Conn's Inc (CONN) 2014 Q2 法說會逐字稿

Good morning and thank you for holding. Welcome to the Conn's, Inc. conference call to discuss earnings for the second quarter ended July 31, fiscal 2014. 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 September 5, 2013, distributed before the market opened this morning, and slides that will be referenced during today's conference call can be accessed by the Company's Investor 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 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.

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 like to turn the conference over to Mr. Wright. Please go ahead, sir.

Good morning, and welcome to Conn's second quarter of fiscal 2014 earnings conference call. I'll begin the call with some comments on this quarter's credit segment performance and an overview of our retail segment. Then Mike will discuss our credit segment further, and Brian will finish our prepared comments.

Starting with the credit segment, our provision for bad debts for the second quarter was higher than forecast, and delinquency unexpectedly deteriorated. In late May, we upgraded our collections platform. This is a software system our collections agents use when collecting delinquent balances. The system we upgraded to is widely installed, and has been in use elsewhere for years. Our former platform was internally developed older technology, and not the best long-term solution for the Company.

Although software systems are never perfect, and we can improve the use of the new system, the platform worked properly when placed in service. Unfortunately, there were errors in the construction of data flows from our other systems to the collections platform. Some information wasn't transferred to the new system and wasn't available to our collections agents. Some information was lost and not recovered. User errors, typical with a new system, made matters worse.

Our primary collection method is phone communication with delinquent customers. These implementation errors reduced the phone numbers available for our collections agents to pursue collections. Because the reduction in phone numbers available occurred over time, the effects were not immediately apparent. By July, delinquency was increasing for reasons we couldn't understand. But by mid-July, we had identified the causes; and by early August, corrective actions were completed.

Since that time, collections performance has improved rapidly, and Mike will provide more details on this improvement. The damage was already done. Later-stage delinquency had deteriorated, and charge-offs of uncollectible accounts during June and July were higher than expected. Additional provision for bad debt expense of $5.9 million was required in the second quarter. Our failure to implement the system properly and to identify issues quickly enough was painful and expensive, but the issues were identified and were corrected.

We don't expect any additional expense from these implementation issues in the third quarter of this year or other future periods. We are reaffirming the earnings guidance provided last quarter for the full year of $2.50 to $2.65 per share.

Turning to the retail segment, same-store sales for the second quarter by category are on slide 2. Same-store sales increased by double digits in all major categories except electronics. On slide 3, we show product gross margins by product category for the second quarter. Product gross margin percentages were up over the prior year across the board. Total gross margin percentage for the quarter was 38.3%, an increase of 420 basis points over the prior year.

The Company set a longer-term goal of 40% retail segment gross margins. We didn't meet this goal in the second quarter, but continued to progress. With increasing furniture sales and margins, this goal can be achieved. August margins, although not yet finalized, indicate an improvement over the second quarter. Preliminary August same-store sales increased about 31%. Same-store sales were up by double digits in every category. Total sales for August increased 51%.

Turning to slide 4, sales floor execution is still getting better. Sales associate productivity improved to $77,000 per sales associate. Measured customer satisfaction improved as well. Our sales associates are earning more while total commission calls have not increased. Turnover of tenured productive sales associates is minimal. Our customers are getting better sales experience, assisted by a more capable, long-tenured sales associate. We believe our sales associates have the best opportunity in the industry, and we've been able to recruit associates to support our growth plans.

On slide 5, you can see a three-year trend in furniture and mattress sales. Same-store sales of furniture and mattresses increased 34% in the second quarter, on top of a 58% increase a year ago. For the second quarter of fiscal 2014, furniture and mattress sales represented 25% of product sales, and 35% of product gross margin dollars. Stores opened in fiscal 2013 and 2014 averaged 38% of sales from furniture and mattresses for the quarter.

Remodeled stores continue to outperform as well. During the second quarter, we changed part of our furniture lineup, mostly in living room furniture. This line resetting pressured furniture margins in the second quarter as we sold floor models and discontinued products. The expanded and improved assortment gives customers more selection, and gives the Company more margin opportunity. Many of the new SKUs are directly imported from Asia.

In August, furniture margins increased, and furniture same-store sales increased 64%. Mattress same-store sales continued to increase steadily, with mattress sales up 37% for the quarter and 46% in August. August combined furniture and mattress sales were 26% of total product sales, the highest level yet for the Company. The Company previously established a longer-term goal of 35% of sales from furniture and mattresses. We are exceeding this goal already in some stores, and are making progress to our overall goal.

As we discussed on our prior conference call, we spent more on TV, direct mail, and digital advertising. We increased TV exposure; we reduced radio and print spending, with radio now an infrequent component of our plan. We included more and stronger messages to apply online in all media.

Also starting in the second quarter, we made it easier for our customers to apply for credit. For the first time, we advertised a phone number to call to apply for credit. On slide 6 is new information added to our advertising, showing the three easy ways to apply for Conn's credit, including the phone number to call to apply. Direct mail programs also included the use of a mail-in form for application. Although most of our customers probably have Internet access, not everyone likes using the Internet for everything.

The response to our advertising changes was impressive. As you can see on slide 7, for August, application traffic increased dramatically. Phone application volume was surprisingly high. In fact, initial phone application volume was more than we could handle. Overall customer traffic and the quality of traffic improved, and it was the principal cause of the 18% same-store growth in the second quarter.

On slide 16, you can see our advertising spend was up slightly as a percentage of sales. However, the changes to our advertising approach made advertising much more efficient in our established markets. Advertising spending in our mature markets was well below 4% of sales. New market advertising, particularly in the major metropolitan market of Phoenix, masked the improvement in efficiency.

Beginning in the third quarter, we are applying what we have learned more aggressively. In August, the same-store growth rate increased from the trend of the three months prior, to 31%. These changes in advertising strategy are still relatively recent. Over the next few months, we will see if the results in August are sustainable.

On slide 8 is information about stores opened in fiscal 2013 and 2014. The new stores are performing well, and new store performance is still above the Company average after the significant same-store increase in the second quarter. The information on slide 9 also does not include results from our recently opened Phoenix stores. Early indications are these stores will perform well above the Company average.

Some investors have expressed concerns that Conn's business model may not work as well in new markets with a smaller Hispanic population. Tulsa is a new market for us, with a much smaller percentage of Hispanic population than many of our Texas, New Mexico, or Arizona markets. The Tulsa store is performing solidly above the Company average. Our model has performed well in Southeast Texas and Louisiana markets, with a fairly low Hispanic population, for decades.

We plan to add 10 to 12 stores in the current fiscal year. Year-to-date, we have opened six stores, and are confident we will meet our yearly goal. Work is well underway on our fiscal year store opening plan for 2015, with nine leases or purchase agreements already signed for locations expected to open in fiscal 2015. Our plan is to open 15 to 20 stores in fiscal 2015.

We have the infrastructure in place to support the store opening pace. Store openings in fiscal 2014 have not overstretched our resources or capacity. In many ways, new store growth has created less stress on the retail organization than same-store growth.

Now I'll turn the call over to Mike.

Mike?

Thanks, Theo. Credit segment profits declined sequentially and year-over-year, on a higher provision for bad debts. The deterioration in delinquency in charge-off performance during the quarter is shown on slide 9, while slide 10 shows the decline in the percent of the portfolio re-aged during the quarter. As we corrected the implementation issues Theo discussed, early stage delinquency, 1 to 90 days past due, moved back in line quickly.

You can see on slide 11, excluding March of this year and last year, the early-stage delinquency rate at the end of August was at its lowest point in the last 24 months. It was also the lowest August early-stage delinquency rate in the last six years. Conversely, late-stage delinquency, 91 to 209 days past due, deteriorated further in August, as shown on slide 12.

The provision for bad debts this quarter considers the impact of this deterioration. The improvement in early-stage delinquency during August will benefit late-stage delinquency over the coming months. And we implemented additional corrective actions during September, but expect it will take 4 to 5 months to bring late-stage delinquency back in line.

Slide 13 shows static pool loss information on the portfolio over the past nine fiscal years. The static pool loss rate is the charge-off rate for a specific pool of loan originations. Here, it is based on the fiscal year the balances were originated. The information is reported on a cumulative basis over time to show the trend in the timing of charge-offs. This analysis gives the user the ability to assess the impact of changing conditions on charge-off rates, including changes in underwriting, while eliminating the impact of changes in the portfolio balance over time.

Other than fiscal year 2009, which was significantly impacted by the recession, the static pool loss rates have been fairly stable over time, at around 6%, while charge-off and provision for bad debt rates have been highly volatile. The Company's many years of experience underwriting and collecting this type of credit allow us to deliver this consistent performance. Because of changes during fiscal 2012 that shorten the time periods before charge-off and limited re-aging, charge-offs are occurring sooner after origination than in the past.

Since the receivables pay off quickly, recent fiscal year originations have only a small balance remaining -- 2.4% of fiscal 2011; 15% of fiscal 2012; and less than half of the balances originated last fiscal year. We expect the final static pool loss rates for the recent fiscal years to be in line with historical experience, though there may be modest upward pressure as a result of the recent execution issues; and, for the current fiscal year, due to the increased volume of new credit customers entering the portfolio.

As shown on slide 14, the average payment rate for the quarter improved by 1 basis point over the same time last year, despite the rapid balance growth and collection issues expense during the quarter. The payment rate is benefiting from shorter contract terms put in place in 2011; and the increased offering of short-term, no-interest payment options; six and 12 months same as cash programs.

Turning to underwriting trends for the quarter, as shown on slide 15, roughly 92% of our sales in the 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 changes in our advertising programs, as well as merchandise mix changes, which drove higher ASPs and reduced the volume of cash tickets. The approval rate under our in-house credit program increased by 2.6% over the prior-year period, and the average store underwritten during the quarter was 6.01 compared to 6.02 in the first quarter.

Results so far indicate that performance of current-year originations is within expectations. At the end of August, our delinquency issues are concentrated largely in late-stage delinquency, as previously shown on slide 12. The deterioration in performance occurred across all years of loans originated. And less than 10% of the late-stage delinquency at the end of August of this year and last year was from accounts originated in each respective fiscal year. We expect to see improvement in the profit contribution of the credit segment over the coming quarters.

Now I'll turn the call over to Brian Taylor.

Brian?

Thank you, Mike, and good morning, everyone. Net income was $19 million or $0.52 per diluted share for the three months ended July 31. This compares to $0.35 per share last year when our diluted share count was lower. Second-quarter retail revenues totaled $224 million, up 30% from the same period last year. Through July 31, nine Conn's HomePlus stores had opened, and 22 additional stores had been remodeled or relocated in our new format. We opened two additional stores in August. The third quarter will include the full revenue benefit of the stores opened in the latter part of the second quarter and in August.

Sales rose significantly in all product categories from the prior-year period, ranging from 20% for home electronics to almost 60% for furniture and mattresses. As shown in slide 16, the leverage impact of this significant revenue growth was partially offset by our investment in future store openings and the supporting infrastructure. We estimate that such pre-tax expenses, including rent, personnel, and advertising, totaled $2.5 million or $0.04 a share this quarter, with no significant costs incurred in same period last year.

Operating income for the retail segment more than doubled to $25.7 million or 11.5% of revenues in the current period, reflecting the sales growth and expansion of gross margin. Credit segment revenues were $47 million this quarter, up 31% from the prior-year period. A 25% increase in the average portfolio balance was the primary driver of the reported growth. Annualized interest and fee yield was 18% this quarter, down 50 basis points from a year ago. Short-term, no interest receivables represented slightly over 30% of the portfolio balance at July 31, 2013.

General and administrative expenses for the segment rose 39% over the prior-year period, due to higher originations and portfolio growth, which drove an increase in staffing levels. Servicing costs were 38% of revenue this period, comparable with the fiscal 2014 first-quarter level. Provision for bad debt equaled $21 million this quarter, reflecting portfolio growth and an increase in delinquency rates. Excluding the impact of the second-quarter collection issues previously discussed, bad debt provision rose $3.4 million or 28% over the prior-year quarter, driven by growth in the outstanding receivable portfolio.

The annualized provision rate was 7.3% on a normalized basis, consistent with the levels reported in the prior two quarters. Based on current trends, we expect the bad debt provision rate to range between 8.5% and 9% of the average portfolio balance for fiscal 2014. This provision for bad debt rate guidance for the year is higher than provided last quarter. Part of the increase in guidance is due to the $5.9 million in additional provision recorded in the second quarter. The guidance for provision rate also increased because of the faster rate of sales growth and related portfolio growth.

Portfolio growth causes a higher provision rate because the provision for new loan originations is front-end loaded. We provide a full year's amount of expected credit losses in the month of origination.

Credit segment operating income was $7.5 million this quarter, or 22% of the consolidated total. Interest expense decreased almost $2 million year-over-year due to a reduction in our overall effective interest rate. The rate decline reflects the repayment of our asset-backed notes over the previous four quarters, as well as a reduction in rate under our revolving credit facility. We expect our effective interest rate for the balance of fiscal 2014 to be in line with the second-quarter level.

Focusing now on the balance sheet and liquidity, our inventory turn rate was fixed in the second quarter. At quarter-end, 90% of our $91 million in inventory was financed with outstanding accounts payable. As shown on slide 17, our customer receivable portfolio balance rose $70 million during the quarter to $843 million at July 31. Borrowings increased $41 million during the quarter, and equaled $335 million at the end of July. Outstanding debt stands at 40% of the customer receivable balance, consistent with the level at the end of last fiscal year.

Turning to slide 18, at quarter-end we had immediately available borrowing capacity of $225 million under our revolving credit facility, with an additional $25 million that can become available with growth in receivables in inventory. Given our current capital position and growth plans for next year, we believe we have sufficient capital to fund the business for at least the next 12 months. We, however, continue to evaluate financing alternatives to support our longer-term needs.

Moving now to slide 19, the more significant items influencing our current full-year expectations include same-store sales growth of 15% to 20%; retail gross margin of 37.5% to 38.5%; credit portfolio interest and fee yield of approximately 18%; provision for bad debts of between 8.5% and 9% of the average portfolio balance; and average diluted shares outstanding were approximately 37 million. Based on the midpoint of our fiscal 2014 full-year guidance, we expect return on equity to approximate 18.5%, which compares to our longer-term goal of 20%.

A more detailed presentation of our second-quarter results will be available on 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.

(Operator Instructions). John Baugh, Stifel Nicolaus.

Thank you. The question I have is, if the collections process has been rectified at this point, are you saying you're seeing that even with the older accounts, that that issue is yielding positive results and not just on the recently originated accounts?

Yes, the corrective actions we've taken are benefiting the collections experience in later-stage delinquency, but later-stage delinquency is much more difficult to ultimately collect. And once accounts reach those later stages, the probability of those accounts going to charge-off increases significantly. So, are the corrective actions we've taken helping later-stage delinquency? Yes. But are they going to cure the increase in later-stage delinquency caused by the errors in our implementation? The answer there would be no. And that's the reason for the additional provision in the second quarter.

Thanks. Then as a follow-up, when we look at the average customer balance, I think it was up around 13%, and you made a comment in your prepared remarks about a higher quality customer. I'm just curious how, first of all, you're defining a higher quality customer if the FICO number is roughly unchanged from the first quarter. And then would we not expect a higher ultimate charge-off and therefore provision, everything being equal, if the balance on the customer's account is higher? Thank you.

In my comments, I commented on the quality of the traffic, meaning that the customers were more likely to make a purchase. I wasn't really referring to a credit quality measure. I was really oriented towards the likelihood of completing a sale with that customer when they walked through the door. The average balance is going to increase to a certain extent with the decreasing age of the portfolio. More of the portfolio is recent originations. So some of what you see is simply the impact of the sales growth and portfolio growth that we saw during the period.

In terms of losses based on the size of the origination, the amount of the loss for an individual loan, yes, would increase with larger balances. But that doesn't necessarily mean that the rate would increase. So there are two separate concepts there. One is, how much are you going to lose on that individual loan versus how much of a loss rate for the overall portfolio you will experience. And we don't think the loss rate for the portfolio should be materially different with a slightly larger average balance size.

And we've supported that with our own internal analysis. It's built into our underwriting process. It's something that we continue to look at. But we don't believe that that modest increase in average loan size is going to significantly affect the portfolio loss rates.

And so, Theo, we can't see the delineation between how much of the business is younger; higher balance; versus just an actual higher -- is there a rough -- is it low-single-digits? Mid-single-digits? In terms of balance per customer, excluding the influence of younger origination as a percentage of the portfolio?

This is Mike, John. I can say is we look at the average ticket size month-over-month and year-over-year. The average ticket size is not up appreciably over the prior year.

Great. Thank you for that color. Good luck.

Peter Keith, Piper Jaffray.

Thanks. Good morning, everyone. A couple of questions here. First on the very strong comp in August, 31% -- certainly, congratulations on that. I just wanted to be clear, have a better understanding -- it sounds like there were some changes to your marketing strategy, and you talked about telephone applications. Could you just give us a little more color? Were a lot of those things started just at the beginning of August? And is that the direct impact on why the comp accelerated so much?

Yes, Peter. What we commented on was the last conference call, was we had made some and changes to our advertising approach, and that we would see how those worked over the coming quarter and evaluate our approach going into the third quarter. And that's exactly what we did. What's happened in August was we increased our spending rate on direct mail and television, and saw the benefit of that increased spending rate.

I don't think it's really any more complicated than that. We tested the new approaches to advertising; we saw they were clearly working; we saw of the types of return on investment we were achieving; and then we decided in August to spend additional money, and that drove additional traffic and sales.

Okay. That's helpful, Theo. Appreciate it. And then turning to the credit business, with the loan-loss provision guidance now being taken up to 8.5% to 9%, you had started the year at 6% to 6.5%. You did comment that you thought the static loss rate should kind of normalize around 6%. As we go forward, and considering some of the portfolio growth, where do you think that loan-loss provision settles out at, once this collection issue is behind you?

A complicated question and answer -- but if the static pool loss we expected was around 6%, and the portfolio was absolutely stable, and charge-offs were around 6%, you would expect the provision to be around 6%. But to the extent that we're in a period of rapid growth and we're providing for those new loans coming on the books, then that provision rate will be elevated.

And then the second part of the reason for the elevated provision rate relates to the things that Mike talked about around the timing of when we recognize the provision. So you could experience some volatility in the timing of recognition related to issues in collection or elsewhere, but that wouldn't necessarily have the same impact on static loss.

Okay, thank you. One last question then, too. So I guess it is good to see that 0- to 90-day delinquencies are now turning back down as you fix some of the collections issues. Those later-stage delinquencies keep climbing. Could you just explain why you think that has been occurring in recent months?

Peter, this is Mike. June and July, those were driven by the issues and the implementation of the system. And as Theo talked about, we got our hands around it in mid July. We implemented the corrective actions in late July, early August, and we saw the benefit in early stage. It's the easiest to impact is when somebody is only a payment, or not even a payment past due yet. But as they get later into delinquency, it's much harder to cure them as quickly as we're able to in early-stage delinquency.

And so you've seen that elevated delinquency rolling through the back end to the late-stage delinquency. And as we move forward, and the improvements in early-stage work their way into the later-stage buckets, we would expect to see the late-stage delinquency turn come back down.

Okay. That's helpful color. I appreciate all the explanations today, guys. Thank you very much.

Rick Nelson, Stephens.

Thank you. I'm curious if you're doing anything different from a credit standpoint around new store openings, the approvals, and the down payments there, and how the delinquent fees fare in the new markets compared with the chain average.

Well, from an underwriting standpoint, Rick, this year in the new stores we are using the same underwriting rules and procedures in new stores as we use in existing stores, so nothing different there. From a delinquency standpoint, it is still relatively early. But, generally, we'll see slightly higher delinquency in the new market because it's all new customers, and we're building that repeat customer base. But everything, I'd say, to this point, is in line with what we would expect.

Okay. Some of our store folks we've noticed have -- you're taking up prices in the furniture department. We don't see that on TVs and appliances. And if you could provide some color there -- is it a test? Or is it something you're doing more widespread?

Rick, I don't believe that we're taking up prices in a broad way in furniture for a specific SKU. Those prices may move up or down promotionally. What we've done, though, over the last several months is bring in some higher-priced, better quality products -- leather covers and upholstery in living room furniture, as an example. And those products are at higher price points than some of the other products that they replaced. But we don't have a widespread increase in the pricing of our furniture, SKU to SKU.

Now, we are doing more bundling. We are showing package prices that may be higher prices. But we don't have just an across-the-board increase in the furniture pricing.

And, by the way, if I could ask you when the new stores come into the comp base, I guess Waco will be the first one, this fall. Is that after 12 months, or a different timeframe? And how do you think those new stores are going to comp?

Rick, this is Brian. Beginning in the third quarter, Waco will be in the comp base. So it's -- effectively, it's 15 months after opening or something like that, depending on the timing of the quarter. So it's the first full quarter following opening.

Yes, got you. And any sort of expectation as to how they comp? I know that you opened at the very strong volume. Do you think you can grow on top of that sort of volume?

Other than the first two or three months, yes. Now, that's what we're seeing is growth on top of the volume. Other than that brief grand opening period, we're seeing that trend.

Okay. Thanks a lot, and good luck.

Brian Nagel, Oppenheimer.

Hi, good morning. So the question I wanted -- ask another question on finance. And just to be 100% clear, so as we look at the results here in the finance division in Q2 -- we're 100% certain, then, that this reflected only a systems issue, and not some underlying deterioration within the portfolio. That's the question.

I think the one caution is, with a credit portfolio, saying something with a 100% certainty is always a dangerous thing. But I would say we are certain that the impact in the current quarter was related to the systems issue. To the extent that we've had other issues where credit portfolio performance wasn't as good as we would like, or there were other influences, those were already in place the quarter before, and reflected in our provision at that time and our provision forecast going forward.

So, 100% certainty -- I'm a little cautious saying that. But it's clear that, other than the systems-related issue, there was no change in performance -- meaningful change in performance or trend compared to the prior quarter.

That's fair. And then I'm still a little confused as to why the systems issue which impacted the shorter-term, the 1- to 90-day credits, is having a longer -- that the impact is persisting on the credits over 90 day past-due. Guys, maybe explain that again.

Well, and Brian, to be clear, in impacted the entire portfolio. So as the data came over, and the issues with phone numbers and information impacted the entire delinquent portfolio at all stages of delinquency; and so to start, things that were already in late stage had the same impact that early stage had. And then as the problem persisted, things that were in early stage that we were not collecting effectively, rolled into late stage, increased the issues in late stage.

Once we've resolved and made the corrections, we were able to clean up what's flowing into early stage much more quickly and easily. The cure rates are much higher in early stage than they are in late stage. And so it will take a little more time to clean up what flowed into the late-stage delinquency.

So this is simple to say that prior to the systems change, if an account started to go delinquent, you would have been able to easily contact that borrower? And then after the systems change were unable to contact that borrower, so the problem persisted?

Yes, that's a fair characterization. I won't have the exact percentage right, but at the worst, something like a quarter of our delinquent portfolio, we weren't even pursuing them. We didn't have a means to pursue those customers because we didn't have the phone numbers to call for those customers.

Got it. And then the final question on the same lines is, okay, so you fixed the systems problem. But is there -- as you look forward, is there a need for additional investment to maybe improve the day-to-day or quarterly oversight of the finance division?

I don't think it relates to the systems issue in any way, but we have added additional resources, management resources in our credit operation. We recently appointed an SVP of Credit to oversee the collections operation, with a deep experience in managing call center operations. But that process was in place, to put this individual in place, well before any issues we experienced this quarter. And you hate to say it now, but the improvements in technology that we think we've made should also help our collections performance over time.

A little over a year ago, we replaced our predictive dialer system. That's been beneficial. And we expanded the use of that to both of our call center locations here just very recently. So we actually think there's some fundamental improvements that have taken place behind the scenes; and the credit and collections operation, they just haven't shown up yet.

Well, thank you.

David Magee, SunTrust.

Yes, hi, good morning, guys. A couple of questions. One is, if you look at the early-stage delinquency improvement that we saw in August, are you seeing a difference in terms of 60- or 90-day or 30-day -- if you slice up into buckets, are you seeing a difference in those upticks?

Where we are -- David, what we're seeing is the 1 to 30, and 30 to 60, in the month of August showed the biggest drops. The 60- to 90-day stabilized in the month of August. And then the 90-plus kind of speaks for itself.

Okay. And then over on the retail side, just given the very strong pace of business you're seeing right now, and the upwardly revised outlook for the balance of the year, are you having any issues as far as sourcing inventory?

No, we're not having issues sourcing inventory.

Then, lastly, what is your current thinking as far as the TV performance in the fourth quarter around the holidays? Is it more or less, or the same? And are you concerned at all about any cannibalization that could come about because of the new gaming cycle starting in the fourth quarter at the same time?

Don't anticipate any cannibalization related to gaming. We think that could be an opportunity, potentially, for us. It's not a big piece of business for us, but there could be some opportunities there. And, generally speaking, I'd say our attitude towards the television business is pretty consistent. It's been weak; there isn't a really strong catalyst for a big, upward move in the short-term that we see. So I'd say more of the same would be our expectation for the fourth quarter.

Okay, thank you.

Laura Champine, Canaccord.

Good morning. My question is also on the credit side. I think that the spike in bad debt has brought to the fore some concerns that some investors have about Conn's accepting lower FICOs and doing more business on a no-interest basis. And you commented, Mike, that delinquencies from 1 to 30 days, and 30 to 60 days, are down a lot in August, but is that sequential? What's the year-on-year trend for delinquencies in those ranges?

The year -- well, for the year-on-year for those ranges, the 1 to 30 is better; the 30 to 60 is about the same; and 60 to 90 is up slightly year-on-year.

Great, thank you.

Peter Homans, Arthur Wood.

Peter, your line is open. Please check your mute button.

I'm sorry. My mute button was on. I apologize. One could hardly be disappointed in a 400% increase since I bought the stock at $15. And so having a slip between the cup and the lip I guess is -- occasionally happens. But I had a couple of questions, mathematical questions, and wondered if they go into your figuring at all. It looks to me like on your release, the percent of sales paid for by payment options for the six months ended 2012 was 68.1%; and for three months ended 2013, was 76.8%.

Do you think that to the extent that Conn's is a bank as much as it is a retailer -- maybe even more than it is a retailer -- do you think that that increase of 800 basis points of the percentage of the sales you make being done through in-house financing, which requires those nasty assumptions that you were talking about being hard to make -- do you think that had any effect on the changes that took you by surprise as you came into the April, May, June period in terms of charge-offs and that sort of thing?

The short answer is no. We don't believe that that increase in the percentage of sales that we're financing had anything to do with the issues that we faced in collections. The increase in the percentage of sales that we financed is due in part to the higher average selling prices. That's a trend that's been going on now for several years.

Right.

So that wouldn't really be something that would affect the current period. And then the other factor, which does come into play in the recent past, is increasing our advertising of our credit offering. So we're attracting more customers who have an interest in our credit offering, and may want to use that, but that doesn't change -- they're still the same type of customers we've always gotten. We're still using the same underwriting tools and practices that we used before. And so we expect we'll get a similar result. So, no, we don't believe that that's a factor.

So I'm trying to look at all these -- you're very good at releasing huge amounts of data about the nature of your customers, et cetera. And I'm trying to look at the numbers and see something that is as much of an outlier as the change in charge-offs, and I can't find it. So I was wondering if you could drill down again, a little more than you did in the prepared remarks, into what you think the -- beyond, quote, systems -- which can be anything. It can be 10 computers in Dallas; it can be a change in software, database software, whatever. Could you drill down a little more to talk about the change that had a magnitude equal to the magnitude of the accounting changes you had to make?

Yes. I don't think that there's a change that had a significant impact during the period, other than the issues that we described related to the system implementation. And I understand the complexity and difficulty of understanding it. Trust me, it took us a while to find the problems. Missing phone numbers is not something you run around hunting for normally. But that was, in fact, the cause of the issue.

And a simple way to think of that is, for a big chunk of our delinquency for a two or 2.5 month period of time, we weren't collecting those accounts. We weren't calling them to collect. We were not engaged in collections activities on those accounts. And given the period of time and number of delinquent accounts that we weren't pursuing, that had a significant impact.

Yes. You've gotten to be a pretty big company. And I just sort of wonder how Fred -- to use a generic name -- in your collection agency in Texas, didn't two years ago notice that he didn't have a phone number for the woman who bought a big-screen TV. In other words --

Well, two years ago, we had the phone number. So it's really not (multiple speakers).

So it was a function of having not gathered them on an ongoing basis, kind of as you rapidly (multiple speakers)?

We were gathering them. But the information was in one place over here, and we weren't transferring that information --

Oh, I see.

-- to where the collectors could actually pursue collections.

Okay, I see. That makes more sense. I appreciate that answer, sir. Thanks very much. And I say, who can argue with $15 to $60 and change? But as you say, it is sort of a banking business, and it's hard to forecast stuff in banking.

All right. Well, thank you.

Thank you.

(Operator Instructions). John Fix, [D Cap].

Hi, guys. Thanks for all the information today, and addressing these issues that everybody has focused on. Just one last time, you said to the last caller -- and this wasn't the question I was originally going to ask -- that basically for 2.5 months you were missing phone numbers. And it took a while to even figure out that they were missing. You guys, when I think of your business, what makes you better than everyone else is your collections focus. And I don't understand how if you don't collect money, if somebody is not paying you, it would seem like the first thing you would look for would be their phone number. And if you didn't have it -- phone numbers aren't exactly the most complicated things in the world to get -- you would get it, or you would knock on their door.

So, was it a data translation issue? Was it a system install around an SAP system? And I don't understand how it could take 2.5 months to not figure out that you didn't have someone's phone number. Just once again hit on that?

Yes, and I'll walk you through the timeline again. We implemented the system in late May. By the time July rolled around, we knew we had a problem. And by the time mid-July hit, we were already engaged in finding solutions to the problem. But it took some time to implement those solutions. So it didn't take us 2.5 months to figure out we were missing some phone numbers. It took us 2.5 months to get everything fixed that needed to be fixed. And even then, I will say we didn't see -- because of the way this happened, it's not like we lost all the numbers all at once. It was a loss of numbers over time. So we didn't have the same number of missing numbers, day one, as we did at day 60.

Those were totally different numbers. At day one, it was close to zero. By day 60, it was a lot. So the issues developed over time; weren't immediately apparent. But once they were apparent, we corrected them. And they relate directly to the implementation of the new system which, thankfully, we're not going to have to do again. It's not like an SAP system; it's not a fully integrated ERP or anything like that. This is just the tool our collectors use when they are pursuing collections from a customer.

Okay, and thank you. Just once again on the last question, I brought up another different one, which was why would higher ASPs lead to more internal financing? I would think higher ASPs would be spread across GE and RAC and you all.

Higher ASPs lead to a higher percentage of internal financing because we are selling fewer small-ticket items that the customers buy with credit cards or cash. We typically don't finance any amount below $300.

Okay. Excellent. And this is just my own ignorance of your story -- did GE or RAC see similar changes in credit deterioration, or are you responsible for all collection?

We are not responsible for collections for GE or RAC.

And do you know if they saw similar changes in underlying credit deterioration?

Really can't say; don't have visibility to those collections practices. For us, those are third-party financings. And they create their own underwriting rules and collections rules, and we don't know what their experience is once they send us the cash for the purchase.

All right. And last question, you mentioned a couple of times limited re-aging, but it looked like re-aging upticked a little bit, from 10.7% to 10.8%. What is the target percentage for re-aging, and how do we think about that going forward?

I don't know that we'd say we have a specific target. It has kind of stabilized here in the 11% plus or minus range. Over the last several quarters it's up a tick over last year, but it is down from last quarter. And so what we would expect the re-age population to do, is it will vary seasonally throughout the year, and we would expect it to rise over the next couple of quarters as we get into the -- the last couple of quarters, the payment rate goes down; delinquency typically rises in the back half of the year and there is slightly more re-aging. And then as we go through tax season and the first half of the year, we generally see re-aging come down.

So oscillating between 11% and 13%? Is that how we should think about that?

No, we don't anticipate going back to 13%. In fact, the move compared to the prior year was a grand total of 10 basis points. So we really don't see a significant increase in re-aging.

What's the ultimate collection outcome in a re-aged portfolio? Do have history on that?

We do. It's reflected in our reserves, so we definitely have -- and it's going to depend on how many times it has been re-aged; what stage of delinquency it's in. But generally speaking, accounts that are re-aged four months or less, there's not a significant change in collections experience there. But as accounts are re-aged more, then the collections or the loss rates increase.

Those the statistics of the re-aged portfolio? Is half of it four months or less, and half of it greater?

What we do have is -- so at the end of the quarter, total account balances re-aged were $91.1 million, which is the 10.8%. And account balances re-aged more than six months was $19.9 million. So the vast majority of the re-aged population is 1 to 5 months.

Super. Thank you very much.

Thank you. And I have no further questions in the queue at this time.

I would like to turn the conference back to Conn's for any concluding remarks.

Thank you for joining our call today.

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.