equity capital raising opportunities, and dependent upon sales growth and store opening plans. The sources of this liquidity as of April 30th include approximately $128.5 million of unused capacity under the Company's ABL facility, of which $63.3 million was available to be drawn at April 30th 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, including adjusting the amount of credit granted to our customers. 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 have been reducing the volume of receivables transferred to the QSPE, allowing it to pay down the $92.5 million owed under the note at January 31st, 2009.

As of April 30th, 2009, $46 million remained outstanding under this commitment, and we anticipate continuing to reduce the balance of receivables held by the QSPE to allow it to repay this amount by August, 2009. As a result, we will continue to see accelerated growth of the balances held on balance sheet during the second quarter.

Accordingly the $46 million reduction in the QSPE's debt balance is expected to be funded through increased borrowings under the revolving bank facility on our balance sheet, cash flow from operations, and other capital sources as we grow the balance of receivables on our balance sheet. We reaffirmed our earnings guidance per diluted share, excluding potential fair value adjustments of $1.75 to $1.85.

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 second quarter fiscal 2009, make it likely that our earnings per share during the second quarter 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-Q for the quarter ended April 30th, 2009, to be filed with the Securities and Exchange Commission later today.

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

Let's take some calls.

Thank you. Today's question-and-answer session will be conducted electronically. (Operator Instructions) Our first question comes from David Magee with SunTrust Robinson Humphrey.

Yes, hi. Good morning, guys. Congratulations.

Thank you, David.

Thank you, David. Good morning.

Thank you for the.

Can you give us a little color regarding on the CE category what are some of the offsets that you see with regard to the strength you see in LCD and plasma that keeps the comp, I guess under 10% and do we have any period in which we begin lapping that impact, so it's not as much of a drag going forward?

Yes. I can answer both of those. The primary issue in that category is micro display as it becomes less popular, although to us it's still an exciting category in the larger screen sizes, as we like to say, of course, in Texas people like things bigger.

So, there's lots of space in these homes in Texas and Oklahoma and Louisiana, allowing for larger screen sizes, but it has declined at a much faster rate than we would have hoped and, of course, you do see the large increases in plasma and LCD and, of course, we're very excited about the new LED product that has come out. So we see that older technology is starting to decline, not in the larger screen sizes.

It's actually increasing when you get above 70 inches. Some of the offsets we see in the future are the 240 megahertz product, the LED product and, of course, price compression occurring in larger flat screen sizes, and there is a point when certainly we'll lap the issues associated with the decline in the micro displays, and we should see another increase, another bump up in the electronics category when that does occur, but off the top of my head, I don't know what that time frame is.

And, Tim, when you said that sales in May had tracked at, did you say low single digits? Was that a net sales number or are we talking about comps at that point?

That's an overall sales number. Comps, we have an unaudited, and since May just finished, it's kind of hard for me to talk in specifics, but I will tell you that comps were slightly negative, but in a much better position than in the first quarter.

Then with regard to gross margins, did you see much sequential improvement, the deeper you got into first quarter and as you moved into the second quarter, are you seeing better stabilization there, relative to liquidation periods?

I wish I could say that is true, but it's a challenging environment, very competitive and certainly we're going to do whatever it takes to not just maintain our market share, but as we have been, go out and get more market share, which we think is very important at this time, but it is stabilizing. We're not seeing any dramatic movement in either direction with the gross margin.

Thank you. I guess lastly, how have sales been over the past week, since the Attorney General's suit was announced?

They've been fine. As I actually pulled and looked at them right before I walked in here, just to refresh my memory and the day that the suit was announced we were up almost 10%.

Okay. Great. Thanks a lot.

Thank you.

Thank you.

And our next question comes from Jeff Blaeser with Morgan Joseph.

Good morning and thanks for taking my question. Tying into Circuit City a little bit, how long do you expect the liquidation sale to negatively impact the business? Any pull forward activity that you expect to linger?

I would expect at this time that, that's not impacting us at this time. I mean that ended early to mid-March for us, as far as what occurred, and then it pulled forward through. So I would expect that it had been completed in that first quarter, that impact.

Okay. And then on the pricing side, particularly with your low price guarantee, can you give us a feel for how much Circuit City may impact that? Is there an opportunity for margin expansion, or not much of an effect going forward there?

Didn't take long for that void to be filled. We're getting some of that business. Others are and I think with Wal-Mart, I think that our industry is always going to be very competitive.

So as much as I would hope that we'd be able to see margin appreciate, and it may as time marches on, because quite frankly, I think other markets are becoming appealing to LCD and flat panel manufacturers and we may see some appreciation in the margin because of that, but as you know, the retail market in this particular industry is very competitive. But again, I would restate what I said earlier today, that we've not seen significant swings in either direction.

Okay. And then ex-electronics, how are product margins holding up in the other categories? Obviously, you mention that prices are coming down on the TV side, and that's a little bit more competitive, but ex-that are margins, how are they faring?

They're holding fairly well. Appliances which quite honestly, you're fully aware that over the last several years there's been an industry decline in appliances, and we've been able to maintain our margin through improved mix because of merchandising, but also because we have a trained sales floor which is able to show and really demonstrate the features and benefits of better quality product. So the mix of that product has helped to stabilize that margin.

Okay, great. Thank you very much.

Thank you.

And our next question comes from Rick Nelson with Stephens.

Thank you and good morning. Congratulations on navigating a tough environment. Mike, did you say financing capacity, you have the capacity to grow receivables for 24 months?

Yes, sir.

And previously I think you had talked about 12 months.

We had talked about 12 months, but given the cash flow from operations this period, and the fact that we actually saw a reduction in the portfolio balance that spun off additional cash flow, and allowed us to reduce leverage in the QSPE and our own balance sheet, we added $50 million of additional financing capacity for future growth that helped us extend that out to in the 24 month time period.

Rick, this is Tim. I'm going to add a little color commentary to that. Any time that we tighten the credit underwriting standards and reduce the credit penetration, and we don't have to do a lot of that, just a little bit, there's an inflection point, and at that point we start generating a lot of cash, and that's essentially what happened in the first quarter.

At any time that we really need to generate cash, we can do it. We have to figure out another way to drive sales besides relying so much on credit, and we're able to do that because we have an excellent merchandising program.

And to expand on Tim's point, we can tweak that finance penetration rate, and it could be longer than 24 months.

Thank you for that color. Also the tighter credit standards that you're referring to, any way to quantify how that may have affected comps in the first quarter?

There's no way to quantify it. It did certainly impact it, but Rick, I would say that it made us better on the merchandising side and I think that the credit certainly in these times of capital austerity, I'll say for lack of a better way to say it, that we need to be able to drive our business more through the merchandising segment and I see our team stepping up and doing just that.

And these tighter credit standards, how do you see that affecting comps as the year unfolds, and might you indeed loosen things a bit to drive more sales?

Absolutely. And, in fact, we were able to generate enough capital, cash in the first quarter, by tightening that we have been able to go back to our more historical standards in reference to underwriting and we do believe that it will help with the sales. It's been a recent event and we've seen some positive results from it already.

Can the TV shortages you referred to, I noted the inventory decline per store, how are you addressing that and how do things look at this point in time?

They're improving. I would not say that the issues that we see currently are anything like what we saw a few months ago, and so we're certainly improving screen size selection is improving.

I'm particularly excited about the new technology that we're seeing in this LED product in the 240 megahertz, because that gives us strong features and benefits to demonstrate to consumers to get them to buy higher priced items and, of course, much more value for them.

Thank you very much and good luck.

Thank you.

(Operator Instructions) We can pause for a moment to give anyone with a question a chance to signal. Looks like we have no further questions at this time. I'd like to turn the call back over to Mr. Timothy Frank.

Thank you, Amber. Thank you for your questions. I want to thank everybody for their time today. I want to thank our 3,200 employees and their families. I want to reiterate that this Company over the last 118 years has been built on customer service. We have many, many customers that represent second and third generation in their family and certainly we appreciate them, our employees and your time today. Thank you for your time.

This concludes today's conference. Thank you for your participation.