Conn's Inc (CONN) 2015 Q2 法說會逐字稿

Good morning and thank you for holding. Welcome to the Conn's Inc. conference call to discuss earnings for the second quarter ended July 31, 2014. My name is Kate and I will be your operator today.

(Operator Instructions).

As a reminder this conference call is being recorded. The Company's earnings releases dated September 2, 2014, distributed before the market opened this morning and the 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 meanings of the Private Securities Litigation Reform Act. 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 risk are discussed in Conn's second-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. Reconciliation 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, and Brian Taylor, the Company's CFO. I would now like to turn the conference over to Mr. Wright. Please go ahead, sir.

Good morning and welcome to Conn's second-quarter fiscal 2015 earnings conference call. I'll begin the call with an overview and then Mike will discuss our credit segment further. Brian will finish our prepared comments.

The retail segment had another outstanding quarter with higher gross margins, expanded operating margins and the 12th consecutive quarter of increasing same-store sales. Strategies to grow sales of our most profitable product lines are proving enduringly successful.

Over the last five months we have successfully opened an additional 14 stores in 11 markets without disrupting our retail operations. We are reaching customers that were underserved before, giving low income consumers the opportunity to purchase quality, durable, branded products for their homes at affordable monthly payments.

Overall those results were not satisfactory. Our credit operations ran into unexpected headwinds resulting in portfolio performance deterioration.

As it has for half a century our combined retail and credit business model proved its strength and resiliency. Retail profitability cushioned the impact of credit performance volatility inherent in subprime consumer credit. Had we not pushed ahead to expand our retail sales we would not have mitigated negative credit trends with strongly growing retail profits.

The growth in gross margin helped cushion the impact of credit performance as well. We remain confident in the business model. The midpoint of our revised guidance for the full year assumes EPS growth of 12% and a 17% return on equity.

This performance is expected to be achieved while absorbing high customer acquisition costs from credit losses on new customers, elevated advertising expenses in new markets and inefficient distribution infrastructure. I'll comment specifically on the actions being taken to reduce each of these impacts later on the call. As our expansions mature and growth pace declines to more stable and predictable rates, we anticipate our performance will be more stable as well.

Same-store sales for the second quarter by category are on slide 2. Same-store sales for the quarter in total increased by 12% on top of an 18% increase in the prior year and 22% two years ago. Same-store sales excluding air-conditioning and a discontinued lawn and garden category would've been 18%.

Unseasonably cool weather depressed air-conditioning sales for Conn's as reported by some other retailers as well. Free delivery for appliances was an additional 1% drag on same-store performance. Modifications to our underwriting standards also produced second-quarter fiscal 2015 same-store sales increases by an estimated 8% to 10%.

On slide 3 we show product gross margins by product category for the second quarter. Total retail gross margin percentage for the quarter was 40.8%, an increase of 250 basis points over the prior year.

Furniture and mattresses represented 42% of product gross margins. Gross margin for the quarter benefited from a number of factors. The increase in higher margin furniture and mattress categories was an important contributor.

But increasing purchasing power was an important contributor as well. Gross margins increased in all major product categories. With each passing quarter our retail sales shift to higher margin categories with defensible positions against direct-to-consumer Internet retail.

When we enter new markets our ability to consistently deliver furniture, mattresses and appliances the next day is value, not just drop at the front door but unbox, assemble and install. For the six months ended July 31, gross margin percentage was 41%. This is above our long-term goal of 40% and full-year expectations are 40% to 41%.

Opening two warehouses in Q1 2015 along with the two warehouses opened in fiscal 2013 and fiscal 2014 increased warehousing costs as a percentage of sales. These warehousing costs are included in cost of sales.

We made progress improving utilization of these warehouses. At the beginning of Q2 the Denver warehouse was supporting two stores and the Charlotte warehouse also supported two stores. At the end of August these warehouses supported eight stores with four more stores planned for the remainder of the fiscal year.

We now have 18 stores supported by the Phoenix and El Paso warehouses. These facilities are reasonably efficient with more stores to come in their markets.

An additional warehouse will open in McAllen, Texas in October and like the warehouses mentioned earlier, this warehouse will be fully utilized when it opens. The cost of the McAllen facility will be largely offset by reduced transportation and other costs in our Houston, San Antonio and Dallas warehouses.

Increased sales, particularly furniture sales, has pushed Houston and San Antonio warehouses above their efficient physical capacity. Rio Grande Valley area customers will now be able to pick up products at the warehouse giving us a competitive advantage for both local and cash cross-border sales.

Overall this warehouse should not result in any meaningful negative impact on cost after a transition. Over the next several quarters gross margins will benefit from improving utilization of our warehouses supporting our guidance for 40% to 41% gross margins for fiscal 2015.

On slide 5 you can see a three-year trend in furniture and mattress sales. Same-store sales of furniture and mattresses increased 30% in the second quarter on top of a 34% increase a year ago. For the second quarter of fiscal 2015 furniture and mattress sales represented 31% of product sales and 42% of product gross margins.

For our new stores sales of furniture and mattresses are about 39% of the total in the quarter. The share of sales from furniture should increase with the full effect of stores opening this year. Completion of our relocation and remodeling program along with store closures should also increase the share of sales from these categories.

On slide 6 is our four-year trend in furniture and mattress gross profit. The Company set a longer-term goal of 35% of sales from furniture and mattresses. We are making progress towards this goal.

Last quarter Conn's laid out a strategy and goals to investors for our appliance category in the same way as we have for furniture and mattresses. On slide 7 is a three-year history of same-store sales trends and appliances. We are consistently taking share in this category.

Second-quarter same-store sales and appliances were up 19%. Slide 8 shows the mix of payment sources for appliance purchases. We compete effectively for customers that have access to credit or cash to purchase appliances anywhere.

We strengthened our competitive offering by adding 100% free delivery for appliances every day starting in May. Prior to May free delivery was by rebate. This change has been well received by customers and took away our number one cause of retail customer complaint.

Our advertising exposure for the category has increased and most of our price and product advertising messages feature appliances outside of holiday periods. Our three-year goal is to double appliance sales. The 32% increase in appliance sales in the quarter is in line with achieving this goal.

Electronic same-store sales increased 8% in the quarter. Television same-store sales were up 1%. Ultra HD, or 4K, was 13% of LED television sales in Q2 and 21% in August.

Pricing is more attractive and we now have 4K product on the floor at prices below $2,000. At prices below $2,000 these products are affordable for most of our customers. 4K television should have a greater impact in Q4 and help us maintain both ASP and margins.

Product gross margin percentages for the electronics category increased to 29%. The increasing sale of attachments and higher proportion of 4K television is raising gross margin.

Same-store tablet sales declined 36% in the quarter reducing the same-store comp by 1.5%. The speed of decline in tablet sales is faster than expected; this category will likely not recover quickly.

For the past year we've experimented with the sale of mobile phones and prepaid plans refining how we go to market. We will have a more compelling offering later this year which may offset some of the lost sales from tablets in our home office category.

Slide 9 shows the performance of our new store model. This slide now shows results from the new stores that are included in our same-store sales base.

These store sales were unchanged in Q2. Our new stores in Arizona and New Mexico have been impacted more than our other stores by changes in our underwriting. Despite the ability to charge higher rates in these markets we now have identical underwriting standards in all states.

For several of our newer stores now in our comp base we have opened another store or stores in the market. This will be the case in future quarters, as well, as more stores open in Phoenix, Tulsa, Tucson and other markets. Total market sales and profitability for these markets is increasing, however.

Our plan is to open 18 stores in fiscal 2015. We have either opened or we have signed leases or purchase agreements for all these sites.

Four stores closed through August. Our plan is to close an additional six stores over the course of the fiscal year as discussed on previous conference calls.

We plan to open 15 to 18 stores in fiscal 2016. This represents a small decline from our previously stated plan to open stores representing a 20% to 25% unit increase.

More important than the reduced number of stores we refined our plan to open stores in markets with existing marketing spend, existing distribution, or both. This should allow us to increase profits faster because of leverage in both cost of sales and SG&A. Execution should be easier as well.

Initial store productivity may be lower than our recently added stores, however. Our plan does not call for opening another warehouse until late fiscal 2016. The plan for the next several years would not require opening warehouses without stores already in place to support.

Turning to August results and future trends, August same-store sales were up 3%. Excluding the impact of air conditioning, lawn and garden and appliance free delivery, same-store sales would've been up 8%.

Last year August same-store sales increased 29%. Appliance same-store sales for August were up 17% excluding air conditioning.

Furniture and mattress same-store sales were up 10%. Electronic same-store sales were down 4% and home office was up 1%.

Television sales were down 10% and tablets were down 49%. As in the second quarter, electronics gross margins should benefit from the increased sales of 4K television.

Electronics comparisons are most difficult in Q3. Prior-year Q3 electronic same-store sales were up 26%. Electronic same-store sales were up 13% in Q4 of the prior year.

We don't expect positive comps for the second half in television. We expect full-year same-store sales growth of 5% to 10%. Same-store sales growth for the first half of fiscal 2015 is 14%.

Long-term trend of declining electronic sales as a percentage of our total sales continues. Electronics categories are a significant contributor to profitability, however, generating traffic and high sales per square foot.

The Labor Day weekend was outstanding. For the first time in several years our holiday performance was better than the non-holiday period.

Television sales trends reversed and TV comps were positive for the weekend. Hopefully, this is an indication of holiday trends in the fourth quarter.

Overall, the retail segment adjusted operating margin increased 39% despite an increase in SG&A as a percentage of sales. As shown on slide 10, SG&A other than advertising declined as a percentage of sales. SG&A in relation to gross profits declined.

The increase in advertising expenses was largely planned and temporary. The improvement in gross margins should be sustained. Advertising expenses increased with the store opening pace offsetting much of the operating leverage from increasing same-store sales.

We opened 14 stores over a five-month period and 8 of these were in separate advertising markets. Stores opened in Las Vegas, Nashville, Memphis, Knoxville, Greenville, Jackson, Lubbock and Odessa. Many of these markets will have more than one store when mature.

Advertising expense as a percentage of revenue will be high through August and then is expected to decline over the remainder of the year. As an example, in the first quarter we opened one store in the Denver metropolitan area in Aurora. Another store was opened in the second quarter, a third store was opened in August and the fourth and fifth store is planned at the end of Q3, or beginning of Q4.

Our ultimate plan for the advertising market in Denver is for seven stores. In this market, advertising as a percentage of sales will go down as these stores open.

Similarly, we opened one more store in the Phoenix area with two more planned for the future. We now have seven stores in the Phoenix market. A second store opened in the Tucson market as well.

We opened Nashville and Memphis with one store each. We expect to have three or more stores in each of these markets.

As we build out markets and the customer base matures, we expect advertising expenses to decline as a percentage of sales from Q2. Given our product mix trends we don't expect advertising to return to historical lows. However, advertising expenses in mature markets are about 5% of sales today.

A sales mix shifts away from electronics SG&A expenses will likely be pushed upward as a percentage of sales. Advertising expenses for furniture and mattress retailers in particular are typically higher than for electronics. More of our products including large televisions are delivered to customers' homes.

With 100% free delivery on appliances, more customers choose delivery. Delivery cost is included in our SG&A.

Turning to our credit segment, we completed the first quarter in May with high confidence in the portfolio performance improvement trend because of the actions taken over the last several quarters to improve performance. Those trends were not sustained.

The Company's credit segment performance unexpectedly deteriorated. Delinquency over 60 days increased 70 basis points in the quarter and was up another 50 basis points in August. Our failure to return to the expected trend required adjustments to our expectations for future portfolio performance.

Provision for loan losses and guidance has been adjusted to reflect this expectation. The increase in delinquency occurred despite actions the last several quarters to improve delinquency performance. Tighter underwriting since late fiscal 2014 has led to increases in average credit score underwritten, average credit score in the portfolio and down-payment percentage.

The percentage of originations with FICO scores below 525 is virtually zero. And originations to customers with no score is down within 40% from Q3 a year ago.

First payment default as a percentage of the portfolio is down 25% from the end of fiscal 2014. First payment default as a percentage of total delinquency is down 27% as well. Entry into the delinquency and early-stage delinquency in total is in line with past experience and the expectation is built into our underwriting model.

Early stage delinquency remained low at the end of August. Operational execution improved measurably. Staffing has been at or above the current need for two consecutive quarters.

Agent tenure is improving. Staff over 12 months with the Company is up 50% year-over-year and staff over 6 months with the Company is up 74%.

Individual collections agent performance is more consistent. The gap between top and the bottom performers is narrowing.

We added experienced talent to the collections management team from both outside hires and promotion from within. System enhancements have been implemented. Our systems have been stable and improving.

We have opportunities to improve certainly but execution is better, not worse than in the recent past. Late stage delinquency increased for all FICO scores, markets, product categories, years of origination and customer groups. The increase in new customers as a percentage of the portfolio compared to a year ago is impacting delinquency as we have commented on many times over the last year; however, the percentage of new customers was not significantly different in the second quarter than at the end of the first quarter.

Once customers become delinquent more than 60 days our customers are not resolving the delinquency at the same rate as in the past, or as expected. Customers are under pressure from a number of directions. Inflation of rents is one example, increased subprime issuance for vehicle purchases may also be pressuring customers' ability to pay Conn's.

Car loans and rent will generally rank ahead of Conn's and customers priority to pay. Although we cannot specifically identify the causes for pressure on our customers' ability to resolve delinquency, we haven't identified any internal factor causing the increase in delinquency.

We believe there are several factors that should help future performance of our credit segment. Portfolio growth should be slower in fiscal 2015 than in fiscal 2014 and slow further in fiscal 2016 due to slower same-store sales growth, store closings, slower store opening pace as a percentage of existing stores and more restrictive underwriting.

The anticipated slower same-store sales growth should result in increasing originations to repeat customers. As a percentage of the portfolio balance we expect lower collections cost as the hiring pace and turnover subside.

Portfolio growth, although slower, will provide operating leverage on expenses for systems, facilities and other fixed overhead.

Delinquency rates by product category are on slide 11. Declining electronic sales as a percentage of the total should benefit delinquency as well.

Turning to underwriting, on slide 12 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.

In Q3 and Q4 of fiscal 2014 and Q1 of fiscal 2015, we made changes to our underwriting to reduce risk. These changes were reflected in the FICO score underwritten in Q2 of fiscal 2015 of 607 compared to 599 in Q3 of fiscal 2014. (technical difficulty) increased as well.

The aggregate impact of these changes is estimated to be a reduction in sales rate of 8% to 10% compared to the same period a year ago. The changes to tighten underwriting affect about half of the current portfolio. Over the next several quarters more of the portfolio will have been originated under current standards.

We made some minor changes to our underwriting in August. These changes should have minimal impact on sales.

No additional changes to underwriting are planned at this time although we are constantly evaluating our standards. The volatility and reported provision for bad debts and charge-offs of bad debts can create impressions about our underwriting that are not consistent with underlying economics of our credit offering. The provision rate this quarter of 14% is not an indication we believe that static loss or the ultimate losses on a pool of originations will reach this level.

Static losses for fiscal 2013 originations are now expected to be higher than originally forecast moving from seven to around eight. As we've indicated previously, the fiscal 2014 originations static losses will be elevated and we now expect these to be around 9.5%.

Fiscal 2015 origination static losses are expected to turn down from fiscal 2014. We stated the goal of maintaining static losses at 7% or below to assist investors in understanding how the Company is underwriting accounts. At historical rates of curing late stage delinquency, this goal should be achieved or exceeded.

Based on our most recent performance this goal doesn't appear realistic. Given the items discussed above that should benefit performance over time we are revising our goal to deliver a long-term static loss around 8%.

Tightening underwriting enough to deliver a 7% static loss given current late stage performance would reduce profitability and returns on capital. If our approach to underwriting changes we intend to communicate this by revising our stated goal.

In response to the changing environment we are raising credit prices where we can. Mid-August we eliminated the use of six-month interest-free programs. These are about 15% of non-interest-bearing balances.

Effective today we are no longer offering 12-month interest rate financing programs to a portion of our customer base with lower credit quality. Over the next few months we will raise the rates we charged consumers by a few points in some states. Over several quarters these adjustments should add to our yield.

If portfolio performance trends as reflected in our guidance these changes will offset a portion of the effect. In closing, Conn's offers a unique value to an underserved lower income consumer. Our offering continues to be well received in markets with all types of demographics.

Despite the volatility and performance over the last year we remain committed to the business and its potential for growth. We regret the disappointing results and our difficulty forecasting credit performance. We are taking steps to reduce volatility although subprime credit performance is not always predictable.

Where possible we are working diligently and quickly to make adjustments to offset weakness in our credit performance. Even at current credit loss rates we can deliver attractive returns on capital and earnings growth. We look forward to seeing many of you at our upcoming Investor Day.

The longer format and site visits will give us an opportunity to better demonstrate the underlying value of Conn's to our customer, the future direction of the business and why we remain so committed to the business model. Now I will turn the call over to Mike. Mike?

Thank you, Theo. As Theo already discussed, despite improvements over the past few quarters in collection execution, credit quality and collection system performance, we saw delinquency deteriorate broadly across the portfolio.

The recent delinquency and charge-off trends are shown on slide 13. 60-plus day delinquency increased 70 basis points during the quarter to 8.7%. This compares to a 150 basis point increase for the same period in the prior year, which was impacted by previously discussed system implementation issues.

Our expectation is that the delinquency rate will rise to just over 9% at the end of October. The net charge-offs rate increased 220 basis points sequentially to 10% partially impacted by the fact that we did not complete a sale of charge-off accounts during the quarter. The sequential increase is consistent with the expectations we communicated on the last earnings call though it was higher than originally anticipated.

We expect the charge-off rate to decline in the third quarter due in part to the anticipated completion of additional charge-offs account sales.

Turning to the payment rate, as the average age of the receivables in the portfolio declines the payment rate will also decline. At July 31, the average age of an account was 8.5 months compared to 8.9 months in the prior year due largely to 40% 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 when the balance is at its highest point.

As a result the payment rate declined 20 basis points in the quarter to 5% this year. In August the payment rate was 5%, down 20 basis points from the prior year. The year-over-year GAAP has narrowed from the 40 basis points decline experienced during the first quarter as the difference in the age of the portfolio shrinks.

Turning to underwriting trends for the quarter, as shown on slide 14 94% of our sales in the quarter were paid for using one of the three monthly payment options offered. The 77% of sales under our in-house finance program was consistent with last year. The approval rate under our in-house credit program decreased 640 basis points year-over-year due to the underwriting changes made since late in the third quarter of last year.

The average credit score underwritten increased sequentially to 607 and was up 6 points year-over-year while down payments rose 50 basis points to 3.6%. This is the fifth quarter in a row with a year-over-year increase in the down payment percentage.

We have remained focused on achieving and maintaining appropriate collector staffing levels and improving training. Additionally, we have brought in additional management talent during the quarter to continue to develop the collection organization and prepare for the coming growth.

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

Thank you, Mike. Retail gross margin was 40.8% this quarter which includes $2 million of underlevered expenses associated with our two new distribution centers.

As shown on slide 10, retail SG&A expense was 28.5% of sales increasing 130 basis points from last year. This increase reflects our investment of approximately $4.6 million during the period and the opening of eight stores in the second quarter and four stores in August.

Advertising as a percentage of retail sales was 6.8%, an increase of 210 basis points from last year. In total, underlevered operating cost related to facility openings totaled approximately $6.6 million this quarter impacting earnings by about $0.11 per diluted share. This is almost double the level reported last year.

As the pace of store openings moderates over the balance of the year, we expect expense leverage to improve. On an adjusted basis retail operating margins rose 90 basis points year-over-year to 12.4% of revenues. The impact of sales growth and margin expansion was partially offset by our current-quarter investments in new store openings.

Credit segment revenues were $64 million this quarter, an increase of 38% over last year. Annualized interest in fee yield was 18.2%, up modestly from a year ago. Our yield is reduced by a provision for uncollectible interest and our use of short-term no-interest financing to accelerate portfolio velocity.

Short-term no-interest receivables were 37% of the portfolio balance at quarter end, flat sequentially but up 500 basis points from a year ago. As a percentage of the total portfolio balance, we expect no-interest receivables to decline gradually over the remainder of the year with the elimination of the 6-month program and the tightening of eligibility requirements to qualify for the 12-month program.

General and administrative expenses for the credit segment were 40% above the prior-year level due to increased staffing. We invested in additional staff this quarter to address the expected portfolio growth in the third quarter. When compared to the average portfolio balance, credit SG&A expense was 8.8% this quarter consistent sequentially and year-over-year.

Provisions for bad debts increased $18 million from the prior-year quarter to $40 million. This increase was driven by a 40% increase in the average portfolio balance, higher than previously anticipated delinquency and expected future charge-offs, and an increase in the level of accounts cumulatively re-aged more than three months during the quarter.

We provide for full life losses on accounts cumulatively re-aged greater than three months. Growth in restructured, or TDR accounts, generally lags overall portfolio growth. With the rapid growth in the level of customer receivables seen in the second half of fiscal 2014 and the increasing delinquency levels, the volume of restructured accounts increased sequentially and year-over-year.

Provision for restructured accounts increased substantially from the prior-year quarter and accounted for approximately 20% of the year-over-year increase in provision for bad debt. Our bad debt provision rate may be influenced from period to period by the level of accounts we re-age more than three months.

For the first six months of fiscal 2015, provision for bad debt was 11% of the average portfolio balance. Based on our current expectations of future charge-offs levels, delinquency trends and sales levels in the third and fourth quarters of the fiscal year we estimate provision for bad debt to range between 11% and 12% on a full-year basis.

Reflecting the impact of higher provision for bad debt the credit segment reported an operating loss of $200,000 this quarter. Interest expense increased $3 million year-over-year due to higher borrowings and an increase in our overall effective interest rate. The increase in our effective rate reflects the July 1 issuance of $250 million of 7.25% senior notes.

Net proceeds were used to pay down lower rate borrowings under our revolving credit facility. The all-in effective interest rate on the notes is approximately 7.6%.

Focusing now on our balance sheet and liquidity, as of July 31, 70% of our $138 million in inventory was financed with outstanding accounts payable. Inventory was flat on a sequential quarter basis while our store count grew 9%.

Our inventory turn rate was approximately 5 for the quarter. Inventory levels and turn rates this quarter were also impacted by the planned opening of four stores in August.

As shown on slide 15, at July 31, our customer receivable portfolio balance was $1.2 billion, an increase of $75 million sequentially and $336 million from the prior-year quarter. Our allowance for bad debts was 7.2% of the total portfolio balance at July 31, up 60 basis points sequentially due to portfolio performance trends observed at the end of July and into August.

Turning now to slide 16, as I mentioned earlier in support of our longer-term liquidity requirements we issued $250 million of eight-year notes in July. Additionally, we completed the sale and lease-back transactions for three properties. We received net proceeds of $263 million from these combined transactions, which was used to repay borrowings under our revolving credit facility.

Outstanding debt was $607 million at July 31, or 52% of the outstanding customer receivable portfolio. As of July 31, we were well within compliance of our debt covenants. Our cash recovery percentage was 5% for the quarter as compared to a minimum level of 4.49% required under our revolving credit facility.

Based on current facts and circumstances, we expect to remain in compliance with our debt covenants. At quarter end we had $517 million of total borrowing capacity under our revolving credit facility.

During the six months ended July 31, we invested $38 million in CapEx on a gross basis and $19 million on a net basis. This excludes funds we have or will receive from landlords which are treated for accounting purposes as a reduction of future rent.

After considering amounts received our current year net investment capital expenditures is approximately $14 million. Additionally, we expect to receive an additional $18 million from landlords related to completed projects.

As shown on slide 9, we expect net buildout costs for our facilities of approximately $500,000 for the more recent leases we have entered into. From time to time we may have to be required to purchase a site directly on a temporary basis. As we did this quarter, we would expect to ultimately divest of the acquired real property under a sales leaseback or other transaction.

Now turning to slide 17, we revised our full-year earnings guidance to a range of $2.80 to $3 per diluted share on an adjusted basis. For our fiscal year ending January 31, 2015, our revised guidance primarily reflects the impact of recent developments in delinquency and the July issuance of the $250 million in 7.25% senior notes.

Full-year expectations considered in developing the guidance are highlighted on this slide and in our earnings release. A more detailed presentation of our fiscal 2015 second-quarter results will be included in our Form 10-Q we will file with the SEC today.

In closing, I want to note that members of management will participate in the Credit Suisse Investor Conference in New York on September 16 and we will hold an Analyst and Investor Event in San Antonio in September. This concludes our prepared remarks. Kate, will you please begin the question-and-answer portion of our call?

Thank you. (Operator Instructions). Laura Champine, Canaccord.

Good morning. So guys, in part of the credit portfolio, the 60 days-plus delinquent, what is the average FICO score for that segment of the portfolio?

We don't have that right now for you, Laura. We don't have that specifically in front of us.

Generally speaking, the delinquent accounts would have lower-than-average FICO scores almost by definition because we do report to the bureaus. So those would have lower-than-average FICO scores.

Got it. And of your portfolio right now, do you have what percentage has a FICO below 550?

We don't have that in front of us, what percentage of the portfolio, but it is reflected in the average FICO score that we provided.

Okay. For the accounts that have 60 day-plus delinquencies, can you give us what percentage of those were generated by promotional no-interest offers?

We did not include in the slide presentation this quarter but the percentage generated by no-interest offerings is lower than the other percentage.

I'm sorry. I'm asking specifically about the delinquent accounts with 60 day-plus delinquencies. Is that the question that you are answering, Theo?

Yes. The delinquency of what are referred to as promotional receivables is lower than other receivables. So the proportion is less than the proportion of originations.

We included that in the last quarterly presentation. We didn't include it this time because it was redundant, but you can refer to the quarterly presentation last quarter. We also just pulled out the percentage of the portfolio that is below 550 today, is 15%.

Got it. Thank you.

Peter Keith, Piper Jaffray.

Good morning. I just wanted to follow up on the promotional receivables. So you are taking away the six-month interest option and then cutting back on the 12-month. So you're doing that either to increase the yield, or are you seeing elevated delinquencies as a result of that interest-free option on those accounts? Could you clarify that for me?

Peter, it has nothing to do with delinquency. Delinquency on those accounts is better than average. The reason we are reducing the use of no interest receivables is to increase the yield.

Okay. And then I don't know if you have a calculation, but the changes that you are making, would you have an estimated impact on same-store sales that we might see over the next 12 months as a result of the change?

We have already implemented the elimination of six-month cash option for that change. We don't see any impact. It was our choice largely to use six-month cash options to try to accelerate repayment.

We don't actively promote that alternative, so really it is our choice to offer that and we didn't see an impact when we made the change. So we don't see any impact there.

As we reduce the availability of 12-month cash options we don't expect that to have a significant impact. But we are going to introduce that in steps to make sure that we don't have a significant impact on sales performance.

Okay, that's helpful. And then the bigger picture question --

Peter, if I could just emphasize again, that 12-month cash option program we use is not something we actively promote. So it's really something that we did as a benefit to customers so that they can lower their potential cost to purchase and we can encourage that customer to repay us more quickly.

Okay. So to that point, you have identified there is nothing internally that you can see that caused that unexpected rise in delinquencies in July and August. So I guess as you step back now, it now becomes more of an economic issue around rent and subprime auto lending? That's your best assessment here?

That's our best assessment. What we are seeing is that once the customers become delinquent beyond a certain period of time, they are simply not able to resolve that delinquency in the way that we have expected. And although we can't identify it specifically, it appears that they simply lack the financial resources to get current with their other responsibilities as well as with Conn's.

Okay. And then just one last question as a follow-on to that. So if I heard Mike correctly, you are thinking that the delinquency rate will max out at around 9% in October?

So you ran at 9.2% in August. I guess that sounds to me like you are sort of calling for stabilization from the current level while you have seen it kind of rise up in the last two months. So what gives you the confidence that you will max out only at 9% a few months from now?

What gives us confidence at least in the foreseeable term is what we see in early stage delinquency today with 1- to 60-day delinquency actually declining in August. So what we see in the earlier stage performance gives us confidence that at least in the short term that there shouldn't be significant upward additional upward pressure on 60-plus delinquency.

Okay. Thank you for all of the feedback. Good luck with the coming quarter.

Brian Nagel, Oppenheimer.

Hi, good morning. In your prepared comments you made a comment with respect to the static loss rate in the adjustment there and then what impact keeping that at 7% could have on -- I guess you mentioned the property bill, the retail business -- so my question is, could you maybe go a little further into that math?

And then beyond that, as you look at this now, at the business, and we have had several quarters with higher-than-expected delinquencies. How do you think about the trade-off between maybe it's oversimplified, but delinquencies, 60-plus delinquencies, and your comp store sales. How do you manage towards that?

There were several questions there. I will try to start with the first.

If you look at the margin that we are achieving in our stores, gross margin, and you consider the fact that all of our stores are above four-wall breakeven, the contribution margin of an incremental sale is in the vicinity of 30% after direct SG&A. So to the extent that we reduce same-store sales, the impact on profitability would be about 30% of that reduction. So there's a significant impact on profitability of same-store sales by reduced.

I think that leads into the answer to the second part of your question, which is that given our current gross margin performance, significant tightening of underwriting would not result in improvement in profitability or returns on capital. And we have already over the last four quarters now, three quarters now, tightened underwriting significantly. And the difference between the bottom end of our underwriting and the average isn't enough where we could cut a small proportion of the total originations and have a meaningful impact on delinquency, or loss.

Okay. And maybe a follow-up to the prior question in a way. If you adjust -- if we take out the 0% offers you have, and you mentioned that there really isn't -- or the delinquency rate on those has actually been better than the house, I think that is correct, but you are taking that out in an effort to increase yield. Doesn't that then suggest that you could potentially have higher delinquencies?

It's a little more complicated than that because you also have the impact on the portfolio from the early repayment of those no-interest programs. So you are in effect taking the best performing customers out of the portfolio more quickly. Even though those customers are less likely to go delinquent they stay in the portfolio a shorter period of time so overall we think the impact on reported delinquency will be neutral.

All right. Then just one final question. You mentioned before in your prepared remarks and in the response to the questions that you can't really see specifically what is causing delinquencies to climb as they have been.

But if you step back and having, I know you guys have been in this business for a long time, is the move we have seen in delinquencies here recently, is it unprecedented? Or was there a period we can look back to with some type of guide is to maybe explain why it's happening and then, probably more importantly, what the future trajectory should be?

The delinquency we are experiencing today is higher than we have in any past period. So I think the delinquency that we are experiencing we don't have a historical precedent.

What I would say is if you look back at the period as we went into the recession four or five years ago that you saw a rise in delinquency and then stabilization and then later a trend downward. That is the best historical example we can see and that's -- those periods are reflected in the information that we provide on historical portfolio performance.

Thank you.

Karru Martinson, Deutsche Bank.

Good morning. I was wondering when you look at the delinquency rates that you are seeing here, do you feel more of them are coming from your new markets, or are they kind of across the board for you?

They are across the board. We've looked at that with care and we don't see any difference in performance between markets.

New customers without regard to what market they are in do perform worse than customers who have purchased from us before. But we don't see any difference between markets like Belmont where we have been 100 years and markets like Phoenix where we have been in operation for a year.

Okay. And then when you look at the customer mix and the availability of financing, do you feel that when you look at your portfolio that perhaps some of those higher-end customers are being siphoned off by others, or do you feel that the competitive response has stayed the same?

In our case specifically we have siphoned off a portion of those higher-end customers. This goes back several years but we used to underwrite higher FICO score customers on our own books and then we made a decision to transfer those customers to GE Now Synchrony Financial.

And so we have taken a group of higher FICO score, higher credit quality customers that we used to finance when you look at earlier static loss periods and earlier delinquency performance, we've taken those customers off our books and moved them to a third party. If we adjusted the FICO score in our portfolio and the FICO score underwritten for those originations, it would have a significant positive benefit to both of those measures.

Thank you very much, guys. I appreciate it.

John Baugh, Stifel.

Thanks and good morning. Theo, I think you sort of answered this question but I'd love to hear the answer again, or maybe it's a slightly different question.

And it basically is, you have set a 7% static loss number recently and now it is 8%. Can you go into why you in a very short timeframe have switched that number, why it makes more sense now to be at 8% versus 7% and what parameters would cause that possibly to go to 8.5% or 9% in the future?

If you look at fiscal 2014 originations, those originations were affected by a number of operating issues. And we have suggested that those static losses will go to about 9.5%.

We are assuming that we are going to have continued stable operating performance. But what we have seen in the short term and what we are not seeing reverse despite the effort, the intensity, the improvement in people is our ability to cure later-stage delinquency.

So if we look at our projections going forward, what has changed is we seem to be unable at this time to cure later-stage delinquency the way we have in the recent past and historically. And that is the reason for the change.

What would drive that static loss rate higher absent some operating issue is that there is further deterioration from what we see today, or if there is a higher entry rate into delinquency than we see today. But that's our best estimate based on the conditions that we face in the marketplace today.

And do you have any thoughts, once we anniversary the high comps in the next two quarters, you made a number of changes here since January 1 of underwriting and eliminating six-month -- you have done a lot of things here. And then you have moved the static loss number to maybe an 8% goal versus 7%. I'm trying to guess as to what all of this might mean for comp sales as we go out into calendar 2015.

I think it means very little to comp sales. As we pointed out the changes to six-month cash option programs has been negligible, or none. And we are not anticipating a significant impact on comps and that is reflected in our guidance.

We don't really see a significant impact especially since as we go into fiscal 2016 we will be anniversarying comparisons against similar underwriting absent some changes that take place in the future. So we don't think there will be a significant impact on comps. And when you adjust for seasonal categories in August, we think we are trending right in line with where we thought we would be.

The biggest question mark in comps in the reason that we still have a significantly wide range of comp expectations is really television sales. That is the question mark in same-store sales because so much of same-store performance in television will be affected by the pace of adoption of Ultra HD, or 4K.

So that is really the biggest question mark we see in same-store sales performance. We don't think it's credit.

And my last question is, and I know you're not giving fiscal 2016 guidance, but you talked at length about warehousing cost as a leverage point going forward. And then I presume there is some kind of advertising leverage you get from opening more stores in existing territories and opening fewer new stores in total as a percentage of the mix. How do all of these things in terms of retail gross margin look to your calendar 2015 versus calendar 2014?

We will definitely benefit from both. We would expect advertising as a percentage of sales to trend down from Q2 levels and there would be a benefit to gross margin from much better leverage on warehouse operations in 2015.

And as I have said, we refined our plan for warehouse operations to in effect establish the stores that are going to be supported by a warehouse before we open the warehouse rather than vice versa. So very confident in that particular benefit.

And the only caution, as I said in my prepared comments, as our mix of sales shifts to furniture and mattresses and appliances and less electronics, generally you would expect that advertising expenses would trend upward. But in our mature markets our advertising expenses are in the range of 5% of revenues today.

Great. And then maybe I will sneak one more in here. I think you said the month of August comps were positive even with the impact. Would you anticipate, though, the next two months of the quarter being flat to negative and the overall quarter being fairly flat?

I don't think we are going to issue quarterly guidance on same-store or monthly guidance on same-store performance but we have provided guidance for the remainder of the year. I think there will be some volatility and monthly performance because of volatility in television sales. So I think that our guidance is what we have provided but I think monthly sales could be somewhat volatile.

Great. Thanks for the color.

David Magee, SunTrust.

Thanks, good morning. Have you contemplated changing the advertising, or what changes do you contemplate in that regard, I guess?

It seems like over the last year you have been emphasizing credit as the lead point and that has had a big uptick in business. Has that kind of run its course and do you of touch people in that way you need to change or message, or is there -- how do you see that evolving?

We have touched the people that we can touch with that. In other words we have I think fully implemented that advertising strategy. And so we anticipate we will be comparing against a consistent advertising approach and a consistent level of penetration in that market with an advertising message.

So I think it has run its course to a certain extent. Over time though as those customers who purchased with us make payments on their credit with us then we do have the ability to market to those customers and get them to return to the store to make repeat purchases. And those customers have much better performance within our portfolio.

So the point we are trying to make in the prepared comments is we have acquired -- we have made an investment in acquiring these new customers. And we are going to get a payoff in that investment with repeat purchases from customers that have proven their ability to pay.

The other thing that we have done and we have pointed this out over the last couple of quarters is emphasized the appliance category. And there are several slides in the deck that point out the superior delinquency performance of this category as well as the higher percentage of sales in this category that Conn's does not directly finance. And that is an ongoing part of our advertising program today.

Thanks, Theo. Secondly, did you comment on new store productivity, or reception in the Southeast? How happy are you with the stores in the Southeast right now, new stores?

It is going to vary based on the location and the individual example. I think overall I would say we are happy and there is no surprises in performance.

Memphis in particular has been a really strong opening for us. It's a small market but actually Florence, South Carolina as well has been strong.

Where we have opened those stores exactly (technical difficulty) with the right staff and we have gotten great performance but overall no surprises. I think for us the big opportunity in markets like Memphis and Nashville is just to get the store complement right. We don't have all the stores yet in those markets to get the performance that we would like and in some cases we are not -- we haven't yet opened a store that is in the ideal location for those markets.

But overall we feel really good about it. I will use some other examples. It depends on your definition of Southeast how you think about this, but Shreveport continues to do really well for us. Our stores in Oklahoma continue to gain ground month after month.

So I think overall we see performance. Jackson, Mississippi is another store that has opened well, so we feel good about our ability to perform in the Southeast. We just need to get more stores open in several of those markets.

Which leads to my last question, I guess given the bumpiness in credit over the past year, is there consideration being given to maybe slowing things down over the next couple of years, more than you might be already to try to make sure that that part of the business is operating as well as it can?

Yes. Certainly consideration. Absolutely.

And I think we have determined to slow the store opening pace down. But I think in the shorter term, which is where we have given specific guidance, the direct profitability benefits of opening those additional stores to fully build out both the use of the distribution infrastructure and the advertising investment is so powerful that I think that overwhelms any potential credit benefit from slowing down in the short term. And we will continue to evaluate our store opening pace as we see developments take place.

But we don't believe that the issues that we are facing today relate to opening new stores. It is really not something that is simply in new markets, or with any particular group of customers. What we saw in the current period affected all classes of customers within our portfolio.

Okay. Thank you and good luck.

Rick Nelson, Stephens.

Good morning. Theo, the allowance account as -- was 7.2% of the outstanding receivables. Theo, shouldn't that number be more in line with the static losses that you are estimating and would that require a higher provision?

I'm sorry, I couldn't hear the first part of your question, Rick.

The allowance account was 7.2% of the outstanding receivables. Your guidance for the static loss, 8%. Should those two accounts be in line with each other and might that require a higher provision than we are currently thinking?

Yes, the static loss expectations that we discussed are reflected in our provision. Without getting too tangled up in the mechanics, what is on the books today is a partially mature portfolio of receivables as opposed to a portfolio comprised solely of new originations.

So you are comparing an apple to an orange a little bit. But I can say conclusively that the static loss guidance that I outlined is aligned with our provision.

And the allowance account?

That's right.

Also, curious about covenants. I guess the payment rate where you said today versus covenant and how much cushion there is?

I think the easiest way to explain that is in this past quarter we were at 5% versus a 4.5% minimum for the covenant. And for us to get close to that 4.5%, 30-day delinquency in the quarter would have almost had to double.

Okay. Got you. And the higher the charge-offs go that kind of affects the payment rate as well, correct?

Not significantly. Because they are already in delinquency and it is just the flowthrough of non-paying accounts.

Got you, okay. Thanks a lot. Have a good one.

Andrew Hain, Baird.

Thanks for taking the question. I am curious what goes into the decision to close a store knowing your same-store sales have been up double digits for at least six straight quarters now? One would think that your store closures would be fairly minimal.

The stores we are closing are in two categories. One, they are in markets that are much smaller than markets that we would open a store in today, or they are stores that are close to other stores and are small format stores that we could not remodel to fit our current prototype.

So these are stores that really represent a legacy site selection process that resulted in stores that are much smaller than our average store today. And much closer together than our stores would be today.

Is it safe to say that they are not performing as well?

It is safe to say that they aren't performing as well. Their productivity is much lower than our average productivity.

Great, thanks. And then just a question on your chart on page 13. Your 60-day delinquency rate there, how does that treat your re-aged accounts?

If an account is re-aged during the period and brought current it is reported in whatever delinquency status it is after re-aging. But if it goes delinquent again it stays in delinquency.

Okay, great. Got it. Thank you.

And then just a couple of quick ones. Your indenture, your 7.25% notes you guys sold a couple of months ago, what is the -- I apologize, I haven't had a chance to go through -- but how much -- what's the limitation on debt there included in that indenture? In other words, how much debt can you secure debt or get ahead of those unsecured bonds could you put in?

It's got some limitations. It allows for the capacity of our revolving credit facility and based on financial performance it could go higher than that amount.

Okay. And then today what would you say your most restrictive financial covenant is today?

I would say right now we are not close to any of those covenants, so it's really hard to identify the one that would be the most restrictive since we are well within compliance in all of them.

All right, great. Maybe I will just follow up offline with some of those. I appreciate that.

I would now like to turn the call back over to management for closing remarks.

Thank you for joining on the call today.

Ladies and gentlemen, this does conclude today's presentation. Thanks for your participation and you may now disconnect. Everyone have a good day.