Conn's Inc (CONN) 2014 Q3 法說會逐字稿

Good morning and thank you for holding. Welcome to Conn's, Inc. conference call to discuss earnings for the third quarter ended October 31, 2013. My name is Jonathan and I will be your operator for 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 December 5, 2013, distributed before the market opened this morning and slides that will be referenced during today's conference call can be accessed via the Company's investor relations website at IR.com.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 station 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 now like to turn the conference over to Mr. Wright. Please go ahead, sir.

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

Conn's earned $0.71 per share in the third quarter on an adjusted basis. This compares to an adjusted $0.38 in the same quarter a year ago, an increase of 87%. We are raising our guidance for the full fiscal year 2014 to $2.75 to $2.80. A year ago, we initiated guidance for fiscal 2014 at $2.05 to $2.15, and have since raised our guidance twice for an increase in our guidance of 30% at the top end.

Consistent with our past practice, we are initiating guidance for fiscal 2015 at $3.80 to $4. Guidance at the top end for fiscal 2015 is a 43% increase over the top end for fiscal 2014.

Sales over the Thanksgiving weekend were strong in all categories and remained on trend. This year we opened up Thanksgiving Day for the first time. Without the sales on Thanksgiving Day, we would not have had performed nearly as well for the weekend.

Americans have decided they want to shop on Thanksgiving. Because of this, regretfully, we have asked our associates to work on Thanksgiving Day. We appreciate our associates' support serving customers on this day.

Same store sales for the third quarter by category are on slide 2. Same-store sales increased by double digits in all major categories.

On slide 3, we show product gross margins by product category for the third quarter. Product gross margin percentages were up over the prior year across the board. Total retail gross margin percentage for the quarter was 40.1%, an increase of 460 basis points over the prior year.

The Company set a longer-term goal of 40% retail segment gross margins. We met this goal in the third quarter. With increasing furniture and mattress sales, this goal can be achieved for a full fiscal year.

Preliminary November same-store sales increased about 32%. Same-store sales were up by double digits in every category. Total sales for November increased 51%. Gross margins for November appear in line with expectations.

On slide 5, you can see a three-year trend in furniture and mattress sales. Same-store sales of furniture and mattresses increased 55% in the third quarter on top of a 34% increase a year ago.

For the third quarter of fiscal 2014, furniture and mattress sales represented 27% of product sales and 39% of product gross margin dollars. The same-store sales growth trend in furniture and mattresses accelerated in the third quarter and this trend continued in November. November same-store sales of furniture and mattresses increased 63%.

Expanded assortment, store remodels, store relocations, and improved in-store merchandising are all contributing to accelerating same-store growth in furniture and mattresses.

Stores opened in fiscal 2013 and 2014 averaged 38% of sales from furniture and mattresses for the quarter. We will keep increasing the assortment and the quality of our furniture offering to consumers.

Our vendors are working with us to provide color or cover options for our better selling SKUs. This allows us to increase our assortment on the same sales square footage and meet the needs of more consumers.

Mattress same-store sales continued to increase steadily with mattress sales up 40% for the quarter and 38% in November. The Company previously set a longer-term goal of 35% of sales from furniture and mattresses. We are steadily progressing to our goal. With more new stores, continued remodeling, and relocations, along with enhancements to our offering, we can reach this goal.

As I have discussed on earlier conference calls, we changed our advertising approach and spent more on TV, direct mail, and digital. We increased TV exposure, reduced radio and print spending, with radio now an infrequent component of our plan. And we included more and stronger messages to apply online and all media.

Starting in the second quarter, we also made it easier for our customers to apply for credit. We now advertise the phone number to call to apply for credit. Direct mail programs include the use of a mail-in form for application.

The consumer response to advertising changes was sustained in the third quarter and in November. As you can see on slide 6, application traffic increased dramatically.

Changes to our advertising approach are attracting more customers new to Conn's. Based on past experience, we would expect each of these new customers to make, on average, nearly two additional purchases in the next five years. We are building a new customer base in both our existing markets and new markets that will benefit sales in future periods.

Our new stores are illustrative. One new store entered the comp base in the quarter and was a solid contributor to sales comps. Our other new stores are following the same pattern and would suggest these stores will be contributors to comp sales performance in fiscal 2015.

In Q3, we made alterations to our direct mail program to reduce mailing to higher credit risk customers and increase mailings to lower credit risk customers, including adding prime quality credits to our mail program. This change was implemented over the course of the quarter and was more fully in effect in November. Although not a change to underwriting standards, this is improving the credit quality of applications received and credit granted without reducing sales growth.

On slide 13, you can see our advertising spending was up slightly as a percentage of sales. Advertising spending in our mature markets was about 4% of sales for the quarter. New market advertising, particularly in the major metropolitan market of Phoenix, was less efficient.

On slide 7 is information about stores opened in fiscal 2013 and 2014. The new stores are performing well and new store performance was still above the Company average after the 35% same-store increase in the third quarter.

We plan to add 10 to 12 stores in the current fiscal year. Year to date, we have opened 10 stores with two stores opening today. An additional three stores will open in January for an expected total of 13 for the full fiscal year.

Work is well underway on our fiscal store opening -- our fiscal year 2015 store opening plan, with 15 leases or purchase agreements already signed for locations expected to open in fiscal 2015. We plan to open from 15 to 20 stores in the next fiscal year.

Two stores were closed in the third quarter and another store was closed in November. As mentioned in earlier conference calls, the valuation of our store portfolio is ongoing and we have a few additional stores likely to close over the next 12 to 18 months. We expect these store closures will have minimal effect on sales and will benefit profitability.

Turning to our credit segment, the Company made good progress in addressing the issues we experienced in the second quarter with our credit collection system. We are on track to meet our timetable of 4 to 5 months from our last conference call to fully address the effects of these issues on our portfolio. Delinquency should improve markedly over the next quarter.

To follow up on some recurring questions from investors after our last conference call, as of November 30, greater than 60 days delinquency on originations in our new stores was 10 basis points higher than in legacy stores. The increase in proportion of sales to new customers, including existing and new stores, will likely cause, if sustained, 60-day-plus delinquencies to increase an estimated 30 basis points with potentially a similar effect on overall static losses.

As seen on slide 21, a 100-basis-point change in provision for bad debt would affect EPS by an estimated $0.20 per share. A 100-basis-point change in gross margin percentage would change EPS by an estimated $0.22 per share.

Although important, the provision for bad debt is one of many items impacting our earnings. Our objective is to manage the business to provide returns to our shareholders and service to our customers and associates. Minimizing bad debt expense will not accomplish our objectives.

Our team is looking forward to a strong finish to the holiday season after a great start. We appreciate the efforts of our associates to manage all the opportunities provided by the Company's growth. Now I will turn the call over to Mike. Mike?

Thank you, Theo. Credit segment profits increased sequentially on portfolio growth and declined year-over-year due to a higher provision for bad debts and lower interest yield, given the increased balance of interest-free receivables.

At last year's interest yield, current year operating profits would have exceeded the prior year and SG&A as a percent of revenues would have been the same.

The recent delinquency, charge-off, and re-age trends are shown on slides 8 and 9. As of November 30, 60-day -- 60-plus-day delinquency was down 20 basis points from August month-end, when it spiked due to system implementation issues during the second quarter. The 20-basis-point improvement since August compares to an average seasonal increase of 60 basis points over the past five years. And, the delinquency rate at the end of November is consistent with the average for November over the previous five-year period.

The net charge-off rate increased during the quarter, as we discussed on the last earning call, and is expected to be elevated during the fourth quarter as we address the increased delinquencies created by the second quarter system implementation issues. To date, we have not identified any new issues related to the system implementation and are focusing on enhancements to the system to improve collector efficiency and effectiveness.

Early-stage delinquency has stabilized and, as you can see on slide 10, late stage delinquency, 91 to 209 days past due, has improved since August.

Slide 11 shows static pool loss information for the portfolio over the past nine years. The static pool loss rate shown is a cumulative charge-off rate based on the fiscal year of origination.

Other than fiscal 2009, which was significantly impacted by the recession, static pool loss rates have been fairly stable over time at around 6%, while charge-offs and provisions for bad debt rates are highly volatile.

Many years of experience underwriting a single type of credit for our core customer limited variation in underwriting practices over time, and experience collecting this specific type of credit, allow us to deliver consistent performance.

During fiscal 2012, changes were made (technical difficulty) contract terms and the time period before charge-off, including limiting re-aging. Credit accounts are now paying down more quickly and charge-offs are occurring sooner in the contract life.

Since the receivables pay off quickly, only small balances remain from recent fiscal year originations. 1% of fiscal 2011, 11% of fiscal 2012 and only 35% of the balances originated last fiscal year. The more conservative re-aging and charge-off practices result in the balances remaining in the portfolio being higher quality than in the past.

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. However, due to the rapid paydown of the receivables we now experience, we do not expect the final static pool loss rate under reasonably foreseeable scenarios to exceed 7%.

Turning to underwriting trends for the quarter, as shown on slide 12, roughly 93% of our sales in the quarter were paid for using one of the three monthly payment options offered. The increase in the percent of sales under our finance program was driven largely by 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 decreased by 3.3% from the prior quarter levels and the average score underwritten during the quarter was 599 compared to 601 in the second quarter. Results so far indicate that performance of current year originations is within expectations. We expect this quarter's improvement in the profit contribution of the credit segment to continue over the coming quarters.

Now I will turn the call over to Brian Taylor.

Thank you, Mike, and good morning. We generated record revenues and net income this quarter. Net income was $26 million or $0.71 per diluted share in the current quarter [after certain] charges. This compares to net income of $13 million or $0.38 per share on an adjusted basis last year.

Reported net income was $0.66 per share versus $0.35 per share a year ago. Reported results for the current quarter include pretax charges of $2.8 million from store closures. During the quarter, we closed -- we lost a closed store subleased tenant due to bankruptcy and revised prior estimates for a few others.

Additionally, as Theo discussed, we closed two stores and relocated several other facilities. The lost tenant accounted for almost half of the total charge.

As of October 31, 11 new Conn's HomePlus stores had opened and 29 additional stores have been remodeled or relocated using our new format. By the end of January, we expect two-thirds of our store base will be in the Conn's HomePlus format.

Third quarter retail revenues were $257 million, rising 54% from the prior year period. Compared to last year, sales have increased significantly in each major product category ranging from home appliances, which rose 35%, to furniture and mattress, which rose 95%.

Turning now to slide 13, retail SG&A expense was 27% of sales this quarter, flat sequentially and improving 130 basis points from last year. Our investment in future store openings and supporting infrastructure tempered the leverage impact of the revenue expansion. We estimate that such expenses including rent, personnel, and advertising, totaled $2.5 million or $0.04 per diluted share this quarter.

Adjusted operating income for the retail segment increased 163% to $34 million this quarter, driven by sales growth, gross margin expansion, and SG&A leverage. Retail operating margins on an adjusted basis expanded 550 basis points year-over-year to 13.2% of revenues.

Credit segment revenues were $53 million this quarter, up 38% from the prior year period. Annualized interest and fee yield was 18% this quarter, relatively flat sequentially and down 150 basis points from a year ago.

Short-term, no interest receivables represented 33% of the portfolio balance at October 31, as compared to 24% 12 months ago. We do not expect the relative mix of promotional receivables to increase substantially in future periods.

General and administrative expenses for the credit segment were 47% above the prior year period as we added collection personnel to support the sales driven growth in originations and the overall portfolio. Servicing costs were 38% of revenues this period, comparable with the fiscal 2014 first-half level and impacted by the decline in portfolio yield.

Provision for bad debts equaled $22.5 million this quarter, reflecting portfolio growth and the year-over-year increase in delinquency rates. Based on current trends, we expect bad debt provision rates to range between 9.4% and 9.7% of the average portfolio balance for fiscal 2014. The guidance for provision rates increased due to the faster sales growth and related portfolio growth realized in the third quarter and projected for the fourth quarter.

Credit segment operating income was $10 million this quarter, approximately 25% of the consolidated total. Interest expense decreased $800,000 year-over-year due to a reduction in our overall effective interest rate. The lower rate reflects the repayment of our asset-backed notes in April 2013 as well as a reduction in the rate under our revolving credit facility.

Focusing now on the balance sheet and liquidity, in the third quarter, our inventory turn rate was 5.5. We expect this to improve as we sell through purchases to support fourth quarter activity.

At quarter end, 80% of our $132 million in inventory was financed with its outstanding accounts payable.

As shown on slide 14, our customer receivable portfolio equaled $945 million at October 31, increasing $102 million during the quarter. Borrowings rose [$88 million] during the quarter, totaling $423 million at the end of October. Outstanding debt stands at 45% of the customer receivable balance.

Moving now to slide 15, in November we amended our asset-based revolving credit facility, raising commitments by $265 million to $850 million, lowering borrowing costs by 25 basis points and extending the term to November of 2017. After giving effect to the amendment, we would have had immediately available borrowing capacity of $231 million under the facility, with an additional $196 million available with the growth in receivables and inventory. If our current growth pace is sustained, we will evaluate further expansion of our credit facility as well as other capital alternatives to support our longer-term liquidity requirements.

For the third quarter of 2014, our annualized return on stockholders' equity grew to 19.2% on an adjusted basis. Moving now to slide 16, we raised the top end of our earnings guidance for fiscal 2014 by $0.15. Our revised guidance excluding charges is $2.75 to $2.80 per diluted share based on full-year expectations, which include same-store sales growth of 22% to 25%, retail gross margin of 39.3% to 39.8%, and credit segment bad debt provision of between 9.4% and 9.7% of the average portfolio balance, based on stated same-store sales expectations.

Turning to slide 17, today we initiated earnings guidance of diluted earnings per share of $3.80 to $4 for our fiscal year ended January 31, 2015. Full-year expectations considered in developing the guidance include same-store sales growth of between 7% and 12%, new store openings of 15 to 20, retail gross margin range of between 39% and 40%, credit portfolio in the interest-free fee yield of around 18%, and a credit segment provision for bad debts of between 8% and 9%, again dependent on our same-store sales expectations and no significant change in the number of diluted shares outstanding.

Based on the midpoint of our fiscal 2015 guidance, we expect return on equity to approximate 21% next year. A more detailed presentation of our third quarter results will be included in our Form 10-Q we will file with the SEC.

This concludes our prepared remarks. Jonathan, will you please start the question and answer portion of the call.

(Operator Instructions) Brad Thomas, KeyBanc Capital Markets.

Congratulations on a great quarter here. I wanted to -- well, first, just applaud everything you guys are doing on the retail side, but follow up first with maybe a couple questions on the credit side.

First, with respect to the quarter you just reported here, could you help us just parse out in a little bit more color what is going on in terms of the underlying trends of your existing customers, versus how much new customers that you haven't had experience with may have weighed on that provisioning rate, as well as how much the increase in the short-term, no interest debt may have increased that provision rate.

To start with the short-term no interest financing, that has no impact on the provision rate. The weight of new versus existing customers, you will see in the investor deck about 45% of our originations this year to new customers versus about 30% same time last year. So, Theo already spoke to the impact on delinquency being about 30 basis points and that some measure of that would flow through to static losses over time.

Okay. And then, as we look forward, I just want to make sure everyone is connecting the dots right here. As we think about your guidance for 2014, the provision for bad debts to being 8% to 9% below what you guys are guiding for this current year, what are your assumptions for new customers going into the portfolio, use of -- any other factors? And just make sure everybody is clear on why that rate can come down next year rather than needing to continue to go up.

We expect that the mix of new customers as a percentage of the total remains essentially the same. The reason for the decline in the current year is largely we don't anticipate the same problems that we had in the second quarter of the current fiscal year. And so that is the principal reason for the decline.

Peter Keith, Piper Jaffray.

Congratulations and thanks for all the detail in the slide deck. I wanted to look at the retail side of the house first. So the gross margin expansion just remains well above what I was expecting.

Clearly, I think we would anticipate some ongoing expansion with furniture and mattresses, but you are really getting nice expansion across all categories. Could you help us understand what is driving that in appliances and consumer electronics and how sustainable that might be?

I will take appliances first. I think, in the appliance area, some of that is being driven by better terms from vendors. As we have increased our volume and we are focused on selling more volume, we are getting benefit of volume rebate programs and other programs that are improving the overall margin in appliances.

We are also doing a better job in refrigeration, particularly on focusing on French door refrigeration, stepping the customer up to that product where we have a little better gross margins.

On the electronics side, 65- and 75-inch televisions are becoming a bigger piece of the business. We also benefited from 4K or ultra HD becoming a meaningful part of our business beginning this quarter. And I think on electronics, we have also done just a better job of merchandising and executing on the sales floor with add-on products for electronics.

Display furniture, audio, and other accessories where we have dramatically improved our performance. And that is having a big benefit to our overall electronics gross margins.

Okay. Thanks. That is a helpful summary. Then, I did want to pivot to the credit side of the house.

When we look at when the 60-day delinquency rate for Q3, so that was up roughly about 150 basis points year on year, versus the year on year increase from Q2 of 70 basis points. Could you divide that out between the late stage and early-stage?

I guess we are trying to understand is, are you seeing the late stage is kind of just taking the python that's moving through from the Q2 collections issue? And then are the early-stage delinquencies relatively stable, and then ultimately that will begin to flow through as well?

Yes. So slide 10 shows the late stage and shows actually the gap widen somewhat in November from where was in August when it spiked. So we talked about on the last call, in August it spiked up from July. So we are actually -- 60-plus is down since, August since we talked on the last call, but you nailed it that it has got to flow through those backend stages before we get it fully cleaned up. And early-stage is -- has stabilized.

Okay. So it sounds like when the reporting with July quarter end and October quarter end that the delinquency rate (inaudible) was up. But then you referenced if we shifted a month, August to November, you are actually now running down from those two time periods. So if we look at Q4 as a whole, and kind of projecting delinquencies, how do you think that Q4 rate should look when we get to year-end?

It will definitely be improved from where it is today.

So that would be down sequentially from the 8.5%.

Yes.

Okay that's great. Thanks for the feedback. Good luck through the end of the year.

Rick Nelson, Stephens Inc.

Congrats as well. I'm curious if you are doing anything different from a credit standpoint? The data that you are providing us, the static pool analysis, it looks like the percent of applications approved went down and the average downpayments went up in the quarter.

Yes, Rick. Generally, we did not change our underwriting standards and risk modeling for the quarter. However, we did evaluate some of our processes and controls around the approval of credit, and made some minor modifications to those processes and controls to eliminate some of the very highest risk -- the highest risk customers.

We also saw a change in the mix of applications that influenced the approval rate. So the change in approval rate is not strictly the result of alterations in our approval process, but we did make some minor modifications during the quarter.

Thank you. Also, I wanted to ask you about the slide on page 19. The annualized [provision] example has an annualized provision rate of 14%. And I am curious how that works into your provision guidance as we look forward.

That slide demonstrates the impact on our provision of originations. And it is intended to illustrate how an increasing pace of sales growth in originations puts upward pressure on our provision rate. And the way this was incorporated in our modeling is, we include the same-store sales and new store growth forecast in the modeling and that, as we said, as that sales increase impacts the overall model, it also impacts the provision and causes the provision rate to increase.

So our provision rate forecast for next year includes an assumption of significant sales growth that is putting upward pressure on our provision rate forecast as well.

That's helpful. Congrats and good luck on this holiday.

David Magee, SunTrust.

Great quarter. I have a couple questions. One is, I know as you move to new states, you expect see better flexibility in terms of what you can charge on the credit side. Is that something that you have meaningfully baked into the assumptions for next year at this point in time or is that a longer-term trend?

That will benefit our interest yield over the longer-term as we build balances, but we haven't included that in any meaningful way in our forecast for next year.

Has it been a factor this year in a meaningful way in 2013?

No. Not really. The balances associated are small enough that it is not a significant impact.

Thank you, then. Also, with regard to next year, are you -- do you anticipate further upside with the ASPs across the categories?

We are not anticipating that in our forecasting, and we think that the upside opportunity there is much more limited than it has been in the past. I think as ultra HD or 4K really takes hold that might give us an opportunity to get some benefit in television. And I think that is the single biggest opportunity for us. Furniture and appliances ASPs, we don't see a dramatic opportunity to improve those over the coming year.

Thank you. And then, with regard to see -- was the ultra HD -- was that the driving factor for the success there? That was a real trend change, it looked like, in the third quarter. It just seems like that product would be sort of out of reach for your core customer right now. I am surprised that you called it out.

It is one factor among many. I think the fact that 65- and 75-inch LED was at price points that reach our customer was more meaningful. I think the other items I called out on attachments were also significant.

So it was one factor among many, but it wasn't insignificant. And one reason to call it out is, looking forward, we see it being a bigger opportunity for us is if it behaves like electronics always have before; those price points come down to where they are more achievable for our customer.

Laura Champine, Canaccord.

Congrats on very strong growth in the quarter. The revenues obviously are growing very quickly, but inventory is growing even faster. Can you talk to us a little bit about where that growth is weighted and what decisions you are making from an inventory management perspective?

Sure. We can talk about that. Some of it relates to seasonality. There are some categories, particularly television, where we were a little more frontloaded this year versus prior years in television. And then, we also saw increases in furniture.

As we expanded our assortment and put on the floor these color options and color alternatives that I talked about, that also led to an increase in inventory during the quarter. But we expect that to flow through the system here rapidly and we don't anticipate any sustained increase. We don't anticipate any sustained increase in inventories in relation to our sales rate.

Got it. Thank you.

Brian Nagel, Oppenheimer.

[Asher Frank] for Brian Nagel. Congrats on a very strong quarter. Our first question has to do with credit.

So you guys reported that the 60-day delinquency rate increased to 8.5% from [8.2%] in Q2. And Theo indicated that you guys will see a marked improvement in Q4. Is that improvement mainly driven by the timing and charge-off of the delinquent accounts related to the systems issue or is there something else also going on?

It is related to flowing through the delinquencies that were impacted during that timeframe as late stage delinquency continues to improve as we reported on the slide in the earnings debt.

Okay. And then, just moving on to the retail business, you guys laid out your SG&A margin guidance for next year of -- I think it was, 28% to 29% versus this year's 28.5% to 29%. How can we think about SG&A leverage as you guys start to, again, ramp up growth of 15, 20 units next year. What type of comps would you need to leverage SG&A?

We are levering SG&A today in our legacy stores. If you look at our retail business, that segment independently, and you back out the performance -- or the costs associated with the new store openings, we are significantly levering SG&A.

So if you looked at slide 13, you can see the leverage -- you can see the leverage there in SG&A in the retail segment. And if you look through that to our legacy stores, there would be -- I'm sorry; I am getting the number. There would be another 180 basis points of SG&A leverage in our legacy stores.

So it's really the increased pace of growth of new stores that is offsetting a portion of the leverage in our retail segment.

Okay. And then, in terms of the openings next year, are there any additional color in terms of the weighting? Should we expect them more to be back half weighted or--?

You should expect them to be more consistent over the course of the year, this year, as opposed to in the current year it is more back half weighted with a substantial number of stores opening in the fourth quarter. It should be more steady over the course of the year next year.

Good luck next quarter.

Scott Tilghman, B. Riley.

Wanted to follow up on the G&A question, really two other components to that. First, on the credit side we have seen that ticking up, obviously tied to some of the issues around second quarter but sustained here in the third quarter. When do you anticipate that G&A levels for that segment of the business will return to more normalized levels?

And then, as a second question, looking at the retail side and your slide 4, the sales per associate, the growth there year-over-year is less than half the overall sales growth rate. I wanted to get my hands around what you're thinking in terms of your staffing model today with the existing store base, with the change in the merchandise, but also going forward as you enter some of the newer markets.

Scott, the credit SG&A leverage relative to revenues is really an impact of the yield in the higher interest-free receivable balance. If you adjusted to last year's yield, credit SG&A would have been the same as last year's SG&A as a percentage of revenues.

Okay. And, in terms of SG&A related to our sales associates in particular, that should be relatively stable because, without regard to headcount, our sales associates are paid based on commissions that are based on the sales rate. So we are building staff to support the increasing sales rate. And, at the same time, we are raising individual sales associate productivity, but we are not reducing the amount of commission rate on those sales.

So we think the sales compensation, particularly, should be relatively stable. It doesn't benefit from leverage, particularly. And then there is no negative effect on SG&A as we add those additional staff, particularly either.

So it should be fairly stable. The pure selling component of SG&A should be pretty stable.

So, just to clarify, it sounds like the reason the pace of sales per associate is not matching the pace of overall sales growth is because of additions to the floor.

That's correct.

David Kin, Solaris Capital.

Congrats on the quarter. I was wondering if we could touch on sort of -- there has been a dramatic increase in no interest in-house promotional receivables as a percent of the total. I was wondering if you could break out the payment rate on those receivables versus the non-promotional receivables. I would say it was significantly higher, but.

Don't have the specific payment rate for you, but I would tell you that roughly half of those customers meet the terms, and the majority of our no interest financing is a 12-month term.

12-month term. Okay. I guess, if I look at sort of payment rate over the last few years, and it seems pretty stable over that time. I would have expected, I guess, that to kind of go higher as sort of the mix has shifted towards your promotional receivables. Wondering if you could address that, or if I am missing anything there?

You bet. Rapid portfolio growth puts pressure on the payment rate because our finance contracts have a fixed monthly payment. The payment rate is at its lowest right after the sale is financed. So the high growth is what is putting pressure on the payment rate.

So the rapid growth is reflected in the decreasing average age of receivables in the portfolio, which was 8.6 months old this year, 9.7 months last year. And if you are looking at the portfolio stats, you go back a few years ago, the average age of receivable was 12 months or longer.

Okay. Got you. And then, so the cash recovery percentage covenant on your revolver, is that a calculation that is comparable to your payment rate? How is that calculated?

The same calculation.

Same calculation. Okay. And then, I was wondering, in what fiscal year did you make changes to your re-aging and charge-offs criteria?

That would have been calendar 2011 or fiscal 2012.

Okay. And I guess what is the criteria that you use currently to charge off for receivables? How delinquent does it get before that happens?

If it is contractually more than 209 days past due, it is charged off.

Okay. So I guess when I look at the static loss ratio table, seeing a steeper slope in more recent vintages -- and you addressed part of that earlier on the call with there being changes in the re-aging policy and how you -- and being more conservative on how you define charge-offs. It sounds like you are keeping the terminal loss ratios pretty stable around 6%, which sort of implies a pretty meaningful flattening of that slope over the next few years. I was just wondering how you gain confidence in that evolution.

You bet. So we know based on the change in contract terms and our re-aging and charge-off policies and a contract can't remain in the portfolio as long as it did historically. And if you go to slide 20 in the earnings call deck it will show how the fiscal 2012 and fiscal 2013 originations by quarter were playing out.

And you can see the fiscal 2012 period where we are a couple of years in now be cumulative rates or flattening out for the quarterly originations as we have incurred most of the losses we will in those originations. And, when you look at the detail on our balance -- or the percentage of the balance left, it is running off very quickly. There is very little of the Q1 2012 balance actually left on the books.

Got it. Okay. And then, final question I guess is, how many remodels did you have this quarter and last quarter? And can you give us a sense of the timing or the cadence of those remodels intra-quarter for both quarters?

I am afraid I am not going to be able to give you the exact number of remodels in the quarter. We can provide that to you later. The pace of remodels is decelerating and the pace of relocations is accelerating.

And, as we have seen the results of our remodels and new stores to date, I would say we are developing more conviction around our new store model. And we are going to move more aggressively to get the stores remodeled, relocated, or, if they aren't suitable for our current format, closing some of those stores.

Okay, great. Thanks. And congrats again on a good quarter.

Peter Keith, Piper Jaffray.

You had referenced in the past that, with the collections issue in Q2, that it actually caused you guys to reassess your collections practices and you maybe made some changes. Could you highlight what some of those changes were? And then, are there any early observations that those have had a positive or negative impact?

Okay. I would say that the changes that we have made are numerous, that there are lots of little things as opposed to any sort of dramatic, strategic move in any way. But we realigned our collection teams along similar lines to what we had two or three years back when our collections performance was better.

We have made some enhancements to pay for performance among collectors, similar to what we have done on the sales side where we are paying better, but we are paying based on productivity. We have increased our hiring in our Beaumont site because we have seen strong performance there historically. And so we are using that Beaumont site more aggressively than we were a few months ago.

I would say there are a number of other specific examples without getting too deep into the detail. But early indications are that, over time, we are going to benefit from these moves and that, I think, is having an impact on the trend.

So in your questioning, you are asking about August -- I'm sorry; July versus October and then we talked about August versus November. And, what we are seeing is a -- an accelerating pace of performance. And I think that the changes that we have made are an influence there.

Okay. That's good to hear. One last little quick modeling question for me. I know you maybe only have one store right now that is now in year two. But what should we expect that year two comp on some of these new stores to be on a go forward basis as more and more of them roll into the comp base?

I hesitate to make a prediction since we don't have any yet, but from the one that entered the comp base, we are running very strong double-digit comp levels right now. And the other stores that will enter the comp base going forward, again, a relatively small group are following that same pattern.

This does conclude the question and answer session of today's program. I would like to hand the program back to management for any further remarks.

Thanks, everyone, for participating.

Thank you, ladies and gentlemen, for your participating in today's conference. This does conclude the program. You may now disconnect. Good day.