Conn's Inc (CONN) 2016 Q3 法說會逐字稿

Good morning, and thank you for holding. Welcome to the Conn's Incorporated conference call to discuss the earnings for the quarter ended October 31, 2015. My name is Kaylee, and I will be your operator today.

(Operator Instructions)

As a reminder, this conference call is being recorded. The Company's earnings release, dated December 8, 2015, 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 website at IR.Conns.com.

I must remind you that some of the statements made in this call are forward-looking statements within the meaning of the Securities and Exchange Act of 1934. These forward-looking 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 Norm Miller, the Company's CEO; Mike Poppe, the Company's COO; and Tom Moran, the Company's CFO. I would now like to turn the conference over to Mr. Miller. Please go ahead, sir.

Good morning, and welcome to Conn's third-quarter FY16 earnings conference call. I'll begin the call with an overview, and then Mike Poppe will discuss our retail and credit performance for the quarter. Tom Moran will complete our prepared remarks, with additional comments on the financial results and our balance sheet.

The key points of my comments are highlighted on slide 2 in the earnings call presentation. Since this is my first call since joining Conn's, let me just take a moment to speak why I joined the company. First, I was impressed with the knowledge and passion of the Board of Directors. They are truly engaged and committed to the long-term success of the Company.

Next, we have a distinctive business model based on delivering a unique value proposition that provides access to quality goods for the home to a growing population of underserved customers. The unique synergy of Conn's retail and credit businesses gives us a competitive advantage in the marketplace. Conn's has a long and rich history serving its customers, and I was proud to be a part of the Company's recent 125th anniversary celebration in Beaumont, Texas, where the Company was founded.

Next, let me take a minute to discuss what I have found when I joined the Company. Thanks to the work of our prior CEO, Theo Wright, and the leadership team, I found a solid long-term strategic plan, and many aspects of this plan will continue to serve as the foundation moving forward. I found a passionate workforce that cares deeply about our customers and the long-term success of the Company.

We have all seen companies in the past under perform, even with great strategies. What is critical now for our team is how we execute. With a strong foundation in place, it is the team's responsibility to execute. It is in the details of execution where most value creation takes place.

While we did not deliver the results we would have liked this quarter, I am pleased with the progress we are making to improve trends in the business. Our strategy to drive the furniture and mattress business is paying off with increased sales in these categories and is driving retail gross margin expansion on the sales mix shift. As a reminder, our longer-term goal is for furniture and mattresses to deliver 45% of our product sales. Slide 3 shows that we are making progress towards that goal, increasing from 31% last year to 36% this year. Also of note, our stores opened in the past few years have delivered a 43% furniture and mattress sales mix during the quarter.

During November, we made enhancements to our marketing strategies, which are driving strong credit application growth. This helps us to achieve a high teens percent increase in written sales over the Thanksgiving holiday, and excluding the categories that we made a strategic decision to exit during earlier this year, drove same-store sales growth for the month of November to 8%. Similar to other retailers, we are seeing sales activity concentrate around holiday promotional periods, contributing to the acceleration of our sales takes during November. This is consistent with what we experienced around the Labor Day holiday, as well. For the remainder of the fourth quarter, we expect flat to low single digit same store sales.

We have previously communicated a long-term retail gross margin goal of 42%. We have continued delivering year-over-year improvements, and this goal was achievable, considering the following: Decreasing share of revenues from lower margin small electronics and home office, increasing sales of furniture and mattresses, which have a higher margin, increasing sales of appliances, and improving warehouse utilization.

From a credit perspective, the investments we are making to enhance our underwriting are beginning to deliver benefits, with the first phase of the installation of our early pay default scoring model implemented during the month of November. Our team is very engaged to provide more enhancements in the early part of next year. We realize the importance of maintaining an appropriate balance between retail growth and credit risk in the business, and these ongoing actions help support that objective.

More broadly, we also delivered on a number of strategic objectives during this quarter that position us to execute our growth strategies, while reducing risk and enhancing shareholder value. As part of an initiative to diversify our capital structure, we reentered the ABS market, completing a securitization of $1.4 billion of receivables. We completed this transaction, knowing our cost of borrowing would increase temporarily, in order to gain access to this important source of liquidity and capital, to support our long-term strategic plan.

Additionally, as expected, the residual delivered $7.6 million of cash flow by the third month, and we expect to receive a meaningful residual payment this month, based on November performance. We plan to execute periodic securitizations of future originated receivables, and the Company intends to complete to originate and service these receivables going forward. For now, we expect to retain the residual equity in these transactions, given our solid liquidity position and strong returns provided by these assets. We will, however, continue to monitor the market for residuals, and will consider selling the residuals in the future.

In conjunction with this transaction, we also completed an amendment and extension of our bank facility, which underscores our lenders' confidence in our business model, and gives us the flexibility to continue to execute securitizations in the future. These transactions, along with our outstanding senior notes, gives us multiple sources of capital, and greater flexibility to execute our business plan. As part of Conn's commitment to enhance long-term shareholder value during the quarter, and through yesterday, we repurchased 5.2 million of our outstanding shares, returning $132 million to shareholders. We believe the repurchase program underscores our confidence in our long-term growth prospects.

We also continue to execute our plans to deliver continued growth. During the quarter, we opened six new stores, including our 100th store in Las Vegas. As we expand, our focus is to build out existing markets, so that we maximize profitability by gaining efficiencies in marketing and distribution as quickly as possible. All of our new stores are in that Conn's HomePlus format, which supports our expanded furniture and mattress assortment. The Company has added many talented individuals to the organization over the past few years, and has started making the investments needed to support an ever-growing footprint. We are continuing to assess opportunities to improve our customers' experience, expand margins, and improve portfolio performance to deliver consistent predictable results. Now, I will turn the call over to Mike.

Thank you, Norm. Starting with our retail performance, same-store sales, excluding the exited categories of tablets, gaming equipment, and cameras, was up 3.8% for the quarter, driven by furniture and mattresses. Strength in furniture and mattresses, consumer electronics, and home office products was partially offset by softness in home appliance sales. Additionally, performance in our energy impacted markets stabilized in November.

As we show on slide 4 of the earnings deck, total sales growth for the quarter was driven by furniture and mattresses, up 21.8%, and home appliances, up 4.4%. These are also are two highest-margin product categories. In addition, revenue from repair service agreements were up 12.9%, due to increased retrospective commissions, product sales, and mix-driven higher average selling prices of these agreements. On the other hand, we experienced sales declines from categories where we made the strategic decision to exit certain products, including tablets which are part of home office, and video game products and digital cameras, which are part of consumer electronics.

Same-store sales on a year-to-date basis are up 1%, in line with our full-year guidance. Retail gross margin increased over the prior year, due primarily to the increased proportion of sales from furniture and mattresses, as noted by the increased percentage of product sales and gross profit contributed by these categories on slide 4.

Slide 5 in the presentation recaps product gross margins, which were up 70 basis points as a percentage of product revenue, due to the favorable product sales mix shift towards our higher-margin furniture and mattress categories. We saw margin rate decline in home appliances on a shift in the timing of vendor funds. Consumer electronics margin rates improved during the quarter, benefiting from a sales mix shift to higher-end TVs, which provide higher margins, and the elimination of lower margin gaming equipment and digital cameras. Year to date, our retail gross margin is 41.5%. We are on track to achieve our margin guidance for the year.

From a marketing perspective, in late October, we introduced a new TV campaign that has helped drive increased application and sales volume. After a small decrease in the third quarter, November application volume was up 10%. Additionally, in November, we expanded the implementation of the furniture marketing plan we were previously testing to all major markets.

Lastly, we had a different grand opening strategy this year, compared to the prior year. You will recall from previous discussions that we now give the store associates roughly three months to prepare for the increased volume created by the grand opening campaign. Inventory increased year over year, as we expanded our assortment and in-stock levels for furniture, in addition to building inventories for the first -- fourth-quarter selling season. We're comfortable that our sales and purchasing plans will bring inventory in line early in FY17 without impacting margins.

During the quarter, we opened six new stores in our Arizona, Nevada, and North Carolina markets. At this point, we anticipate opening one more store before the end of the year, bringing us to a total of 15 stores, within the range of our guidance for the year. We have three new stores that will open in early February to kick off our plan to open 20 to 25 new stores next year.

Turning to our credit operations, on slide 6 is the average FICO score of the portfolio for the last five years. The portfolio has been in a narrow range of credit scores, and remained there last quarter. The FICO store of all originations in Q3 of FY16 was 613 compared to 608 in Q3 of the prior year.

As Norm noted, we implemented the first stage of our early pay default underwriting strategy. Its impact will be felt beginning in the fourth quarter. This custom scoring was developed with support from FICO, and is designed to further segment the application data to identify customers at a higher likelihood to charge off after making two or fewer payments.

Additionally, we implemented changes to reduce originations to higher loss potential [thin file] customers. Our early estimate of the impact of these two changes is a 1.5% reduction in sales, and a 25 basis point reduction in the net static loss rate. We are underway developing the next generation of our underwriting scorecard, and expect to implement it in the first half of next year. As with the early pay default scoring process, the goal is to provide enhanced segmentation of the application population, to allow us to more precisely isolate low-performing segments of the population, and equally importantly, identify additional profitable customers to approve.

Slower portfolio growth is benefiting the underlying performance of the portfolio, but has a negative effect on reported delinquency and charge-off rates. The fourth quarter of FY16 delinquency is expected to decrease seasonally. November greater than 60 day delinquency was down from October to 10.1%. If the portfolio had grown at the same pace in the third quarter as it did in the prior year, the 60-plus delinquency rate would have been 30 basis points lower than reported this year.

As a result of the underwriting and other changes over the past few years, at October 31, as shown on slide 7, the 60-plus day billing delinquency rate of balances originated in the last 15 months was 7.7%, compared to 8.1% for the comparable period in the prior year. The underlying portfolio performance is improving.

See slide 8 for our delinquency data by product category. Consistent with historical performance, appliances delivered the best delinquency results, while home office products delivered the worst. As our product sales mix shifts towards more furniture, mattresses and appliances, it is expected to benefit our delinquency rate over time.

The elimination of tablets, gaming equipment, and cameras is helping speed the shift in the product mix. At the end of November, the combined home appliance, furniture, and mattress 60-plus day delinquency rate was equivalent to last year's rate, with the higher year over year total portfolio 60-plus day delinquency rate being driven by the electronics category, in addition to the slower portfolio growth discussed above.

While still higher than a year ago, slide 9 shows that the existing customer mix trend in origination has flattened out with the new store openings during the quarter. Typically, we see an increase in repeat customer transactions during the fourth quarter. Our current expectation is for the delinquency rate to show improvement on a year-over-year basis during the first quarter of FY17, depending on portfolio growth rates.

Looking at net charge-off performance, the rate for the quarter was higher than the prior year, due largely to the change in our recovery process, as we completed our last sale of charged-off accounts in the third quarter last year. It was also impacted by the slower portfolio growth this year. We remain focused on delivering outstanding value and a great experience to our customers, by continuing to improve execution in our retail and credit operations. Now, I will turn the call over to Tom Moran. Tom?

Thanks, Mike. Adjusted diluted earnings for the three months ended October 31, 2015 were $0.02 per share. This excluded net charges of $3.9 million or $0.09 per diluted share on an after-tax basis from legal and professional fees related to the exploration of strategic alternatives, securities-related litigation and loss on extinguishment of debt.

For the retail segment of the business, total revenues for the third quarter of FY16 were $323.1 million, which was an increase of $17.9 million or 5.9%, versus the same quarter a year ago. This growth reflects the impact of a net addition of six stores versus last year, with same flat store sales, including the impact of exited product categories. Retail gross margins improved by 90 basis points versus the prior year to 41.5%. The majority of this improvement was driven by the 70 basis point increase in product gross margin. A secondary driver was the impact of repair service agreements, which benefited from higher retro or back-end payments, as well as higher average selling price on the front end, due to mix.

Slide 10 of the earnings presentation shows retail costs and expenses. Starting with the top row, we show that cost of goods and parts including warehousing and occupancy costs, leveraged by 90 basis points as a percent of total retail revenue, declining to 58.3%. This improvement resulted primarily from the drivers, as we just discussed, for retail gross margins.

Delivery, transportation, and handling costs deleveraged by 20 basis points to 4.5%, due to a greater impact from new stores in markets not yet fully built out versus last year, and by higher costs stemming from the shift in product sales to mix, to furniture and mattresses. a higher proportion of these are delivered to our customers than with other product categories. These higher-cost impacts were partly offset by efficiencies in delivery operations, resulting from distribution centers we opened during Q3 of last year.

Retail SG&A, excluding delivery costs, was 25.2% for the quarter, compared to 24% for the same period a year ago. The 120 basis point increase was driven by the impact of new store openings, which drove a 60 basis point increase in occupancy, as well as a 50 basis point impact on compensation and benefits, and finally contributed to the 60 basis point increase in advertising.

The other SG&A expense category was favorable, due to a gain on sale of real estate, and a decrease in certain professional fees and employer-related expenses, when compared to last year. During the quarter, we recognized $2.5 million in expenses relating to store closing costs, as well as a class-action lawsuit. This compares to a prior-year total of $350,000 associated with facility closures and legal fees.

Taking a look at the credit segment, finance charges and other revenues were $72.2 million for Q3 of FY16, which was up $7.3 million or 11.2%, versus Q3 of last year. This was driven by a 21.6% increase in the average balance of the portfolio, partly offset by a decline in the interest income and fee yield. Drivers of this decline included first, the introduction of 18 and 24 month equal payment, no interest finance programs, beginning in October of 2014 to certain higher credit quality borrowers. Second, there was a higher provision for our uncollectible interest. And third, the impact of our discontinuation of charging customers certain payment fees.

SG&A expense in the credit segment for the quarter grew 23.2% versus the same period last year, driven by the addition of collections personnel to service the increase in the average customer portfolio balance, together with anticipated near-term portfolio growth. Credit SG&A as a percentage of average total customer portfolio balance, which we use as a key metric, delevered slightly by 10 basis points versus last year. While this quarter's consolidated SG&A delevered, we anticipate that fourth quarter in total will be roughly in line with Q4 of last year, as a percentage of revenue.

Provisions for bad debts for the three months ended October 31, 2015 was $58.1 million, which was a decrease of $13.9 million from the same prior-year period. The provision for bad debts for the three months ended October 31, 2014 included an adjustment due to expectations for charge-offs occurring at a faster pace than previously anticipated, and the decision to pursue collection of past and future charged-off accounts internally, rather than selling these accounts to a third party.

Key factors in determining the provision for bad debts for the three months ended October 31, 2015 included the following: The 21.6% increase in the average receivable portfolio balance, resulting from new store openings over the past 12 months. There was a 15.9% increase in balances originated during the quarter, compared to the prior-year quarter. The increase of 20 basis points in the percentage of customer accounts receivable balances greater than 60 days delinquent to 10.2% at October 31, 2015, as compared to the prior year period. And finally the balance of customer receivables accounted for as troubled debt restructurings, increased to $109.9 million, or 7.3% of the portfolio. As a result of these factors, the provision for bad debt as a percent of the average portfolio balance was 15.6%, compared to 23.6% in the third quarter of last year.

Interest expense increased by $10.8 million in Q3 year-over-year, driven largely by our reentry into the ABS market, which increased the average debt balance outstanding, and contributed to an increase in the effective interest rate. We view the higher borrowing costs associated with our ABS transaction as a temporary cost of reentry into this market. As we've mentioned in the past, this will give is a diversified capital structure to support the growth of our business, and enhance long-term shareholder value, through our ability to execute share repurchases. Our expectation is that, as we become a repeat ABS issuer with an established performance record, our borrowing cost on these transactions will improve in the future, as they have for other companies that have accessed this market.

Turning now to balance sheet and liquidity, inventory was up 41.3% to last year, primarily due to our strategy to increase in-stock levels to support holiday sales. As of October 31, 59% of our $238.2 million in inventory was financed with outstanding accounts payable. Our debt as of the end of the quarter totaled $1.2 billion, which included $934 million of ABS notes and $227 million of high-yield notes. We had no drawn balances on our revolving credit facility.

Looking at slide 11, our liquidity and capital flexibility has improved substantially, following the recent ABS transaction, the amendment and extension of our ABL facility, and amendment of our high-yield notes. As of the end of the second quarter, our capacity totaled $322 million. As of the end of the third quarter, this had increased to $918 million, including $109 million in cash. We expect to launch and complete our next ABS offering during the first three months of 2016.

We wanted to give an update on our repurchase program. As Norm mentioned, year-to-date through yesterday, we have repurchased 5.2 million shares of common stock for a total of $132 million. We have also repurchased $23 million of face value of senior notes. As we have mentioned in the past, the share repurchase program underscores the confidence we have in our long-term growth prospects, and is consistent with our overall commitment to generate enhanced long-term shareholder value. Operator, this concludes our prepared comments, and we are now ready for questions.

(Operator Instructions)

Our first question comes from the line of Peter Keith with Piper Jaffray. Your line is open.

This is actually [Jon] on for Peter. I know you mentioned, I think on the call here, that your sales trends in oil-impacted markets stabilized in Q3. Could you maybe talk a little bit about delinquency or re-aging trends in those markets given the increase in re-aging overall in the quarter? And I guess overall, have you seen a material change in any of those trends, specifically within oil-impacted markets?

Sure, Jon, this is Norm. It's really hard to predict what the future holds, but right now, what we are seeing from a credit standpoint is really not much of a factor from a business standpoint. Really, where this would be driven from is from an employment standpoint, as opposed to anything else. And we're monitoring closely the employment trends in all of the oil-producing markets, but at least at this point, we have not seen any material impact from a delinquency or credit standpoint.

Okay, and then just looking at your monthly trends here, throughout the year. Obviously, you had a really nice comp in November. It looks like the appliance category, I guess, was down for the second straight month, which is contrary to what you had run up through September. So is there anything going on with that appliance category in October and November that you would like to call out?

We are seeing some more promotional activity in the opening price point within the appliance category, that we typically do not carry, that's driving a significant portion of growth at the other retailers. These products don't really provide us with sufficient gross margin to work effectively within our business model. There has been activity and price points in the $400 to $600 range, as well, which we have increased our SKUs and our presence within those categories as well. And we are very committed to maintaining our market share within the appliance category.

Okay, and then just one last quick one, if I can. Looking at your 60-day delinquency rate, you saw a nice narrowing here in November. It's only 10 basis points above where you were last year. As we look at December and January now, do you think it's possible that you can crossover that 9.7% rate you saw in the last two months of FY15?

Well, as Mike had mentioned in his comments, part of the struggle has been the slower portfolio growth than what we had expected. We would have seen already a crossover improvement, had we had the similar portfolio growth that we had last year. So having said that, the underlying performance continues to improve, and at the latest, we would expect it to crossover, if not at some time here in the fourth quarter, very early in FY17.

Great, thanks a lot. Good luck on the fourth quarter.

Thank you. Our next question comes from the line of John Baugh with Stifel. Your line is open.

The first question I had was on the fourth quarter comp. You had indicated obviously exiting the product categories, as about a 6 point drag. So I'm curious what your expectations would be, say, for TVs and appliances and furniture, to counter that?

Well, John, what I would say is the categories that we exited have the biggest impact within the month of December. We recognized that going in. However, having said that, as you saw in the month of November, even with that drag, our electronics category was up. We still expect our furniture category to continue to perform well, and as I mentioned previously on the appliance standpoint, we are fighting to maintain our market share there, as well.

Okay. Could you comment on overhead, corporate overhead? It took a significant jump from Q2 to Q3, I think from about 1 point to 2.3 points, 230 BPs. Can you tell us what's going on there?

So, this is a Tom, a lot of the things that contributed to that were, as we are making investments and building out the business, so as we are entering stores into new markets, which are not fully as productive yet, and new store openings, we haven't built out our distribution costs, we're not leveraging our marketing costs. And so we saw some impact of that year-over-year. We are also making investments in expansion for the future, and making some additional investments in IT, and in other, some of the other overhead departments. So that's why we called out that as we go to Q4, a percentage of revenues basis, we expect that to be more in line with what we had in the prior year.

And does that number, Tom, get more in line in future quarters, or it remains elevated year-over-year in future quarters, because obviously you got the benefit of a lot of seasonal sales in Q4.

We would expect it to continue to leverage, and our performance to be better from an SG&A standpoint, at least as a percent of revenue standpoint. Having said that, next year, as we had mentioned, we are accelerating our growth to 20 to 25 new stores, starting with three stores in February.

That growth is targeted towards markets where, in many instances, we already have existing stores to be able to leverage those distribution and marketing costs. But having said that, we will have to continue to invest as we expand from a growth standpoint, at least through, from an infrastructure standpoint. But at least through the early part of FY17, we would expect to be able to leverage some of those investments we've already made.

Okay. And then on inventories I know, I think, Mike, you commented that, obviously it's finance with payables, and you expect it to come, quote, in line at some point in the future, and not to impact gross margin. I think I heard all that correctly. What does come back in line meaning? What is the metric? And the timing again on that?

It's early next year. January, February, March timeframe, and really tracking revenue growth.

Proportionate to the growth. Proportionate to our growth.

Okay, and my last question is around the two comments you made. One, I think I heard correctly was a new first payment default credit scoring. I'm not sure I got the second one, but could you maybe give a little color around both of those?

When they're going to get implemented precisely, and when we start to see the revenue drag from that? And I guess with the lag, when we would expect to see 60-day plus dues benefit from those changes? Thank you.

This is Norm. I'll start it, then I'll hand it over to Mike to give little more color, because I think strategically, these are both real important for our long term growth strategy. And the first is, the implementation of the early pay default model that we have already implemented in the month of November, within the business. And we are already working with that early pay default model to improve it, and come up with a second generation of that model, that we would be rolling out in the mid-part of next year.

In addition, we are also re-looking at the original underwriting model that we implemented three years ago in 2013, and refreshing that, and improving that from a segmentation standpoint that will enable us to underwrite even more effectively. Not only in taking out, the trick here is leveraging, so that we don't see a significant drag from sales, and being able to very skillfully go in and take out customers from an underwriting standpoint that would not be profitable, and not meet our hurdle rates from a return on investment standpoint. So with that, Mike, will give little bit more specifics.

A little more color on the two changes we made, John, so the early pay default model, we really, in the work with FICO, it was identifying those customers that charged off after making zero, one or two payments, and identifying characteristics that helped us more precisely identify them, and make a better underwriting decision. And the second change was thin file customers, predominately customers with no FICO score, as we have gotten more data here the last couple of years, we have adjusted our underwriting related to lower income customers in that segment, and we see the impact about 1.5 points to sales, it went in the first half of November.

We were actually testing the early pay default model in late October just operationally, and really turned on first phase of our implementation of that process in the first half of November. So it will impact the majority of the quarter. As far as when you'll really see it show up in 60 day, it will be several quarters before there is enough origination volume seasoned into the portfolio, to really have a meaningful impact on the 60 day delinquency.

Great. Thank you for the answers. Good luck.

Thank you. Our next question comes from the line of Brad Thomas with KeyBanc. Your line is open.

I wanted to ask about going to market, and doing your next securitization, and with the cadence of business where it is today, could you give us your latest thoughts on when you may be back out in the market again, what size deal you might want to go for, and maybe what you're hearing from those who advise you on what the market rates look like right now?

Sure. Our expectation is that going forward, we would become a repeat issuer. We do it on a more frequent basis, so that the size of the transactions would be smaller in scope than the first one. And so, as we mentioned, we are looking to target something over the first couple of months into next year, which would, if you look at the pace at which we generate receivables, but that's probably somewhere in the $500 million or $600 million range for that.

With respect to the market, we are hearing that there are some changes, the spreads are widening a little bit just as we go through holiday, but we don't expect things to be significantly different, early next year. The big things that we think will affect us in the future going forward are the fact that we are starting to reestablish a track record. The fact that we will be focusing on a marketed deal versus a bought deal.

We may consider securing ratings, agency ratings, if we feel that's worth it economically. So there will be changes as a result of what we're doing going forward, that we think will anticipate, will help us to get better pricing on that going forward. And so the important thing for us is to become a repeat issuer in the market, and maintain our diversified access to capital with that, as well as with the asset-backed facility and the high-yield notes.

Having said that, Brad, I would say that our expectation, as we entered into the first securitizations, recognizing that the all-in borrowing costs were in that 9% range, our expectation going forward is that over this next securitization and several others probably in the future, that we would see those all-in borrowing costs come down markedly over the next two to three securitizations.

That's great. And then if I could ask a few housekeeping items here. For the fourth quarter, could you give us your thoughts on where you think interest expense will come in, what kind of tax rate you're expecting, and what kind of share count you're expecting for the quarter?

So for the interest expense, directionally, if you think of the three buckets of what drives our interest, you will see the updated components of our debt, we have the outstanding high-yield notes balance that's still out there at a stable rate. We'll be, we talked about the ABL that's undrawn, but we utilize that as needed.

And then finally, the ABS debt will continue to be paid down, as we collect on those accounts. The balance at the end of October was the $934 million, and you can check the subsequent balances as you look at the servicer reports, but the amount of portfolio to which that higher all-in cost of funds that Norm talked about will be gradually reducing, and so that would be a driver of a lower interest expense rate in Q4, as you look at that in your model.

And, Tom, sticking with interest expense, it would seem like at least directionally, it would be bigger in the fourth quarter than what you had in the third quarter, given that you have a full quarter securitization. Does that sound right?

That's correct. Our total interest expense will be up for the quarter.

Great. And then would you hazard a guess on tax rate and share count for the quarter?

Share count you can see directionally, based on the repurchases we've had, and it's obviously a weighted average share count, but nothing really beyond what we have talked about there. I don't have a view for you on tax rate, as far as any differences versus what's out there now.

Okay. That's helpful. And just one last item if I could. It looked like the rent to own segments of your sales decreased as a percentage of what you do. I think this is the first quarter in a while that it had declined. Anything in particular going on there, in your partnership with the rent to own players?

Nothing really worth commentary at the end of the day. It is a little lighter, I would say, in the fourth quarter. We are seeing that pick back up again. So I think in the quarter, it was just slightly down. Nothing materially that we saw that drove that.

Okay. Thank you so much.

Thank you. Our next question comes from the line of Brian Nagel with Oppenheimer. Your line is open.

This is Dan Farrell on for Brian Nagel. Just had a question on the previously securitized portfolio and its performance versus your expectations, and specifically around the timeframe of the current pay downs that have been received. And then the flow through of the about $7 million of the residual equity interest.

Is that something you guys are expecting to receive on a go-forward basis? And does it have any impact on your ability or intent to sell the residual interest or the timeframe surrounding that? Thank you.

As you mentioned, we did get the first payment within our anticipated timeframe, within the first 2 to 3 months. We do expect to receive another meaningful payment this month, related to November results. And because it pays down so quickly, at this point, as Norm mentioned, it's such a high return asset and amortizes quickly, for now, we're going to hold onto it, and continue to monitor the market for purchase of residuals.

We would say, Dan, what we're seeing is, in essence, what we modeled out, when we initially did the securitization.

Okay. Great. Thanks.

Thank you. Our next question comes from the line of Rick Nelson with Stephens. Your line is open.

Hey guys this is Nick Zangler in for Rick. I'm just looking at that expectation next quarter for the 13.75% to 14.25% charge off rate, a little bit higher than our expectations. Can you just detail that again? I'm curious if you are limiting the number of accounts that are being re-aged going forward? Just any potential or fundamental changes going on there?

No fundamental changes. If you look at last year, it was 13.1%. Seasonally, we generally see higher charge-offs in the fourth quarter. And then with the slower portfolio growth, that's impacting the rate, the comparable rate year-over-year, and then certainly we look like we're pushing through the last of those originations from early 2013, early 2014.

Okay. All right. I understand that. Than just regarding the potential residual sale here, looking to future securitizations, I know at one point you had suggested that during the announcement of a new securitization you had hoped to sell the residual equity along with it at the same time. Does that expectation still out there for the go-forward securitizations, or has that thought process changed as we have progressed here?

No, our thought process hasn't changed. But what I would say is, ultimately that is the point that we believe we will get to, is to be able to sell the residual at the same time as we do the securitization in the ABS transaction. But it won't be for this next transaction. It may be a couple down the road.

Part of it, we need investors to see the performance of the portfolio, the performance that occurs, and then from a pricing standpoint, we would expect it to be in a much tighter range, and to be at a point that, from a return from a shareholder standpoint would makes sense for us to do it all in one transaction. That certainly is still our ultimate objective.

Got it. Awesome. Thank you, much appreciate it. Have a good one.

Thank you. And our next question comes from the line of David Magee with SunTrust. Your line is open.

The inventory repositioning that you did earlier this year, which is a good thing obviously for several reasons, but does that put you at a disadvantage around the holiday time? I know November doesn't seem to indicate that, but I'm just curious, as we get closer to Christmas, does not having the small electronic stuff put you at a disadvantage?

Are you meaning, I'm assuming you're meaning from a traffic standpoint? Obviously from a product standpoint, when you look at what those margins were at the end of the day, even though the volume was significant, more significant in the fourth quarter, the margins that those products were sold at still created downward pressure from an overall retail gross margin standpoint.

It could have, arguably, an impact from a traffic or a sales standpoint, but we feel confident with the promotions that we have in place, and what we're doing within the other categories from a TV standpoint, and from a furniture standpoint. And certainly what we have seen in November to this point, we have been very pleased with the traffic that we are seeing in our stores. So we believe it's having minimal, if any impact.

Okay, good. And then at this point, just given that the stores in the oil-impacted areas seem to be stabilizing, do you think that, do you have any visibility how that plays out in the first half of next year? Do you think that stays stable?

We hope it does. I mean, we have seen a softness for the oil markets for several months, versus our other markets. However, in the month of November, as Mike mentioned, it stabilized, and we didn't see further deterioration. Obviously, we are continuing to monitor and watch it very closely, both from a sales standpoint, as well as the credit and delinquency standpoint, to be able to respond or react, if we need to.

Are you doing anything different at this point with regard to promotions in those markets?

We're not.

Thank you. And lastly, the impact of the change in recovery process for the troubled assets, the impact on the provision in the third quarter, how does that play out over the next couple quarters? Does that impact stay the same, does it lessen?

As far as the provision standpoint and a charge-off standpoint, it is really baked in to what you're seeing now. It was really a one-time adjustment that occurred when we made that change a year ago. And we would continue to expect over time actually for recovery cash flows to continue to build, as we have more and more charged off accounts to work.

It's really not an underlying impact to the portfolio. It's really just a change in timing of when you receive recoveries at the end of the day.

But now are you side of comparing more apples to apples, with how you did it last year?

Yes, fourth quarter is apples to apples, you're right.

Okay. Great, thanks, and good luck.

Thank you, and I'm showing no further questions at this time. I would like to turn the call back over to Mr. Miller for closing remarks.

Thank you. In closing, I would like to thank our nearly 5,000 associates for their support and dedication into delivering an outstanding experience to our customers. I have been on the job now for about 85 days, and I am truly excited about the many opportunities that lie ahead of us.

I am committed to ensuring transparency, both within our organization, and with our shareholders. We have a time sensitive business model, and I look forward to leading the organization as we work to build on our past successes, to deliver value to our shareholders. Have a great day.

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