Conn's Inc (CONN) 2014 Q1 法說會逐字稿

Good morning and thank you for holding. Welcome to the Conn's Incorporated conference call to discuss earnings for the first quarter ended April 30, 2013. 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 the question-and-answer session. As a reminder, this conference call is being recorded. The Company's earnings release dated June 6, 2013, distributed before the market opened this morning and slides that will be referenced during today's conference call can be accessed by the other Company's investors relations website at.ir.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 and 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.

Your speakers today are Theo Wright, the Company's CEO; Mike Poppe, the Company's COO; Brian Taylor the Company's CFO; and David Trahan, the Company's President of Retail. I would now like to turn the conference over to Mr. Wright. Please go ahead, sir.

Good morning and welcome to Conn's first quarter of fiscal 2014 earnings conference call. I'll start the call with an overview of our retail segment. Then Mike will discuss our credit segment, and Brian will finish our prepared comments.

Same-store sales for the first quarter by category are on slide 2. Same-store sales in the quarter increased by double digits in all major categories except electronics. On slide 3, you can see gross margins by product category for the quarter. The Company previously established a longer-term goal of 40% retail segment gross margins. We've met that goal in the first quarter, but this isn't yet sustainable for a full year.

Preliminary May same-store sales increased about 18%. Same-store sales increased in all major categories and were up by double digits in every category except electronics. For May, electronic same-store sales increased 4%. Appliance same-store sales were up about 14%, and furniture and mattress same-store sales increased 43%.

Turning to slide 4, sales floor execution is still getting better. Sales associate productivity improved to $68,000 per sales associate. Turnover was 56% in the quarter, similar to the prior year. About 50% of this turnover was directed by the Company as we work to improve the productivity of our sales associates. Our sales associate productivity and conversion rates are still not acceptable despite the progress. We're increasing the intensity of training and raising accountability for meeting goals.

On slide 5, you can see a three-year trend in furniture and mattress sales. Same-store sales of furniture and mattresses increased 51% in the first quarter on top of a 43% increase a year ago. For the first quarter of fiscal 2014, furniture and mattress sales represented 26% of product sales and 35% of product gross margin dollars. Our new stores averaged 36% of sales from furniture and mattresses for the quarter, and our remodeled stores continued to outperform as well.

We're still adding to our furniture assortment; with a more competitive assortment, sales growth should accelerate. As an example, our dining and bedroom categories are closer to a complete assortment. Dining and bedroom same-store sales increased 90% for the quarter. Our assortment and living room furniture and accessories will expand significantly this quarter and next quarter. The mattress assortment and presentation has also been enhanced, and our associates have better tools for matching customers with the right mattresses.

Mattress sales continue to increase steadily, with mattress sales up 60% for the quarter and 66% in May. Despite a 73% total increase in furniture and mattress sales for the quarter, inventory levels are constraining our ability to grow even faster. We will be relaxing our internal inventory turn targets in furniture and mattresses for the next several quarters to ensure there are adequate quantities of all SKUs on hand, giving our sales associates confidence in selling everything on the floor. The Company previously established a longer-term goal of 35% of sales from furniture and mattresses. We are exceeding this goal in a number of locations and are making progress towards our overall goal.

As discussed on our prior conference calls, sales in the fourth quarter didn't meet our internal expectations. Higher advertising spend in the holiday period didn't create the traffic we anticipated. Because of this disappointment, we reevaluated our advertising. We concentrated more of our spending on credit-based messages to consumers. We continued this approach into May and June and have seen consistently improving traffic over the prior year. ¶ Specifically, we've allocated more of our spending to TV, direct mail, and digital. We've increased TV exposure in our average markets roughly 50%. We reduced radio and print spending, with radio now an infrequent component of our overall plan. And we've included more and stronger messages to apply online in all media. Some results of our advertising changes are total applications for credit increased 18% in April and May, reflecting increased customer traffic overall. Online applications increased 44% in April and May. The percentage of applications resulting in a completed sale increased 2.3% in April and may indicating the quality of traffic and our ability to convert improved as well.

New customers in the same store base increased to 39% of sales from 31% a year ago. We are acquiring new customers as a result of revisions to our advertising approach. Based on past experience, these acquired customers will be retained, supporting future sales levels. Our core customer usually doesn't have available cash or financing to purchase our products. Put simply, if our core customer has only price and product information, there is no call to action because of the lack of resources to complete a purchase.

Consumers with credit scores below 650 still represent a higher percentage of the population than before the recession. Median household incomes have declined significantly. There are more individuals that fit our core customer profile. We just need to communicate our value proposition to these consumers more clearly. Over the next several months, we will continue testing our allocation of media and messaging. Beginning in the third quarter, we'll apply what we have learned more aggressively and consistently. We believe we can drive more and better quality traffic to our stores.

On slide 7 is information about stores opened in fiscal 2013, with our Las Cruces and Tulsa stores open for only a few days in the quarter. The new stores are performing well, but store conversion rates remain below the Company average. Our sales force will likely take a year or so to fully mature in the new locations. Despite the lack of maturity, our new stores outperformed the mature store base by 30%, even after the 16.5% increase in same-store sales in these mature stores. Conn's business model is dependent on repeat purchases by customers. New locations should grow as we build the base of customers that understand and appreciate the unique value of our credit offering.

Store sales associate development combined with building a customer base has led to store growth over time, and we expect this to continue. We plan to add 10 to 12 stores in the current fiscal year. As of today, we have executed 15 lease or purchase agreements. Some of these locations won't open until fiscal 2015. Another four agreements should be executed in the next few weeks.

Our expectations for future store openings by quarter are two stores in Q2, seven stores in Q3, and the remainder in Q4. New stores on average have more square footage than existing stores. Combined with our continued remodeling and relocation projects, we expect sales square footage to grow by approximately 25% in fiscal 2014. The Company, we believe, has the infrastructure to support this growth pace. Work is well underway on our fiscal store opening plan for 2015. Assuming our new stores continue to perform, the store opening pace in fiscal 2015 will increase. Now, I'll turn the call over to Mike. Mike?

Thank you, Theo. Operating profits increased year over year on portfolio growth. We expect continued improvement in the second quarter, driven primarily by portfolio growth on strong sales performance. As shown on slide 8, roughly 90% of our sales in the first quarter were paid for using one of the three monthly payment options we offer. The increase in the percent of sales under our finance program was driven largely by the change in merchandise mix, as ASPs increased and the volume of cash tickets declined significantly. The improved performance in delinquency and percent of the portfolio re-aged, as well as charge-off trends are shown on slides 9 and 10.

60-plus day delinquency declined to 6.7% at April 30, down 40 basis points from year end and 60 basis points from the same time last year. This is our lowest quarter and 60-day delinquency rate since July 2011. Consistent with prior guidance, the charge-off rate declined sequentially and year over year in the first quarter. The charge-off rate for the first quarter was approximately 6.1%, down 130 basis points from the fourth quarter and 240 basis points year over year.

Also, slide 11 shows that a larger portion of the current portfolio balance is from recent originations. The percent of the balances in the portfolio originated more than 36 months ago has declined rapidly over the past two years, and at the end of April, represented only $6.2 million of the portfolio balance. While the delays in tax-refund processing this year impacted the timing of cash received, we do not believe it had a meaningful impact on portfolio performance. As shown on slide 12 the average payment rate for the first quarter improved over the same time last year by 9 basis points after five consecutive quarters of year over year declines. This also suggests that the change in payroll taxes did not significantly effect our customers' ability to make their monthly payments. We believe the payment rates benefiting from shorter contract terms put in place in 2011 and increased offering of short-term no-interest payment options, our 3, 6, and 12-month Same as Cash programs. In May, the payment rate was 14 basis points higher than the same time last year.

The portfolio yield was 18%, consistent with the prior year and down from the fourth quarter. Also, it is lower than originally anticipated, due to increased use of short-term, no interest financing options, which represent about 31% of the portfolio balance to quarter end. This is a conscious decision on our part to speed up cash collections. We believe the benefit of the accelerated repayment on these receivables outweighs the cost of the reduced yield and effect it has on operating margin. The benefits include a 9-basis-point increase in the payment rate during the quarter; improving portfolio velocity, that is how quickly the balances turnover; allowing reinvestment of the funds and sales to the same and new customers; and requiring less capital to fund growth. It should also reduce servicing costs and static loss rates. We will continue to monitor the impact of the higher short-term cash option offering on portfolio profitability and capital needs, and we'll adjust our plans if we do not continue to see the anticipated benefits.

As discussed in the prior call, we implemented changes in our underwriting process during the quarter. These changes were based on analysis performed over the past year to identify credit attributes that would allow us to enhance our decision model to better identify quality credit customers. It is important to note that standard credit scores are not reliable predictors of customer performance at lower scores. We continue to test and enhance the internal custom grading process we've developed over our 45 plus years of offering credit to sub-prime borrowers. The analysis was based on our historical portfolio performance data and supported approving certain lower score customers we had been declining, while declining certain higher scored customers we had been approving. As a result, the approval rate increased about 400 basis points compared to the prior-year quarter.

Additionally, the analysis indicates that the changes should have little effect on the credit risk and the receivables underwritten, despite the fact that the average score underwritten dropped from 611 in the fourth quarter to 602 in the first quarter. Early results indicate that this is, in fact, the case as first payment delinquency rate for the February and March originations trended lower compared to prior-year performance. Our approval rate and decline decisions -- sorry our approval and decline decisions are based on expected transaction profitability. Our ability to incrementally approve customers being declined today and still deliver our targeted 20% return on equity increases as the interest yield and retail gross margin increase. The additional expected credit losses would be more than paid for by the increased gross profit.

Our ability to improve credit profitability over time will be driven by improving portfolio performance, portfolio growth driven by same-store sales growth and new store openings, portfolio yield expansion from the ability to charge higher interest rates as we enter new markets, such as New Mexico and Arizona, where we're earning 26% on interest-bearing accounts, increased operating leverage as a result of portfolio growth, and the ability to find much of the portfolio growth from Company earnings. As such, we expect to see continued improvement in the profit contribution of the credit operation over the coming year. Now, I'll turn the call over to Brian Taylor. Brain?

Thank you, Mike, and good morning, everyone. Net income for the quarter rose $10.6 million over the prior year to $22.2 million, or $0.61 per diluted share. In the same quarter last year, we earned $0.35 with 10% pure diluted shares. Retail segment revenues were $210 million this quarter, an increase of 25% over the prior-year period. The growth was driven by a 17% increase in same-store sales, and the five new Home Plus stores opened in fiscal 2013. The stores opened on April 26 in Las Cruces and Tulsa will benefit in feature periods.

Furniture and mattress sales rose 73% from the prior-year period, driving over 50% of the growth in product revenues. Significant revenue growth was also reported in the other major product categories, with double-digit same-store increases in the appliance and home office groups. Same-store sales of electronics improved through the quarter, and in April were up 6% over last year. Retail gross margin was 40.3% this quarter, up 660 basis points year over year and 340 basis points sequentially. Margins improved in each of the product categories. The overall margin level also benefited from the rapid growth in the higher-margin furniture and mattress sales.

In the first quarter of each fiscal year, certain of our vendors provide us with higher promotional assistance. Excluding such assistance, retail margin would have been 38.8% in the current period. Operating income for our retail operations rose 150% to $27.3 million, or 13% of revenues in the current period, driven by the sales growth and expansion in the retail margins. We continue to invest in future store openings, which tempered SG&A leverage this quarter. Pre-opening costs including rent, personnel, and advertising were $1.5 million this quarter, or $0.03 per share, and were not significant in the prior-year period.

Now turning to the credit segment operations, credit segment revenues increased $8 million over the first quarter of last year due to a 19% increase in the average portfolio balance. SG&A expense rose 16% from the prior quarter due to portfolio growth, which drove increased staffing levels. Servicing costs were 38% of revenues this quarter, 230 basis points below last year. Bad debt provision rose $5 million over the prior-year quarter, driven primarily by the $118 million increase in the average receivable portfolio. The increase also reflects a $32 million increase in the portfolio within the current quarter, compared to a decline of $8 million during the prior-year period. As a percentage of the average credit portfolio balance, the annualized provision rate was approximately 7%, relatively consistent with the fourth quarter of fiscal 2013.

Based on current trends, we expect the second quarter charge-off rate to increase slightly from the first-quarter level, and the full-year charge-off rate to finish between 5% and 6% for fiscal 2014. We expect the bad debt provision rate to range between 6.5% and 7% of the average portfolio balance on a full-year basis in fiscal 2014. The increase in our guidance for bad debt provision is driven by higher than previously anticipated sales growth and the related acceleration in projected portfolio growth. Credit segment operating income increased slightly to $11.7 million, equaling 30% of the consolidated total this quarter. Interest expense was relatively flat year over year. We recorded $400,000 of accelerated amortization of deferred financing costs related to the early repayment of our asset-backed notes in April. This offset a decline in borrowing rates under our revolver. With the April repayment of the notes, we expect the effective interest rate for the balance of fiscal 2014 to decline from the first-quarter level.

Focusing now on the balance sheet and liquidity, inventory turns in the first quarter were 6.1. At quarter end, 84% of our $89 million in inventory was financed with outstanding accounts payable. As shown on slide 13, our customer receivable portfolio balance rose $32 million during the quarter to $773 million at April 30. Borrowings declined slightly during the quarter and equaled $294 million at April 2013. Outstanding debt stands at 38% of customer receivable balance, dropping 200 basis points since year end.

Turning now to slide 14, the expansion of the profitability of our operations and proceeds from stock options exercises allowed us to fund the increase in our receivable portfolio and working capital this quarter, as well as capital expenditures. Our debt-to-equity ratio improved 40 basis points from January 31, and 230 basis points over the past year, standing now at 0.6 times at April 30. This improvement reflects both our profitable growth and controlled investment in inventory. At quarter end, we had immediately available borrowing capacity of $245 million under our revolving credit facility, with an additional $45 million that can become available with the growth in receivables and inventory. Given our current capital position and growth plans for the next year, we do not believe additional capital will be required to fund the business for at least the next 12 months. We have however, continued to evaluate alternatives to support our longer-term needs.

Moving now to slide 15, we raised our annual earnings guidance to $2.50 to $2.65 per diluted share for fiscal 2014. The more significant items were influencing our revised full-year expectations include increased same-store sales growth by 300 basis points to 8% to 13%. Retail gross margin expectations were raised to range between 37% and 38.5%. Credit portfolio interest and fee yield of approximately 18% compared to 18.6% in fiscal 2013 due to the increased proportion of short-term, no-interest receivables to the overall portfolio balance. Provision for bad debts of between 6.5% and 7% and average diluted shares outstanding of approximately $37 million. Based on the midpoint of our revised fiscal-2014 full-year guidance, we expect return on equity to approximate 18.5%, which compares to our long-term goal of 20%. Much of this analysis and more will be available in our Form 10-Q to be filed with the SEC. This completes our prepared remarks. Karen, please begin the question-and-answer portion of the call.

Thank you.

(Operator Instructions)

Peter Keith, Piper Jaffray.

Congratulations on the continued success here. I, myself and I think others have questions on the increase in the bad-debt provision. Can certainly understand the rapid growth of the portfolio, but a lot of the current statistics are actually getting better. So there just seems to be a little bit of a disconnect. And wondering if you could explain it in more detail, or is it -- and help us understand if it is maybe just some conservatism on how you're provisioning. Thank you.

Peter, this is Mike. It is driven largely just by -- as we accelerate growth and you continue to see more receivables roll into the portfolio and move into in season in the portfolio, it is driving this acceleration in the provision rate. And as performance continues to improve, that should moderate over time. And we would expect the guidance implies that the provision rate should improve over the remainder of the year.

Okay, that's good to hear. And you had mentioned briefly that you thought the charge-off rate might pick up a little bit in Q2, but then it sounds like it would drop off in the back half. Could you just explain what might be happening there?

It is just as we project forward performance in the portfolio and the way we're seeing delinquency flow through, we would expect just a slight tick up from the 6.1% rate in the first quarter. And then continue the path down over the remainder of the year.

Okay. More on the retail side, an interesting comment that despite the strong furniture and mattress sales, you feel like your growth might actually be hindered by inventory or lack thereof. A two-part question on that, could you estimate how much sales you think you're losing as a result of the lower inventory? And then part two on that, when might we be able to see the looser inventory start to come to fruition?

Peter, it's hard to estimate the impact on sales. I think what you can say objectively is as we finished the month of May, there were something in the range of $2 million worth of revenues that we weren't able to recognize because we didn't have the inventory -- round numbers, something in that range. But what's harder to estimate is the impact on sales when our sales associates don't have confidence in inventory levels and certain SKUs. And so, don't really promote sale of those items. If our sales associates have confidence in all of the floor and their ability to deliver that product to the customer, without having any out-of-stock conditions, then I think sales could rise significantly. How much? We don't know; we'll just have to see what happens once we get the inventory levels to the right level to support the possible sales.

That's actually great feedback. It's hard to project, but is getting the inventory to the right level, do you have an estimate on how long that might take?

We think we'll be in a good position by the early part of the third quarter. So as we roll into August, we should be in a much improved position.

Okay, that's great to hear, congratulations again, thank you.

David Magee, SunTrust.

It's David Magee and good quarter. Just a couple of questions, one is I was intrigued to hear that the CE category has improved in the last two months. My recollection is that April or April NPD wasn't much improved for the sector. Do you sense there's something that happened out there as far as industry demand, or is this something different that you guys have been doing in recent months?

We see the same NPD information that you see. I think what we've done that's not really different, but continues our trend of really promoting larger screen size and also compensating our sales associates for selling those larger screen sizes. We've continued that. And I think the one change we've seen is the assortment available of those larger screen sizes has increased significantly. If you go back a year, we really had one larger than 55-inch supplier available to us through Sharp, and now there's 60-inch available from a lot of people and 80- and 90-inch television available as well. So I think what we're seeing in our case is that our strategy of promoting larger screen size seems to have lined up well with the availability of product now from key vendors like Samsung and LG in electronics.

Thank you, Theo. The second question I have has to do with the new stores and the volume being so much higher than the legacy stores. With the conversion rate being maybe a little less than planned, is that just a training issue that needs to be smoothed over, over time?

It is in part, but and a part of it isn't going to be smoothed over in time. As we put a group of new sales associates on the floor, even if we train them perfectly, those sales associates are not going to perform at the same level as our mature sales associates in our existing store base. We definitely need to get better at training. We need to get better at recruiting and bring the right people in as well. But you're still going to have some lag in those new locations. You're simply not going to be able to deliver a fully trained, fully experienced Conn's sales staff in a new store. So part of it is just the nature of a commission-based sales force and a true selling floor. I think we can absolutely do better. We're working to do better, but I don't think we're going to get to perfect.

And what is the offset that's creating the higher volume? Is it traffic, the basket size, or the size of the stores, or all of the above?

Size of the stores and the furniture display area, it clearly is having some impact. But I would say the biggest difference is location. The new stores we've opened at a lower store density in relation to population, and we've located those stores in proximity to our core customer base. And so I think much of the improved performance there really relates to a site selection process that's been driven by an understanding of who is our customer, how do we serve them, and where do they live?

Good luck.

Rick Nelson, Stephens.

I would like to follow-up on the store productivity as well, that chart you have on page 7. Curious if the credit is the same around the new stores as it is around the rest of the store base in terms of approvals and down-payment requirements?

In the quarter, which is what is reflected on this slide, the credit-granting process in the new stores was the same as in our other stores. So for the quarterly period that's presented here, it is in fact the same.

Theo, are all five stores performing above that Company average?

I believe that there's one that is right at the Company average, and then the other four are all well above the Company average. And the one that is right at the Company average is the one we opened in a more mature market. And I think we've struggled to promote effectively in that situation. We're getting better, but there's some unique challenges there. But they're all at or above the average.

And the credit metrics out of the new stores, how do they look? The 30-day type delinquencies would be helpful.

Is still very early.

60 days, how that would compared to the Company average?

So, Rick, this is Mike. It's still early to have a really strong read, but generally, they're going to be a little bit higher because it's a new customer base and doesn't have the seasoning of a bunch of existing customers rolling through. But would be for the originations during the quarter under the same rules as every other store. Those new customers will perform very similarly to a new customer in an existing store.

Finally, if I could ask you about the store growth, the 10 to 12. Are those all in existing states, or are you going to be entering new states this year?

Those 10 to 12 are all in existing states, since we've already opened in Arizona and New Mexico. But those should all be in existing states.

2015, will you see probably some new states being entered?

Yes, and we have a couple of locations that depending on the timing of construction that are in new states that might open at the very end of the current fiscal year or the beginning of next fiscal year, but we'll definitely be going into new states in calendar 2014.

Good luck.

Brad Thomas, KeyBanc Capital.

This is Jason Campbell standing in for Brad today. Congratulations on a good quarter. You had mentioned in your press release the gross margin, you were getting some benefit from some better sourcing. I was wonder if you can speak a little bit more about what you are doing in that area?

I think there are a couple components to that, and it's reflected on slide 3 that we provided. One, in the furniture and mattress area, we are direct importing a much higher percentage of our products, mostly in the case goods area. And that is clearly having a benefit to our margins. So if you look at our dining and bedroom assortment, a lot of which is direct imported, in those categories our average margins are going to be in the low 50s. And so, as we start to source more products, including upholstery and leather products, direct from Asia, we think that there could still be opportunity to improve. The other area where I think we've had an impact from sourcing is in home appliances, where we've consolidated our vendors and I think done a better job of sourcing there. And that some of that improvement that you see in gross margin and home appliances reflects better sourcing in that category.

Okay. And then you had mentioned long-term target of 35% for furniture and mattress. It's accelerating pretty quickly. Is that a three- to five-year target? And do you think that it could potentially be a little bit higher? And where are you guys looking longer out with that category?

Some of it's going to depend on the store opening pace. The stores that we've opened recently are already above that goal. And so, as we see more new stores roll into our operation, that's going to affect how quickly we get to the goal. We also have a number of our existing locations that are relocating to new locations within their market area, where we'll have more sales square footage for furniture and mattresses. And that will have an effect. I'd say the goal is more of a two-year type timeframe, if I was to give you a rough guess. Could be a little faster; could be slower, but if I was to guess, I'd say two years from now, we'd like to be at that goal.

All right, and then lastly, the furniture-mattress category overall was over 50% comp. Can you break that out between what it was at remodeled stores versus what it was at the stores still in your old format?

Don't have that precise number, but the comp into the remodeled stores was materially higher than in the stores that hadn't been remodeled. And that's true, both of the furniture and mattress comp, as well as the overall same-store sales comp in those locations.

And how much of your store base has been remodeled so far?

If you look at it on a revenue basis, we're getting up to two-thirds roughly of the store base that's been remodeled. In revenue dollars, it's less than that in end locations. But most of our large stores at this point have either been remodeled or we have an active plan underway to relocate those stores.

Scott Tilghman, B Riley.

I wanted to circle back on one item on the bad-debt provision. The answer that was provided before sounded like we were looking at it from a dollar standpoint. And obviously, as the portfolio balance grows, it's going to go up in dollars. But, I'm still not getting my hands around why the guidance for the full year is up about 50 basis points from the level it was at before. I was wondering if you could just circle back on that. And I'll throw out my second question now, as well. In thinking about the heavy opening schedule towards third quarter, what will that mean from a pre-opening expense standpoint in the second quarter? Thank you.

We'll answer those in the reverse order.

That's fine.

On pre-opening schedule we do expect that in the second quarter we'll have somewhat higher pre-opening costs than we had in the first quarter. And that's reflected in the guidance we provided overall for the year. But yes, the pre-opening expense should be somewhat higher in the second and third quarter and then go down to a much lower level in the fourth quarter. So that's the trajectory we would see in pre-opening costs.

And the provision guidance, the rate impact, why it is going up is we had not -- when we originally set the guidance, we did not have the anticipation of this strong of sales and portfolio balance growth. And so the faster the growth, it puts pressure on the provision rate.

Okay, so it's not tied to the credit metrics or anything like that? It's the size of the balance?

It's the speed that the growth -- the speed of growth in the portfolio.

Laura Champine, Canaccord.

My question is on -- my first question is on the May comp, which obviously is performing very well against a tough comparison. But how does that monthly comparison for May compare to the 22% growth you had in the full quarter last year?

Are you asking how does May compare to May a year ago?

I'm asking what the May was a year ago, basically.

Okay -- 24% a year ago.

So you're performing very well in May, even up against a really difficult comparison, thank you. The other question I have is obviously, your margin was much higher in consumer electronics, and that segment seems to be showing some recovery, some growth. What is driving that? And in particular, what's driving the higher margin there?

The higher margin is being driven by the same thing that's driving the dollars, which is selling more large screen size, higher ticket television. If you look at the ASP as well, terrific ASP performance. And those two things are clearly correlated. I'm just going to throw out numbers that aren't perfectly accurate, but directionally they'll be [okay]. A $2000 television, we're going to have 30% plus margins or in the 30% range. A 7 -- a $500 television, it might be 12 points. So there's -- and again, I don't have those numbers exactly right, but the difference in margin between lower-priced, smaller screen television, higher-priced, higher featured, larger screen television is huge. So the fact that we're selling more of those large screen sizes has benefited the gross margin.

And Theo, lastly, is that a function of Conn's getting better at selling big TVs? Or Conn's getting better at selling its credit offer?

In this case, I think it's we're getting better at selling the big TVs. We've made some modifications to our compensation as well to really focus our sales force on those larger screen size TVs. If you look at the data that we provided on slide 4, I believe, it's about our sales per associate. I think that's where you see some of that as well, is that our sales force is more mature, better trained, and properly motivated with our commission structure to focus on those larger screen size, more featured televisions.

Peter Keith, Piper Jaffray.

I was intrigued that you guys had said that the store growth actually could be accelerating next year. You have the stated view of 12% to 15%. If that is executed upon, what store growth range could we think about for next year?

Peter, I think we're still evaluating that. We've talked about 10% to 15% annual store growth count -- or store count growth. And I think we're still evaluating what pace we think we could effectively manage. But assuming the performance of the new stores continues like it has, we would look at raising that growth rate.

Okay, great. One other question that we get a lot of inquiries on is the promotional receivables. Could you help us understand why that is ramping as much as it is in the last 12 to 18 months? And then, as a follow-on, what does that ramp do to the overall ROE for the credit segment? Because you talk about that it may diminish the yield, but it sounds like there's some other costs associated with that might come down. Could you help us understand that dynamic overall?

This is Theo. I'll take a stab at that and Mike may fill in as well, but the real motivating factor behind the increase of those promotional receivables is to increase the velocity of our portfolio, and in effect, increase the size of business that our existing capital structure can support. So that is the primary motivation. And so, the result of that as it flows through is we could see a lower ROE in the credit segment alone, but given that we could support a larger retail business with the same portfolio, our total ROE would actually be up, and potentially up quite materially. And so that's one of the things that we're seeing today, which is we need less equity, in effect, to support a bigger business, because of those promotional receivables.

That's helpful. To follow on that, I've always thought about your business as maybe on a normalized run rate, the total EBIT contribution would be about 50/50 from retail and credit. As you were to look forward now with that dynamic around the promotional receivables, do you see it settling out? That maybe 60/40 with retail/credit? Or what kind of overweight to retail do you think we could see over time with that EBIT contribution?

I think it's hard for us to give you a precise number there, and especially since a lot of the use of promotional receivables is dependent on consumer preference; the consumers decide some of that. We can't necessarily force it. But I'd say in a stabilized environment, something closer to 60/40 might make sense. If both credit and retail are performing equally well, something in that range does make sense. But you will definitely see -- the direct answer to your question is there definitely has been and will be a shift to more of the profitability coming from retail as compared to credit.

(Operator Instructions)

Bob Sales, LMK Capital Management.

You mentioned in the gross margin discussion that there was a, I think you said 300 basis points of contribution from favorable -- what I interpreted to be favorable vendor activities. Can you just expand on that a little bit more and talk about whether or not that's repeatable going forward?

It was about 150 basis points in the quarter, and it is repeatable. We've been doing that for many years. It goes back a long, long time. We did it last year. We did it the year before. So yes, we believe it is repeatable, but it really only affects the first quarter.

Okay and so is that the reason for -- the rest of the year adjusts to a more normalized state for that activity?

That's correct.

Okay, and then on the press release, I didn't see the FICO scores and the credit disclosures. What were the FICO averages during the quarter like you have had the last several quarters?

You bet, and there's also multiple quarters of data on our IR website, if you want to go pull the credit stats. But the origination score was -- we commented on during the call was 602 for the quarter versus 611 in the fourth quarter. And the weighted average score in the portfolio was 601 last year and is 596 as of April 30 this year.

What was it the end of period for Q4?

At the end of January, it was 600.

Thank you, and that concludes our question-and-answer session for today. I'd like to turn the conference back to Conn's for any concluding remarks.

Thanks, everyone, for joining.

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