Conn's Inc (CONN) 2014 Q4 法說會逐字稿

Good morning, and thank you for holding. Welcome to the Conn's Inc. conference call to discuss earnings for the fourth quarter and fiscal year ended January 31, 2014. My name is Danielle, 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 March 27, 2014, distributed before the market opened this morning, and slides that will be referenced during today's conference all can be accessed via the Company's investor relations website at IR.Conns.com.

Before I turn the call over to Mr. Wright, I must remind the audience that some of the statements made on this call may be forward-looking statements within the meaning of the Securities [and] Exchange Act of 1934. Any such statements reflect Conn's views, expectations, or beliefs about future events and their potential impact on performance. These statements are based on certain assumptions and involve risks and uncertainties that could impact operations and financial results and cause our actual results to differ materially from any forward-looking statement made on today's call. These risks are discussed in Conn's fourth-quarter and annual 2014 earnings press release and Conn's Form 10-K and other filings with the Securities and Exchange Commission.

In addition, certain non-GAAP financial measures are defined under SEC rules may be discussed on this call. Reconciliations of any non-GAAP financial measures or comparable GAAP measures can be found on the Company's website.

Joining Theo Wright, Conn's CEO, on today's call are 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 fourth-quarter and fiscal 2014 earnings conference call. I'll begin the call with an overview of our retail segment and comments on the credit segment, then Mike will discuss our credit segment further, and Brian will finish our prepared comments.

Conn's completed a successful fiscal year 2014. We achieved record earnings for the year with adjusted earnings increasing 58% from a year ago. Our new store model has proven itself, and we achieved our gross margin goals. We have work yet to do to improve execution, but our business has grown while delivering an 18% return on equity. Profitability has improved at the same time we've been taking market share.

Conn's earned $0.74 per share in the fourth quarter on an adjusted basis. This compares to an adjusted $0.54 in the same quarter a year ago, an increase of 37%. We are affirming our guidance for the fiscal year 2015 of $3.40 to $3.70.

Same-store sales for the fourth 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 fourth quarter. Product gross margin percentages were up across the board. Total retail gross margin percentage for the quarter was 40.6%, an increase of 370 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 and fourth quarters.

Fiscal -- first quarter of fiscal 2015 today, same-store sales are up about 15%. This is in line with our forecast, which anticipates higher same-store sales increases in the early part of the year; comparisons become more difficult as the year progresses. Gross margins for the first quarter to date appear in line with expectations.

We expect SG&A to be affected by the new store opening pace. We have 9 stores scheduled to open between April and July. Late first-quarter advertising expenses and advertising expenses through Q2 will be elevated, offsetting some of the operating leverage in our mature markets.

Same-store sales trends by month during the fourth quarter were November up 32%, December up 37%, and January up 18%. There were no changes to underwriting our marketing strategy from December through January. Through the first week of February, same-store sales were up only low single digits.

Weather-related store closures affected all of our Texas markets except the Rio Grande Valley at points during the quarter. Our second-largest sales market, Dallas-Fort Worth, was repeatedly impacted. Weather impacted our sales trends as well as credit consumer payment trends. Customer disposable income was also affected by reducing hours worked and increasing utility bills.

Turning to electronics, electronic same-store sales trends during the quarter were November up 24%, December up 27%, and January down 14%. Current quarter-to-date electronic same-store sales growth is about 3%, well less than our overall average. We're expecting full-year comparisons in this category to be flat to slightly negative.

Longer-term, we're more confident. 4K model televisions will benefit our business as prices decline. 4K now represents about 3% of our total sales. We expect this to increase over the year and to help us maintain prices and margin in the category. At some point, we think that adoption of the technology could drive a more aggressive replacement cycle, but that inflection point isn't yet visible.

The appliance category continues its steady growth. Market share in the category is increasing, and we think we can continue to take share. We're allocating more of our advertising exposure to the category and will be increasing our assortment this year. New stores appliance sales start more slowly than other categories, but we are encouraged to see these stores gain appliance sales as the locations mature and brand awareness increases.

On slide 4, you can see a three-year trend in furniture and mattress sales. Same-store sales of furniture and mattresses increased 60% in the fourth quarter on top of a 40% increase a year ago. For the fourth quarter of fiscal 2014, furniture and mattress sales were 26% of product sales and 37% of product gross margin dollars.

Sales of furniture and mattresses represent over 30% of product sales in March to date. Expanded assortment, store remodels, store relocations, and improved in-store merchandising are all contributing to same-store growth.

The Company previously set a longer-term goal of 35% of sales from furniture and mattresses. With more new stores, continued remodeling and relocation, along with enhancement to our offering, we can reach this goal.

Slide 5 shows the performance of our new store model. In past quarters, we used a hypothetical store example. This slide now shows average results from the 5 stores opened in fiscal 2013 for their full-year 2014 performance. The payback in ROI is impressive.

We don't believe stores opened in fiscal 2014 will be significantly different. Stores we are opening today also require less cash investment than the stores we opened in fiscal 2013. As our Company's credit standing improves, landlords have been willing to provide larger improvement allowances.

The stores opened in fiscal 2013 haven't yet reached maturity. Our past experience is that it takes about three years to reach full maturity. During fiscal 2014, purchases in these stores by repeat customers were about 70% of our overall average. We opened 14 stores and closed 3 stores in the 2014 fiscal year; our plan is to open from 15 to 20 stores in fiscal 2015. Two stores have closed thus far this fiscal year; our plan is to close an additional 8 stores over the course of the fiscal year. This represents the completion of our overall evaluation of our store base. For many of these stores, we've been pursuing an exit strategy for years. These additional store closures will have a modest effect on sales volume, about 2% for the year, and will benefit profitability and returns on capital.

Total closing costs, since most of these locations are at or near lease maturity, is estimated to be around $1.5 million. With the planned store closings, store openings, remodels, and relocations for the year, all but 5 of our stores will be in the Conn's HomePlus format by the end of the fiscal year. Our customers will have a better and more consistent experience. We can then advertise our appliance and furniture and mattress categories more aggressively with confidence the customer will have the right store experience.

Our net store count is expected to increase 5 to 10 units in fiscal 2015. We believe we can manage this growth rate effectively. In the fourth quarter of fiscal 2014, 8 new stores opened, with minimal disruption to our retail operations.

Turning to our credit segment. The Company made good progress in the third quarter of fiscal 2014 addressing the issues we experienced in the second quarter with our credit collection system. We were on track to meet our timetable of four to five months from the second-quarter conference call to fully address the effects of these issues on our portfolio. As announced in our prior conference call on November 30, greater than 60 days delinquency was down 20 basis points from the end of August. This is a better trend than normal for November.

In December, 60-plus delinquency was flat, followed by an increase of 30 basis points in January. Normal seasonality in December and January for the growth in the portfolio from higher fourth-quarter sales to offset the lower payment rate in this period. We didn't see the normal trend this year.

In the fourth quarter, the portfolio grew at a 52% annualized rate. Collection headcount grew from 450 agents at August 31 to 650 agents at January 31. During this period, late-stage delinquency was also increasing. We weren't able to get newer collectors up to speed fast enough to be effective collecting late-stage delinquency.

The variation of performance between an effective tenured collector at Conn's and a new or ineffective collector is substantial. A good collector is 100% or 200% more productive, not 10% or 20%. A shortage of fully trained, tenured collectors in our most challenging collection season led to increasing delinquency and charge-offs. Add to this weather impacted the portfolio by reducing payment activity. More than 50% of our payments are received from customers in store.

Portfolio growth and portfolio growth rates for the first quarter will be much lower than in Q4. Our hiring pace has decreased. With delinquent balances declining, we are able to give our agents time to build the experience to become fully effective. Portfolio growth will also be impacted by lower same-store sales growth, store closings, and elimination of the lawn and garden category which is about 4% of sales in the first half of the year and 1.8% for the full year.

Turning to underwriting on slide 6 is our average FICO score in the portfolio for the last five years. The portfolio has been in a narrow range of credit quality, with average income increasing each of the last four years. The unexpected delinquency increase in the fourth quarter was not a result of deterioration and underlying credit quality or a meaningful change in underwriting standards.

A few supporting data points. Fiscal 2012 originations Q4 delinquency increased 2.2% in the quarter, fiscal 2013 originations increased 1.6%, and fiscal 2014 originations increased 1.7%. The deterioration was consistent for all years of origination. Using 600 to 649 FICO scores as an example, this score band saw increased delinquency year-over-year of 60 basis points. All FICO score bands delinquency increased. Said differently, the deterioration and delinquency was evenly distributed in the portfolio and not caused disproportionately by higher-risk accounts. The increase in delinquency was also consistent between new and repeat customers.

In Q3 and in early Q4, we made some minor changes to our underwriting to reduce risk -- for declining some accounts we would've previously approved, reducing credit limits for some accounts, and demanding more and larger down-payments for some accounts. In Q1 of this fiscal year, we made additional changes, although not a significant as the changes we made in Q3 and early Q4 of last year. The aggregate impact of these changes is estimated as a reduction in sales rate from Q3 of 2014 of 5% to 7%, most of which was fully reflected in Q4 sales rates.

We are already seeing the benefit of these changes as first-payment default rates have declined, and the entry rate into early-stage delinquency is low by our historical standards as shown on slide 7. These changes to underwriting reduce pressure on our collections operations. We don't believe additional changes to underwriting are necessary now, and none are planned.

Currently about 40% of our portfolio balances were originated after November 1, reflecting most of the enhancements to our underwriting. Because of the rapid turnover in the portfolio, the effect of our changes to underwriting should be fully realized within the next few quarters. To address many questions we receive from investors about portfolio performance, please refer to slide 8.

Cash options for short-term, no-interest financing accounts have lower delinquency and loss rates than the interest-earning accounts. Static losses are lower on these originations compared to other accounts. These originations are promotional only in the sense of being advertised. The underlying credit quality is actually better. New customers for Conn's in our portfolio were 47% of the total portfolio at January 31. New customer 60-plus delinquency was 9.6% at January 31, compared to 8.5% for repeat customers. The new-customer share of the portfolio increased by 10%; the 60-plus delinquency would be expected to increase by 10 to 15 basis points.

Keep in mind that that high rate of repeat purchases -- the percentage of origination is higher than the percentage of the portfolio represented by new customers. As we have commented on several earlier calls, an increasing percentage of sales to new customers pressures delinquency and loss rates. This has always been true in our portfolio, but the impact is modest.

Delinquency rates by product categories are on slide 9. Normalized for credit quality, there's no material difference in delinquencies. First-payment default -- customers who don't make the first payment due that proceed to charge off from worst to best by category are home office of 3.2%, home electronics of 2.3%, furniture and mattresses at 1.5%, and appliances at 0.7%. The shift to higher sales in furniture and mattress categories is not putting pressure on delinquencies.

New-market delinquency is 8.3%, compared to 8.8% in mature markets at February 28. In Arizona and New Mexico, our underwriting has been slightly less restrictive until recently because we can charge a higher rate in interest. Of our portfolio, 85% originated in Texas. Our underwriting and collections operations are centralized, not managed locally or by state like many other consumer credit companies. Our collections practices are largely consistent across states. We wouldn't expect significant variation by geography, and we don't see variation by geography. None of our markets are experiencing local trends in employment that might cause a divergent trend in delinquency.

In the fourth quarter, we demonstrated the strength and resilience of our business model. Despite a weak performance in our collections operations, we delivered solid profitability and earnings growth. Our commitment to the business remains intact. Our returns on investment and equity justify continued investment in the business. New store openings are performing better than expected. We believe the best use of the Company's capital is to execute our growth strategy.

Now I'll turn the call over to Mike. Mike?

Thank you, Theo. As Theo commented, credit segment performance was impacted by a number of factors this quarter, particularly the rapid portfolio growth and related lack of seasoned collection agents. As a result, delinquency and charge-offs trends deteriorated. The recent delinquency charge-offs and re-aged trends are shown on slides 9 and 10. As of January 31, 60-plus-day delinquency was up 30 basis points from October month-end. This compares to a 10-basis-point increase for the same period in the prior year. 60-plus delinquency was down 10 basis points in February, consistent with the prior-year trend.

As we look at the portfolio performance today, with a few days left in the month, early-stage 1 to 60 days past due delinquency declined seasonally and compared to last year in February and should end up lower than the prior-year in March. Late-stage 60-plus-days past-due delinquency as a percent and in terms of the absolute amount and number of accounts is trending down seasonally. Also, we are closing the gap as compared to March of last year, benefiting from the improved early-stage trend that started in February. The delinquency rate per account 1 to 90 days past due is lower now than it was the same time last year.

We would anticipate these trends, which are reducing the workload on our collection operations, to continue to the later-stage delinquency buckets over the next four months.

Turning to the payment rate, as the average age of the receivables in the portfolio declines, the payment rate will decline. At January 31, the average age of an account was 8.2 months, compared to 9.3 months in the prior year due largely to portfolio growth. As a result, the payment rate declined from 5.1% in the fourth quarter last year to 4.8% this year. This is due to the fact that the finance contracts have a fixed monthly payment, so the payment rate is at its lowest right after the sale is financed.

The net charge-off rate increased during the quarter as we indicated on the last earnings call but was higher than anticipated due to execution issues. Additionally, we did not complete any sales of charged-off accounts during the quarter, which would have reduced the net charge-off rate. We expect the charge-off rate to remain elevated in the first quarter, though not as high as the fourth quarter, and then decline thereafter.

Slide 11 shows static pool loss information for the portfolio over the past 10 fiscal years. Static pool loss rate is shown as the 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 provision for bad debt rates were volatile.

During fiscal 2012, changes were made that shortened contract terms and the time period before charge-offs, including limiting reagents. 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 remained from recent fiscal year originations. Less than 1% of fiscal 2011, 7% of fiscal 2012, and only 26% of the balances originated in fiscal 2013. The more conservative re-aging and charge-off practices result in the balances that remain 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, so 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 the new credit customers. However, due to the rapid pay-down of the receivables we now experience, we expect the final static pool loss rates under reasonably foreseeable scenarios to end up around 7%.

Turning to underwriting trends for the quarter as shown on slide 12, roughly 94% 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 the changes in our advertising programs as well as merchandise mix changes which drove higher ASP's and reduced the volume of cash tickets. The approval rate under our in-house credit program increased by 1.5% from the prior quarter level, and the average credit score underwritten during the quarter was higher at 605 compared to 599 in the third quarter. The average credit score origination for the month of February was 602.

As we look at expected profitability of the credit segment going forward, the portfolio yield should increase modestly over time as we benefit from increased origination volume in our new markets that have higher interest rates than our legacy markets. SG&A expense as a percent of the portfolio balance should decline as collector effectiveness improves and we leverage fixed cost as the portfolio grows. And the provision for bad debt should decline based on the reduction in delinquent balances during February and March, though it will fluctuate quarter to quarter based on the level of the portfolio growth during the period.

We expect the improving delinquency trends seen in February and so far in March to continue over the coming quarters as we are more appropriately staffed for the portfolio growth and with the increased focus on training and monitoring of daily execution.

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

Thank you, Mike, and good morning. Net income was $27 million, or $0.74 per diluted share, in the fourth quarter after excluding the lease termination benefit. This compares to adjusted net income of $19 million, or $0.54 per share last year. On a reported GAAP basis, fourth-quarter net income was $0.75 per diluted share versus $0.50 a year ago. Results for the current period included pre-tax benefit of $700,000 related primarily to determination of a ground lease.

The prior-year quarter included charges related to facility closures, severance costs, office relocations, and the early extinguishment of debt.

Fourth-quarter retail sales were $302 million, expanding 45% over the prior-year quarter. This growth reflects the impact of increased traffic in existing stores and our addition of 14 new stores in fiscal 2014. We opened 8 Conn's HomePlus stores this quarter and closed one less productive location. We will see the full benefit of the 40 new stores opened in January in the first quarter of fiscal 2015. The reported 33% same-store sales growth in the fourth quarter met our expectations but we saw the pace of growth slowing in January as Theo discussed.

Looking forward, in February we lowered our fiscal 2015 same-store sales guidance to reflect the industry trend in television. Our guidance also reflects our decision not to sell lawn equipment in 2015. Retail SG&A expense was 25% of sales this quarter as shown on slide 13 down 300 basis points from last year reflecting the leverage impact of higher seasonal sales volumes. Our investment in future store openings and supporting infrastructure and higher advertising expense in new markets tempered the leverage impact of revenue expansion. We estimate that such expenses, including rent and personnel, totaled $1 million, or $0.02 per diluted share, in the period.

Adjusted operating income for the retail segment increased 147% to $49 million this quarter, driven by same-store sales growth, gross margin expansion, and SG&A leverage. Retail operating margin on an adjusted basis expanded 680 basis points over the year-over-year to 16.3%.

Credit segment revenues were $59 million this quarter, an increase of 42% over last year. Annualized interest and fee yields equaled 18.2%, down 60 basis points from a year ago due to an increase in the relative mix of short-term no-interest receivables and higher estimated future interest charge-offs.

Advertised short-term no-interest receivables were 36% of the total portfolio balance at January 31 as compared to 27% a year ago. We do not expect the relative mix of no-interest receivables to increase substantially in future periods. General and administrative expenses for the credit segment were 49% above the prior-year period due to increased staffing levels.

SG&A expense was 39% of revenues this quarter, up 190 basis points from the prior-year period. About 90 basis points of this increase was due to the impact of the lower interest yield levels on revenues. Provision for bad debt equaled $38 million, reflecting the impact of rapid portfolio growth and elevated delinquency and charge-offs.

As a result of higher than anticipated delinquency at January 31 and charge-offs in December and January, annualized provision for bad debt was 15% of the average portfolio balance in the fourth quarter. The provision rate was 11% on a full-year basis.

Based on current trends, we expect the bad debt provision rates to range between 8% and 10% of the average portfolio balance for fiscal 2015. We expect the provision rate to be lower in the first half of the year and higher in the second half. We recorded a credit segment operating loss of $1.9 million this quarter due to the elevated provision for bad debt. Interest expense increased $715,000 year over year with the impact of higher borrowings, substantially offset by a reduction in our overall effective interest rate. The lower rate reflects the repayment of our asset-backed notes in April of 2013 as well as a reduction in the rate under our revolving credit facility.

I will now turn to our balance sheet and liquidity. As of January 31, 70% of our $132 million in inventory was financed with outstanding Accounts Payable. Our inventory turn rate was 5.2 for the quarter. Inventory levels declined in February. As presented in slide 14, our customer receivable portfolio balance rose $123 million during the fourth quarter to almost $1.1 billion. Our allowance for bad debt rose 40 basis points over the prior quarter levels to 6.7% of the total portfolio balance at year-end. Outstanding debt increased $113 million during the period and totaled $536 million at January 31. Outstanding debt as a percentage of customer receivable portfolio was 50%.

As of January 31, we were well within compliance of our restricted debt covenants, and our relationship with the bank group is solid, evidenced by our increase in commitments. Both the receivable portfolio balance and outstanding debt declined in February.

Turning now to slide 15, earlier today we announced that we increased the capacity under our revolving credit facility by $30 million to $880 million. There was no change in the terms and maturity date of November 2017.

We have also agreed to terms on the sale and leaseback of 3 properties subject to due diligence procedures. Together with the pending sale of purchased properties, we expect to receive cash proceeds of approximately $25 million in the second quarter of fiscal 2015. We are currently evaluating other debt capital alternatives to support our longer-term liquidity requirements.

Moving now to slide 16, our current earnings guidance is $3.40 to $3.70 per diluted share for our fiscal year ended January 31, 2015. Full-year expectations considered in developing this guidance include same-store sales growth of between 5% and 10%; 15 to 20 new store openings; a retail gross margin range of between 39% and 40%; credit portfolio interest and fee yield of around 18%; credit segment bad debt provision of 8% to 10%, again, dependent on our same-store sales expectations; selling and general administrative expenses of between 28% and 29% of total revenues; and 37.4 million diluted shares outstanding.

Based on the midpoint of our fiscal 2015 guidance, we expect return on equity to approximate 20%. A more detailed presentation of our full-year results will be included in our current year Form 10-K, which we will file with the SEC in the near future.

This concludes our prepared remarks. Danielle, will you please begin the question-and-answer portion of our call?

(Operator Instructions) John Baugh, Stifel.

First of all, I was wondering if you could comment at all on the payment rate in February and March.

The payment rate in February with the accelerated tax refund, actually this season better than last year. We saw a strong recovery between that and the impact of improving weather. And then March is a little farther behind than it was in February but still solid payment rate in March.

Thank you. And then Theo, maybe you could talk a bit your direct marketing plan. And I guess I'm interested in terms of the potential applicants you've solicited for much of last year and how that may have changed as you went through the year. In that same vein, whether you saw higher delinquency rates with online applicants or with higher-balance customers or anything relating marketing to delinquencies. Thank you.

Over the course of last fiscal year, we gradually increased the FICO scores that we were mailing in our direct-mail program. So earlier in the year, we mailed to customers with FICO scores that were in line with our approval criteria. And as the year progressed and we saw strong responses from customers, we actually raised the mailing to customers who generally had FICO scores well above our approval criteria. And we also began mailing to customers that we wouldn't normally think of as our core customers with FICO scores of 650 to 675.

So over the course of the year, we increased the FICO score of the customers we were mailing to and we eliminated mailing to lower scores. As of today, really for the full year to date, we're not mailing to any FICO scores below 550, and we're mailing to quite a few FICO scores above 650.

We don't really see anything that's material in our Internet applications. Keep in mind that our process on the Internet is only an application process. The customer still has to complete the sale. Their identity is verified; it goes through all the same procedures in the store as we would with the customer that applied in the store. And I don't see a significant difference in delinquency or loss rate by balance size. The impact of a $100 increase in balance size as an example is about $5.00 in a monthly payment. It's just not enough to significantly affect the customer's ability to pay.

Thank you. And just one last quickie, could you explain -- and I just don't understand how a provision is calculated, and I would've thought the provision rate would be higher early this year and then lower in the back half and it's going to be reverse of that. Maybe you could educate us on how a provision rate is calculated and why that would occur that way. Thank you.

I'm not sure that we have the time here on this call to educate someone on how provision is calculated, especially since ours is fairly complicated with two methods, really, of provisioning.

But why would the provision rate be earlier in the first part of the year? Two reasons. Lower portfolio growth. So in the first part of the year, the portfolio would grow more slowly because of the seasonality of sales as well as the seasonality of customer payments, with a higher payment rate by customers in the early part of the year. So portfolio growth is one part of the answer.

And then the second part of the answer is because of the seasonality of customer payments, the actual delinquency declines in the early part of the year, reducing the delinquent accounts that we have to provide for using our provision methodology.

Great. Thank you for that color and answering my questions. I will defer to others.

Peter Keith, Piper Jaffray.

I wanted to look at the 60-day delinquency trend sequentially. I think you had said February was down a little bit, kind of in line with historical averages. I was just curious as you're thinking about the 60-day delinquency trend for the full Q1, it looks like historically it's gone down 100 basis points from Q4 to Q1. Should we expect something in line with that this quarter or perhaps even a little bit better?

Yes, we don't provide a specific forecast for delinquency, but I think our comments in the call -- the prepared comments indicated that we are performing in line with the seasonal expectations, and we are gaining ground on prior-year 60-plus delinquency.

Okay. And as a follow-on to that and somewhat related to John's question -- just on that provision for bad debt, it's 8% to 10%. That is a pretty meaningful step down from where you finished with Q4. I know there's a lot that goes into that calculation. But could you give us some comfort in how you're getting down to that range, just in terms of the impact of slower portfolio growth on one side; and then on the other, the improved delinquency trends?

Peter, this is Brian. Our bad debt provision for the fiscal 2014 full year was 11%. And that included the impact of execution issues we experienced in the second and fourth quarter. The top end of our guidance for bad debt does not assume a significant improvement from that level. And as I stated earlier, we would expect to see it higher in the second half of the year than in the first.

Brian, is it as simple as based on the decelerating same-store sales guidance that has a 200- or 300-basis-point impact on that decline?

I don't know that we could quantify it exactly that way. I would just say that if you are looking at the full year, not quarter to quarter, we get into a little trouble when we look at provision rate quarter to quarter because there's some volatility in that rate. When you look at the full year, we're not really assuming a significant improvement in performance at the high end of our guidance range.

And at the lower end of the guidance range, we're assuming that we don't install another system, which we're not going to, as well as we continue to execute at the level we're executing at today in our credit operations.

Okay. And final question for you, Theo. As you look back on this past fiscal year and some of the execution issues, how do you think about the optimal top-line growth rate that you think you should run at in order to manage the credit book appropriately?

I think we can manage the credit book with a range of increases. I -- on one hand, I wish we could sustain a 50% top-line growth rate, but that's not realistic long-term even if we wanted to. I think that, at a lower rate than that 20 to 40%, which is going to vary depending on the season, I think we can manage that effectively. I think a bigger issue than the absolute amount of the increase is the visibility of the increase. So it's our same-store sales growth accelerated in the third and the fourth quarter. Unlike new store openings, we didn't have long-term visibility. We didn't have a year's planning going into that increase in sales. And so there was more of an element of surprise in the rapid increase in sales that we achieved in the third and fourth quarter.

We didn't build a plan for our credit operations based on our almost 40% same-store sales growth rate in January, and we're not going to repeat that. So I think that the growth is more predictable, and we have longer line of sight for that growth. I think we can manage effectively something in the 20% to 40% range in our credit operation.

Okay. Thanks. That's helpful. And good luck this coming year.

Thank you.

Rick Nelson, Stephens Inc.

Curious what gives you confidence that the loss rates are going to mirror historic average, given what we've seen with delinquencies and the static pool analysis that you provided on page 11.

That static pool analysis in our comments would say we don't expect to mirror the loss rate. We actually expect a slightly higher loss rate. Really if you look at it on a percentage basis, it's not slightly higher, it's meaningfully higher. But we expect those static pool losses in more recent years because of higher delinquency to end up higher. We're just going to get there quicker is really the change.

Our changes in re-aging, our changes in charge-off policy, the changes in how we underwrite the portfolio with shorter terms for many of our accounts -- all of those things are accelerating to -- through charge-off.

And one thing that isn't readily apparent is if we cure, so to speak -- if we get a payment from late-stage delinquency customers, that doesn't really mean that that doesn't have a high probability of flowing to charge-off later. It means we got more money from them, which is a good thing. But to a certain extent, our delinquency increases and our execution issues have just been another factor that's accelerated the charge-off accounts that were likely to end up there anyway.

And if I could ask you also about your capital needs as you look out over the next 12 to 24 months, given your growth plans.

Well, we've increased the availability under our ABL. We expect the growth pace to moderate from same-store sales growth. The number of net stores we're going to open is declining from our previous guidance. And we believe that we can finance our business using debt capital at this point and don't have any plans to pursue raising equity capital and believe we have alternatives available to us in the debt capital markets.

And the margin assumption of 39% to 40%, you finished this year at 39.9%. I'm curious what that assumes in terms of mix shift toward furniture and mattresses -- why we wouldn't see a bigger lift than you're guiding to.

We assume that furniture and mattresses are going to continue to increase as a percentage of sales. Given the volatility in margins in our categories, we're just guiding based on what we feel confident in.

Okay. Fair enough. Thanks a lot, and good luck.

Thank you.

Laura Champine, Canaccord.

Good morning. Did you grow last fiscal year? Particularly in Q4, did you grow the collection staff in line with your internal expectations for growth in the credit portfolio? And if not, why not?

We grew the collection staff in line with our expectations. I think what we didn't do was grow the credit staff in advance of those expected increases in portfolio balances. We didn't grow them far enough in advance. It wasn't we didn't have enough people, it's just those people didn't have sufficient tenure and experience to be fully effective.

Theo, that sort of seems like basic credit portfolio management. And in Q2, to take 2.5 months to find the problem -- I'm just wondering if you are considering any difference structure, any different personnel in your actual collections management team.

We've made some significant changes to our collections management team, and we've expanded the management structure there as well. So we are making changes. But I would say again that the most important thing we have is a clearer understanding of the pace of increases in the portfolio balance, and we're getting the staff hired in advance of the need so that they have enough time to gain the maturity and experience they need.

Brian Nagel, Oppenheimer.

I was wondering if we could step back here. Obviously, a lot of questions on finance. But just to be clear, as you go back on the fourth-quarter performance with some deterioration in delinquencies, are you basically saying that in your view and looking at all the data this was purely a collections issue? Meaning that your collections infrastructure was simply not adequate to keep up with the rapid growth of sales? Or is there some other factor? And how should we think about the breakout in those buckets?

The issues in the fourth quarter were predominantly collections execution. There was an additional factor, which was weather, and we saw that in our retail business as well as in our credit business. There was definitely an impact on activity with our customers in January and the early part of February.

Okay. And then just a question -- I want to make sure I ask this right. I think we're all aware of how big a deal collections is to your business -- the execution collection is to your business. But we obviously see the delinquency rate, but can you give us some flavor for what share of your accounts deal with a collections agent meaningfully? How many of your -- what portion of your accounts need that reminder to stay on track just in the normal course of business?

About 20% of the accounts on a daily basis are one-plus days delinquent, Brian.

For our customer base, they -- at some point in time during the life of that account, it is highly likely we're going to speak to that customer. And it's not a majority of the accounts, but a meaningful minority of the accounts will get more than 30 days past due at some point in their life.

Okay. And then just finally, as we look at the sales trajectory that's laid out here for 2014, particularly early in the year, sales growth is slowing down. How should we think about that? Is that primarily due to comparisons, seasonality of the business, or is it more a function of you sort of, say, tapping the brakes in order to get the retail business growing at a level that your collections infrastructure can support?

Most of it is tougher comparisons. I think the comparisons we're going to face in the third quarter and fourth quarter of this year are in the 30% range. So most of it is comparison. I think we've quantified the potential impact of, as you've said, tapping the brakes as somewhere between 5% and 7%, but the biggest issue is the impact of much more difficult comparisons.

Then just one more question (inaudible) -- other people asked about the loan-loss provision, the 8% to 10% you've laid out for (inaudible) 8% to 10% for 2014. Is there any thought -- coming off the quarter, would that spike up to 15% to maybe lay out a more conservative number just given the issues? Or is that range basically sort of, say, spit out from the other guidance you provided?

I just would answer the question, really, the same way we answered the question previously that the high end of our range of guidance assumes no significant improvement in performance over last year that included two episodes of weak execution, one of which is not possible to repeat. So we're comfortable with that guidance that we've provided.

Okay. Thanks.

Brad Thomas, KeyBanc Capital Markets.

Want to just to follow up on credit and how it's affecting the comp. Your underwriting from 3Q to 4Q did tighten a little bit; your FICO score in 4Q was still lower year-over-year. Theo, can you maybe give us a little bit of a sense for, year-over-year, how much of a benefit in comps came from that underwriting being a little bit looser versus the marketing that you have in place, which is clearly a big driver of comps in the last couple of quarters?

Yes, I really can't answer that question because, based on the way we approach the underwriting, I wouldn't say the underwriting was looser. I'm saying differently that tightening the underwriting, which we did, did reduce the sales rate by, as we've said, roughly 5% to 7%. So if you reverse that logic, it would say if you were looser that's what it would -- that's the kind of sales increase it would generate. And our sales increases on a same-store basis were much larger than that.

So whatever influence underwriting may have had during the year, it was dwarfed by the influence of our changes in marketing program.

And so in terms of the underwriting standards today, would you expect those to hold consistent going forward? Or you feel the need to -- would we from the outside see those FICO scores move up a little bit more from where they are in the fourth quarter?

We don't feel the need to change our underwriting standards further, as I commented in the prepared comments. I think we're right where we need to be.

Great. And then just to follow-up on the comment on collections about how much experience matters. How long did it take for a new collector to get a material amount of experience?

It depends on what stage of collections the collector is engaged in. Early collections, a month or two, is all they need. And as the customers become more and more delinquent, the agents need more and more experience. But generally speaking, by six months a collector is capable of doing any stage of collections in our operations if they have the ability and aptitude that's required.

Got you. Thank you so much, and good luck.

Scott Tilghman, B. Riley.

Wanted to touch on two items. And I apologize if any of this was addressed; I did jump off for second.

On the development side -- the store development side, first off, what was the timing of the fourth-quarter openings. How late in the quarter did they open? And then as it relates to fiscal 2015, it looks like there will be more closings than you had communicated previously. Just wanted to get a sense on the thinking around that or what -- how you are approaching those particular locations; whether they are relocations with part of the new store planned or if they are just areas that are not working out well because of some of the legacy development.

Okay. Four of the stores that we opened in the fourth quarter opened in January. So the store openings were tilted toward the late end of the fourth quarter.

In thinking about closing of stores, these are all stores that, for one reason or another, wouldn't justify the investment to get them to our new store model or they wouldn't accommodate it. A couple of the stores are in very small markets, markets where we wouldn't enter that market today if we were looking for a new store. Several of them are extraordinarily small by our standards, one of them only 15,000 square feet. We really can't execute our store model in a space that size.

And then most of them, with one exception, are relatively close to other stores. In our past experiences, we'll be able to capture most of the sales from those stores once they're closed and other stores that have the right footprint and the right presentation. These are stores that we would have ended up closing anyway. I think all we've done here is just analyze the discussion and articulate our plans to help investors understand that the actual impact on our growth of store count is not as much as they may think because we have these closings that will take place over time as well.

That's helpful. The other topic I wanted to address is the good old CFPB. We get a lot of questions on that. I was wondering if you wanted to comment on your collections practices relative to what they're looking at and what you're seeing with other actions that the CFPB is taking industry-wide?

The CFPB hasn't really done anything on collections practices other than issue a document for discussion and begun a process of identifying issues that they're going to pursue. But there's no official action that the CFPB has taken on collections practices. And since it appears they're following a more open regulatory process around collections practices, we expect whatever changes that result will take some period of time -- likely years to be fully completed.

We haven't seen anything in enforcement or other actions related to other companies thus far that have been publicly disclosed that would affect our business. So as of this moment, we don't see a direct impact from the CFPB's activities.

Great. Thank you.

Ed [Dubois], Taconic Capital.

I want to go back to your credit line. If I recall, you renegotiated the credit line in November. And it seems at that time that you were very close to tripping that account receivable coverage ratio. And I know you are guiding -- you're saying you'll be able to greatly improve your delinquency problem. What is the trigger point on the line right now?

And supposing that you're wrong and that your delinquency continues to deteriorate and you trip that aspect of the credit line, what would happen to the credit line and what would you have to do about it to run the Company?

So we did in anticipation -- and the fact that the portfolio was growing and we saw that and the bank group saw that, everybody agreed it was prudent to move the payment rate covenant to a level that made sense given the growth in the portfolio. And we -- consistent with prior-year performance relative to that covenant, we were at pretty consistently above the revised covenant level in that range that was consistent with prior-year performance. So -- and then as we move in the fourth quarter, the lowest payment rate of the year, we are -- we will be trending consistent with our prior year's performance in the first quarter. So the payment rate will rise pretty significantly in the first quarter and will continue not to be an issue from a covenant compliance standpoint.

But hypothetically, supposing -- I don't know -- credit conditions deteriorate or you still have continuing collection and customer relation issues or problems, and you trip that percentage, what happens? Is it just that you just have a higher interest rate, or can they call all those lines? Seems to me that you're really -- it's a risk that we as shareholders have to take into account.

Well, I think we have visibility into payments through almost all of March, and we are far, far but that covenant. We have visibility into the delinquencies and early stage at this point, and we don't see a concern about the payment rate covenant at this point. And every company has had covenants in their bank agreements and so do we. And the documents reflect whatever we would need to do in the event of a covenant breach. But we don't have a concern about an issue with that covenant, and the payment rate is in line with our expectations. And as we noted, we just received an additional commitment from a bank based on that package of covenants. So it's really not a concern for us at the moment.

And the fourth-quarter payment rate trend and into the first quarter, our payment rate trend is following our more normal seasonal pattern. There's nothing surprising or unexpected happening with the payment rates.

Just one other quick thing. I know that in the past you've had a set-up where you could renegotiate the terms with individual borrowers, and then you would discount the projected payments to present value. Are you still doing that as a matter policy, or have you stopped doing that?

I'm not aware of anything where we discounted or made adjustments like that. We're using the same collection practices with our customers that we've always used.

Okay. So you haven't changed it at all. The last time you guided -- there was a comment on it, I guess, last year sometime about these renegotiation and restructured loans that you were doing. You haven't changed that?

We have our same re-agent practices or extensions that we -- primarily extensions that we've always used.

Okay. Thank you very much.

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back to Mr. Wright for any further remarks.

Thank you for joining us today.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.