Conn's Inc (CONN) 2010 Q2 法說會逐字稿

Good morning, and thank you for holding. Welcome to the Conn's, Inc. conference call to discuss earnings for the second quarter ended July 31, 2010. My name is Karen, and I will be your operator today.

During the presentation, all participants will be in a listen-only mode. After the speakers' remarks, you will be invited to participate in a question-and-answer session. As a reminder, 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 and Executive Vice President. I would now like to turn the conference over to Mr. Poppe. Please go ahead, sir.

Thank you, Karen. Good morning, everyone, and thank you for joining us. I am speaking to you today from Conn's corporate offices in Beaumont, Texas.

You should have received a copy of our earnings release dated August 26, 2010, distributed before the market opened this morning, which describes our earnings and other financial information for the quarter ended July 31, 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 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 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. Our comments will be in the context of our separate retail and credit segments.

In the big picture, we believe that economic conditions in our markets are stabilizing, though they continue to be challenging. While we are pleased with the significantly improved earnings contribution of our retail operations this quarter, our credit operation continues to be challenged in this difficult economic environment.

The pretax income of our retail operations improved by $3.2 million as compared to the year-ago period. This improvement was driven primarily by expense reductions and higher gross margin. However, due to the higher level of delinquencies in the credit portfolio, compounded by the declining portfolio balance, our credit operations' pretax contribution fell to a $433,000 loss in the second quarter. The loss was due to lower interest earnings, higher expenses to combat the higher level of delinquencies and increased credit losses.

I would remind you that the recession hit our markets the hardest beginning in the third and fourth quarters of last fiscal year, and the economic environment in the first six months of last fiscal year was stronger than we had experienced so far this year.

Net sales for the quarter were down 6%, as same-store sales declined 6.4%. We saw our furniture and mattresses and lawn and garden sales grow over 10%, while we declined in consumer electronics and appliances. Our consumer electronics revenues declined 12.5%, after decreasing 4.2% last year, despite a 10% increase in units due to a 20% reduction in the average selling price, similar to industry performance. This is compared to a 31.7% decline in the first quarter of this fiscal year.

Our appliance revenues declined 7.7%, after increasing 2.6% last year, driven by a decline in unit sales, as average selling prices were up slightly. This is compared to a 16% decline in the first quarter of this year. Tracked sales were down 3.5%, after essentially being flat in the prior-year period, as growth in accessory, MP3 player and desktop computer sales were offset by declines in sales of videogame equipment, GPS devices, camcorders and digital cameras. We drove a 17.2% increase in unit sales of laptop computers that was offset by a 14.8% decline in the average selling price.

We saw our furniture and mattress business grow 15.8% on top of a 10.7% increase in the year-ago period, continuing a very positive growth trend in this category.

Lawn and garden sales grew 17.9% during the quarter, and our repair service agreement sales were down 5.8% during the quarter, as improvements in the penetration of sales of these contracts were offset by increased contract cancellations due to a higher credit account charge-off situation.

Same-store sales performance was impacted by the slowdown in economic activity in our markets compared to last year and by our focus on improving gross margin.

Our gross margin increased to 38% during the quarter as compared to 37.7% in the prior year, primarily as a result of the 180-basis-point increase in our retail gross margin this quarter as compared to the prior-year quarter, driven primarily by improved product gross margins. Partially offsetting this improvement in the total gross margin was a decrease in finance charges and other as a percent of total revenues. The improvement in our product gross margins compared to the prior-year quarter was due largely to improved focus.

During the second quarter, we were more aggressive from a pricing standpoint than we were in the first quarter in an effort to drive our sales volume and move clearance items. We expect to improve our retail gross margin in the third quarter.

In expenses, our SG&A expenses were down $1.5 million, increasing 150 basis points as a percent of revenues. SG&A expenses for the retail segment were reduced by $3 million, while credit SG&A expenses increased $1.5 million, primarily as a result of our efforts to address the higher level of delinquencies in the credit portfolio. We expect this improvement in SG&A to continue.

Our inventory was down slightly at July 31 as compared to the same quarter last year, and was up compared to January 31. We have increased inventories since year-end to accommodate recent sales trends and to expand our furniture and mattresses lineup. While our inventory level is a little heavy relative to our sales volumes, we are comfortable with our current inventory position and supply going into the third quarter, and believe we can reduce the level of inventory without a significant impact to gross margin.

In credit, our credit customer continues to face challenges and expected improved portfolio performance will come more slowly, given the economic conditions we are experiencing today. The dollar amount charged off during the quarter was consistent with the amount charged off during the first quarter. However, we expect charge-offs during the third quarter of fiscal 2011 to be somewhat higher than the level we experienced this quarter as we work through accounts impacted by the economy.

Additionally, 60-day delinquency increased 40 basis points during the quarter to 9% as of July 31. This 40 basis point increase in the delinquency rate is in comparison to the 70 basis point increase in the delinquency rate we saw during the same period last year, when the 60-day delinquency rate ended at 7.6%. As is typically the case at this time of the year, we are seeing the delinquency trend rise seasonally.

The percent of the portfolio reaged was reduced by 70 basis points during the first quarter to 18.4% as compared to 18.9% at July 31 last year. The balance of the portfolio reaged has been reduced by $14.3 million since January 31, 2010 and by $11 million since July 31 of last year.

We have also seen the amount collected as a percent of the outstanding balance increase as compared to the same period last year. This is a key measure of collection success.

Throughout the past year, we adjusted our underwriting standards to improve the credit quality of the receivables portfolio and to control the amount of capital used in the business. In addition to tightening the standards at the lower end of the credit spectrum, we've also increased our use of third-party credit providers to offer long-term cash option financing programs to our customers.

Going forward, we plan to decrease our use of non-interest-bearing cash option programs to be more consistent with what the industry is currently offering. We expect this reduction to reduce the amount of expense we incur to provide these programs. Subsequent to July 31, we tightened our underwriting standards in an effort to further improve the quality of the portfolio and improve future credit portfolio performance. We will continue to review and revise our underwriting standards as necessary.

To offset some of the impact of the tightened standards, we are expanding our offering of a third-party-provided rent-to-own financing option to our customers. We have tested this program during the second quarter with very favorable results, and look to expand the program to approximately 80% of our stores before the holiday selling season. We currently have 11 stores offering the rent-to-own financing option. We expect to have this program in 30 stores by the end of September.

We will continue to monitor our portfolio performance and capital requirements and will adjust our credit offerings, including the use of third-party credit, to support the long-term success of our Company.

While we are seeing the economic conditions stabilize in our markets, we expect the macroeconomic conditions to continue to be challenging in the short term. That being said, we are taking action to maintain our profitability and improve our results through gross margin improvement, expense reduction and improved credit quality. We are dedicated to giving customers the ability to purchase the products that they need when they need them through our consumer credit offerings at competitive prices when others cannot.

This is evidenced by recent reporting from TRACKLINE showing improved market share trends in TV, refrigeration, laundry, furniture, computing, lawn and garden and digital cameras. This is consistent with our long-term history of providing outstanding customer service and being a leader in the communities that we serve.

I am now going to turn the program over to Mike Poppe, so he can share additional financial information with you. Mike?

Thank you, Tim. This quarter, compared to a quarter when we benefited from stronger economic conditions, we generated diluted earnings per share of $0.07. One indicator of the current economic conditions in our largest market, Texas, is the unemployment rate, which averaged 8.2% during the most recent quarter versus 7.5% during the same quarter of last year, roughly a 10% increase. Though the economy was weakening during the second quarter last year, we did not feel the full effect of the recession in our markets until the third quarter.

As a reminder, we adopted new accounting principles during the first quarter of this year 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 from our securitization program are now shown in the income statement as opposed to the previous presentation of securitization income and the related fair value adjustments. The prior-year periods have been adjusted to reflect the change.

Looking at our results for the quarter, total revenues decreased 7.3% to $213.7 million on a net sales decrease of 6% and a 13.4% 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 compared to the same quarter last year and the interest income and fee yield earned on the portfolio also declined.

The decline in the yield was due largely to the higher level of charge-offs, which resulted in increased reversals of accrued interest and an increase in the reserve for uncollectible interest. 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 second quarter of last year. I would note that the net charge-offs of credit accounts were roughly equal this quarter to the amount charged off in the first quarter. While actual net charge-offs for the portfolio increased $1.8 million during the quarter as compared to the second quarter in the prior year, the adjustment to the allowance for bad debts declined approximately $1 million as compared to the prior-year adjustment. As a result, there was a $500,000 increase in the allowance for bad debts for the credit portfolio during the second quarter of the current year.

Additionally, though the balance of debt outstanding has declined, as a result of the borrowing cost increase due to our credit facility amendments at the beginning of the year, interest expense increased as compared to the same quarter last year. Remember that during the third quarter, the additional interest fee charged on the revolving facility and the securitization program will increase by $800,000 compared to the amount paid in the second quarter.

Turning to our liquidity and cash flow, there was $430 million outstanding under the Company's borrowing facilities at July 31, before considering $21.7 million of letters of credit. As a result of the reduction in the total credit portfolio balance since January 31, we have reduced the total debt outstanding by $22.6 million this fiscal year.

Given the current facts and circumstances, we believe we have sufficient capital to fund our operations and scheduled debt repayments until the maturity of our revolving credit facilities in August of next year. This is before considering renewals or expansions of existing facilities or other debt or equity capital-raising activities, and it is dependent upon continued compliance with the debt covenants under our various credit facilities.

As a reminder, monthly principal payments of $7.5 million will begin in September to start repayment of the bonds issued under our securitization program. The payments will be made out of the proceeds of the collections of the receivables held in the securitization program. As a result, we will fund a larger portion of the receivables generated each month through our ABL facility.

The sources of our capital as of July 31 included approximately $79 million of unused capacity under the Company's ABL facility. As of July 31, $57.1 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 owned 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 $16.1 million in cash option and rent-to-own financing this quarter, and as Tim mentioned, we plan to expand the use of the third-party rent-to-own program. Increased use of these third-party financing programs will allow us to reduce the amount of credit granted under our consumer financing program and thus reduce the amount of capital we must generate or borrow to fund that program.

We have engaged our commercial and investment banking partners to present and review the various debt and equity capital market alternatives available to us to raise capital to allow us to renew or replace our existing credit facilities. The options currently being discussed could result in one or more of our existing credit facilities being repaid in full and not renewed or extended. Based on what we know today, we expect our weighted average costs of borrowing to increase between 200 and 400 basis points compared to the costs incurred in the recently completed quarter.

Much of this analysis and more is available in our Form 10-Q for the quarter ended July 31, to be filed with the Securities and Exchange Commission later today.

Tim, that concludes our prepared remarks. If you're ready, we will open up the line for questions.

Certainly. Let's take some questions.

(Operator Instructions) Dan Binder, Jefferies.

Actually, several questions for you. I will just try and picture them here quickly. First, on the new financing of credit facilities, do you have a sense of what the timing looks like on that at this point? That's the first question.

Second question, I was wondering if you can just give us a little bit more color on sales by month. I know you said July was positive. I'm just curious how that has carried through here into August as well.

This is Mike. I will take the financing question. Certainly, as we indicated, we are working with our commercial and investment partners, looking at multiple alternatives. I can't give an exact time frame, but certainly we would rather have it wrapped up sooner rather than later. But at this time, I can't give a definite period when we will have it completed.

But as we stated in the comments, we do still have close to a year before the revolving facility is mature. So we have a little time to work on it. But we are very focused on resolving the refinancing.

Mike, I would also add to that, and just sort of reiterate what has already been said, about the use of GE Money and the use of this rent-to-own program through third party, that our capital usage continues to decline as we find other sources to finance our customers and get those sales made.

On your second question, sales by month for the quarter, same-store sales were down 13%, just a little over 13% in May. They were down right around 5% in June, just a little over that. July, they were up 2.1%. And as far as how we are tracking in August, I would say we are really closer to June than we are July. But we are looking at certainly taking costs out and really looking at other things. So hopefully, we will get that back on track to those July numbers.

But we are seeing improved margin in August versus July, too.

Certainly.

On that note, your gross margin has moved around a little bit here the last couple of quarters. I sense you're trying to balance the profitability with the top-line sales growth. As you look out across the back half of the year, trying to find that balance, would you expect the gross margin rate to be something closer to what we just saw in Q2, or something closer to what we saw in Q1?

Definitely closer to what we saw in Q1. In Q2, we were also trying to move some clearance items and back-to-school type items, some changes of mix, to where it's certainly heavier toward computers and laptops, those types of things. And we were a little bit more aggressive in July. You're right, we are trying to find that balance between sales growth and margin.

Although I do think that considering the comps we are going up against, of course, competition is always out there and always aggressive. But certainly, I would hope it would be closer to Q1.

Okay. And then on credit, you have a light moving around here on credit. I guess could you just give us a sense of -- I'm not sure if I missed it -- where the portfolio was in terms of size at the end of this quarter? And then what you expect that to look like in the back half of the year -- is it going to be roughly stable? It sounds like you are expecting write-off rates to rise, so what kind of a bad debt reserve should we expect in the back half of the year?

From a total size of the portfolio, Dan, the balance at the end of the July was $706 million. I'm sorry, the second part of your question --

The second part of the question was as you look out to the back half of the year, with the use of more third-party credit and changes in programs and so forth, how would you expect that to look as we progress through Q3 and 4? Are you going to try and grow the size of it, shrink it, keep it roughly stable? Just directionally.

A lot of it has to do with the capital situation. In either case, when we first went public, what we experienced was a lower penetration rate and a higher growth rate. What I would like to see us get back to is that type of a situation. It is a more prudent use of capital and allows us to grow our store base at a faster rate.

And so regardless of the capital situation, the credit portfolio, what we are really looking at doing is contracting it a little bit, looking at moving some of the higher-risk paper to that rent-to-own. Makes sense, higher yield; again, it's going to a different company. But there is a higher risk there. The top end going to GE Money.

What that will do is increase the yield on a smaller, sort of more nimble portfolio, and that is really what we are looking at. There is a marginal reduction at this point, which we will believe will not hurt sales because, again, we will have GE Money and we will have the rent-to-own.

Now, that was part of your question. I thought the other part had to do with what our future expectations on write-offs and delinquency. Is that correct?

Yes, I mean, it sounded like in your formal remarks, you are expecting the write-off to be somewhat higher in the back half. I was just curious what we should expect in terms of the bad debt reserve that is flowing through the P&L, what we should look at. Will it be a reserve in excess of those write-offs? Is it similar to Q2? Just a little bit of color on that line item.

So what we're looking at is in the back half and third quarter, I believe we will have a slight increase -- again, seasonal. I don't think we are going to see a big spike, and we are certainly managing it as it is a seasonal adjustment.

Mike, maybe you want to talk about the reserve situation and what your expectations are at this point.

So we would hope that we have appropriately baked in the expectations for future charge-offs into the reserve estimate. And where the reserve relative to actual charge-off goes will really depend on how the economy continues to play out and how the future charge-off performance expectations look as we move deeper into the year.

I would add that Mike and his team -- and of course we agree with this philosophy -- are very conservative in reference to the accounting practices, and certainly we took a pretty good reserve this past quarter.

I have a few other questions, but I will let someone else go first, and then maybe I can follow up later on the call.

David Magee, SunTrust Robinson Humphrey.

On the rent-to-own business, can you give us a little more color about sort of the rationale for that and how you plan to manage the risk in that business? It seems like it is sort of a -- it can be messy, is my sense, unless you're really hands-on with that part of it.

It is not our rent-to-own business. It's a third-party company that is inside our stores that we are working very well with. Typically, if a customer is declined or if the down payment is extremely high because they have a lower score, we will do what we call a TO, or a turnover, and we will walk that customer over to this other financing option within the store. And it allows us to save the sale, so to speak. That third-party provider then takes the risk of the product. And in the case that they actually have to repossess a product, we do not see that product back.

So they take care of all of that part of it, the repossessions and --?

That is all their business plan; we just facilitate the product for their sale.

We are not underwriting or servicing that transaction.

Okay. And then on the video side of the business, I am curious what you are seeing at the higher end with regards to the newer products coming into the fold. Whether LED or [IP]-ready, 3-D products, what are you seeing with the sell-through of those items?

We are very enthused about what we are seeing with the 3-D, as well as Internet-ready TVs, which are across all formats, and optimistic that eventually -- not anytime soon -- but eventually that it will help with the pricing pressure that we continue to see in the TV category, that is really across the industry in reference to TV price points coming down.

We do a very good job of mixing that product and have been recognized by our vendors in reference to doing that. Particularly Samsung has recognized us recently. And with the commissioned sales force, with the additional training, constant training -- I mean, in a given sales meeting, we will have 13 separate vendors doing training. So we have really stepped up our training program. And of course, the use of credit as a leverage point to help step up into that better product as well.

So we are very excited about it. And I've heard some of the other comments made by other contemporaries, and I think everybody pretty much is excited about it.

What percent of your TV business would the newer-gen products be roughly? Is it 25%?

So, when we look at that, it may be 25% in units, but it would be more in dollars, and I would need to get the exact amount for you. It has been growing pretty quickly for us.

And would the pricing for that subset be relatively stable, would you think, right now, or over the next few months?

Right now, it is fairly stable. The problem is, of course, that there is somewhat of a glut -- I don't want to use the word glut -- there is quite a bit of product out there in the market regardless. And you know as an industry, we like to take the newest and best product and chop the price down as quickly as possible to try to drive volume. Not us necessarily, just as an industry, we are pretty aggressive with pricing.

And then for that -- again, for that subset of business, would you say that you are seeing increased competition from discounters out there? It seems to me that some of the headwinds you are facing right now has to be competitive, above and beyond just sort of the economic [malaise] in which you operate.

It's interesting. When we look at margin segmented out by product, it is not electronics that we have any issue with. In fact, our electronics margin is really almost competing with our furniture margin. It is not so much that. And we do very consistent and aggressive competitive shops three times a week.

The area that we have a little bit more challenging is in appliances, and right now, competitively speaking, it is much more aggressive in significant discounting in appliances right now. Sears, different folks, are getting very aggressive.

Good. Thank you, and good luck, Tim.

Rick Nelson, Stephens.

I'd like to follow up on the financing plans for the credit portfolio. What size of capital commitment would you be looking for, and how do you rank the alternatives that are available to you at this point?

The sizing right now, we are at about $430 million in outstanding debt balances as of July 31, with a small amount of letters of credit. Certainly, we would look to, at a minimum, replace what we have and hopefully have -- and when we're done, have some capacity to manage and control the business the way we would like over the next couple of years, as we continue to see the economy and work to improve the business results.

As far as ranking the alternatives, right now, we are looking at multiple alternatives, and we are pursuing more than one alternative, and don't really have one ranked necessarily ahead of the other. And we will -- when the right opportunity, we will close the right transaction to get this behind us, Rick.

Can you tell us what led to the decision to segment your results between retail and credit? And would the Company consider selling the credit operation?

I will give an answer, and then Mike can give his, in reference to the segmenting. I like the segmented approach from an operational standpoint in reference to managing the two divisions. I think it's extremely helpful in tracking these items separately, and I think the presidents of both of those divisions feel the same way.

So from an operational standpoint, it makes a lot of sense. And then in many cases, key stakeholders in the industry, I think, kind of felt like -- are you a retailer or are you a bank? And I think clearly, we are a retailer that has a financing operation, and you can clearly see that in the more recent numbers.

And then really, we wanted to make sure that it was clear to the stakeholders, all the different numbers, the transparency that everybody has been asking for, really for years -- what are the numbers, the contribution to profitability of retail, what are the numbers in the contribution of credit. Interestingly enough, we always felt both contributed; both normally do. I think that right now, clearly, retail is contributing more as credit works through these accounts.

And that is the beauty of the model, is the diversification of the business plan, so that if retail is struggling, credit can pick it up, and vice versa, which is what we saw this quarter.

But as you know, Rick, and as Tim mentioned, the investors have been asking for this information really, I imagine, since we went public. And internally, especially as the capital markets and the economic environment has changed, we have changed internally the way we look at some of the data and taking a much more focused look at the way the two operating segments perform. And as a result, we have initiated providing that information to the market.

And as far as selling the credit end of the business, I know many retailers have gone this path. We have a unique position, I believe -- positioning with our credit. I don't call it subprime. I'd call it low prime for some of it.

And by getting some of the lower scores to the rent-to-own, and getting some of the higher and increasing the yield, I think it is a very valuable -- not only profit driver so far as shareholders I think it makes a lot of sense. The way we run it is completely separate from retail. So many of the risks that other retailers have experienced with that credit portfolio, we simply do not, because we manage it differently than some of them have in the past.

And I consider it to be a value in helping a commissioned sales floor, highly-trained commissioned sales floor to be able to help our customers into products that hopefully offer them more value, either a better brand or a better-featured product, which generally has more margin. And of course, so it would aid in our effort to try to drive the margin up as well.

So no, certainly not interested in selling it. Are we interested in shrinking it a little bit? Yes, I think we are, and I think that is exactly what we are doing right now, at a very measured, well-thought-out approach.

Thank you for that color. Also, like you to assess the promotional environment. I know you mentioned that the appliance business has become more difficult. Is that a recent phenomenon, Tim, or was that the case throughout the quarter?

I think it has been that case throughout the year. I think it is a consistent challenge. I think it is just kind of the first time anybody has asked specifically about electronics or electronics margins.

Electronics is always competitive. Electronics is always an exciting product category, where prices are driven down. I think what we are starting to see is that the appliance industry has started taking a cue from electronics and kind of getting out of the gates very quickly in reference to their promotional activities. And the competition has really heated up with Lowe's, Home Depot, Sears. I mean, you are just seeing a lot of that type of price point activity; not so much cash option activity, but more price point.

And I know you didn't ask, but I will say that when we look at sort of high-end cash options, 36 months, 24 months, really the only retailer out there other than us doing a lot of that has been Best Buy, and I think that certainly plenty of people are able to keep sales going without using 36 months to the extent that maybe we have historically.

So we will continue to do 36-month cash options, but we will rein that back a little bit.

The merchandise margin pressures that we saw sequentially, do you think -- what is the direction there? Do you think you can stabilize things, or should we anticipate --?

Well, for us, there is a little bit of seasonality to margin in the second quarter, and certainly -- so it did not necessarily surprise me we were down a little bit from the first quarter. But we were up 200 basis points -- Mike, it was 200 basis points, right -- same time last year?

180.

180 basis points from the same time last year. So I am optimistic about the margin and what we look at in the third and fourth quarters.

Now again, the wild card is always how promotional do things get. And again, with the increased inventory position that a lot of these vendors have, we might see some pretty aggressive pricing in the third and fourth. But we are showing a lot of discipline in our merchandising and also in our stores. And certainly, I am watching it every single day, and David Trahan, our President of our retail organization, is. And with our model, you would expect that we would be able to hold our margin at a certain point.

And the inventory that you referred to at the vendors, is that on both sides of the business, electronics and appliances, or is it --?

It is really electronics. The appliance manufacturing process and how quickly we can get that product is much faster than electronics. Electronics tends to be outsourced in different components, manufactured across various countries, both in Asia and in North America, and then a lot of times assembled in Mexico. So just the actual supply chain process is longer.

Thank you very much, and good luck.

Dan Binder, Jefferies.

On the same topic there, in terms of supply chain, we've heard in the industry that LCD is built up in terms of quantities, and for a good part of the first half, we were hearing LED technology was seeing shortage of components. I'm just wondering if you can just give us a little bit more color on what is happening in the supply chain, and then your access to product. Any color would be helpful.

Sure. We don't have any problem with access to product. In fact, many people in our industry have de-committed product, creating this issue of having a lot of excess product out in the market. And what that does, and historically has done and certainly is doing now, is create special purchase opportunities for us. Again, since a lot of this product is actually assembled in Mexico, we're one of the first logical stops as far as shipping.

But in addition to that, we are known for our consumer -- for wanting this type of product, and the vendors work with us on it. As they work with all retailers out there, but we have been able to enjoy that.

Is there a lopsided supply of the older LCD technology versus the LED? In other words, is the LED still a problem because of component shortages, or is that now back to where it should be?

I really don't think that is an issue any longer. I don't think there is necessarily those types of component problems at this time. But I do know what you are referring to.

I was just trying to draw a contrast between what is happening in the supply chain toward the older-technology LCD versus the newer technology LED.

It's not really an issue with the supply chain, as much as sell rates, as LED and 3-D technology really starts taking off. And then the value certainly for plasma is significant in our markets. One of the reasons is just that real estate is less expensive in some of our markets and some of the Northeast markets, and so the houses are a little bit bigger and there is more room for a larger set. So a lot of times, it is sort of a -- a thought process is, okay, do I want the higher technology, the better-featured TV, or do I want to go with a larger screen plasma type TV set.

So (multiple speakers) back to credit -- I'm sorry -- were you finished with your answer?

I was just going to say, the middle -- the LCD TVs are just not selling as well as the two ends of the technology spectrum.

Okay, I see. Moving on back to the credit for a couple questions there. First is, as a percentage of your sales, I think you talked about the financing representing somewhere around 60%, 61% historically. Has that -- given the change in the programs and so forth, are you still expecting that rate to hold?

No, no -- of our own credit, no; overall, certainly. And what we are seeing in most recent trends is a reduction. Whether or not that is going to hold is yet to be seen, but certainly that is what we are working toward.

So what do you think would be a good rate to use, just from a modeling perspective?

From a modeling perspective, eventually, I would like to see us get to 55%.

Okay.

And then maybe more in the future, depending on how that works out. So we will do it in a very conscientious, well-thought-out manner.

Right. That will be -- you will move towards that level gradually, I suspect.

Yes, because we don't want it to impact sales. And part of that is making sure that as we bring that down that we have other sources to finance that customer, either through GE Money or through this rent-to-own option -- so we don't lose the sale.

Understood. Okay. And with the changes in the credit card industry, new guidelines and so forth, does this impact your business as it pertains to the way you are collecting or late fees that you can charge?

We actually are governed by state as opposed to the more recent national changes. So it does not, at this point.

It does have some impact on the revolving portion of our portfolio, but that is less than 5% of our portfolio, Dan, so it's not a significant impact. And the limits and curbs we have seen, we have generally already fit within those limitations. So we don't see any significant impacts of the laws.

Revolving is a very small part of our overall portfolio.

Okay. What is the principle look like on the portfolio at this point, per quarter -- in terms of us helping model through that?

I'm sorry. Can you ask that question (multiple speakers)?

What does the principle paydown look like on the credit portfolio every quarter?

So the second quarter, the payment rate was about 5.2%, up about 10 basis points from same quarter last year. And then we ran 5% payment rates in the third and fourth quarter last year.

Okay, so on a per-quarter basis, I would just take the portfolio times that rate, and that is essentially -- is than an annualized number, or --?

That's the monthly collection. That's the monthly -- yes, that's the average for the quarter, that's the monthly rate. So about five -- so $700 million portfolio, we collect about $35 million a month in total payments.

Understood. Okay, great. And then as you look at the type of credit that you are getting from -- or the consumers are using through GE, does that tend to be -- I guess where I'm going with -- has their credit underwriting tightened or loosened, or do they tend to focus more on the higher quality or higher FICO score customers, or have they been more flexible in the last couple quarters?

They have not been more flexible in the last couple of quarters as far as what we've seen. It doesn't mean that they won't in the future. They've been very good partners, by the way.

What they focus on is the higher scores, and in many cases, what we are able to do is if they decline a customer, we are able to put them on our books, and if that score is still sufficiently high enough, to where we will step them down in cash option. So instead of doing a 36-month cash option, we might be able to do an 18- or a 12-month cash option. Because the score is still very high.

And so what we are seeing is it is actually improving a segment of the score base in our model. So they may take the very, very high scores, but it still is to the right side or to the north of our average.

Okay, I understand. And then on your tax rate, it seems to move around quite a bit quarter-to-quarter. I think that is in part a function of the (technical difficulty), the provision in Texas. And I'm just curious as you look to the back half of the year, any rough estimates on what that tax rate might look like?

Dan, it depends. As you model it, it depends on -- as you know, the Texas margin tax is based on gross margin. So it depends on your -- kind of how you are projecting top line and margins. And then obviously, the remainder of tax expense is on sales tax. So to the extent that your pretax expectation in your model goes up, then the tax rate should come down slightly. To the extent your pretax drops from where it is, that tax rate will go higher.

So the core rate is about -- am I still correct that is around 35%? And then you have this margin rate that gets blended in in Texas?

That's right.

Okay. Is that margin rate on total gross profit or just on product gross profit?

Total gross profit, is the (multiple speakers)

Okay.

-- way to think about it.

And then just my final question, which is related to your maintenance agreements and service revenue. Did I hear correctly in your formal remarks that the penetration rates or the attachment rates on that are actually rising, but the offset is just cancellation on those credit card agreements or credit agreements that have been written off?

That's correct, and you will see when we file the 10-Q later today, in the segment financial statements, you will see for the retail segment that actually their repair service agreement commissions are up versus last year on slightly lower product sales. That the offset is the increased cancellations due to the higher charge-offs.

Okay. So if we think about this in the back half of the year, assuming that the charge-off rates are somewhat higher and the penetration rates remain healthy, we will probably still see that come down as a percentage of overall sales?

It depends on your expectation of top-line sales and sales growth.

Okay.

They move independently. I mean, sales -- the retail segments should hopefully hold or improve their repair service agreement penetration. And then the impact relative to the credit segment will be dependent on your expectation for charge-offs.

Right, right. Okay. Thanks.

We have no further questions at this time. I would like to turn the conference back to Mr. Tim Frank for any further remarks.

In closing, I want to thank our financial partners, vendors and employees for their dedication to our Company. I especially want to thank our customers, who in many cases represent the second or third generation of their families to shop at Conn's.

In addition, I would like to express to all stakeholders that we continue to pursue solutions to our capital needs, reduce costs and improve margin. Economic challenges as well as consumer credit challenges are not new events for our Company or this management team. I believe we are taking the appropriate steps to ensure the long-term stability and future success of our Company. Thank you for your interest in our Company, and thank you for your participation in the call today.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.