Conn's Inc (CONN) 2010 Q1 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 first quarter ended April 30, 2010. My name is Javon and I will 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 Tim Frank, the Company's President and CEO, and Mike Poppe, the Company's Chief Financial Officer.

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

Thank you, Javon. 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 our earnings release dated May 27, 2010, distributed before the Market opened this morning, which describes our earnings and other financial information for the quarter ended April 30, 2010. 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 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 President and CEO. 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 financing operations. In the big picture we believe the economic conditions in our markets have stabilized and are pleased with the improvements we saw during the quarter in sales, product margin and credit portfolio performance. I would remind you that the recession hit our markets the hardest beginning in the third and fourth quarters of last fiscal year and economic environment in the first quarter of last year was stronger than we are experiencing today.

In store performance net sales for the quarter were down 18.6%, as same-store sales declined 19.7%. We saw our furniture and mattresses and track categories decline only slightly, with the sharpest declines being felt in consumer electronics and appliances. Our consumer electronics revenues declined 31.7% after increasing 4.6% last year, on a 23% drop in units and a 12% reduction in the average selling price. Our appliance revenues declined 16% after increasing 3.5% last year, driven by a decline in unit sale, as average selling prices were up slightly. Track sales were down only 1.1% after a 6.7% decrease in the prior-year period, as strong laptop and netbook unit sales growth of 42% was offset primarily by declines in sales of video game equipment, GPS devices and camcorders. We saw our furniture and mattress revenue decline only 0.9% against a 7.6% increase in the year-ago period. Our repair agreement sales were down 19.1% during the quarter, largely as a result of the 18.6% decline in product sales.

The same-store sales performance was adversely impacted by the slowdown in economic activity in our markets since this time last year, evidenced by the unemployment rate in Texas increasing from 6.4% in January 2009 to 8.3% in April 2010, and our focus on improving retail gross margin while maintaining our competitive pricing image in the marketplace. Our gross margin increased to 41% during the quarter as compared to 38.1% in the prior year, primarily as a result of the 290-basis point increase in our retail gross margin this quarter as compared to the prior-year quarter, driven primarily by improved product gross margins. Additionally, contributing to the improvement in the total gross margin was an increase in finance charges and other as a percent of total revenues. The strong improvement in our product gross margins was due largely to our focus on improving pricing discipline on the sales floor while maintaining our competitive pricing image in the marketplace through competitive shopping of our competition.

In expenses SG&A expenses, while down $2 million, increased 460-basis points as a percent of revenues, primarily as a result of reduced operating leverage caused by the decline in same-store sales. Additionally, fees from the increased use of third-party credit from our cash option programs and higher debt amortization expense as a result of the recently-completed credit facility amendments partially offset expense reductions, negatively impacting SG&A expense as a percent of revenues by approximately 100-basis points. Finally, some impact to SG&A is attributed to higher servicing costs of the portfolio due to increased compensation for elevated levels of delinquency. These compensation levels should decrease as delinquency is reduced. Our inventory was down 2% at April 30th as compared to the prior-year first quarter ending balance and was up 40% compared to January 31st. We've increased inventory since year end as we have seen sales trends to improve and to address tightness in the supply of television inventory in the market and expand our furniture and mattress lineup. We are comfortable with our current inventory position and supply going into the second quarter.

In credit we have seen the credit portfolio performance improve and we believe our performance continues to compare very favorably against other consumer credit operations, especially in light of recent economic and credit conditions. The net charge-off rate was 4.6% during the first quarter as compared to 3% for the first quarter of last year, but down from 4.8% in the fourth quarter. We expect the dollar amount to be charged off during the second quarter of fiscal 2011 to show further improvement from the reduction achieved in the first quarter after peaking in the fourth quarter. Additionally, 60-day delinquency, which was 10% at January 31, 2010, was reduced to 8.6% as of April 30th. This 140-basis point improvement in the delinquency rate compares very favorably to the 40-basis point improvement we saw during the same period last year when the 60 day delinquency rate ended at 6.9%. We benefited in both periods from the tax refunds our customers typically receive in the first few months of each calendar year. As is typically the case at this time of the year, we are seeing the delinquency trend begin to rise. We've also seen the payment rate, the amount collected as a percent of the outstanding balance, increase as compared to the same period last year, a marked improvement.

The percent of the portfolio reage was reduced to 19.1% from 19.6% at January 31, 2010, as compared to 18.8% at April 30th last year. The balance of the portfolio reaged has been reduced by $10 million since January 31, 2010, and by $4.2 million since April 30th of last year. Our reage programs are effective in achieving our goal of assisting these customers to stay on track with their scheduled monthly payments when they experience hardships. Our experience over the past three fiscal years indicates that on average 89% of the reage balances successfully pay out. Clearly, based on the current charge-off, payment rate, reage balance and delinquency trends it appears that the underwriting changes we made this past year are paying off and are having the desired effect on portfolio performance.

Throughout the past year we adjusted our underwriting standards to improve the credit quality of receivables portfolio and to control the amount of capital used in the business. In addition to tightening the standards at lower end of the credit spectrum and requiring increased customer data verification we also increased our use of third-party credit providers to offer long-term, cash-option financing programs to our customers in an effort to preserve capital. We will continue to monitor our portfolio performance and capital requirements and we'll adjust our credit offerings, including the use of third-party credit, to support the long-term success of the Company. We are continuing to monitor capital availability and will resume opening new stores when we have more clarity around our ability to obtain the capital necessary to fund the credit portfolio.

I am encouraged by the positive trends we experienced across our retail and credit operations this quarter, driven by improved execution by our team. We are dedicated to giving customers the ability to purchase the products they need when they need them through our consumer credit at competitive prices when others simply can not. This is consistent with our long history of providing outstanding customer service and being a leader in the communities that we serve.

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

Thank you, Tim. This quarter, comparing to a quarter when we benefited from stronger economic conditions, we delivered diluted earnings per share of $0.25. One indicator of the current economic conditions in our largest market, Texas, is the unemployment rate, which was estimated to be 8.3% as of April, 2010 versus 6.4% in January of last year, roughly a 30% increase since the beginning of the first quarter of last fiscal year, though still approximately 160-basis points better than the national average. One point to note before I begin my discussion is that we adopted new accounting principals this quarter that resulted in the consolidation of our finance subsidiary that was previously accounted for off balance sheet. As a result, interest income and fees, provision for bad debts and interest expense of the securitization program are now shown in the income statement as opposed to the previous presentation of securitization income and the related fair value adjustments. Additionally, the receivables, allowance for bed debts and borrowing for the securitization program are included on the face of our balance sheet replacing the previously-present interest and securitized assets. The adoption of this change in accounting reduced GAAP earning per share by $0.01 for the first quarter of the prior fiscal year.

Looking at our results for the quarter total revenues decreased 17.7% to $197.5 million on a net sales decrease of 18.6% and a 13.1% decrease in finance charges and other. As Tim provided color to you already on the underlying changes in net sales, I will speak to the decline in finance charges and other for the quarter, which was driven by reduced interest income and fees, as the average credit portfolio balance outstanding declined to the same quarter last year and the interest income and fee yield earned on the portfolio also declined due to the higher level of charge-offs. Additionally, reduced credit insurance income, primarily due to lower retrospective profit commissions, impacted finance charges and other. The increase in the provision for bad debts this quarter was driven largely by the higher actual and expected net charge-offs as compared to the first quarter of last year. While actual net charge-offs for the portfolio increased $2.6 million during the quarter, as compared to the first quarter in the prior year, the allowance for bad debts declined approximately $2.2 million since January 31st after absorbing a portion of the higher net charge-offs incurred and as a result of a decline in the portfolio balance.

Also I would note that the net charge-offs of credit accounts declined by approximately $600,000 this quarter as compared to the quarter ended January 31, 2010. We believe the reduction in the allowance for bad debts is appropriate given the improving credit portfolio performance we have experienced. Additionally, as a result of the decrease in the balance of the credit portfolio and related reduction in debt balances we saw a reduction in net interest expense this quarter versus the same quarter last year.

Turning to our liquidity and cash flow, there was $420 million outstanding under the Company's borrowing facilities at April 30, 2010 before considering $21.7 million of letters of credit. As a result of the reduction in the total credit portfolio balance since January 31, 2010 we reduced the total debt outstanding by $32.5 million during the quarter. Given the current facts and circumstances we believe we have sufficient capital to fund our operations for at least 12 months before considering renewals or expansions of existing facilities, or other debt or equity capital-raising opportunities, and dependent upon continued compliance with the debt covenants under our various credit facilities. The sources of this capital as of April 30th included approximately $89 million of unused capacity under the Company's ABL facility.

At April 30th $55.4 million was immediately available to be drawn and the remainder will become available based on growth in the receivables portfolio held under the ABL facility and growth in eligible inventory. $10 million was immediately available under an unsecured line of credit and among other sources we have future cash flow from earnings, cash flow from receivables collections, third-party consumer financing programs, flexible inventory payment terms, the ability to sell or finance owner real estate, the ability to adjust capital investment programs and other operating and financing alternatives, including changing the amount of credit granted to our customers under our credit programs. I would note here that we utilized third-party finance programs to provide approximately $13.5 million in cash option financing this quarter and we plan to continue to use these programs. We will continue to work with our banking partners to explore the debt and equity capital markets to opportunistically raise capital or renew or replace existing credit facilities to continue to fund the operations of the Company. Much of this analysis and more is available in our Form 10-Q for the quarter ended April 30, 2010 to be filed with the Securities and Exchange Commission later today.

Tim that concludes our prepared remarks. If you are ready to open up the lines for questions we'll get started.

Certainly.

Thank you. (Operator Instructions). And our first question comes from David Magee from SunTrust Robinson.

Yes, hi, good morning, guys.

Hey, David.

I just want to, if I could, get a little more color, please, on the gross margin on the product side being so much better. Were there --

We just lost you, David, are you still there? David, if you could try to get back on and I'll try to answer what I think your question is, which is our margin in the, say, early fourth quarter we were more aggressive to try to preserve market share and to get our volume really kick started. We were unsuccessful with that and so we took a different tact, one of profitability to make sure that we were able to be profitable in the business. In addition, I have some market share information that came out in Q1 that shows that in many areas our market share actually expanded so we weren't really hurt from that tact. And, again, the discipline necessary on the sales floor, you have the commission sales environment and we already have so much that we offer between our credit offerings, between our next-day delivery, between our own in-house service, between our highly skilled and knowledgeable sales people that I did not feel that a cut-and-close mentality really needed to be on our floor anymore, so we went through a little bit of pain as we went through that.

But I would tell you that I think it was well worth it and that we have reached a point where hopefully we can keep these margins up there and stable and that we will not need to use them as a mechanism to grow the business. But I do believe that we should always leave it open as if we need to defend market share from time to time, but I'm fairly optimistic that we can maintain these higher margins, possibly with improved product mix. Certainly furniture and mattresses have higher margin, that we might be able to improve it even more in the future. But just as a few data points to throw out there, in Q1 total flat-panel TV, that would be LCD and plasma, we moved from Q4 of a share of 6.1% to a share of 9.5%. In LCD, which, of course, is the big growing piece we moved from a 5.4% to a 10.2%. We were down a little bit in plasma from 9.7% to 5.8%, but, again, LCD and total flat panel was up significantly. And we saw refrigeration, which is a key component of our business was up significantly, 10.6% to 11.2% overall in refrigeration. Side by sides, which we like to sell, we provide, I believe, a better mix for our vendors when we do that, we were up from 11.4% to 14.6%, so just some key points there. Can we get David back on or did we just lose him?

David, if you can requeue and press star one to get back into the queue.

I think David's about to get back on for us.

David, your line's open.

Great, thank you, Tim, for that answer. Are you seeing anything different with regard to your competition in your marketplace in terms of the pricing levels?

I really think that in most cases it's sort of mixed but we're seeing a more stable environment. Mix is a more stable environment for us in electronics business so really starting to see that stabilize. In some areas, in the appliance business, we're actually seeing some price points increase a little bit dependent on the category and dependent on certain price zones within the category.

Thank you. And, Mike, just one question regarding the -- your ability to finance the credit side of the business, you say 12-months out but it sounds like you've got a lot of flexibility. And is that -- are you being conservative when you say 12-months out?

The reason I say at least 12 months, David, is that the ABL facility and the ABS conduit facility mature in August of next year, so we're good until at the point that we have to renew those two facilities.

Great. Thank you and good luck.

Thank you.

Thank you, Dave.

And our next question comes from Scott Tilghman from Hudson Square Research.

Good morning, Scott.

Hi, Scott.

Wanted to quickly follow up on your answer to David's question just to clarify. Would it be fair to say that almost all of that product margin improvement was a function of your own internal actions rather than any improvement on the products themselves?

Yes, absolutely. And one piece that I left out is that our repair service agreement sales, that penetration has been improving as the AG lawsuit is hopefully becoming a distant memory for our customers. Also we've improved our training and focus on that end of the business, as well. There's been a significant push through our training and really our day-to-day management of that process, literally to the point -- this might be a little bit granular, but literally to the point that every day we look at every salesperson and we have a standard that they're supposed to meet and if they miss it we're following up with them and we're coaching them on a daily basis to try to get it back up, so it's from that standpoint. And then, also, our merchandising team has done a really good job of increasing the inventory. You've seen that in some of the -- what we've been reporting, which allows the sales people the ability to mix up better.

Great. And then, secondly, with real estate costs being down and really not much in the way of a near-term pipeline, have you given any thought to beginning the expansion again to maintain some of those market share gains that you alluded to earlier?

Well, I absolutely am chomp -- I'll use the southeast Texas colloquialism, chomping at the bit, which means that absolutely I would love to go back out there and pick up some of those opportunities and hopefully we will be able to, but certainly it would not be responsible of me to say that we're in a position to do that right now as we look at our capital structure and take the appropriate actions to get it back to where we can do that. But I think that the thing that I look at -- every metric that I look at in our credit facility, every metric that I look at in the retail side shows signs of improvement against the current trend, so that if we can get the funding, which we are, of course, looking at that opportunity and looking at ways to do that, we should be able to get back into an expansion mode.

Great, thank you.

Thank you.

And our next question comes from Rick Nelson with Stephens, Inc.

Thank you and good morning.

Morning, Rick.

A follow up on the improvement that we're seeing sequentially in sales, as well as our credit statistics, is it internally generated improvement, or do you think we're seeing some using in the external environment in your markets?

Well, I think it's a combination of events. It's difficult for me to assess which is more impactful. I will tell you that as this Company has gone through -- as many companies, retail companies have gone through challenging economic times and, of course, in Texas the economic and credit events came later than in other areas, we certainly have been sharpening our saw. I believe we've been improving our operations. We've had to. And there's just been an intense focus, every aspect, every corner of this Company. But, again, every metric I look at is improving. Every key metric, certainly. The morale, traffic is up, just everything seems to be going in the right direction. And, again, I hesitate to be overly optimistic, but I just see that we're on the right path and look forward to this next quarter as we continue to see these improvements, I believe.

And any comment as to what you're seeing in the early going of Q2, May, in terms of sales and credit statistics?

Sure, just talking primarily with the sales, when you look at sales right now, especially in the last two, two-and-a-half weeks, we've seen some much improved numbers. Now, of course, Memorial Day is falling on a different -- slightly different time period, so I'm going to say this two ways. Right now it would indicate we're down 19%, 19.5%, but Mike and I believe that 500 or 600-basis points of that has to do with the Memorial Day shift and what's going to happen is that the way the month ends -- and again, primarily most of our business is not take or take out the front door, primarily most of our business is a delivered business, and so what we expect to see that a lot of that volume will then roll into June. And again, the most recent written volume trend in the last two weeks has been positive.

So the upward slope of the trend line that we've been experiencing since January I believe will continue and I think we have a very good opportunity certainly in June. On the credit side, we see improvements or flat essentially in the charge-off piece of the business. We see some what of a seasonal issue with delinquency, but I would consider it to be minor. I think the biggest issue that we have right now with credit is that we've had to shrink the portfolio and tighten the credit so that it is impacting some of the percentages. When I look at what we've done this past year in underwriting and how it's impact the overall business, the thing that I would say to our investors that are listening here, because there are probably mixed feelings about how we approached it, but I believe you want a management team that's going to be conservative and that is going to do the right thing in an economic downturn to protect assets and that credit portfolio and that's exactly what we've done.

So I believe we've moved in the right direction and I believe that we will continue to see in the second quarter certainly improved write-offs and the delinquency is a little bit different and hopefully we'll see improved delinquency trends, as well. A lot of that has to do with our ability to improve the balance growth in the second quarter, which hopefully we'll get to a point with our capital restructuring to where we can do that. We get to that point to where we can get back into a growth mode it really changes the dynamics of our business. And we believe the economic climate in our markets has changed to where our consumers can start taking on more personal debt, which allows them -- when they come in, as an example, let's say on a $299 or $399 washing machine, it allows us to step them up into a $599 or $699 washing machine. But we love it, the customer loves it, and certainly Whirlpool or LG or whoever the vendor is they like that because it improves product mix. That is our model, that is the uniqueness of our model and so I think we're getting back on track. That was a soliloquy wasn't it, Rick? That was a little bit too much. Was that -- did that answer your question?

No, that's terrific. On the growth mode and potential capital raise, I guess I'd be curious any feedback you've received from your non-deal road show and the options available to you from a capital standpoint and how you would rank them in terms of attractiveness?

We -- Rick, this is Mike. We always get good response, we believe, when we go out on the road and meet with investors and get to tell the story and help them to understand the story. As we've talked about previously, we continue to work with our banking partners looking at the right opportunity to raise capital for the Company, and make sure we do something in the best interests of the Company and our investors. And we will continue on that path with them, and we'll keep everybody updated as there is more information to report.

Okay, thank you.

Yes, sir.

And our next question comes from the line of [Justin Cantowich] from Jefferies.

Hi, guys, how are you?

Hey, Justin.

Good morning, Justin.

Good morning.

Where do you see -- in regards to the credit portfolio as we get towards the end of the year, where do you ultimately see the charge-off rate going to?

We see significant improvements and we have very detailed forecasting tools. My experience is it's a little dicey to really give guidance on something like that this far out, although I would say that we're going up against credit charge-off comparatives, for lack of a better way to say it, that I would think that if we continue on the trend we are now that we would see significant improvements.

And to Tim's point, Justin, with the portfolio shrinking, as we've talked about the last couple of quarters, we tried not to talk as much about percentage and as much about dollars, and so we saw a decrease from fourth quarter to first quarter. Tim's already commented that he expects to see another decrease in the second quarter from first quarter, and so that kind of gives you the trend line we think we're on.

But I would tell you and it was in the discussion and maybe me restating it here would be worthwhile, there is a seasonal uptick in reference to cash collections. That's the primary metric I look at in reference to collector productivity and there was a seasonal uptick in reference to absolute cash. But what's more important to me is that it was better as a percentage than it was last year when you look at that, and then when you look at 60-day delinquency, when you look at the reage trend, when you look at write-offs, every single thing went in the right direction and consistently, and so really just going down the right path in reference to the credit. One of the things I'm not sure we do a good job of is really stating that, you know what, that credit portfolio is best-in-class. Put that charge-off performance against anybody and it's best-in-class. We get labeled as sub-prime because we help hard-working, blue-collar individuals who may not have the highest credit scores in the world, but we help those individuals and they are very loyal customers to us and I think that they pay tremendously well and I think it shows in the results.

Okay, great. And as far as the Texas stimulus for appliances that went out, I believe it was in early April, was all the benefit received in this quarter, or is there some lag to what we might see in the second quarter?

I think what we saw was some benefit, certainly less than what I was hoping for, although our market share numbers indicate that we did well certainly in refrigeration. When you look at -- there's an appliance [E-Star] tax-free weekend in Texas over Memorial Day. We're much more optimistic about that, quite honestly, just because it's in combination with a huge sales holiday and we really pulled out all the stops in reference to advertising to push that, so we're optimistic about that, I will tell you that. So that would, just like you're saying, that impact that quarter.

Okay. So when we look at this quarter we shouldn't really expect any of the tax stimulus benefit to impact basically Q1?

As far as the federal rebate program we think that was essentially in Q1. There will be very little spill-over to Q2, but as Tim talked about state of Texas has a big program this weekend in conjunction with Memorial Day weekend that we'll see in the second quarter.

And I don't want to beat a dead horse, but my opinion is that it was certainly not the same as Cash for Clunkers, which essentially people got a lot of money to buy a cheaper car that saw immediate savings on a -- every time they went to fill up their car. You're talking about buying a much more expensive product to get an energy savings benefit that it wasn't as readily knowledgeable as, say, when you go to -- instead of putting $40 in your car you're putting $20 in your car. So at least for us, we saw some benefit but it wasn't overwhelming and I don't want to overstate it.

Okay. Thanks, guys.

Thank you.

(Operator Instructions). And, sir, I'm showing no questions on the line.

Great, thank you, Javon.

Well, very good. Well, in closing, again, I want to thank each of our over 3,000 loyal employees, I want to thank our shareholders, our owners of our Company. Our employees are dedicated at executing at the highest level every day. Of course I want to thank our wonderful customers. We know that many of you represent second and third generations of families, including my own, that have been loyal Conn's customers for decades. And I also want to take a minute to note that we're seeing a clear improvement in our retail and credit operations. So thank you for your interests in our Company today and thank you for participation in the call.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, you may now did disconnect. Have a great day.