Conn's Inc (CONN) 2015 Q1 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 first quarter ended April 30, 2014. My name is Karen and I will be your operator today.

(Operator Instructions) As a reminder, this conference call is being recorded. The Company's earnings release dated June two, 2014, 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.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 the potential impact on performing. 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 first-quarter fiscal 2015 earnings press release and in Conn's Form 10-K and other filings with the Securities and Exchange Commission.

In addition, certain non-GAAP financial measures as defined under SEC rules may be discussed on this call. Reconciliations of any non-GAAP financial measures to 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; David Trahan, the Company's President of Retail. I would now like to turn the conference over to Mr. Wright. Please go ahead, sir.

Good morning and welcome to Conn's first quarter of fiscal 2015 earnings conference call. I will begin the call with an overview of our retail segment and comments on the credit segment, and Mike will discuss our credit segment further and Brian will finish our prepared comments.

We achieved record earnings for any quarter in the first quarter of fiscal 2015 with adjusted earnings increasing 32% from a year ago. Credit segment performance improved as expected and our retail segment delivered another standout performance. Our store model is proving itself yet again in markets to the east of Texas.

Same-store sales for the first quarter by category on slide 3. Same-store sales for the quarter in total increased by 16% on top of the 17% increase in the prior year and [18%] the year before the prior year.

On slide 4 we show product gross margins by product category for the first quarter. Total retail gross margin percentage for the quarter was 41.4%, an increase of 110 basis points over the prior-year. Furniture and mattresses represented 42.4% of product gross margins.

Shifting sales mix to furniture and mattresses was the cause of the increase in gross margins over the prior year. Future gross margin growth opportunity will likely come from increasing furniture and mattress sales per square foot.

Paid same-store sales are up about 13%. Exiting the lawn and garden category reduced the first-quarter same-store increase by 3% and the May same-store increase by 5%. As discussed on our last conference call, modifications to our underwriting standards also reduced first-quarter fiscal 2015 and May 2015 same-store sales increases by an estimated 5% to 7%.

SG&A, particularly advertising expenses, have increased with the store opening pace offsetting much of the operating leverage from the increase in same-store sales. Opening of two additional warehouses in Q1 2015, along with the two warehouses opened in fiscal 2013 and 2014, have increased warehousing costs as a percentage of sales. These warehousing costs are included in cost of sales.

As these warehouses are better utilized, gross margins should benefit. El Paso and Phoenix will benefit from additional store openings this quarter. These facilities should be more efficiently utilized later this year. Denver and Charlotte will gradually benefit from store openings this year, but will likely not be efficient until next year.

On slide 5 you can see a three-year trend in furniture and mattress sales. Same-store sales of furniture and mattresses increased 33% in the first quarter on top of a 51% increase a year ago. For the first quarter of fiscal 2015, furniture and mattress sales represented 32% of product sales and 42% of product gross margins. Overall sales of furniture and mattresses were about 32% compared to 41% of sales in our new stores.

On slide 6 is our four-year trend in furniture and mattress gross profit. We're growing both sales and gross margin percentages.

The Company previously set a longer-term goal of 35% of sales from furniture and mattresses. We're getting close to this goal. The Tempur-Pedic brand is off to a solid start in our stores, with sales of their products representing 12% of our mattress sales in May.

Turning to appliances, Conn's has not articulated the strategy and goal to investors for our appliance category in the same way as we had for furniture and mattresses, but appliances are a core part of our offering and the growth opportunity. On slide 7 is the three-year history of same-store sales trends in appliances. We are consistently taking share in this category. May same-store sales in appliances were up 18%.

On slide 8 is our four-year trend in appliance gross profit growth. Slide 9 shows the mix of payment sources for appliance purchases. In our legacy markets, consumers are more aware of our appliance offering than our other categories. We are more competitive in this category for customers who don't need our financing, and appliance sales per square foot are about $1,000.

Conn's has a number of competent potential competitive advantages in major appliances: a commission-paid consultative sales force; a first-class retail presentation in our Conn's HomePlus format stores; next-day delivery every day in all of our markets; same-day delivery availability most days in our major markets; competitive pricing and assortment, particularly at higher price points.

We strengthened our competitive offering further by adding 100% free delivery every day starting in May. Prior to May, free delivery was by rebate. Switching to 100% free delivery will make us more competitive with some others in the industry and will improve the customer experience.

Our store selection is improving as well. Many of the color alternatives that we stock are now displayed in most stores, increasing the alternatives available for our consumers. Our advertising exposure for the category has increased and most of our price and product advertising messages feature appliances. Our three-year goal is to double our appliance sales.

Electronics; electronics delivered a same-store sales increase of 3% in the quarter. Television sales were down 2%. Accessories, gaming, and other electronics are responsible for the electronics same-store increase. In May as well, we have a positive same-store performance with television sales up only 2%.

Gaming, in particular, is making a contribution with availability of desirable product. UltraHD or 4K represented 4% of LED television sales in Q1 and 10% in May. Pricing is becoming much more attractive and we now have 4K on the floor at prices below $2,500. We think 4K will help us maintain television sales and ASP over the remainder of the year.

In May, we opened two new stores in Tennessee and plan to open an additional seven stores by the end of July. Slide 10 shows the performance of our new store model. This slide shows results from the new stores that are now included in our same-store sales mix.

These stores delivered a decline in same-store sales of 4% in Q1. Our new stores delivered a same-store sales increase of 2% in May. As we move away from the grand opening periods, the new stores are contributed strongly to same-store sales growth. The stores we opened in fiscal 2013 improved their same-store performance steadily through Q1 and produced an increase of 15% in May.

Our new stores in Arizona and New Mexico have been impacted more than our other stores by changes to underwriting. Despite the ability to charge higher rates in these markets than in Texas, we now have identical underwriting standards in all markets. This was not true a year ago and Arizona and New Mexico stores benefited from more generous underwriting standards.

The performance of the stores opened in fiscal 2013 is consistent with our expectations that store maturity will take three years. Our plan is to open a total from 17 to 20 stores in fiscal 2015. We have either opened already or have signed leases or purchase agreements for these sites.

Three stores have closed this fiscal year. Our plan is to close an additional seven stores over the course of the fiscal year as we discussed on our last conference call.

Turning to the credit segment, the Company's credit segment improved as expected in the quarter. Delinquency over 60 days declined 80 basis points from January to April and was down another 20 basis points in May. At January 31, 60-plus delinquency was 170 basis points higher than a year ago. At May 31 this difference was 80 basis points. At May 31 a year ago our credit performance was solid and our collections issue during fiscal year 2014 hadn't yet occurred.

Portfolio growth and growth rates for the first quarter were much lower than in Q4. Our hiring pace has decreased. With delinquent balances declining, we were able to give our agents time to gain the experience to be more effective.

Portfolio growth should be slower in fiscal 2015 than in fiscal 2014 due to slower same-store sales growth, store closings, elimination of the lawn and garden category, and more restrictive underwriting. The slower portfolio growth has given our staff needed development time. We have better visibility of expected portfolio growth and our hiring is taking place in advance of the expected need.

Turning to underwriting, on slide 11 is our average FICO score in the portfolio for the last five years. The portfolio has been in a narrow range of credit quality and remained there in the last quarter.

Reiterating a few supporting data points from our last conference call, on slide 12 cash options or 0% financing accounts have lower delinquency and loss rates than 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.

Delinquency rates by product category are on slide 13. Normalized for credit quality, there is no material difference in delinquency. The shift to higher sales in furniture and mattress categories is not putting pressure on delinquencies.

In Q3 and Q4 fiscal 2014 and in Q1 of fiscal 2015 we made changes to our underwriting to reduce risk. We are declining some accounts we would have previously approved, reducing credit limits for some accounts, and demanding more and larger down payments for some accounts. These changes were reflected in the FICO score underwritten in Q1 of fiscal 2015 of 605 compared to 599 in Q3 of fiscal 2014.

The aggregate impact of these changes is estimated to be a reduction of sales rate of 5% to 7% compared to the same period a year ago. First payment default rates have declined and the entry rate into delinquency is low by our historical standards.

Delinquency is 20 basis points better than the same time a year ago from 30 to 120 days past due, in part because of the changes in underwriting. By the end of August, the benefit of lower first payment default rates will impact all of our delinquencies. No additional changes for underwriting are planned at this time, although we are consistently evaluating our standards.

Volatility and recorded provisions for bad debt and charge-off of bad debts can create impressions about our underwriting that are inconsistent with the underlying economics of our credit offering and how we are managing the business. Static losses are much more stable and more representative of the underlying economics of our credit segment. We are establishing a goal of maintaining static losses at or below 7% to assist investors in understanding how the Company is underwriting accounts. If our approach to underwriting changes, we intend to communicate this by revising our goal.

In the fourth quarter of fiscal 2014, we demonstrated the resiliency of our business model. Despite a poor performance in our collections operations due mostly to planning errors, we delivered solid profitability and earnings growth. In the first quarter of fiscal 2015 we returned a form with improving credit performance and overall performance exceeding expectations for the quarter.

We have added more human capacity, as well as physical capacity, in both our retail credit segments. In the last two quarters we added seven individuals in senior leadership goals. Our team is better equipped to manage growth than it was six months ago.

Conn's offers a unique value to an underserved lower income customer. This value is best demonstrated by the high rate of repeat purchases and customer loyalty. We intend to continue to execute our growth strategy by opening stores and same-store sales growth.

Now I will turn the call over to Mike. Mike?

Thank you, Theo. As Theo commented, credit segment performance improved since the fourth quarter as execution improved and portfolio growth slowed. The recent delinquencies, charge-offs, and reagent trends are shown on slide 14.

60-plus day delinquency was reduced 80 basis points during the first quarter to 8%. This compares to a 40 basis point reduction to the same period in the prior year.

As seen on slide 15, in May 60-plus day delinquency improved by 20 basis points compared to an increase of 30 basis points in the prior year. At January 31, 60-plus day delinquency was 170 basis points higher than the prior year. Reflecting recent improvements as of May 31, it is now only 80 basis points higher than the prior year.

As we look at portfolio performance through the end of May, 1- to 60-day delinquency declined seasonally during the first quarter and in May. 60-plus day delinquency as a percent and the absolute balance trended down seasonally during the first quarter and declined further during May. The delinquency rate for accounts 1 to 120 days past due is now lower than it was at the same time last year and we would anticipate these trends continuing over the next several months.

Turning to the payment rate, as the average age of the receivables in the portfolio declines the payment rate will also decline. At April 30, the average age of an account was 8.3 months compared to nine months in the prior year, due largely to 43% growth in the portfolio balance.

Since the finance contracts have a fixed monthly payment, the payment rate is at its lowest right after a sale is completed. As a result, the payment rate declined 40 basis points in the first quarter to 5.8% this year as anticipated. In May, the payment rate was 5.25%, down only 17 basis points from the prior year.

The net charge-off rate decreased 280 basis points sequentially to 7.8%. We expect the charge-off rate to be higher in the second quarter and then decline over the last half of the year.

Slide 16 shows static pool loss information for the portfolio over the past nine fiscal years. The static pool loss rate is 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 while charge-offs and provision for bad debt rates are more volatile.

During fiscal 2012, changes were made that shortened 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. Less than 1% of fiscal 2011, 4% of fiscal 2012 and only 19% of the balances originated in fiscal 2013. The more conservative re-aging and charge-off practices resulted in the balances remaining in the portfolio being of higher quality than in the past.

We expect the final static pool lost rates for the recent fiscal years to be in line with historical experience, though there may be modest upward pressure to around 7% as a result of the execution issues experienced in fiscal 2014 and due to the increased volume of new credit customers originated during those periods.

Turning to underwriting trends for the first quarter, as shown on slide 17, 93% of our sales in the quarter were paid for using one of the three monthly payment options offered. The 350 basis point increase in the percent of sales under our in-house finance program was driven largely by changes in our advertising programs as well as merchandising exchanges, which drove higher ASPs and reduced the volume of cash tickets.

The approval rate under our in-house credit program decreased 220 basis points year-over-year. The average credit score underwritten remains flat sequentially at 605 and was up slightly year-over-year, while down payments rose 30 basis points to 4.2%.

We have remained focused on achieving and maintaining appropriate collector staffing levels and improving training, additionally we brought in additional management talent to continue to develop the collection organization and prepare for the coming growth. We expect the delinquency trends to continue to improve over the coming quarter, benefiting from recent underwriting changes, improved staffing levels with improved visibility to the expected portfolio growth, and increased focus on training and monitoring of daily execution.

I will now turn the call over to Brian Taylor. Brian?

Thank you, Mike, and good morning. First-quarter retail segment sales were $278 million, an increase of 33% over the prior-year period. This growth reflects the impact of the net addition of nine stores over the past 12 months and higher customer traffic in existing stores.

We opened two Conn's HomePlus stores in late April in the Denver market and closed two less productive locations during the quarter. We will see the full benefit of these new stores in the second quarter.

On a same-store basis, sales rose 16% over the prior-year quarter. On a full-year basis, we expect same-store sales growth of 5% to 10%, driven by higher sales in furniture, mattresses, and appliances.

Retail gross margin was 41.4% this quarter. In the first quarter of each fiscal year certain of our vendors provide us with additional promotional assistance. Excluding such assistance, retail marketing approximated 40.1% in the current period. Retail gross margin was also influenced by approximately $1.8 million in expenses, which are included in cost of goods sold associated with two new distribution centers to support future growth. As we continue to expand our store base over the next year, leverage of these costs will improve.

As shown on slide 18, retail SG&A expense this quarter was 27.4% of sales, consistent with the level reported last year. Our investment in future store openings, personnel, preopening, advertising, and new markets, and higher advertising costs in markets we entered over the past year offset the leverage impact of the revenue expansion within our existing store base. Preopening expenses totaled approximately $2 million this quarter, which compares to $600,000 in the prior-year period.

Advertising as a percentage of retail sales increased to 6.1%, an increase of 140 basis points from last year. In our new markets, we have invested more for advertising than in existing markets. This quarter advertising as a percent of revenue for new markets was 9% and was 5% in mature markets.

With the accelerated cadence of planned new store openings, we expect advertising expense as a percentage of sales to remain elevated through the third quarter continuing to offset some of the operating leverage of our mature markets. In total, unlevered operating costs related to pending new store openings totaled approximately $3.8 million this quarter, or $0.07 per diluted share. We expect margins and SG&A expense leverage to continue to be influenced by preopening costs as we open additional new stores in fiscal 2015.

Adjusted operating income for the retail segment increased 45% to $40 million this quarter, driven by same-store sales growth and gross margin expansion. On an adjusted basis, retail margins rose 120 basis points year-over-year to 14.2% of revenues. Credit segment revenues were $57 million this quarter, an increase of 39% over last year.

Annualized interest and fee yield was 17.6%, down 40 basis points from a year ago due to higher estimated future interest charge-offs and a reduction in fee income. The overall yield continues to be influenced by our use of short-term, no interest financing to accelerate portfolio velocity. At April 30, short-term, no interest receivables represented 37% of the total portfolio balance compared to 31% a year ago.

General and administrative expenses for the credit segment were 52% above the prior-year period, due to increased staffing levels. We continue to invest in additional staff this quarter to address expected portfolio growth in the second quarter.

When compared to the average portfolio balance, credit SG&A expense was 8% this quarter, down 20 basis points sequentially and up 40 basis points year-over-year due to higher staffing levels. Provision for bad debts equaled $22 million, reflecting the impact of a 33% increase in loan originations and higher delinquency rates year-over-year. Annualized provision for bad debt was 8% of the average portfolio balance during the first quarter, which compares to our full-year balance of 8% to 10%.

As I stated in our last call, we expect the quarterly provision rate to vary over the year, driven by the pace of origination and seasonal delinquency trends.

Credit segment operating income was $11 million this quarter. Interest expense rose $900,000 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.

Moving now to our balance sheet and liquidity, 86% of our $137 million in inventory was financed without any accounts payable as of April 30. Our inventory turn rate was 5 for the quarter.

Inventory levels and turn rates this quarter were impacted by the stocking of our two new distribution centers to support future sales and a pending increase in the assortment of hard good furniture merchandise and the introduction of the Tempur-Pedic mattress line. The inventory turn rate was 5.4 this period, after excluding $10 million of inventory held at the Denver and Charlotte distribution centers.

As presented on slide 19, our customer receivable portfolio balance was $1.1 million at April 30, up $36 million from January and $330 million from the same period last year. Our allowance for bad debts was 6.6% of the total portfolio balance at April 30.

Moving now to slide 20, we paid down $20 million in debt during the quarter and increased capacity under a revolving facility to $880 million. Outstanding debt was $517 million at April 30, or 47% of the outstanding customer receivable portfolio. As of April 30, we were well within compliance of our debt covenants and expect, based on current facts and circumstances, to remain in compliance.

At quarter end we had $362 million of total borrowing capacity under our revolving credit facility. We continue to evaluate other debt capital alternatives to support our longer-term liquidity requirements.

As covered on our fourth-quarter call, we have agreed to terms on the sale and leaseback of three properties. Together with the pending sale of purchased properties, we expect to receive cash proceeds of $25 million in the second quarter of fiscal 2015.

Turning now to slide 21, our earnings guidance of $3.40 to $3.70 per diluted share on an adjusted basis for our fiscal year ending January 31, 2015, remains unchanged. Full-year expectations considered in developing the guidance are highlighted on slide 21 and in our earnings release. A more detailed presentation of our fiscal 2015 first-quarter results will be included in our current Form 10-Q we will file with the SEC.

In closing, I wanted to highlight that members of management will participate in the Stifel, Stephens, Piper Jaffray, and Oppenheimer investor conferences in New York City and in Boston during the first, second, and fourth weeks of June.

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

(Operator Instructions) Peter Keith, Piper Jaffray.

Good morning, everyone. Nice quarter. When looking at the delinquency trend, I don't want to read too much into May, but every month of detail that we get is helpful. So interesting that May was down 20 basis points from April versus last year when you were up 30.

I guess historically is April usually the low point for the year and May is -- naturally starts to run higher, or how does that negative 20 fit in with historical context?

Peter, this is Mike. Yes, you're right; April is typically the low point and then as you get into May and June you start to see seasonal uptick in delinquency.

Okay. Then I know you guys have been hesitant on forecasting delinquencies, but even if we look at that loan-loss provision here 8% to 10% is pretty wide. Now that you are one quarter in the year you've gotten a couple more months of the credit performance, how do you feel about that guidance range? Do you see maybe more opportunity to be closer to 8% to 9% overall or is the back half a little bit lower than you originally thought?

The provision rate is affected by portfolio growth as well as delinquency. And when you add in the volatility of our sales growth and seasonality of sales growth with the volatility in collections performance, we think it makes sense to have a wide range of potential outcomes in the provision rate.

So that's really how we are thinking about it, Peter, is that if growth rates accelerate as we open these new stores that is going to put upward pressure on the provision rate, even with the same delinquency performance we are achieving today. So the possible outcomes are in a relatively wide range and that's what our forecast reflects.

Okay, that's fair enough. The last question I had for you was on the first payment default declined -- it's kind of a two-part question. Would you be able to provide some quantification of maybe what that looked like at its worst point last year and where first payment default is right now as a percentage?

And then I think you had commented that you thought those issues would be done by the end of August. Can you explain that particular timing?

We haven't historically provided detail on first payment default rates as a percentage and I don't think we will start doing that, because again it is heavily affected by seasonality and other factors. But if you are thinking in terms of timing, August really will reflect the seasoning of our changes to underwriting through all stages of delinquency. So that account that was underwritten in November of last year that was a first payment default will be out of the portfolio August.

Okay. Again, is this when you sort of tightened down some of the underwriting metrics last year; it's just the basically seven to eight months after that point?

That's right.

Okay. Thanks a lot for all the feedback, guys. Good luck these coming quarters.

John Baugh, Stifel.

Thank you. Good morning and thank you for giving us the 7% targeted terminal charge-off. I think that's great news.

I wondered if we could focus on the static loss by quarter table, where I think it was 1.9% in the first quarter post year of origination. Could you go into a little detail? I assume that has the first payment default issues in it and other things. And the fact you haven't really changed your provision would imply that these are just some bad apples that you've written off, but the rest of the portfolio is performing within range.

Is that right? Any color there would be helpful.

John, it's Mike. I think there's two points to be made there. One is with the impact of the execution issues that occurred in the back half of the year, so really what it resulted in is just accelerating accounts that were likely to charge off over the coming quarters anyways. And similar to what you see in the prior couple of years as we changed our charge-offs and re-age policies. And then the execution issue are just accelerating expected charge-offs.

So the change in under --? Can you go back and tell us precisely when the changes in underwriting standards occurred or were there different changes at different times?

There were different changes at different times, but most of -- the most impactful changes to our underwriting were made right at the beginning of the fourth quarter of fiscal 2014.

There has been a lot of conjecture around the impact of the marketing program on the quality of the credit. Are you seeing anything changing or -- good or bad in terms of the leads you are getting on the Internet versus people came in the store? I noticed the approval rate is lower. Just any color on that would be great.

The marketing program is having an impact on loss rates because we are attracting more customers that are new to Conn's. And so our delinquency and loss experience is going to be higher on those new customers. We've been talking about that now for several quarters, but that is reflected in both our expected static loss rate and are static loss goal.

If we were underwriting to our current standards with a slower growth rate and fewer new customers, we would actually expect the static loss rates to finalize at or below 6%, rather than 7%. So there is an impact. It is not insignificant, but we don't see anything beyond what we are seeing today and have seen now for over a year from this approach to marketing.

Thank you. My final question is there -- on that theme of so many customers being new, you have slowed the growth rate down, on comp at least, although there's a lot of new store growth. Is there some inflection point or point when we can look forward to that mix of the receivables being a higher percentage of existing customers? And if so when might that be, Theo? Thank you.

At some point if growth slows, yes, the portfolio would benefit from a lower percentage of new customers. Having said that, even though our expected same-store pace is going to decline, we are opening more stores so we don't see that inflection point. And assuming that we are generating the returns on capital that we are today and we are able to execute effectively, we don't see a point in the foreseeable future where we would slow that growth rate materially. So we, as I said, factored that into our expectations for static loss.

Thank you, good luck.

Brian Nagel, Oppenheimer.

Good morning. I've got a few questions here. First off, on the credit side. As we look at that 8% delinquency rate in Q1 and then even the 7.8% you telegraphed for May, to what extent is that still artificially high given some of the maybe transitory disruptions we saw in Q4?

Well, given that it's still 80 basis points above where we were last year, there is still a meaningful -- that is probably as good of an estimate of the impact of where we are relative to what is left from the execution issues.

Yes, so I guess let me ask that a different way. So if we look at what you just said, the increase year-on-year, is that spread then so to say all reflective of what happened in the fourth quarter or is the portfolio itself actually different so to say this year versus last year?

It's reflective of the performance in the fourth quarter, but there are differences as we've talked about many times. We think that the increased proportion of originations to new customers for Conn's is expected to increase 60 plus delinquency by about 30 basis points. So there's about 30 basis points that we would anticipate just based on the mix of customers in the portfolio, and then the remainder would really be reflective of execution issues.

Then the second question also on credit. It was, I think, about -- the numbers you just posted here for Q1 and the performance through last year, 2014, you have given a lot -- in the last two conference calls you've given a lot of detail about the improving performance or some of the measures you're taking to improve your collections business. But is there something you can elaborate more on that?

If I'm looking at the business here through the first several months of 2015, and anything that would give us more comfort that the collections business can perform better as we head towards a seasonally higher volume sales period such as the holiday season?

I think the best way I can in a concrete way give you more comfort is to talk about the impact of first-payment default rate. So as we look at delinquency through 120 days, we are actually below a year ago, even with a higher mix of new customers than we had in the portfolio a year ago. And that -- everything through 120 days reflects the impact of our changes to underwriting on first payment default. Those first payment default accounts, once they get to later-stage delinquency, are not incurable, but they are very difficult to cure and remove from delinquency.

So that is the one concrete data point that I think gives us comfort that the trends are much better. Through 120 days delinquency, reflecting our changes to underwriting, our performance is actually better than a year ago.

Okay, okay. Then I was (inaudible) this on the retail side of the business. You called out again, if you look the gross margin, the vendor support being -- acting as one of the boosted gross margin here in Q1. The question -- maybe a little more color around what that actually is and how sustainable do you view that trend?

That trend is sustainable. It has been in place for a decade or more. We have executed on those programs. They are really a formal volume rebate program from the vendors. And as I said, we have been doing it for at least a decade, so it is sustainable over time.

We are looking to move away from concentrating so much of that vendor support in the first quarter of the year, but it will continue to be part of our volume rebate programs for our vendors.

Thank you.

Laura Champine, Canaccord.

Good morning. So, Theo, I think you mentioned seven new hires in senior management. Can you comment on what their role is and whether they are on the retail or credit side?

Both retail and credit. Four of those hires are in the credit organization and the rest in retail, so it isn't just credit, but a sizable percentage of those new hires are in our credit organization.

Then another thing, in your prepared comments I think you mentioned that on the appliances you might have more competitive pricing relative to your competition on cash and carry. Why is that the case? Why has Conn's made a decision to price more competitively in that category?

We have always priced competitively in that category. That is not a change for us.

I think what we are really trying to highlight is in that category, in part because of competitive pricing, we are more likely to appeal to a customer that doesn't need Conn's credit and you see that in the information that we have provided about the payment source. So 30% of our appliance sales right now are to customers who don't need our credit offering and we think we have competitive advantages in that category.

So we are going to be, as we have been, priced competitive and we also have an offering in delivery that really no one can compete with and a retail experience that many of our key competitors can't compete with. So we see appliances as an opportunity to do more business with customers who don't necessarily need our credit offering.

Got it, and -- thanks. Just lastly, I understand that inventories are up a lot and a lot of that has to do with your expansion. When should we see inventories kind of normalize more towards sales growth rates?

I think there's going to be some volatility there because in addition to the additional warehouses, we also are expanding our product offering -- continuing to expand our product offering in furniture. And as that product flows into the warehouses and gets to the floor and takes time to develop a sales rate, it will also slow turn rates. So I don't know that were going to see a short-term change there.

But if you look a layer deeper and you look at the turn rates other than furniture in our legacy markets, the term rate there hasn't deteriorated at all and we've seen no deterioration in inventory aging or issues around inventory generally. It really just reflects the expansion of the business.

Got it, thank you.

David McGee, SunTrust.

Thank you. Good morning and good quarter, guys. Couple of questions on the expansion. As you've moved into brand-new states, Colorado, Tennessee, and as you sort of look at the Carolinas, do you sense any difference in terms of your target customer and their ability to buy home goods?

No, we don't is the simple answer. If you look at the strength of our opening in Colorado and in Tennessee, it doesn't indicate any real difference in the customers' ability to buy or willingness to buy. I would also throw Shreveport, Louisiana, in that category as well with a different demographic mix than we see in Texas and Arizona.

So as of now, I would say we don't see a significant difference. I think as we move East, what is interesting and is reflected in our thinking about the number of stores that we can potentially open over time is most of those states, really all of them, have the ability to allow us to charge an interest rate that we can operate profitably using. Especially when you look at the rate that we are actually charging our customers today, around 18%.

A lot of those states -- we think virtually all of them will be open to us to do business in and we see the opportunity to have somewhat higher store density just because of the way the population is distributed in the East. Unlike in Texas where you tend to have these dense urban areas surrounded by not a whole lot, the East has a different pattern of population distribution and we think we mail to really be able to have even more store density as we move east.

As you look at these new markets, do you see any different profile of competition? Or do you see so far competition do anything different as you move into Colorado and Tennessee; any different responses?

Electronics and appliances are dominated by a small number of national players, so in those categories there's really no difference mark-to-market. We are competing in appliances with Lowe's, Home Depot, Sears. Lion's share of the market is controlled by those three.

And then in electronics, Best Buy is the dominant player combined with a number of others. But really those are all national competitors.

Furniture is one area where we do see differences by market, but I would say we haven't seen anything that would prevent us from being competitive in furniture and mattress categories.

Thank you. Last question, in the first quarter you mentioned that TVs were down slightly and then it sounds like in May they were up slightly. But at the same time, 4K TVs have really made an impact on what you are selling.

Is it the case there where it's just sort of cannibalizing TVs that would've been sold already, so the benefit really is on the ASP side, or do you see the potential as the price points come down just for there to be some accretion to take place as far as unit sales?

Right now I would say it's cannibalization and we are holding ASP because of 4K. But having said that, the 4K product is very compelling when you are in a store and you are looking at it compared to the other products.

And there will be a point, I just have been reluctant to predict when that will be, but I think sometime in the next year or two there will be a point where the value of the technology is widely enough perceived that it encourages replacement. That hasn't happened yet, but I think it will happen just because the product is compelling.

Great. Thanks, Theo. Good luck.

Brad Thomas, KeyBanc.

Thanks. Good morning and let me add my congratulations on a good quarter as well.

Wanted to just follow up on your comment, Theo, about the drag on comps from the change in underwriting. I believe you quantified that as about a 5% to 7% drag in the quarter. I was hoping you could just talk a little bit more about what your expectations are going forward, if we should expect a similar level.

You should expect a similar level until Q4 of this year and at that point there should be minimal impact.

Great. Then just a follow-up on the gross margin (multiple speakers).

Brad, if I can interrupt also, I think also lawn and garden has negligible impact after the end of the second quarter. So lawn and garden will be a significant drag on our second quarter, which we called out with a 5% impact in May, but we will have no impact, virtually no impact, from lawn and garden in the third and fourth quarter of this year.

That is very helpful. Thank you, Theo.

Then a follow-up on the gross margin outlook, the retail gross margin outlook. It's clear the Company still has a great opportunity from a mix standpoint ahead. As you look intra-category, what are your expectations for the segment level gross margins?

We are obviously coming off of, I think, seven quarters where they were up very, very impressively, but seem to be flattening out a little bit. It does sound like you are making some targeted investments like in the free delivery.

You have that exactly right. We are making some targeted investments. We continue to be price competitive and advertise competitive pricing in the appliance category, so I don't believe there will be significant improvement in gross margins by category.

We see the opportunity to grow our gross margin by increasing the mix of furniture and mattresses. And where we see opportunities to grow the business overall by improving the customer experience and accepting similar margins for what we have today, then we're going to take advantage of those opportunities.

Great. Then just lastly on the marketing front, I believe your investor deck on the website indicated that the first-quarter number of applications was up 47%, continuing the strong trend that you have seen in applications. What's the outlook for the balance of the year, especially as you start to anniversary some of the big investments in marketing that you did in the middle of last year?

I think the outlook is reflected in our same-store guidance; is that as we anniversary those stronger comparisons then the increased pace will decelerate. And that occurs over the course of the year, so virtually every month starting in May actually the same-store sales pace increases through the end of the year. So we expect the rate of increase to decelerate.

Okay. Thank you and good luck.

Rick Nelson, Stephens.

Thanks and good morning. Could we see any account pickup sequentially in year-over-year? If you could talk about that, Brian, and your expectations for that as we look forward.

The increase in the re-aging of accounts, unfortunately, is the reflection of the increasing delinquency. And so the potential population of accounts that are eligible for re-aging increased and there were no significant changes in our approach to re-aging. And so it really just reflects a larger potential that resulted from the execution issues we experienced in fiscal 2014.

Okay. And on the retail side of your margin assumptions, 39% to 40%, your margins were higher than that from the first quarter, 41.4%. I'm curious about that guidance and what it assumes about furniture and mattress proportion of sales.

As we have talked about, we expect to continue to grow furniture and mattress sales as a percentage of the total sales, but we do have some vendor support in the first quarter that we don't have in the second quarter. And as I mentioned in the response to Brad's question earlier, we are making some targeted investments in customer experience, but overall, we anticipate that we are going to continue to deliver strong gross margins.

And the opportunity in terms of sales per square foot in furniture and mattresses, wondering where you are now and what your longer-term targets might be.

We do believe that sales of furniture and mattresses -- I'm sorry, furniture per square foot will achieve the levels we do in our other categories. Actually, in mattresses our sales per square foot are right in line with our other categories.

The furniture is -- it takes up more space and is less productive, but we do think we can significantly increase our sales per square foot, partly by displaying more product. We are taking better advantage of the available square footage, increasing our assortment within the same square footage, and giving customers additional alternatives that meet their needs and their stylistic preferences.

So will we ever see $1,000 a square foot in furniture? I would be surprised, but we certainly think we have an opportunity to improve from the level that we see today.

All right. Thanks and good luck.

John Baugh, Stifel.

I was wondering on bedding quickly; could you update us on what roughly the annual run rate of bedding is as a percentage of your revenues? And I was curious on Tempur-Pedic, how many SKUs did you bring on? What did you replace? What's sort of the ASP impact of bedding overall? Thank you.

As far as the SKUs that we brought on and what kind of price points, I would direct you to our press release on that topic that gives you some good detail that's available on the Internet.

And as far as what we replaced, it was part of an overall effort to reset the line and so there are actually a large number of replacements. It would be hard to characterize those as any one thing. The only thing I would say in a broad way is we no longer have that Sealy Optimum line on our floor and really replaced that on our floor with the Tempur offering.

And your annual run rate of sales, roughly, in bedding, Theo?

John, this is Brian. Mattresses make up about 25% of the furniture and mattress category.

Thank you very much.

Thank you. That concludes our question-and-answer session. I would like to turn the conference back for any concluding comments.

Thank you for joining us on our call today.

Thank you. 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.