Conn's Inc (CONN) 2012 Q1 法說會逐字稿

Welcome to the Conn's Inc., conference call to discuss the earnings for the first quarter ended April 30, 2011. My name is Mary, 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.

You should have received a copy of the Company's earnings release dated May 25, 2011, distributed before the market opened this morning, which describes its earnings and other financial information for the quarter ended April 30, 2011. If for some reason you did not receive a copy of the release, you can download it from our website at Conns.com.

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

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

Thanks and welcome to our first quarter fiscal 2012 earnings call. My comments this morning will focus on our strategy in retail sales outlook. You will notice on this call, in our press release, and in our 10-Q filing that we are emphasizing our segment information. Conn's has a complex business model; and use of segment information makes our business easier to understand and analyze. Segment data also makes benchmarking versus our peer group possible in a way that is not possible using our consolidated data. We are working to provide information to allow effective analysis of our business.

As I mentioned on our last call, Conn's has a Core Customer. Our Core Customer has a credit score around 600 and annual household income of around $36,000. I am pointing this out as it will be a common thread in all of my comments today.

Turning to our stores we previously identified a number of nonperforming locations without enough of our Core Customers in the market area to be successful, and on the last call, announced plans to close five stores. We are also allowing two leases to expire.

One location closed in the first quarter. Very, I repeat, very early indications are that we can capture many of the Core Customers from the closed location and adjacent stores.

Looking at credit, our strategy to provide a valuable credit offering to all customers is beginning to show signs of effectiveness for the quarter. Including down payment amounts, we financed 61.8% of total sales with one of the credit products we offer to our customers. And in April, we financed 73.4% of total sales. Yet, we financed only 50.6% of our total sales using Conn's capital. We're providing an exceptional, unique value to our Core Customer through our credit offering. We are also providing an alternative to non-Core Customers that is a competitive value.

Continuing the discussion of our Core Customer, this customer has limited financial resources. Our qualitative and quantitative work on our customers confirms that price is a critical factor in customer decisions to purchase, but we were able to deliver retail gross margins of 28.4% in the first quarter. This gross margin may provide a misleading impression that we are not price competitive. But we believe we are price competitive in all of our major categories.

Several factors to consider are we continue to offer our price guarantee to customers and this policy hasn't changed. Our customers expect assurance they will pay a fair price. We can and do negotiate on price to match competitors.

The increasing proportion of furniture in our sales mix distorts gross margin comparisons to competitors selling principally electronics and appliances. Gross margins were 19.1% for electronics. Our gross margins in electronics and appliances have declined over time to maintain competitiveness.

Our promotional pricing has actually become more aggressive, particularly when considering the benefit of promotional credit. We compete on price and offer our customers value. But as we said on the prior call, underpricing competitors on all products all the time was not effective in driving traffic to our stores and reduced profitability.

We've altered our strategy, but still provide competitive pricing and use promotional pricing. We believe that in the first quarter we've maintained our market share in electronics and appliances and increased share in furniture and mattresses.

With furniture and mattresses we see continued growth opportunity in our existing stores. For the first quarter furniture and mattresses represented 21% of our total gross profits, and was the third largest category ranked on gross profits contributed. Expanding furniture and mattress sales will diversify our product risk and allow us to more fully utilize our floor space.

Actions we have taken include significant expansion of the floor space for furniture and mattresses for three stores as planned in the second quarter. All these stores are high performing stores that include the number one and number two volume stores for us. The expanded locations will have from 15,000 to 20,000 square feet for furniture and mattresses. Our presentation and selection in these stores will be more typical of better furniture retailers.

We are expanding by approximately 2,500 square feet the allocation of floor space in 15 stores. This space was previously used by unprofitable, low volume, smaller items that we have discontinued.

Our selection is expanding and we are applying our experience in other categories to provide more higher-priced, better quality goods. Our credit offerings match well to this category and we will provide the same opportunity for our Core Customer to make an aspirational purchase in furniture and mattresses that we do in electronics and appliances. The offering does not yet meet our objectives.

We are reevaluating our floor space allocation and presentation and planned store upfits to improve our opportunity to competitively merchandise furniture. These actions will impact results over time and furniture and mattresses growth will vary in speed. But we are committed to expanding this category and increasing sales per square foot.

Looking at our sales floor, all of our customers demand a quality sales experience. A professional, commission-paid sales force is a competitive advantage for Conn's. During fiscal 2010 and 2011, in response to reduced volume and margins and capital availability concerns, we made a number of changes to our sales associate selection and training. We also changed our management of sales associates on the sales floor. The effect of these changes was to significantly increase turnover of tenured sales associates, reduce the product knowledge provided by the sales associates to customers, except, I think interestingly, for furniture and mattresses.

A number of corrective actions have been taken, enhancements to pay opportunities for sales associates, which are reflected in retail segment SG&A for the first quarter, changes to our sales associate training and selection processes, and changes to assignment of new sales associates on the floor. Similar to our furniture and mattress sales approach, we will also be adding product specialists on the sales floor for appliances and electronics. These changes will take several quarters to fully implement.

Our outlook for second quarter retail sales reflects the ongoing impact of high unemployment, limited income growth and high gas and food prices on consumers. These impacts are particularly acute for our Core Customers and since have been seen in recently reported sales for other companies, like Wal-Mart, with a similar customer base.

Another factor in our outlook is the impact of the price increases we've experienced for appliances and television. Larger more featured LED and LCD prices have increased by solid, double-digit percentages as the new models were rolled out.

In our business, we are witnessing the results of the conflict between inflationary pressure and weak consumer demand. Weak consumer demand is winning the battle with the result being substitution. Consumers are not accepting price increases and are choosing products with fewer features. Our consumers often find that quality and functional differences don't justify the price differences in these categories. Our margins don't allow us to reduce prices enough to bridge the gaps.

There are signs our vendors are responding to these trends, which we don't believe are limited to Conn's. We hope there will be a response that allows these pricing differences to narrow and allows us to sell more of the higher-priced, higher quality products.

Portfolio performances continued its improvement, and the credit segment is once again contributing to profitability. Credit quality of new receivables originated continued its improvement. The retail segment is delivering profitability that compares favorably to similar retailers. Capital availability has improved significantly. We believe we can both lower the cost of capital and maintain capital to support growth.

Because of these developments, we are beginning the process to identify and select potential markets for new store openings and to evaluate the real estate available in these markets. We aren't diverting operating resources from the efforts to improve retail segment profitability, but we are laying the groundwork to enable us to restart store openings if our operating performance continues to stabilize.

These new locations will likely be in new metro markets for Conn's. All prospective markets identified have demographic characteristics consistent or better than our highest performing stores in both volume and profitability. The population of our Core Customers in these markets average approximate 2.5 times the population of our Core Customers in our top quartile stores' market areas. These new stores would be expected to deliver larger sales volumes than our average stores. Now, I will turn the call over to Mike Poppe.

Thank you, Theo. Our net income for the quarter was down $1.8 million, largely as the result of a $1.8 million increase in interest expense and $800,000 in employee severance charges. We achieved these results as higher retail margins and lower SG&A and bad debt expense partially offset the impact of a 3.9% decline in same-store sales and reduced interest earnings on a shrinking credit portfolio.

Diluted earnings per share was $0.13 as compared to $0.26 for the same quarter last year. The following key drivers accounted for $0.11 of the difference. Severance charges reduced earnings per share by $0.02. Increased interest expense accounted for $0.04. And the 9.3 million shares issued in last year's rights offering reduced earnings per share by $0.05.

Before I begin my review of our segment performance for the quarter, I would like to point out that we have posted on our IR page some information that may be of interest to you. As Theo commented earlier, we are focused on providing segment information to allow better benchmarking of our performance. As such, on our IR home page we have posted the quarterly, segment financial statements for the past two fiscal years, which have been revised for certain adjustments to improve comparability and reporting across all periods. The adjustments did not impact operating, pretax or net income.

More information on the adjustments will be included in our 10-Q. Additionally, we have also posted a summary of the revised product revenues by category for each quarter in the past two fiscal years, consistent with the revisions we made to our product category presentation in this quarter's sales release.

In reviewing our segment performance for the quarter, the retail segment delivered a 3.1% operating margin as the retail gross margin improvement largely offset the 50 basis point deleveraging of SG&A expenses as a percent of sales due, in part, to the lower sales volume.

Higher contract, delivery and transportation expense, net of related compensation expense reductions, and the severance charges also contributed to the increase in SG&A as a percent of segment revenues.

The credit segment returned to profitability after two consecutive quarterly losses. The pretax contribution declined as compared to the year-ago period as lower interest income and higher interest expense were partially offset by lower SG&A expense. As we increase our use of third-party financing sources relative to our historical trend and see our portfolio turnover improve, we expect the portfolio balance will continue to shrink and interest income will continue to decline.

We did see the interest income and fee yield increase by 70 basis points this quarter as compared to the same quarter last year due to the improving portfolio performance and reduction in non-interest-bearing promotional credit as a percent of total portfolio balance.

The improvement in SG&A expense, in amount and as a percent of revenues, was driven by better operating leverage, as portfolio performance continued to improve. Further improvement in portfolio results should lead to reduced servicing costs included in SG&A expense, which we expect to decline to more normal levels in relation to the portfolio over the next couple of quarters.

The provision for bad debts declined slightly as net charge-offs were reduced $600,000. Additionally, as a result of the continued improvements in portfolio performance and decline in the portfolio balance, we were able to reduce the allowance for bad debts by $1.3 million as compared to a $1.7 million decrease in the prior year. Interest expense rose as a result of the higher cost of borrowing on our term loan.

Turning to our capital and liquidity position, strong cash flow from operations, including cash received from reductions in the credit portfolio balance, allowed us to reduce our revolving debt balance outstanding by $53.3 million. As a result we find ourselves in the strongest liquidity position we have experienced in some time.

As of April 30, we had total, unused borrowing capacity of approximately $147 million, and current, immediate borrowing availability of $104 million, before considering the minimum availability covenant. As of April 30, 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.

Turning to our outlook for the coming quarter, we expect same-store sales to decline in the mid to high single digits range, with retail gross margin between 27% and 28%. We are looking for retail SG&A to increase around 100 basis points as a percent of sales, as compared to the first quarter. SG&A, for the credit segment, should continue its downward trend as portfolio performance improvements benefit our servicing cost. As a result, our credit segment should improve its profit contribution.

Lastly, interest cost should be down modestly on lower outstanding debt balances, and a small reduction in the interest spread on our revolving credit facility, due to our reduced leverage. Assuming our trend towards greater operational stability and predictability continues, we are considering reinstating earnings guidance in the next couple of quarters.

This afternoon at 1 PM Eastern time, we will be presenting at the Stephens Spring investment conference. The slides for the presentation are currently available on our IR home page at IR.conns.com. Additionally, you can listen to the webcast of the presentation by connecting through the link on our IR website on the events and presentations page.

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

Thanks, Mike. I am going to speak today about our retail sales and margin performance for the quarter. We achieved a 28.4% retail gross margin during the first quarter, as compared to 24% gross margin during the fourth quarter. Additionally, same-store sales declined 3.9% as lower television sales, driven by falling average selling prices and lower appliance and home electronics sales, offset a 25% furniture and mattress sales.

To recap our same-store sales by category, furniture and mattresses were up 25%. Consumer electronics were down 5%. Appliances were down 8%, and our home office sales were down 19%. We had a strong quarter in furniture and mattresses as we continue to expand our selection and increase our promotional activity in this category.

The decrease in consumer electronics were driven by a 21% decrease in average selling prices. TVs, as a total unit sales, increased 19% on a 129% increase in plasma TV unit sales. As we discussed on our last call, the average selling price decline was driven by customers selecting less-featured products.

Appliances were down as we experienced a 9% decline in average selling prices on laundry, and unit sales were down 3%. We experienced a 4% decline in refrigeration unit sales, and the average selling prices were down 3%. The average selling price decline we experienced in laundry was driven by more manufacturers offering top load, high-efficiency washers and dryers, and the consumer's demand for these products, which were roughly $200 less expensive than front load laundry. We have seen a shift in our mix to lower-priced, top mount refrigeration, and price compression on French door refrigeration.

Home office sales were down on a 16% drop in laptop and desktop computer unit sales and a 4% decline in ASP. While our home office sales were down, we drove an increase to total gross margin profit contribution as gross margin increased to 13% this year compared to 3.2% last year.

Our retail gross margin for the quarter increased 30 basis points to 28.4% as compared to the first quarter in the prior year. We benefited from an increase in our mattress and furniture sales in our product mix.

For the quarter, our leading gross margin category was mattress and furniture, which had a 31% gross margin, followed by appliances with a 27% gross margin, and consumer electronics with a 19% gross margin.

As we discussed in our previous call, our financing target was to finance sales on our credit program for between 50% and 55%. For the quarter, excluding down payments, we financed 51% of our sales on our program. Our goal for RAC Acceptance sales is between 5% and 10%. We achieved a 3.5% penetration for the quarter, but saw it improve during the quarter with 4.5% of our sales on RAC Acceptance in April.

We saw our GE Money finance sales penetration improve during the quarter. We financed 6% of our first quarter sales on the GE program with 10% of our April sales on this program. We intend to continue the use of our longer term, no interest program through our GE Money relationship to drive incremental sales to non-Core Customers. During the quarter, we began offering up to 48-month terms on TVs and furniture and saw good gain in our store traffic as a result.

We will continue to focus the growth on our furniture and mattress category by improving our in-store displays and expanding our product selection. We have completed our transition to our 2011 TV lineup. While the manufacturers were less promotional on their new lines in the quarter, we believe that may begin to change this quarter.

In our appliance area, we saw some impact from the price increase that manufactures had previously announced. Though the increases were not as significant as first anticipated, additionally some vendors will have additional price increases come in in August in appliances.

As we continue to monitor the effects of the tragedy in Japan, we do not believe there will be a significant impact to TV and appliance inventory availability. However, we understand digital camera production will be impacted and we expect to see shortages until the fourth quarter. That concludes my remarks. At this time I would like to turn it over to Rey de la Fuente. Rey?

Thank you, David. After a challenging year of our credit operations, we continue to see improving credit trends during the first quarter, and the credit segment returned to profitability after losing money during the third and fourth quarters of last year.

As is typical during the first few months of each calendar year, our customers receive their income tax refunds and use the money to pay off their debts and get their credit accounts in order. In combination with the reduced financed penetration on our credit programs and continued runoff, as a result of the sales declines over the last two years, we saw a $50 million reduction in the outstanding portfolio balance since January 31.

The balance 60-plus days delinquent was reduced to $13.6 million since January 31, to 7.1% of the portfolio, down from 8.6% at the same time last year. Historically, we began to see the percentages of the portfolio delinquent increase during the second quarter that we expect to continue to be firmly down versus the prior year period. I would also note that the charge-off, delinquency and re-aged percentages are negatively affected by the shrinking portfolio balance and do not convey the total improvement in the portfolio performance we are seeing.

At the same time that the portfolio and delinquency have been shrinking, we have also been able to reduce the balance of re-aged receivables. At April 30, we had $112.2 million of re-aged receivables in the portfolio, or 17.9% of the portfolio, down from $125.2 million at January 31, and $134 million, or 19.1%, at the same time last year.

Additionally, we completed our 15th month in a row of achieving a year-over-year increase in the payment rate with first quarter payment rate coming in at 6.38% as compared to 5.99% last year. As it relates to charge-offs, we believe we saw the peak during the third quarter of this past year.

The 5.3% charge-off rate we experienced during the first quarter was on $600,000 less in charge-offs than the same quarter last year, and was $1.5 million less than in the fourth quarter. We expect to see charge-offs decline further in the second quarter.

Credit segment profitability was favorably impacted by reduced portfolio servicing cost. SG&A improved $1.2 million or 70 basis points as a percent of revenues over the same time last year, primarily driven by lower salary expense as portfolio performance improved. We expect this trend to continue as delinquency continues to improve.

During the quarter, the weighted average credit score of accounts originated was 623 as compared to 616 for the first quarter of the prior year. Additionally, the weighted average score of the portfolio at April 30, was 589, as compared to 583 at the same time last year. Theo, this concludes our prepared remarks, we'll open up the lines for questions now.

(Operator Instructions). Daniel Binder from Jefferies & Co.

Hi, it's Dan Binder. I have a few questions for you. First, you made a comment that the new TVs saw a solid, double-digit price increase? I just want to make sure that, that was correct. And secondly, as you think about the product cycle in TV, you mentioned possible increased manufacturer discounts. I'm just kind of curious what you are seeing there, what you're thinking in that vein and whether or not that is enough to get folks buying these products.

Well, Dan, this is David. What Theo was referring to, when the product was launched out this past quarter, there was very little IR activity, so the price increase was from the manufacturer in their non-promotional activity. Because, right now for instance, this Memorial Day weekend, there are TV sets with $1,000 off, between bundling and everything else. That did not happen during the first quarter with their new TV launch. As they were clearing out old models, streaming in the new models, there was very little promotional activity. So when the customers are used to saving $1,000, $500, there was no promotional activity on that new cycle that just came through. And, I'm sorry if you would repeat your second question, please?

Well, just regarding the whole product cycle, you and others have talked about how the newer technologies just don't seem to be catching a bid by consumers and there's not a strong enough interest, and I'm just curious if you think that price alone is enough to move the needle here as the manufacturer discounts increase. And then, beyond the Memorial Day weekend, do you expect those discounts to continue?

Sure. Again, price alone is not going to move it, but what is happening is now as Internet-ready TV, smart TV is coming online and also the price has come down, they are putting that in more television offerings. And also, I think what is going to help is between the passive and active 3-D televisions, there's a significant price decrease in those passive 3-D TV sets where the glasses come packaged with the TVs sets. So that's going to help spur the interest in that technology.

But again, it's going to be challenging. There's no two ways about it. But the thing is, like you saw our numbers on plasma and entry-level TV, until the manufacturers continue on a very consistent basis of putting these promotions on there, which we feel they will, because that's what's going to sell these higher-end TV sets, I think the manufacturers will continue this promotion like we are seeing right now.

And, given your outlook on sales for Q2, against what would be your toughest, albeit a negative comparison, your toughest comparison of the year, would that suggest that you think the back half could experience positive, Conn store sales?

This is Theo Wright, and I'll take that question. This quarter does have our toughest comparisons; and comparisons are much less difficult in the third quarter particularly; and we are hopeful of being in a position to generate positive comparisons in that quarter. But, at this point I would say it is too early to tell and we would need to see some consistent, promotional support from the vendors in television, particularly, to be more confident and expressing a view about the third quarter.

And then, if I could just fit one more in, on the margin front, you commented that you've been aggressive on price to compete. Your margins are up, nonetheless, and some of that seems -- or better, I should say. But some of that is a mix of furniture. I'm just curious, could you comment a little bit on where that 19.1% gross margin in consumer electronics was a year ago, and what you are generally seeing in the industry as volumes have been light, have competitors also been -- are you finding that they also tend to be in the motive of taking more margin to offset that weakness?

The margin in this quarter in electronics declined considerably from the same quarter last year, down about 400 basis points. So, we've been aggressively competitive in trying to maintain our market share in those categories. In terms of what we are seeing from our competitors, I think we've seen similar behavior and really don't see anyone that is trying, strictly speaking, just to hold margin and not be competitive and maintain market share.

Great, thank you.

David McGee from SunTrust.

Hi, guys, and good morning. Another question on the TV side, as you sense the demand for the newer, the smarter, or 3-D, or maybe the lack of demand, how are you structuring your inventories for the second half of the year? Are you trying to lean more towards just maybe large plasmas? Or do you still get adequate representation of the newer technology? How do you think about that?

Well, this is David, we are still going to have a good, better, best type offering for those consumers whether it is entry-level 720 P type plasma. We still display DLP on our floor. So again, we are adjusting sales and forecasting for what is going out the door. And also, the other thing we're looking at is the NFL season. As that does a kickoff, that adjusts forecast as well in a timely manner. So, but again, as these TVs come in, the new promotionals out there, we are just going to adjust inventory to sell-through and forecast adequately.

Do you think that the smart TVs and 3-Ds will be meaningful this year to you?

Absolutely, absolutely. Because again, that's the things that the manufactures want to sell as well, that technology. That's where they are putting all their advertising and so are we, out there. But there is a customer that wants, but again, it's that happy medium, what size versus that price. When those 2 continue to come down as the manufactures promote, like they are doing this weekend, which we feel they will, we'll sell-through.

So this weekend might be an important data point for the balance of the year in terms of paying for those TVs at lower prices.

Right, I don't that this weekend necessarily is important for the balance of the year. It's just going to be an indication of how successful we are in taking advantage of price adjustments by the vendors.

Thank you. What is your strategy right now with regard to tablet computers? Are you going to be positioned in that category in the balance of the year in a big way?

Yes, again, this is David. Really, we are going to see the effective this third quarter, really, when the tablets really hit our showroom floor. We are starting the tablets right now. We expect the tablets to really, kind of, consume the low end notebooks. So again, absolutely we will be playing aggressively in the tablet business, and really affects us, really, in the third quarter.

Thank you. And then I guess lastly, given that the economy, the recovery, is very modest at best right now and there seems to be some headwinds out there, what is the risk that the delinquencies, the improvement that you are seeing there, begin to stall?

This is Theo Wright. I will take that question. I think if the economy continues along its path of tepid improvement, that our delinquency will continue to improve based on the improving quality of credit that we are underwriting. If the economy deteriorates from its current condition, and that could certainly have an effect on our delinquency performance, but those economic trends would be offset by the fact that we have underwritten better quality credit.

Great, thanks, Theo, good luck.

Rick Nelson from Stephens.

Morning. I'd like to ask about the furniture business, if you could provide sales productivity, the sales per square foot? I think you mentioned the gross margin in the category, although I didn't catch it and how you intend to promote furniture.

This is Theo. I'll take that. Our gross margins were 31% in furniture. So, it was clearly our highest margin product line. Our sales per square foot, the last time we measured that using furniture only, it was about $170 per square foot. It may be a little higher than that today, Rick. I'd have to guess, but I would say something between that number and $200 per square foot. So, we are still less productive with our furniture square footage than we are with the square footage allocated to appliances and electronics.

In terms of promotional activity for furniture, right now we are aggressively promoting credit in furniture, just as we are for other product categories, with long-term financing products, no interest products, provided principally by GE Money. And then, we are also doing bundling with promotional activity around free television with furniture purchases of a certain size; and we're going to bundle other products going forward, like tablets, with furniture to create additional promotional excitement around furniture.

Theo, if you could talk about the credit attachment to the furniture, specifically, and how those credit stats compare to the Company overall.

The credit attachment is higher than the Company average. We tend to finance more of the furniture purchases than we do on average. If you look at our credit penetration by product line, it's highest in home office, then next would be furniture, followed by electronics, closely followed by electronics, with the lowest in appliances. And then, in terms of loss performance, our performance with furniture is typical of our Company average, better than home office, and slightly worse than the other categories, which is consistent with the difference in penetration rate.

So, thus far, and we've been financing furniture for a number of years now, there is no indication that our loss experience with furniture will be materially different than our loss experience overall.

It makes sense you are pushing on furniture. I'd like to ask you about Walmart test of appliances in Texas. I'm sure you guys have been in the stores, any commentary there?

The only commentary we would make is this is not the first test, this is the second test over the years. And, that the product selection is not competitive with our product selection and the credit offering is not competitive with our credit offering. So, we certainly are concerned about any new competitor in the market, but the competition that we think that they will provide is something that we can compete effectively with.

In terms of cost of capital, the interest cost that you called out $0.04, that is a recurring expense without changes to the balance sheet.

That's correct. As long as the current debt capital structure stays in place, then that will be a recurring impact, until we cycle. And then that $0.04 difference is a comparative, year over year. So until we cycle around the fourth quarter, that will continue to be a difference.

What do you see as the timeline to making change, refinancing some of the debt?

We expect to begin to take action either this quarter or next quarter.

And what sort of rates are available to you versus what you are paying today?

Well, you can look at the interest rate that we are paying today on our asset-backed loan which is LIBOR --

LIBOR plus 400.

Great. Thanks a lot and good luck.

Daniel Binder from Jefferies.

Hi, I just had a couple of follow-ups. First, on the credit side, would you still think that the credit portfolio would shrink if you in fact turned positive on comps simply because of the mix of credit offers you are providing in the GE piece? And secondly, do you have any targets, either for this quarter or future quarters, maybe on an annual basis, even for credit penetration by major sources of funding? And then lastly, where do you expect directionally the write-off rates to move to, given what you're seeing in delinquency trends today?

This is Theo Wright. I will try to answer those questions. In terms of the portfolio growth or shrinkage, it would depend, of course, on the magnitude of the change in sales rate. But even assuming an increase in sales compared to the prior year, we would expect the portfolio to continue to shrink because we have the embedded effects of reduced sales over a period of time, plus the reduced penetration that we are seeing on our balance sheet credit. So, we would expect the portfolio to continue to shrink, absent some unexpectedly large increase in sales.

Our targets for penetration, again, are from 5% to 10% through Rent-A-Center, or RAC Acceptance. 50% to 55% on our balance sheet through Conn's credit. And 10% to 15% with GE Money, our promotional credit offering. And then 7% to 10% in the form of down payments as part of our credit offering. So, our total target is 72% to 90% of all sales would be financed in one form or fashion by Conn's.

And then, as far as charge-off rates, I think we would expect the charge-off rate to continue to trend down based on the performance of the portfolio that we are seeing today.

The delinquencies today are tomorrow's write-offs, so just given what your historical experience and what you're seeing in delinquencies today, would it be possible to give us a book ends on what that write-off rate could look like by the end of the year?

I don't think we are prepared to forecast out to the end of the year what we think our write-off rate will be, because we continue to work through underwriting that we did, 1, 2, 3 years ago when we were underwriting credit with the lower credit score. And I don't think, until that pushes through the system, that we'd be prepared to give a forecast that we'd be comfortable was accurate.

And the continued balance shrinkage makes prediction of that percentage a little more complicated where the absolute dollars in delinquency are coming down, we do expect to continue to see the absolute dollars in charge-off come down.

Okay.

Dan, as we mentioned earlier, we hope over the next 2 quarters to get comfortable with these issues, among others, and be in a position to provide more definitive earnings guidance.

Okay. Just a couple other things I wanted to touch on. Your new store planning, would you agree to opening new stores this year is unlikely, or is that possible?

Opening new stores this year is unlikely, to say the least. I don't think we have an intention of opening any stores this year. What we are really looking to do is put in place the groundwork, and if our performance continues to improve, that we would be in a position to look at opening stores in fiscal '13, and have those begin to contribute to revenues and profitability in that year. We certainly don't anticipate opening any stores this year.

Any numbers, round numbers, 5, 10, 3?

I think some number between 5 and 10 would be the best guess if we did initiate a store opening plan. But we haven't made any firm commitments. It certainly wouldn't be more than those numbers. And, if you look at the demographic opportunity for us, and the number of markets we think we can grow revenues more significantly than the number of stores, so by careful selection, I think we could open a relatively small number of stores and have a much larger benefit to revenues and profitability.

Okay. From the sounds of it, it doesn't sound like appliance inflation is necessarily translating into an inflation benefit in your sales. Are you surprised by that? Or am I overstating it? Are you getting some of that benefit in your sales?

I think you may be overstating it. I think there may be some inflationary benefit in certain products and with certain vendors. But, I think that, that is being more than offset by the shift by consumers to, particularly in laundry, to the top load, high-efficiency laundry, which is at a materially lower price than the front load, high efficiency laundry.

I realize every market is different, but historically, when you saw price increases in appliances, let's say if you had a 5% increase in appliance prices, were you able to capture half of that or more in ticket based on what you've seen historically?

David, if you might answer that question?

I think, Dan, we would say about half of that historically, again, it's very early to tell right now because some manufacturers are all over the board. They came out, reversed them back, like we said, because there's still key price points out there that the manufacturers are warranting. It's kind of all over the board. But again, we are seeing about half of it, I would say.

Great. Thank you.

Thank you. (Operator Instructions). Phil Fischer from Hamagami.

Hi, gentlemen. Great quarter. A couple of questions for you and I apologize if you already addressed these on the call. First of all, you've got about a little less than $100 million in a term loan, 16.5% you're paying on, the rest of your debt you're paying 6% on. What are your plans for renegotiating that downward? Because I calculate that could be as much as $0.20 in earnings if you can get it down to the 6% you're paying on the rest of your debt.

This is Theo Wright, and I think that is something that we will be working on over the next several quarters as I said, and we do have -- believe we will have the capital available to effectively either negotiate or make plans to repay a portion or all of that term debt. And that is something we will be working on over the next several quarters.

Great, great. My other question, you may have mentioned this, I apologize, but did you say the provision for bad debt that you run through the income statement is going to increase slightly from the first quarter to the second quarter?

No, we did not. We expect it to decrease.

Okay, great. Great. And do you have any degree of what you are targeting that number to be for the year, ballpark?

We have not. We have not forecast that number. We think the trend is downward, but we haven't given an explicit forecast.

Would you expect it to decline sequentially for each of the quarters from here to the end of the year?

It is a little hard to say right now. We need to continue to monitor the performance. We would expect charge-offs to continue to show improvement throughout the year.

Okay, great. All right. Thank you very much.

Thank you. If there are no further questions, I would now like to turn the conference back over to the speakers for any additional remarks.

Thanks, everyone, for joining us this morning.

Ladies and gentlemen, that does conclude today's conference. You may now disconnect.