Conn's Inc (CONN) 2015 Q3 法說會逐字稿

Good morning, and thank you for holding. Welcome to the Conn's Incorporated conference call to discuss earnings for the third quarter ended October 31, 2014. My name is Karen, and I'll be your operator today.

(Operator Instructions)

As a reminder, this conference call is being recorded. The Company's earnings release dated December 9, 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.Conn.com.

I must remind you that some of the statements made in this call are forward-looking statements within the meanings of the Securities and Exchange Act of 1934. These forward-looking statements represent the Company's present expectations or beliefs concerning future events. The Company cautions that such statements are necessarily based on certain assumptions, which are subject to risks and uncertainties which could cause actual results to differ materially from those indicated today.

Your speakers today are Theo Wright, the Company's CEO; Mike Poppe, the Company's COO; David Trahan, the Company's President of Retail; and Mark Haley, the Company's Interim CFO. I would like to turn the conference over to Mr. Wright. Please go ahead, sir.

Good morning, and welcome to Conn's third-quarter of FY15 earnings conference call. I'll begin the call with an overview, and then Mike will discuss our credit segment further.

Our results for the third quarter of FY15 were disappointing. While we experienced significant growth in expanded gross margins in the retail segment, unfortunately, these gains were more than offset by additional provisions for credit losses. The Board and Management team are not complacent about these results. And as you'll see, we're collectively engaged and committed to strengthening our Management team, enhancing oversight of the business and improving the Company's performance.

I'll begin with an overview of the retail segment. Over the last 10 months, we've successfully opened an additional 20 stores in 8 markets, and three new warehouses. We're reaching more customers than ever before, giving low-income consumers the opportunity to purchase quality, durable, branded products for their homes at affordable monthly payments.

Revenues in gross margins expanded yet again in the quarter, and operating income in the retail segment grew. However, as I mentioned, our effectiveness in retail operations was more than offset by additional provisions for credit losses. Despite steadily tightening credit standards over the last year and improvements in collections execution, performance deteriorated in the quarter. November credit performance did, however, provide evidence of stabilization, with the over 60-day delinquency rates stable, and 30- to 60-day delinquency declining to levels below a year ago.

We're committed to improving performance in the credit segment through better execution and oversight. To that end, the Board has introduced a number of initiatives, which we announced today. The Board has established a Credit Risk and Compliance Committee, responsible for reviewing credit risk, underwriting strategy, and credit compliance activities. The committee will supervise an independent evaluation of underwriting standards.

The Board has also commenced efforts to augment the Management team. The Board has initiated a search for a President to provide additional senior leadership for the Company. The search has also been initiated for a Chief Risk Officer to provide additional capability in analyzing and assessing credit risk. The previously announced Strategic Alternatives process is underway, and the Company is actively engaged with its advisors exploring a number of potential strategic alternatives.

Turning to underwriting, on slide 1 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 late FY14 and throughout FY15, we made changes to our underwriting to reduce risk. These changes were reflected in the FICO score underwritten in Q3 of FY15 of 608, compared to 599 in Q3 of FY14. (Technical difficulty) increased as well.

The aggregate impact of these changes is estimated to be a reduction in sales rate of 12%, compared to the third quarter a year ago. As we have indicated previously, the FY14 origination static losses will be elevated, and we expect these to be around 9.5%, based on current collections trends.

FY15 origination static loss had been expected to trend down from FY14 because of tighter underwriting standards. Based on current delinquency, we do not yet see the expected improvement in 2015 origination pools, and the time to charge-off is faster than expected. However, we have tightened underwriting in a series of steps over the past year.

Importantly, the reported provision rates for the quarter is not an indication of our expectation for future static losses. We expect the provision rate to decline significantly in the fourth quarter from third-quarter levels.

We recorded additional provisions for credit losses this quarter based on the assumption that we will not realize any improvement in these trends over the next 12 months, despite the underwriting changes and improved collections execution. The amount recorded in the quarter represented the full impact of the additional expected losses for the next 12 months, not just the expected increase in charge-offs in the quarter.

Our long-term goal is to deliver a static loss 8%. To achieve this goal, we are increasing the origination of higher credit score receivables. Beginning in late October, we began to originate 18- and 24-month no-interest loans to higher credit score customers. Prior to October, Synchrony Financial offered these loans to our customers. We'll continue to use Synchrony exclusively for longer-term, typically 36 months no-interest programs, and may use Synchrony for other no-interest programs from time to time. In November, our average FICO score underwritten was 614.

In the third quarter, total originations increased over the prior-year third quarter 12%, compared to a growth rate of 65% a year ago. The slower growth rate in the portfolio should benefit credit quality. In addition to having higher expected losses for new customer originations, losses from originations to new customers also occur faster. The expectation of accelerated losses increased the provision this quarter, and is due largely to the higher proportion of new customers in the portfolio.

As our sales comparisons have slowed significantly, originations should shift to a lower proportion of new customers. As the shift in origination occurs over the next year or so, the portfolio proposition should change to a higher proportion of repeat customers. This changing proportion should benefit both the timing and amount of losses when the shift does in fact occur in the portfolio. Declining sales of home office products -- the category with highest delinquency rates, as shown on slide 2 -- should also benefit the portfolio over time.

We continue to evaluate our underwriting standards, and may make further changes to reduce credit risk. As mentioned earlier, the Credit Risk and Compliance Committee will direct and supervise an independent evaluation of underwriting standards to validate underwriting processes and results.

Although not our goal or expectation, we believe we can still operate the credit segment profitability and generate an acceptable overall return on capital at a long-term static loss rate of 10%, or even somewhat higher. The number and scale of changes in our operations over the last several years, including modifications to credit underwriting, credit collections practices and length-of-loan terms, along with new store openings and a shifting customer mix, has impaired our ability to accurately forecast the timing and extent of provision for loan losses.

For static loss rates to increase significantly from the current trend, delinquency would have to increase as well. We'll be providing investors monthly updates for the foreseeable future on greater-than 60-day delinquencies until we have more stable and predictable trends. We expect fourth-quarter delinquency to be flat to down, compared to the third quarter.

In response to the higher-than-expected credit losses, we raised credit prices in some cases. We eliminated the use of six-month interest-free programs, and are no longer offering 12-month interest-free financing programs to a portion of our customer base with lower credit quality. We raised the rates we charge consumers by 200 basis points in some states.

These changes did not impact sales rates significantly, and we're evaluating other opportunities to increase yield in the future. Over several quarters, these adjustments should add to our yield. These changes will offset a portion of the effect of higher static losses.

Turning to our retail segment, November same-store sales were up 0.5%. November a year ago delivered a 31% same-store increase. A-year-ago comparisons become easier for each of the next three quarters.

November same-store sales of televisions increased 6%. The Black Friday weekend was outstanding. Television sales trends reversed and TV counts were positive for the weekend, with a strong Ultra HD performance.

Ultra HD television is the big winner for us so far in the holiday period. Two Curved Samsung Ultra HD televisions had higher sales in one month than any other SKU in the Company's history. We're excited to see a new television technology that is generating consumer enthusiasm. With prices below $2,000 in larger screen sizes, we could see a meaningful replacement cycle.

On slide 3, we show product gross margins by product category for the third quarter. Total retail gross margin percentage for the quarter was 40.6%, an increase of 50 basis points over the prior year.

Furniture and mattresses were 43% of product gross margins, as shown on slide 4. For the nine months ended October 31, gross margin percentage was 40.9%. This is above our long-term goal of 40%.

Opening two warehouses in Q1 of 2015 and one more in Q3 of 2015 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, with the stores open for the year. Over the next several quarters, gross margins will benefit from improving utilization of our warehouses, as we execute the FY16 store-opening plan without opening any additional warehouses.

On slide 5, you can see a three-year trend in furniture and mattress sales. Same-store sales of furniture and mattresses increased 7% in the third quarter, on top of a 55% increase a year ago. 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. The Company set a longer-term goal of 35% of sales from furniture and mattresses; we're making progress towards this goal.

As shown on slide 6, SG&A, other than advertising, declined as a percentage of sales or held steady. Advertising as a percentage of retail sales was 6.9%, an increase of 180 basis points from last year. Advertising expenses increased with the new store openings.

We opened 18 stores for the year-to-date period, and 12 of these were in separate advertising markets. Stores opened in Las Vegas, Nashville, Memphis, Knoxville, Greenville, Denver, Florence, Charlotte, Colorado Springs, Jackson, Lubbock and Odessa. Many of these markets will have more than one store when mature.

As we build out markets and the customer base matures, we expect advertising expenses to decline as a percentage of sales from Q3. And we expect advertising expenses in Q4 to be lower as a percentage of sales than in Q3. With our product mix trends, advertising will not return to historical lows. However, advertising expenses in mature markets are about 4.5% of sales today.

Retail gross margin was 40.6% this quarter, which includes $0.6 million of under-levered expenses associated with our new warehouses. In total, under-levered operating costs related to facility openings totaled $4.5 million this quarter, impacting earnings by about $0.08 a share.

In the fourth quarter of last year, we opened eight stores, including several late in the quarter. This fourth quarter, we have opened three stores, all prior to Black Friday, and we'll not open any additional stores in the quarter. Compared to a year ago, cost should benefit from the change in fourth-quarter new-store openings.

Turning now to our balance sheet and liquidity, as of October 31, 55% of our $169 million in inventory was financed with outstanding accounts payable. Inventory was up 23% on a sequential basis, while our store count grew 7%. Our inventory turn rate was approximately 4.5% for the quarter. Inventory levels and turn rates this quarter were impacted by the upcoming holiday season and a planned response to supply-chain issues related to the West Coast ports.

Turning now to slide 7, in support of our longer-term liquidity requirements, we issued $250 million of eight-year notes in July. Outstanding debt was $697 million at October 31, or 56% of the outstanding customer receivable portfolio.

As of October 31, we are well within compliance of our debt covenants. Our cash recovery percentage was 4.94% 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 $428.4 million of total borrowing capacity available under our revolving credit facility.

We plan to open 15 to 18 stores in FY16. We'll 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. Our current plan does not call for opening another warehouse until FY17. We'll continue to pursue opportunities for new locations, and we'll evaluate our store opening plan for FY17 and beyond as part of our review of strategic alternatives.

Finally, I want to take a moment to discuss the departure of Brian Taylor, our CFO, before passing the call over to Mike. I want to personally thank Brian for his valuable contributions to Conn's growth over the last several years, and wish him the best in his future endeavors. I'd also like to welcome Mark Haley as interim Chief Financial Officer. Mark joined us recently from Coldwater Creek, and I have great confidence in his abilities, given his host of relative industry and leadership experience. We're pleased to have Mark in place as the Company conducts a search for a permanent CFO.

As we also noted in the press release, with the ongoing review of strategic alternatives and other oversight initiatives being undertaken by the Company, the Company has decided to withdraw its earnings guidance for FY15, and is not currently providing earnings guidance for FY16. Although we are no longer providing earnings guidance, we plan to provide forward-looking information about our expected store openings, same-store sales and retail gross margins. And we'll also be releasing shortly after the end of each month, same-store sales performance for the month.

In closing, despite the volatility and performance over the last year, we remain committed to the business and its potential for growth. The Board and Management are taking the steps necessary to ensure future performance returns to expectations. Now I'll turn the call over to Mike. Mike?

Thank you, Theo. In our credit segment, despite improvements in collection execution and tighter underwriting over the past several quarters, we saw delinquency continue to deteriorate, and charge-offs accelerate. Though we have reduced the proportion of originations to customers with a credit score below 550 and completely eliminated originations to customers with a score below 525, due to deterioration in scores after origination, the proportion of accounts 61 or more days past due with a score below 550 increased this summer and has maintained that level.

The percentage of customers in the portfolio in total whose most recent score is below 550, has decreased since last year, but we have seen an increase in the 60-plus-day delinquency rate for those customers. Conversely, for customers that maintained their score over 550, we have seen the delinquency rate decline year over year, providing some evidence of the improvement in collection execution.

As a result of this sustained deterioration in the customers' ability to resolve delinquency, despite the changes we have made, and the change in our post-charge-off recovery process, we increased our allowance for bad debts during the quarter. The recent delinquency and charge-off trends are shown on slide 8. 60-plus day delinquency increased 130 basis points during the quarter to 10%. As of November 30, the 60-plus day delinquency rate was consistent with October at 10%, compared to 8.5% last year.

The net charge-off rate decreased 110 basis points sequentially to 8.9%. The decrease was partially due to increased sales of charged-off accounts during the quarter, compared to the prior quarter. We expect the charge-off rate to increase in the fourth quarter, due to the increase in delinquency and our decision to stop selling charged-off accounts.

We will manage the post-charge-off recovery process in-house, as we did historically. This will result in the deferral of the realization of recoveries over an extended period of time, beyond the 12-month period considered in the reserve, as opposed to lump sum payments from a sale of accounts. We expect to ultimately recover similar, if not greater, amounts than we were receiving through the sales. The impact of this change was a $7.6 million increase in the bad debt reserve and provision this quarter.

In addition to the underwriting changes we have discussed, we have worked diligently to improve execution in our collection operations. During the fourth quarter last year, the collection operation was overwhelmed by rapid growth in both the portfolio and the proportion of new customers. With a faster-than-anticipated growth rate, staffing levels and effectiveness were inadequate to handle the increased delinquency volume. As a result, delinquency and charge-off rates deteriorated.

On a positive note, since that time, staffing needs have become more predictable, and we have improved our employee-retention and agent effectiveness. At the end of October, the portfolio had grown 33% year over year, while the number of agents with six months or more of tenure with the Company increased 59%.

Additionally, as the size of the operation has grown, we have added seasoned Management talent to the organization, and enhanced our collection strategies by adding specialized teams and processes to address higher-risk segments of the portfolio. As of today, we believe the team is well-positioned to execute our plan through the holidays and into tax season, when staffing needs typically begin to moderate.

We also recently engaged two outside consultants to complete independent studies of our collection operations to identify opportunities for improvement in our collection execution. Generally, the studies confirmed our own findings about the drivers impacting our portfolio results, and the recommendations were largely focused on improving collection efficiency, as opposed to collection effectiveness. We are developing plans to implement the recommendations that we believe are appropriate for our business.

Turning to the payment rate, it is important to keep in mind that the average age of the receivables impacts the payment rate. Since the finance contracts have a fixed monthly payment, the payment rate is at its lowest right after a sale is completed and the balance is at its highest point.

At October 31, the average age of an account was 8.7 months, compared to 8.6 months in the prior year. Given the similarity in the average age this year compared to last year, the deterioration in customer ability to pay on their accounts resulted in a year-over-year payment rate decline of 12 basis points in the quarter, to 4.94% this year. We are encouraged that the year-over-year gap has narrowed from the 40-basis point decline experienced during the first quarter.

Turning to underwriting trends for the quarter, as shown on slide 9, 94% of our sales in the quarter were paid for using one of the three monthly payment options offered. The percentage of sales under our in-house finance program was down 2 percentage points from last year, to 77%. The percentage of sales under our third-party rent-to-own options increased 230 basis points, nearly doubling, to 4.8%.

The approval rate under our in-house credit program decreased 680 basis points year over year, due to the underwriting and marketing changes made since late in the third quarter of last year. The average credit score underwritten increased sequentially to 608, and was up 9 points year over year, while down payments rose 20 basis points, to 3.6%. This is the sixth quarter in a row with a year-over-year increase in the down payment percentage.

During October, we began offering 18- and 24-month no-interest programs to high-credit-score customers, previously financed under our program with Synchrony. We originated approximately $3.5 million under these programs during the quarter to customers with an average credit score of 692. We expect originations under these programs to become a larger portion of our originations and the portfolio balance going forward, benefiting future delinquency and static loss results.

Turning to the financial performance for the quarter, revenues increased, largely due to the growth in the portfolio, which was partially offset by the decline in the interest in fee yield to 16.9%. The interest in fee yield decreased by approximately 40 basis points, due to the additional provision for losses recorded during the quarter. SG&A expenses for the quarter increased 28% year over year, also due to the growth in the portfolio, but were down as a percentage of the average portfolio balance outstanding to 8.6% from 9.1% last year and compared to 8.8% for the first two quarters of this year.

The provision for bad debts increased $49 million from the prior year, to $72 million. The increase resulted from several factors, including 33% growth in the portfolio balance; 12% increase in origination volume compared to the same quarter last year; increased 60-plus days past-due delinquency due to deterioration in customer credit quality after origination; accelerated pace of realization of credit losses; the $7.6 million reduction in recoveries expected over the next 12 months due to our decision to pursue collection internally; and a $4 million increase related to an 18% increase in balances treated as troubled debt restructurings for accounting purposes.

Interest expense rose $5.2 million on increased borrowings and a higher effective interest rate, as the senior notes issued July 1 of this year were outstanding for the entire quarter. We have remained focused on achieving and maintaining appropriate collector staffing levels and improving underlying credit quality at origination, and will continue to identify opportunities to improve execution and credit quality.

Before we begin Q&A, I'd like to remind everyone that the purpose of today's call is to discuss our financial results for the quarter, and I ask that you please limit your questions to our earnings announcement. As we mentioned in the press release, we don't plan to comment further on the Strategic Alternatives review until the process has concluded. Thank you all in advance for your understanding and cooperation.

Karen, let's begin the Q&A portion of today's call.

Thank you.

(Operator Instructions)

Peter Keith, Piper Jaffray.

Good morning, everyone, thanks for taking the questions. I wanted to dig first into the bad debt provision that you had in the third quarter of close to 24%, which was substantially higher than I think anyone expected. And then, the commentary from Theo that that is going to step down in the fourth quarter. Can you help us get our arms around what might be one -- fully one-time charges in the third quarter?

And then, I know you're not providing guidance, but when it's stepping down -- let's just assume that the delinquencies are stable -- what would that provision look like in the fourth quarter, assuming that stable trend?

We're not going to provide, as you said, guidance on the provision, Peter. But we do believe that our longer-term static losses for 2014 originations are in the 9.5% range. And we think 2015 -- we're hopeful that it declines somewhat from there, but we haven't seen as strong a decline in trend as we would like. So longer-term, we would expect that that provision rate would trend more towards that static loss rate.

And that -- however, that would be volatile because of the two different methodologies we have for provisioning, with TDR accounts and non-TDR accounts, and the impact of growth. If you think of that static loss rate longer-term -- again, not talking about the quarter -- as the baseline, then the portfolio growth would add to that additionally -- call it 100 to 200 basis points, something in that range, depending on the pace of growth. So that's the trend that we expect to travel towards. But the past could be lumpy because of the different provision methods we have, and the timing of experience -- seasonality of experience of delinquency.

Okay. For Mike, then, just as follow-on. I think you called out several one-time items. Could you just lay those out again for us to understand what may not be re-occurring in the fourth quarter with the provision?

It was really one, one-time item that we called out, Peter, and that was a change in the recovery process. We have ceased selling charged-off accounts, and that was about an $8 million adjustment to the provision in the quarter to change our expectation. And it's really just a timing difference. It's not our ultimate realization expectation. It's just a timing difference in when those cash flows will be received.

Okay, fair enough. On a separate question, I'm intrigued and was hoping you could expand upon the 18- to 24-month interest-free programs. It sounds like you're actually bringing on prime customers into the Conn's portfolio that previously would have gone to GE or Synchrony. Can you help to just clarify what's going on there? It's interesting.

What we've done is return to a historical practice of originating to prime customers with longer-term, no-interest programs. If you look at Conn's performance for fiscal years prior to FY13, it included some or a significant portion of originations to higher FICO-score customers, with long-term -- longer term no-interest programs. So we're returning to that practice. The FICO scores that we underwrote using those programs were just short of 700 FICO in the quarter, and we expect to continue to do that.

If you're comparing to earlier historical periods, that would be more comparable to the credit mix in the portfolio that we had. If we took back -- as an example, if we took back all of the business we do with Synchrony today, the average FICO score underwritten in the portfolio would be in the low 620s, which you could compare to historical periods when we were underwriting with a similar mix of customers.

The last question for me. The deterioration in oil prices obviously may have some impact on the Texas economy. I know you don't indicate that there's direct correlation with those jobs to your customer base. But can you help us frame that up, in terms of the impact to the Texas economy, and what the lower gas prices would do more broadly to your customer base?

The lower gas prices to our customer base, broadly, are a raise; they immediately have more disposable income than they had before. For our customer base, broadly, nothing but a positive. For some of the markets that we operate in, lower oil and gas prices could have an effect. I will say that our two primary oil and gas exploration markets in the Eagle Ford and the Permian Basin are two of the lowest-cost production areas. And so at current prices, it could have some impact on employment in those regions, but those are likely to be among the least-effected oil and gas exploration areas.

Rick Nelson, Stephens.

Thanks, and good morning. You've done quite a bit of tightening over the past year. The FY14 originations, you think, are tracking 9.5%. Why do you think we're not seeing more meaningful improvement in the FY15 originations?

Two reasons. One is, some of the changes that we made to tighten underwriting are not really reflected in the portfolio yet. So partly, we made those changes in underwriting in steps over the last 12 months, and not all of those changes have been reflected in portfolio performance.

Secondarily, as Mike mentioned in his comments, our customer base has been under pressure, at least as reflected in a group of those customers declining to lower credit scores, and that's also affecting performance. I would summarize that response by saying that although we didn't get the desired result from all of those changes, that we did, in fact, benefit portfolio performance if you compare it to what it would have been otherwise, if we hadn't made those changes when we did, going back a year ago.

When you provisioned this quarter -- and the allowance for loan losses now standing at 10.6% of the receivables balance, that would seem to be a pretty conservative level, particularly with this 8% static loss target out there. If you could comment there, and why you're comfortable with an 8% static loss estimate.

And just for clarity, Rick, the 8% static loss is the goal. We have not articulated that we think accounts in the portfolio today would yield an 8% static loss. What we said is that our goal is 8%, and we'll make changes to our underwriting over time to achieve that goal, not that we think that the loss in the portfolio on the balance sheet today would be an 8% static loss. So if you look at the changes that we've made to issue credit to higher FICO-score customers, the tightening that we've done in a number of other ways, and I think most importantly, the slowing same-store sales growth rate, we believe that those changes should, over time, lead us towards our 8% goal.

Okay, got you. Finally, if I could ask you -- I know you report the credit balance per active account, and a customer can have more than one active account. If you could provide some color on where the credit balance is per customer?

You bet, Rick. This is Mike. I've got the data in front of me. The balance per customer has risen pretty consistently with the balance we've seen per account. So where we're sitting at the end of October, with an average customer balance of about $1,800 -- I'm sorry, average account balance of $1,800, the average customer balance is about $2,300. And the rise over time has been fairly consistent with the average per account.

Do you think that is contributing to the higher losses?

So let's talk about payments, and then the things that have driven the average higher balance in payment. The payment per customer has -- just like the average per account has gone up about 25% the last three years, the average per customer has only gone up about 30%, from $100 to $130 a month.

The change in the balance and the change in the payment are -- two of the key drivers are the fact that we shortened terms a few years ago. So we've shortened the period over which the customer is paying on the account. Improving the credit quality, amortizing the portfolio more quickly should reduce loss severity. And that's driven about 20% of the increase in the payment amount.

And then the fact that the portfolio is much younger today. When it was 12- or 13-month average age of an account three or four years ago, we're at 8.7 months today. And that is driving about 20% increase in the balance, compared to where we were a few years ago.

Got you. Thanks a lot, and good luck.

Thank you.

Laura Champine, Canaccord.

Good morning. Theo, how do you attribute the move in delinquencies and losses that you have? What do you think is causing it? And secondly, why continue growing the book of business at all, or the credit portfolio, until you get those metrics under control?

The increase in delinquency and loss is -- the single biggest driver of those increases is, in fact, the growth in the portfolio and the growth of originations to new customers. That's the single biggest factor. So to the extent that we want to grow the profitability of the business over time -- even assuming perfect execution in every element of the business in every other way, we would still have increasing delinquency and losses, because of the increasing originations to new customers.

Really it's a belief in the business model and its value to consumers. Although we may need to make tweaks to the model and to the underwriting, fundamentally, we could not grow, either on a same-store basis or through new store openings, without putting upward pressure on delinquency and losses.

Do you strip out the business that would have been Synchrony's that you're taking on yourself? Would your FICO-score on origination still be up in Q3?

In Q3, the originations to customers with higher FICO scores, that would normally have gone to Synchrony were immaterial. It would have been essentially what we reported for the quarter. It was really November where that had an impact.

There's only $3 million of originations in the quarter to those customers, Laura.

Got it, thank you.

Thank you.

Brad Thomas, KeyBanc Capital Markets.

Thank you, good morning. Just to follow-up on that last question, the 0% financing, I believe, was about 12% of your mix last year. How much of that would you expect to take on as we look forward?

It will depend on the season. But a rough guess would be something in the range of half of that, maybe three-quarters. We use different programs at different times of year and depending on the competitive environment. So it's partly dependent on what our competitors are doing and hard to predict. But I'd say half would be as good a guess as any, at the moment, based on the originations last year.

Great. And what do you think the typical FICO score is in that band of financing?

What we've booked to date, the average score that we have booked in these 18- and 24-month programs is just above a 690.

Great. I just wanted to ask two questions on the retail side of things. You still got a gross margin benefit this quarter from a mix shift, but it looked like on a category basis you had declines, and for the whole fourth quarter you're expecting gross margin to be down. Could you talk just a little bit about what's changing there from a category perspective? And what the longer-term outlook will be?

You bet. The impact on gross margins is almost exclusively the impact of the additional warehouses and the under-levering of those warehousing costs. So if you look at the margins before allocation of warehouse cost, just the cost of purchase cost from the vendor, there's been no deterioration in those margins. It's really warehousing costs. And as we open additional stores to fully utilize those warehouses, we would expect the gross margins would trend back in line with what we saw a year ago.

Great. And then lastly from me, as we think about growth in 2015, what sort of a comp do you think you need to post in order to get leverage of SG&A?

In order to leverage store SG&A, we would need to have a low single-digit comp. But I would say that we're not going to manage the business to a comp level, particularly. We're going to continue to look at the overall profitability of the business, and not necessarily do whatever is necessary to drive a particular same-store comp number. That's consistent with the comments that we had last quarter, that we are going to consider other factors, not simply just trying to drive to a comp number.

Got you. Thank you for all of the details.

Thank you.

Dillard Watt, Stifel.

Thanks, good morning. I wanted to see if there was any change in new-store productivity. It seems like those numbers have come in a little bit below our expectations for a couple quarters.

You bet. There are a couple of changes. One is cannibalization. We have opened stores in Albuquerque, Tucson and multiple stores in Phoenix. So those stores that we opened a year or more ago were suffering from cannibalization in many, if not most, instances. That's item one.

Item two is, our tightening of underwriting standards has a considerably greater effect on customers that have never purchased from us before. So in the new markets, the tightening of underwriting standards has affected revenues more than it has in the mature markets.

And then the last one is, we also -- going back a year ago, we did have different underwriting standards than the states, that allowed us to charge higher interest rates -- Arizona and New Mexico. And we stopped doing that at the beginning of the fourth quarter a year ago. So that's also something that's affecting the new-store performance.

Got you, thanks. A question for Mike next. Do you have any expectation on this particular timeline, in terms of difference between recovering the charge-offs yourself compared to selling them off?

We generally see that, from the point of charge-off, the cash collection period, the majority of it will be collected within an 18- to 24-month period. But it will build over time.

Just to follow on there. Having previously sold accounts, we don't have an existing pool of previously charged-off accounts to collect from. So it will be -- as we charge off accounts over time and build this pool of accounts that we can collect post-charge-off, that we'll see those recoveries. And that would likely be over an 18- to 24-month period.

Got it, thanks. And lastly, just a point of clarification on another filing this morning. Just wanted to make sure. I read that filing rate on, Theo, your share activity, was that a sale that was under a planned purchase program?

No, it was not. It was just an ordinary vesting of previously awarded restricted stock units, and the shares were issued to me net of taxes. So no, there was no trading activity.

Okay. Thank you very much.

Thank you.

David Magee, SunTrust.

Hi, good morning. I just want to confirm, relative to the second quarter, are the [letting] standards the same, or have they tightened or loosened since the second quarter?

They have tightened slightly since the second quarter, largely through cash option changes

And are your new customers in new regions behaving the way your new customers do in your legacy regions?

They do. So we don't see any meaningful geographic issue. The issue is new customers, generally wherever they reside.

And then with regard to the covenants of and the cash recovery ratio. As you've gotten closer to that number, do you feel like you still have the full support of banks right now, as you go into next year and open more stores? Do you have their full support in terms of credit availability?

The payment rate -- this is following the typical seasonal pattern. So there's nothing unexpected here, and they've seen this over a number of years with portfolio performance. So I'd say, it's really not any new information to them.

Okay. And then lastly, just to clarify. Mike, you mentioned that the change in the duration of an account was the single biggest factor, as far as the increase, in terms of the account balance. So if it's up 30% year over year, would you say 20 points of that is just coming from the duration dynamic?

Yes. The younger age of the account is the biggest dynamic driving the increase in balance.

And what do you think that that goes to over the next 12 months?

The average age of accounts in the portfolio will increase with the decreasing revenue growth rate.

Okay, thank you.

Thank you.

Karru Martinson, Deutsche Bank.

Good morning. When you guys look at the shift in the FICO score and not taking folks below 525, is that just all going to Acceptance Now, or has there been a change in advertising to signal that to the consumer?

There has been a change in advertising since a year ago. We're not using direct mail for customers with lower FICO scores, not anywhere close to 525. So partly, we have changed the marketing message to those customers.

And, yes, some of that business is going to Acceptance Now. But I would say that the increase in Acceptance Now business that we've seen compared to a year ago is far more due to increasing effectiveness, both on the part of Acceptance Now and Conn's, than it is to increasing numbers of declined customers. Given the really low closing rate that we see with those customers, the increasing number of declines cannot be possible as an explanation for the increased revenues with Acceptance Now.

Thank you very much.

Thank you.

Andrew Hain, Baird.

Hi. In your press release, you had mentioned changes to the marketing strategy last year, and that you have lapped those. For those of us that are new to the story, what were those changes?

A year or more ago, we began to communicate to the consumer more directly the availability of credit. So if you think of a customer, a typical Conn's customer, if we communicated to that customer the price and the product, that was not enough information for the customer to take action because they didn't have of available funds to complete the purchase.

So we began to communicate more directly the availability of funds, in addition to price and product. We used more direct mail, more television advertising, to communicate that. And as a result, we generated a lot of business, significant growth, with customers who had never purchased from us. We've been able to sustain that level of business. It wasn't a one-time increase or a pull-forward. But we are lapping those marketing messages from a year ago.

Okay, thanks. And then your new-store performance, I want to touch on that again. I assume that the decision to open a store is made months or quarters in advance, and have certain expectations. It seems like you've tightened credit standards more recently in the last couple of quarters. Maybe that was a deviation from where you had your standards when you planned to open the stores.

I'm just trying to figure if the change in credit standards is impacting what your expectations for the new-store performance was back when you made the decision? Is it making it more difficult for those to meet your expectations?

No. Those stores that we opened a year or more ago opened at above-average productivity for the Company. We wouldn't expect that to be the case anymore, for a number of reasons. But all of those stores are well-above breakeven, contributing to profitability almost immediately. We wouldn't change any decisions that we've made in store locations. I think they would all be valid with our current underwriting.

What will change, though, is the trend of sales when we open. We're more restrictive on originations to new customers, so the store at opening, in its early months or even year of operation, will not have the same level of revenues. But as that repeat and referral business builds over time, we expect we'll end up in the same place. It will just take us a little longer to get there, rather than opening up incredibly strongly the day we open the doors.

Okay, great. And then just lastly -- today, I think your debt that you issued back in July or June is -- I think those bonds are off probably 20, 25 points from par. Is there any interest or anything preventing you guys from potentially purchasing bonds in the open market? Is there a desire to do so, or are you precluded?

At this point, we don't have any plans to repurchase bonds. Along with all elements of our capital structure, that's something that we would evaluate as part of our Strategic Alternatives process. But at this moment, we don't have an intention to repurchase those bonds.

Okay, great. Thanks a lot.

Thank you.

Daniel Gurvich, Beach Point Capital.

Good morning, thank you for taking my question. Just a quick clarification. In the press release, you've noted that the interest in fee income yield has compressed 90 BPs because of provisions on uncollectible interest. So would the uncollectible interest be reflected in the lower yield, and then the provision is entirely related to credit losses on the principal. Is that the right way to look at it?

That's right. Any provision in reversal of yield goes against the interest income line, and then the provision for bad debts is purely for principal balance.

And the contractual yield is actually up.

That's right.

Due to the various initiatives that you mentioned earlier to increase the rates at certain markets?

Yes, and the increase in issuance to consumers and states allow us to charge a higher rate.

Understood, okay. Thank you very much.

Thank you.

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back to management for any closing comments.

Thank you for joining on today's call.

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.