Conn's Inc (CONN) 2011 Q4 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 fourth quarter ended January 31, 2011. My name is Allie 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.

Ask a reminder this conference is being recorded. Your speakers today are Theo Wright, the Company's Chairman and Interim President and CEO; Mike Poppe, the Company's Chief Financial Officer; Ray de la Fuente, President of the Company's Credit Division; and David Trahan, President of the Company's Retail Division. I would now like to turn the conference over to Mr. Poppe. Please go ahead, sir.

Thank you, Allie. Good morning, everyone, and thank you for joining us. I'm speaking to you today from Conn's corporate offices in Beaumont, Texas. You should have received a copy of our earnings release dated March 31, 2011 distributed before the market opened this morning, which describes our earnings and other financial information for the quarter ended January 31, 2011. If for some reason you did not receive a copy of the release you can download it from our websites 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, Theo Wright, Conn's Chairman and Interim President and CEO. Theo?

Thanks. And I'm pleased to be participating in Conn's fiscal year-end and fourth-quarter earnings call. Many of the comments today will focus on strategy and how we intend to return Conn's to high standards of performance.

The first step in evaluating Conn's strategy was to identify our customer and competitive advantages. We'll discuss this further on future calls, but Conn's clearly has a core customer. This customer is responsible for 70% to 85% of our sales and has an average credit score of about 600 and average household earnings of about $36,000 a year.

Our strongest competitive advantage comes from our unique ability to provide this core customer credit. These consumers do not typically have significant disposable income or ready access to revolving credit. Conn's gives its customers the ability to purchase today a product they want at a reasonable price to make an aspirational purchase.

Our value to consumers is reflected in our high rates of customer retention with about 70% of our sales by invoice to repeat customers and about 80% of our receivables balances held by repeat customers. Conn's is a retailer just like any other and Conn's competes based on price, selection, presentation and other factors. Our professional commission paid sales force also provides a competitive advantage.

We do compete effectively in our core product categories. But our credit offering combined with a sales force that can deliver the credit to the customer gives us an additional advantage. We should be able to maintain consistent competitive product gross margin since we provide a unique value to many of our customers. Conn's has historically earned gross margins near the high end of similar retailers.

Over the last 18 months, as we faced the potential need to reduce the amount of financing we've provided to customers, we experimented with ways to compete based primarily on price. This approach didn't drive sufficient traffic to our stores to overcome the loss of margin, as we saw in the third and fourth quarters of fiscal 2011.

We've returned to our past practice; it will take us several more months to better determine pricing that creates maximum profitability. We will compete and compete aggressively on price, but we will not be the lowest priced source for all of our products all the time.

Our competitive advantages have been sustained for many years. Our credit advantage has become even more valuable as other sources of credit for our core customer have gone away. The strong recent performance of the public rent-to-own companies is one indication of the value of an alternative for consumers.

Our core customer and competitive advantages are reflected in our store performance. Stores with high income market demographics have low rates of credit penetration, low sales in total and per square foot and don't perform well. We've evaluated all of our stores and will close five stores.

The local market demographics and Conn's number of locations in the area have led to a conclusion these stores can be successful for us. The selected stores have not been successful even during years when the Company's overall performance was stronger. We've also decided to allow two leases to expire at the end of their lease terms. The seven stores mentioned are all near other Conn's stores.

With our unique credit offering, high customer retention and customer relationships with sales associates with believe we can retain many of the closed locations' customers, particularly credit customers, and improve five to eight adjacent locations. These stores will be closed without requiring layoffs of any personnel; we'll simply redeploy personnel in adjacent stores.

The vast majority of our stores are performing well, even in the more challenging recent periods, and providing returns on capital invested that exceed our cost of capital. Where the market area served has sufficient population of our core customers we have no underperforming locations.

Our strong performing stores fall into two general categories -- one, urban, high density population areas with a significant number and proportion of households with income below $50,000 a year. Our highest performing urban locations have high percentages of the population who are nonwhite, most often Hispanic. Two, smaller markets with a significant percentage of households with income below $50,000 a year. Examples include Orange, Texas; New Liberia, Louisiana; Lake Charles, Louisiana; and Corpus Christi, Texas.

Although we are not at all ready to start store openings, we are redeveloping our ideal store model. There are opportunities in the type of markets where we perform well. As our portfolio of performance and capital availability continues to improve and retail performance stabilizes, we may reevaluate our store plan which does not currently include any planned store openings.

Using our clear definition of our core customer and competitive advantages we've evaluated our product lines and identified a number of low-priced items that do not fit our model well. These items represent an insignificant percentage of sales and did not contribute to profitability.

Other products, like our core products in television, appliances, furniture, bedding, computers, and lawn and garden, fit our model well and we perform well. Furniture and bedding are particularly attractive growth opportunities and our same-store sales growth in these higher margin products continues. Furniture and bedding represented 11% of sales in the fourth quarter and has the potential to represent a much higher percentage of sales given the square footage devoted to these categories.

Turning to our consumer credit portfolio, one benefit of concerns the last year over Conn's access to capital is we learned how to deliver third-party credit offerings to our customers. Our relationship with GE Money provides us an opportunity to extend long-term promotional credit without using our own capital. We're also exploring ways to use GE Money to provide other competitive credit offerings to higher credit quality customers.

The transition of the rental store kiosk alternative to rent-a-center, or RAC, acceptance should be completed shortly. The transition to RAC acceptance combined with more commitment and better execution by our Company gives us a meaningful opportunity for additional sales that do not require our capital.

64% of our stores have RAC acceptance and in these stores approximately 5% of sales month to date were through this alternative channel. A number of stores are approaching 10% of sales through this channel. We believe we can deliver 6% to 10% of total volume, much of which will be incremental through RAC acceptance.

Credit is our strongest competitive advantage and our professional sales force knows how to deliver credit to the customer. We will have a competitive credit offering for every customer. Credit SG&A is currently elevated because of our commitment to ensuring portfolio performance continues its improvement.

We expect that portfolio performance should stabilize in a reducing credit-related SG&A expense gradually. We expect the gradually declining levels of SG&A, combined with our improving portfolio of performance, should allow credit segment profitability to improve over the course of the next several quarters.

Our portfolio continues to shrink because of the declines in sales in prior periods, reduced delinquency and the reduction in long-term non-interest-bearing promotional credit. The projected decline in our portfolio balance should put us in a position to evaluate ways to reduce the cost of our debt capital later in this fiscal year.

Some brief comments on the current quarter -- quarter-to-date sales are down in the mid single digits with offsetting strong sequential improvement in gross margins. Delinquency rates and charge-offs are also expected to improve in the current quarter.

In conclusion, Conn's is refocusing on the things it has always done well and returning to following more closely the strategy that delivered exceptional performance for many years. This isn't a new strategy or approach, execution risk is low because we have been executing the strategy outlined and are simply eliminating what does not contribute to our success.

I'd like to thank our associates, lenders, vendors and investors for their support over the last few difficult years. Management and the Board appreciates the opportunity to prove Conn's can deliver value to all its stakeholders. Now I'll turn the call over to Mike Poppe. Mike?

Thank you, Theo. Our adjusted net income for the quarter was flat with last year after absorbing a $2.6 million increase in interest expense. This operating performance was driven by an increase in same-store sales, improved expense control as SG&A fell 150 basis points as a percent of revenues, and the provision for bad debt was reduced by $2.2 million. Partially offsetting these improvements was a $2.6 million decline in finance charge revenue due primarily to the declining credit portfolio balance.

Our results for the quarter included adjustments for planned store closings, a realignment of inventory, and a write-off of costs related to our terminated securitization program. Over the past three years the seven stores to be closed averaged annual revenues of $5.1 million as compared to $10.4 million at the other non-clearance center stores, and they consumed approximately $40 million of capital to fund customer receivables, inventory and fixed assets.

As we wind down operations at these locations and collect the receivables generated we will recapture that capital and will be able to redeploy it in the business. In addition to a $2.3 million write-off of the leasehold improvements at the five locations we are closing, our early estimate of the potential lease obligation related to closing the stores is $4.5 million, which could vary depending on our ability to release the locations or negotiate lease buyouts.

Exclusive of the cost to close the stores, we estimate that the closure of the stores will benefit earnings per share between $0.04 and $0.06 per year before considering the benefit of any sales that are captured by nearby Conn's locations.

In addition to the review of our store locations we decided to exit certain product lines within the track category and as a result recorded a $1.7 million reserve against the inventory to write it down to its estimated liquidation value. The product lines contributed less than 1% of total revenues and account for approximately 3% of inventory. This special adjustment negatively impacted our retail gross margin by 90 basis points.

As you know, we completed an important financing transaction in November that extended the maturity dates on our debt capital and added additional equity to our capital structure. As a result we were able to pay off and terminate our securitization program which led to the $1.4 million financing cost charge in the quarter to write off the remaining deferred financing fees related to the securitization facilities.

In reviewing our segment performance for the quarter, the retail segment results, which included the $2.3 million leasehold improvement impairment charge and a $1.7 million inventory write-down, improved year over year on a 5.2% same-store sales gain and improved expense leverage. Reduced compensation and related expenses, lower general insurance expense and lower depreciation expense contributed to the improved expense performance.

The credit segment performance declined during the quarter as lower interest income, higher SG&A expense and higher interest expense offset the benefit of the reduced provision for bad debts. Also the write-off of the securitization facility deferred costs hurt the year over year comparison.

As we increase our use of third-party financing sources and see our portfolio turnover improve we expect the portfolio balance will continue to shrink. As such we expect interest income to continue to decline.

Additionally, we have been focused on improving portfolio performance and as such have continued to dedicate significant resources to supporting the collection effort to achieve that goal. However, as Theo noted, as the credit portfolio performance continues to improve our servicing costs included in SG&A expense will decline to more normal levels in relation to the portfolio over the next couple of quarters.

The provision for bad debts declined as net charge-offs were reduced $100,000 and we were able to reduce the allowance for bad debts due to the decline in the portfolio balance and the expected improvement in portfolio performance. Interest expense rose as a result of the higher cost of borrowing on our securitization facility this year and the higher interest rate incurred on the new term loan.

Turning to our capital and liquidity position -- as a result of the financing transactions completed in November, cash flow from operations and cash received from reductions in the credit portfolio balance, we find ourselves in the strongest liquidity position we have experienced in some time.

As of today we have reduced outstanding debt balances approximately $37 million since January 31, giving us total unused borrowing capacity of $131 million and current immediate borrowing availability of $90 million before considering the minimum availability covenant. As of January 31 we were comfortably in compliance with the required credit facility covenants.

A shrinking credit portfolio balance coupled with cash flow from operations and the recapture of our investment in the stores being closed should drive continued improvement in our capital and liquidity position as the year progresses. This will put us in a position to be able to consider the alternatives available to us to reduce our cost of capital.

Much of this analysis and more will be available in our Form 10-K to be filed later with the Securities and Exchange Commission. Now David and Ray will provide additional color on our retail and credit operating performance. David?

Thanks, Mike. I'm going to speak today about our sales and margin performance for the quarter, we achieved a same-store sales increase of 5.2% for the quarter on the strength of our furniture and mattresses and consumer electronics sales. To recap our same-store sales by category, our furniture and mattresses were up 33%; consumer electronics were up 11%; appliances were down 9%; and our track sales were up 1%.

We had a strong quarter in furniture and mattress sales as we continue to expand this category and educate our customers about the availability of this product in our stores. The increases in consumer electronics were driven by a 25% increase in unit sales of TVs as the average selling price declined 9.9%. The average selling price decline was driven by customers' demand for less featured products including the shift to 720p TVs.

Appliance was down as we experienced an 11% decline in average selling price on laundry. While unit sales were roughly flat, we experienced a 9.4% decline in refrigeration unit sales, though the average selling price was just shy of 1%. The average selling price decline we experienced in laundry was driven by a repositioning of top load high efficiency laundry, which are less expensive than front load, and a price compression of HE front load laundries as well.

As prices of three door refrigerators have fallen we've seen customers step into this product from side-by-side refrigerators, benefiting our average sales price.

Track sales are up as we increased sales in accessories, videogame hardware, MP3 players, offset declines in cameras and computers. Our retail gross margin for the quarter declined 70 basis points to 22.8% and was negatively impacted by 90 basis points as we wrote down the value of some of our track inventory. We are realigning our track product strategy in order to eliminate certain product categories like cookware, dinnerware, small appliances, music instruments, DVD movies and telephones from our product offerings.

For the fourth quarter our leading gross margin category was furniture and mattress sales, which we had a 31% gross margins, followed by appliances with a 23% gross margin, and consumer electronics with a 21% gross margin. We will continue to focus on the growth of our furniture and mattress category by improving our store displays and expanding our product selection as well.

We are completing a transition of our new TV product line and are excited about our Internet ready and 3-D smart TVs being offered this year. As an industry though, consumer electronics is expecting a challenging year with many experts predicting a decline in total dollar sales. Many appliance manufacturers are planning price increases this April. We have bought ahead slightly to take advantage of our current pricing while we wait to see the full impact of our manufacturers' plans.

At this time we are continuing to stay very close to our vendors to assess the impact of the disaster in Japan on production of consumer electronics, appliance products and parts. We are comfortable with our inventory at this time and understand the inventory supply chain should sustain our needs until the third quarter. As we understand right now though, it is possible that we could see some inventory issues beginning in that third quarter. However, it is still too early to say with any type of certainty.

This concludes my remarks. At this point I'd like to turn it over to Ray.

Thanks, David. The past year was a challenging one for our credit operations as we worked through the impact of the recession on our credit customers. Additionally, we usually benefit during the first few months of each calendar year from our customers receiving income tax refunds. They typically use the money they receive to pay off their debts and get their accounts in order. This year has been no different.

While the credit portfolio balance declined only $1.2 million since October 31, we saw 60-plus day delinquency drop $6.9 million by January 31. Since January 31 we have seen the portfolio balance decline further and 60-plus day delinquency continued to improve. At the end of February the portfolio balance outstanding dropped to $653.2 million while 60-plus day delinquency was reduced by $8.1 million to 7.6% of the portfolio as compared to 9.4% at the same time last year. Both of these trends have continued into March.

At the same time the portfolio and delinquency have been shrinking we've been able to reduce the balance of re-aged receivables. At January 31 we had $125.2 million of re-aged receivables in the portfolio as compared to $144.2 million at the same time last year. We're on track in March to have our 14th consecutive month of achieving a higher payment collection rate than the same month in a prior year. In fact, in February the payment rate was 30 basis points higher than February last year and we're on track for a similar performance in March.

As it relates to net charge-offs, we believe we saw the peak during the third quarter of this past year; we expect to see charge-offs decline further in the first quarter of the current fiscal year and recorded a 4.1% net charge-off rate for the month of February. During the quarter the weighted average credit score of accounts originated was 628 as compared to 621 for the fourth quarter of the prior year. As a result we finished the year with a weighted average origination credit score of 624, the highest we've achieved of the past four fiscal years.

Theo, this concludes our prepared remarks. If you're ready, we'll open up the lines for questions.

(Operator Instructions). Dan Binder, Jefferies & Co.

Hi, good morning. My question was around the gross margin. You cited some sequential improvement in the coming quarter here that we're in. I was just curious, on this particular line we've seen a bit of bouncing around as you've tried to strike the right balance of promotion and profitability.

And I'm just curious what your thoughts are over the balance of the year with regard to driving comps at flat or better versus your current trend of down mid single and the potential offsetting impact to gross margin. I'm just curious if you can give a little bit of color how you're thinking about those two things.

What we've seen with gross margin is in the product categories where we've increased our prices our same-store sales performance has actually outperformed the category where we had few or no increases in price in recent periods. And all indications thus far are that our improvement in gross margins has not been driving downward same-store sales performance, but has been more of a reflection of the market.

We'll have to evaluate that over coming months, but that's our preliminary conclusion. We think we can maintain same-store sales rates that are in line with the market as a whole and maintain gross margins that are in line with the market as a whole. Our target for gross margins is 28%; we've maintained those kinds of gross margins in the past and believe that we can in the future as well.

If you look at what Best Buy and Gregg have forecast for the coming year, it's in the range of mid single digits down, and we believe if we can achieve similar performance or better and maintain gross margins at the levels we're achieving now we'll achieve an overall performance that's greatly improved from the prior year.

And then with that in mind, in a down mid single digit type comp environment what would you -- what should we expect on the SG&A line? I know you had some cost-cutting and some additional charges here to further reduce costs, can you give us a little bit of sensitivity analysis around whether it's basis points of de-leverage per point of comp or maybe just an absolute dollar growth type SG&A forecast based on a mid single digit decline comp?

Dan, I'd have to think about that a little bit more, I don't have a number right in front of me to give you. But I think we would expect -- especially as we talked about improving servicing cost trends as the portfolio performance continues to improve. There is still some benefit to come on the SG&A line.

And I'd follow on with that. Sometimes these questions are best answered in the context of a retail segment and a credit segment for Conn's. In the context of the credit segment, we expect SG&A percentages to decline fairly rapidly. How rapidly is going to depend on the condition of the portfolio. But on the credit side, I think that trend is in place and, absent some change in the condition of our portfolio, will be maintained over the next several quarters.

On the retail side, we would not expect, even in a down comp 5% environment, SG&A as a percentage of revenues in our retail segment to increase, because of the actions that we've taken to better control selling compensation -- sales compensation and advertising expenses which are our largest expenses in the retail segment. So we would not expect negative operating leverage in the retail segment even in a down 5% environment.

That's helpful. Finally, on the financial side of this Q&A with regard to the credit portfolio -- I understand why it's shrinking. Do you think that a down mid single digit type decline in the credit portfolio consistent with comps is a reasonable way to think about it? Or would you expect it to actually be maybe a little bit faster than that?

We would expect it to be faster than that because we have built into the portfolio shrink associated with the declines in sales in prior periods. So the pace of shrink in the portfolio would be faster than that down 5% rate.

Okay, I thought that might be the case. I appreciate the input. Thanks.

Thank you.

Rick Nelson, Stephens, Inc.

Good morning, guys, this is actually Nate Mendes in for Rick. I wanted to ask about the inventory. We saw a significant uptick in inventory versus a same-store sales increase of 5%. What are you seeing in the business that gives you comfort with this level? And I guess could you just give us a little bit more color around that?

You bet, Nate, this is Mike. The first point I'd make is it's really not so much that this year is elevated as much as last year was really depressed. As you may recall, end of last year we were aggressively looking to reduce our leverage and debt balances as we worked on covenant compliance issues and aggressively reduced inventory levels beyond what was really probably the best answer at the time from a sales standpoint.

And so we feel very comfortable with where the inventory level is relative to our sales volume today. And as David pointed out in his comments, we're bought a little bit ahead on appliance inventory as we watch the potential price increases coming in April.

And then would you say given your level now you still have some more room for opportunistic buys? And what's that environment like?

This is David. Absolutely, we do. And again, with that environment as the slowdown in our industry on both sides of the equation on electronics and appliances, we're seeing that as we speak.

Okay. And then switching gears, I was hoping I could get a little bit more of a general update on the credit environment. From what we're seeing, we're seeing credit coming back to the lower tier customer in other industries. What are you seeing with your customer and how is that I guess changing the way that you've been tightening the standards on the credit portfolio, if at all?

This is Theo. What we've seen is for our core customer say a credit score of 650 and below that there are still very few sources of credit available to this customer. And we are not having to adjust our credit offering at all to appeal to our core customer. There is more credit available and at better terms generally for higher credit scores, but when you look at our core customer, there are limited sources.

We do see the rent-to-own segment as being a strong competitor at the lower end of our core customers' credit scores. But right in the heart of our offering, right at 600, we're not seeing any effective competition for our customer.

Okay, great. Thanks for that. And then just one quick follow-up on the previous question. On the SG&A, I understand that it kind of tends to decline. In the past we kind of thought about the SG&A line as seeing a 10% increase in SG&A of sales. Is that the way we should still think about that SG&A line relative to sales growth? Or is there something I guess different in the business this time around?

Well, what's going to be different in the business this time around, Nate, as we were talking about, is you're going to see credit -- should see credit expenses decline as the portfolio performance continues to improve, (multiple speakers) despite what the sales line does.

So you'll see some leverage there?

Yes.

Okay, great. Thank you very much. I'll jump back in the queue. Good luck with the quarter.

Thank you.

[David Sillerman], [Credit Intel].

I believe you stated that as of January 31 you had $75 million of availability under the revolver. Could you give me the amount outstanding and also the borrowing base as of January 31?

So as of January 31, yes, we had $75 million available and the borrowing base -- I don't have the borrowing base details in front of me. What was your other question, David?

The amount outstanding at that date?

The outstanding amount as of the end of the year, we had a total of $379 million in debt outstanding, $100 million on the term loan and $279 million on the ABL facility.

Okay. And then I believe in your comments you made reference to borrowing availability as of the current date. Was that the $90 million?

Yes, it was.

Okay. And relative to that, could you give me the outstanding under the revolver as of the current date?

Yes. There was -- I commented there was $131 million available capacity, so that would imply just over $240 million outstanding.

$240 million outstanding. Okay. And you anticipate filing your 10-K on which date?

Likely tomorrow.

Okay, thank you very much.

You bet, thank you.

Sheldon Grodsky, Grodsky Associates.

Hello, everybody. I'm relatively new to Conn's, so some of the questions may be simple. But what sort of interest rate would be typical of what you're charging your customers?

In our markets we are charging the maximum rates available to retail financers which typically run in the 21% to 22% range.

Okay. And what are you paying on your various borrowing sources now on average?

On average our borrowing cost is running right around 8%.

Okay, are you actually making the loans to finance your customers' purchases? You mentioned some other facility, I didn't understand. I guess I'm not familiar with the names. But are you making all the loans? Go ahead.

We have three separate ways that we can provide financing to our customers. One of them is our loans that we are providing and carrying and financing ourselves. Above the -- at the high end of the range we're using GE Money for non-interest-bearing promotional credit programs. And those are underwritten and financed by GE Money. And then we also provide a rent-to-own alternative through RAC Acceptance that is underwritten and financed by RAC Acceptance. So we do not carry the GE Money or the RAC Acceptance programs on our books.

Do you make anything from those loans other than what your gross margin on your profit -- on your sales? Do you get a cut of their return?

We do not.

Okay, thank you.

David Magee, SunTrust Robinson.

Yes, hi, good morning. Just a couple of questions, one related to the last question. As you look at how you're positioned now given credit and losing outside sources, what do you see as the appropriate longer-term balance say three years out from now? And how you sort of divvy those up.

This is Theo Wright. That's an excellent question. It's something that we've spent a considerable amount of time on. What we see is the appropriate balances, if you look at our total sales which is how we've thought about it, we'd like to see 6% to 10% of our total sales through a rental channel. We'd like to see 15% or so through a channel like GE Money and then the remainder probably in the range of another 50% to 55% of our total sales through our own provision of credit.

And if you look back to the years where Conn's was performing at a high level, our credit penetration on our books was in that low to mid 50% range. And we think that that's the appropriate allocation of our capital to support our sales rate.

Thank you, Theo. Another question has to do with the current trend in the first quarter. The comparison doesn't seem that hard on paper. But I thought I heard you say you're down 5% versus last year I think you were down 19% or 20%, on comps anyway. Can you talk a little bit about what's -- how the CE part of the business is doing versus the appliances versus the furniture?

Yes, this is David. Our furniture still continues at a double-digit growth pace. Our appliance business is down single digit and our -- really the CE has been hit the hardest in this quarter. So again, as the transition of the product, no IRs, nothing really out there to drive the business. So we just -- although margins dramatically improved in CE, because there are no IRs from the manufacturers we see that changing now that the new line is seeded in.

And what do you think of the new TVs you've seen in the marketplace? I know we're sort of in a transitional period. Last year I guess the price points were too high for the additional features. Do you think they're being packaged better this year? Do you sense that this will have traction with your customers?

We really do. And also when you look at the average the price points where we started out this year versus last year, they're down 25%. We think now that these price points are under $2000 on some very good product -- I'm talking about 3-D with the packaging, with the glasses inside the box now; and also I think in our markets what we're seeing is the Internet smart TVs now are really getting a quicker reception than 3-D did.

People see this as more of a usable feature because of the smart phones, the tablets out there that with all the apps -- now that these TVs have these apps on them customers are really, really gravitating to that TV.

Do you think that you can have a stable ASP on the video category this year?

I wish I could say that. We just don't know, we just don't know. We would hope so, but, again, the market is going to dictate that.

I would like to follow on with an additional answer to your question. When you look at our core customer base, we are not truly representative of the population as a whole. And our customer can react differently to conditions in the economy. And if you look at our performance in the two months to date in this quarter, when gas prices were rising sharply in late February and early March was when we saw sales rates actually come in and those have since stabilized.

So I think a lot of our sales performance in such a brief period may just reflect the nature of our customer base and the economic conditions that they are experiencing.

Does the higher appliance pricing help you this year? Do you think you will be able to pass that on?

Well, we are certainly going to try. This is David again, I'm sorry. We are certainly going to try, but again the magnitude of the price increase has already softened we see because these manufacturers really know what is going on out there. But hopefully, this will, but also what I see is some key price points not going to take a price increase, but the one thing is, we continue to mix -- we feel very good about what is going on in our appliance business right now.

Yes, and just a follow-on. Our credit offering allows us to sell products at the higher price points and actually -- although it may not seem consistent with the income levels of our customers, we actually tend to sell products at a higher price point. Our ASPs, for example, in consumer electronics are higher than the industry average.

Thank you, and just one more quick question. Are you carrying tablet computers this spring?

Absolutely. We think the tablet is going to really explode coming the fourth quarter. We see it replacing entry-level laptops, absolutely.

Okay. Thanks a lot and good luck.

Thank you.

Ian Ellis, MicroCapital.

Good morning. I've got two questions. The first relates to the type of annual impact of store closures. If you assume that you are going to retain the business associated with customers who are using credit and transfer that into other continuing locations, what type of annual impact do you think you are going to get from the stores that you have decided to close?

And then the second question is about furniture mattresses, lawn and garden. What sort of kind of long-term mix would you expect that -- those categories to represent and how is that business different from the traditional business that the Company has had in appliances and CE?

Hey, Ian, this is Theo. I will take a stab at these questions first. The annual impact, if we are able to retain the customers that use credit in the locations that we are closing, would be more in the range of $0.06 to $0.08 as opposed to $0.04 to $0.06. So the impact -- the positive impact would be greater. And that just assumes that we retain the credit customers and in the locations that are being closed, most of them -- the percentage of sales to credit customers is low. So it is not like those stores have our typical credit penetration rates.

Right.

The answer to the second question, and I think it's an excellent question, is that furniture and mattresses currently represent low teens on a full-year basis as a percentage of our total sales. Furniture and mattresses represent somewhere between 25% and 33% of our total floor space. And we think that we can grow furniture and mattresses to where their share of our sales is consistent with their share of our floor space.

If you look at Aaron's, who I think is a close comparable in many ways to Conn's, at Aaron's, furniture represents 31% of their sales. And so we believe that that is a reasonable target and reflects a reasonable sales rate given the floor space that we have allocated.

Lawn and garden is 2% to 3% of our sales now. We think that business is more of a stable business. We may have the opportunity to grow that business somewhat, but we think we are doing a pretty good job of capturing the opportunity there and have had that business in place for a number of years.

What is different about furniture and mattresses is that, one, the gross margins are higher. We were at 30% plus in the last quarter. We are running at a rate considerably higher today. And there really is not pricing transparency in these markets. It is not something where we can be price-shopped effectively on our product offering in the same way that you can be in electronics.

So we think furniture is a big opportunity, furniture and bedding. We think we have an opportunity to improve our overall gross margins and we think that our credit offering has particular utility in furniture. If you look at the growth in our furniture category, a lot of it has been in increases in average tickets because we started with more of a low to middle-end line of product and have gradually improved our performance as we have increased the pricing and quality of our furniture offering.

So we think furniture fits right in our sweet spot. It is a big ticket, it's a big box, it requires distribution, requires delivery. So we are excited about the opportunity in furniture particularly.

Just as a follow-up question on that, Theo, has the credit performance of furniture been different from the traditional categories?

Initially, the credit performance has been slightly worse than some of our other categories, but in line with our average. So if you look at credit performance, our credit performance and appliances is best and furniture and consumer electronics would be slightly behind that. Our worst performance is with home office computers and small electronics. So furniture is in line with average, but it is not better than average.

Great. Okay, thanks very much. I appreciate it.

Thank you.

Dan Binder, Jefferies & Co.

My question on this round are really around merchandising -- merchandising and competition. You mentioned just in your prior comments about price matching and price competition. I'm assuming you mean online and along with other retailers.

I'm just curious as more of this business has moved online, do you think you are getting your share of it through Conns.com? Are you seeing increased price matching activity at the store level or are you somewhat immune to that because of the type of customer that you've described?

This is David. There is no way we are getting our share of online business, absolutely not. We feel we are behind a little bit in that, making definitely some strides there. But again, we are definitely behind in getting our own line of retail sales where we feel they need to be.

As far as competition, hey, we have the price guarantee like everyone else does. We are going to be right with the market, but also we control that floor a little tougher than most. We are (inaudible) to get a deal, we just don't do that. Hey, we will be competitive just every single day. But we don't think we need to be underneath the market, especially with our credit offering as well.

This is Theo. I have a couple of follow-on comments. On the Internet opportunity for us, Conn's currently does not offer its credit, its own credit alternative over the Internet and until it does so, we are not going to be as effective a competitor over the Internet. We are addressing a number of issues with provision of credit over the Internet.

It is not a distribution or execution -- sales execution issue. It is really a credit issue that we have to address on the Internet. But once we can deliver our credit over the Internet, we think we can be an extremely effective competitor on the Internet.

And as far as price competition, the answer is yes. I think we are able to avoid some of that. I will give you a specific example. If you look at our computer sales, our credit penetration is about 80% in computers. Essentially, we have the ability to provide a credit alternative to a customer and computer sales that is not available anywhere else and we believe that does give us a pricing advantage in computers.

My second question related to merchandising is around furniture/mattress business. You mentioned you thought you could get that percentage up given the floor space you dedicate to it, but at the same time you're not necessarily the destination for that type of purchase given your what seems to be somewhat limited assortment. So I'm just kind of curious what you can do to really get that mix up? Do you think the issue is more about marketing or is it something else that's kept you from hitting that level thus far?

This is David. I think a couple of things. Number one, our customers don't know we're in the furniture business, believe it or not. So again, as we continue to improve our marketing to our consumers and to the general public that has improved.

Also our mix -- like Theo mentioned before, we really started at the bottom to mid-level. Now as we are improving the assortment, remodeled our stores, continue to freshen these stores up and really and truly get more things in our store to feel like a furniture store in there.

It took us several years, to be honest with you, just to learn the business and we feel we're getting better and better at it every day. But we think we can compete very well with this -- in this category, because I really go back to our cores. It's a very high financed penetration on the product and also most of this product is getting delivered. It fits our distribution network tremendously. We deliver furniture seven days a week. So that really fits into our wheelhouse.

And then my final question is around appliances. Just curious on -- really two questions there. One, what kind of inflation are you expecting in appliances this year? And secondly, can you just refresh our memory on what we should expect as we lap the stimulus in terms of the timing and the likely comp impact?

I think I'll address your last question first. On the stimulus, it was -- in Texas it was really early summer. The impact, we did not feel it for a long period of time, not like the car business did with the Cash for Clunkers and things like that, is the way Texas did it, it was very short, very limited, it had about a four or five day impact with these rebates that they did.

In fact, we did it a second time and didn't use all the money again. So I think the impact -- we should be okay with that in comping that number. Then also the categories that it really played, it was basically refrigeration that won on the stimulus program in Texas. And one more time -- I'm sorry, your first question again?

Just hearing about price increases coming in the appliance industry. I'm just curious what your expectations are from an inflation standpoint in appliances overall?

At first, when they first came out, of course they were saying a 6% price increase across the board, that did not happen. But right now we just don't know the total impact, what it's going to be. But I know it will be less than was first announced because at one time it was an XYZ, a hard number across the board, that did not happen.

So the impact -- we just don't know. It's not going to be as broad and as big as it was when it first was talked about 30 to 45 days ago, but we just don't know where it's going to shake out. We will know very shortly in April. But we just don't know at this point in time. I can't really give you a number.

Okay, thank you.

Thank you.

Kurt Wolf, Hestia Capital Management.

Yes, I had some questions about your liquidity position. As you move forward it sounds like your overall customer balances will be moving down. I'm assuming profitability -- assuming it does improve, which I know you can't predict, but assuming it does your liquidity obviously improves a lot.

Mike, I believe you said that you would look to that as an opportunity to reduce cost of capital. Am I understanding that correctly, that that may refer to the term loan? And specifically do you have the ability to prepay that early and if so what sort of penalties and restrictions are there?

You bet, this is Mike. We certainly would look to reduce the balance of the term loan, the prepayment fees related to the term loan, it's a minimum of a make-whole or 5% until the first anniversary which is November 30. But then starting December 1 it's a 3% prepayment premium and it drops to 2% the following year and 1% in the last year of the loan.

And then we have the ability, if we do a real estate transaction, to pay down the term loan at any point at a 1% prepayment premium. And if we do a securitization transaction -- and both the real estate and the securitization there's dollar limits on how much of the loan we can pay down with those transactions. And we up to $15 million on an ABS transaction can be used to pay down at a 2.5% prepayment premium in the first year.

Okay. And it's sounds like right now -- I mean the term loan is about $100 million and it sounds like you have about that in liquidity. Obviously you don't want to get things too close, but it sounds like if the portfolio continues to work down that that's certainly plausible in the near term as opposed to a few years out?

Absolutely.

Okay, thank you very much.

Yes sir, thank you.

I'm showing no further questions at this time. I would like to turn the call back over to management for any closing remarks.

Thanks, everyone, for participating.

Ladies and gentlemen, that does conclude today's conference. You may all disconnect and have a wonderful day.