Conn's Inc (CONN) 2017 Q1 法說會逐字稿

Good morning, and thank you for holding. Welcome to the Conn's Inc conference call to discuss earnings for the fiscal quarter ended April 30, 2016. My name is Jonathan and I will be your operator today.

(Operator Instructions)

As a reminder, this conference call is being recorded. The Company's earnings release dated June 2, 2016 distributed before market opened this morning and slides that will be referenced during today's conference call can be accessed via the Company's Investor Relations website at IR.Conns.com.

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 call over to Mr. Miller. Please go ahead, sir.

Good morning, and welcome to Conn's first-quarter FY17 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.

Before I talk about the quarter, I'd like to discuss the management changes we announced this morning to strengthen our leadership team. As we discussed in our last call we are focused on creating an infrastructure to support our growing retail and credit operations. And having a strong, driven management team in place is paramount to delivering outstanding performance.

I am pleased to announce the appointment of Lee Wright as our CFO. Lee is a proven financial leader who brings over two decades of capital markets, advisory and transactions experience to Conn's. His expertise in capital and debt management, along with his experience in the subprime finance industry, are critical to enabling Conn's to achieve its long-term financial goals.

In addition we announced two more executive appointments. Mark Prior will be joining Conn's as our new General Counsel and Corporate Secretary, and John Davis assumed the role of Chief Credit Officer in late May. Both Mark and John present a unique mix of skills and experience that will immediately enhance our legal and credit risk management teams.

Finally, I'd like to congratulate Mike Poppe on his recent promotion to President and Chief Operating Officer of Credit and Collections. The title of President recognizes Mike's 12 years of significant contributions to Conn's, reflects the integral role he plays within the executive management team, and our desire to focus his efforts on our critical credit and collections business. I am excited to work with these proven business leaders as we focus on turning around our financial performance, executing our growth-oriented business plan, and creating long-term shareholder value.

Now let me discuss our results for the quarter. The first quarter reflects the transition that we are undergoing this year. We have an amazing opportunity to create a national retailer and are focused on this goal.

However, in order to achieve our objectives we must invest in our business, turn around our credit operation, and build a platform to support our growth plans. Five years ago Conn's began revitalizing its retail operations. The Company created a differentiated retail business model, unlike any national retailer I'm aware of, that is focused on delivering a unique value proposition to our under-served and growing customer base.

Unfortunately while we were focusing our attention and strategy on building the retail business, we under-invested in credit and now find ourselves with a credit operation that could not support the significant transformation and growth that took place and needs additional investment to support the opportunity ahead of us. As a result we are slowing our near-term growth plan, and refocusing our business to achieve a proper balance between retail growth and credit risk. It will take several quarters until our strategies to improve credit performance will begin to show in our financial results.

Before I talk about the strategies we are implementing to turn around our credit operation, let me quickly discuss some highlights from our retail business. We have a strong retail strategy and continue to execute against our plan. In the first quarter of FY17 the retail segment expanded with new store growth, successfully opening five new stores.

Adjustments in underwriting that I will speak to later significantly impacted same-store sales growth during the quarter. As a result first-quarter same store sales, excluding the impact of our strategic decision to execute -- or to exit video game products, digital cameras and certain tablets were down 1.3%, while total net sales for the quarter were up nearly 7%.

Our strategy to drive the higher margin furniture and mattress business is paying off with increased sales in these categories, and benefiting retail gross margins on the sales mix shift. In the past four years our retail business has seen margins grow by just over 1,000 basis points. We continue to believe 45% of our product sales can ultimately come from furniture and mattresses while maintaining or growing share in appliances and electronics.

We are making progress towards this goal. For the first quarter of FY17, furniture and mattress sales increased by almost 18% and represented 37% of our retail product sales.

Finally, adjusting our near-term growth plan has had an impact on Company and retail segment profitability. As you know, retail profit is reported when a sale is completed, while credit losses are provided over time. As such, when the Company is growing rapidly, retail profits grow rapidly, while only a portion of the losses related to the higher sales and credit balances are reflected concurrently.

As retail growth slows, retail profitability growth slows but credit losses from earlier, more rapid portfolio growth periods flow through at a higher rate. As a result, until our growth rate achieves relative stability, we will continue to feel the impact on earnings related to this slowdown in sales. Specific to retail during the quarter, slower growth impacted our ability to effectively leverage our fixed warehouse and delivery costs.

In addition, more aggressive promotions and pricing, particularly with appliances, higher strength and the impact of slower sales on vendor rebate expectations all impacted retail gross margin in the first quarter. We are taking actions to reduce warehouse and delivery costs to return to expected margin levels. And in early May we revised our pricing on non-advertised appliances to improve margins. SG&A also delevered as a result of higher new store occupancy and advertising expense as well as the investments we are making within our organization to build the necessary infrastructure for continued expansion.

I want to use the remainder of my prepared remarks to discuss several of the strategies we are implementing to improve our credit results, how you should grade our success during this transitional year, and how we will position ourselves to show significant earnings growth in FY18 and beyond. Management and the Board have thoroughly analyzed the drivers of the Company's higher credit losses. Having reviewed the data and taking a hands-on approach within our credit operation since coming to Conn's, I am convinced our credit problems resulted from changes in customer behavior and under-investment in credit risk management.

As we have outlined before, our customers have experienced greater access to credit, a higher cost of living, and little or no improvement in their income while rapidly evolving regulatory environment has made it more difficult for all lenders to collect from consumers. In addition the transformation and rapid growth of our retail segment combined with the significant influx of new customers amplified the negative portfolio performance trend.

A sophisticated credit infrastructure scaled properly with advanced analytics would have provided Conn's management the ability to identify the changing behavior sooner and make appropriate adjustments to reduce losses. This is a focus of FY17 investment. Our credit operation is better positioned to analyze trends today than it was a year ago.

So more investments are occurring -- continue to transform our credit operation. As you can see, it is critically important to proactively manage credit in order to quickly adapt to changes in consumer behavior, the macro and regulatory environments, and portfolio performance. While consumer behavior and the macro and regulatory environments are largely out of our control, we need to ensure we have the ability to react quickly to changes, and are proactively managing credit risk effectively while having systems in place to make sure all levels of our organization are complying with consumer protection regulations.

On slide 3 we show the historical performance of the three main drivers of our credit contribution: provision for bad debt, yield, and interest expense on our borrowings. We indicate for each of these metrics what steps we are taking to improve results.

Beginning with the provision rate, we can improve performance through improved collection execution and better underwriting. Slide 4 gives a time line of the underwriting changes that we have made over the past year.

As we communicated in our last conference call, during the fourth quarter we implemented the first phase of our early pay default scoring model. Most recently, in the last week of March 2016 we made additional enhancements to reduce the credit risk related to new customers. Quarter four and quarter one underwriting changes reduced retail sales in the first quarter by approximately 300 basis points.

We anticipate a larger reduction in sales in the FY17 second quarter in the range of 650 to 700 basis points with the changes in place for the entire period. We are also finalizing an update to our origination score card and strategy that we expect to implement in the coming days. While these changes are not expected to have a significant impact on sales, we are estimating a reduction of net static pool losses in a range of 80 to 100 basis points, which is incremental to the 75 to 100 basis point net loss benefit anticipated from the change made during the fourth and first quarters.

Next as we discussed previously, to improve portfolio yield and returns on capital, we have implemented changes to our no-interest program. All long-term no-interest programs are now being offered through Synchrony as of early February. We do not expect this change to have a significant impact on profitability, but it will improve returns on capital as we recapture the capital invested in similar accounts on our books today.

Additionally, we removed no-interest program eligibility for certain higher risk customers. We are not anticipating a meaningful impact on sales as a result of this change, but expect they will improve yield by approximately 150 basis points over the next few quarters.

Finally, the actions we are taking to reduce losses and improve yield will also help the Company lower its borrowing cost in the ABS market. While the last two ABS transactions we completed demonstrate we are headed in the right direction, we believe improved credit profitability will continue to lower our borrowing cost with ABS investors, in addition to completing more successful transactions.

To summarize our turnaround activities, we are focused on initiatives to improve three key areas of credit financial performance: reducing losses, increasing yield, and lowering our borrowing costs. With a $1.5 billion portfolio, every 100 basis point improvement in losses, yields or borrowing cost as a percentage of the portfolio balance equates to $15 million of annual pretax earnings, or approximately $0.32 per share.

Therefore as our turnaround initiatives take hold, we expect to end this fiscal year positioned to significantly increase profitability in FY18 and beyond. It is going to take several quarters before investors begin to see these financial improvements flow through our income statement. In the meantime you can measure our transformation during FY17 by monitoring trends in delinquencies, losses, portfolio yield, and borrowing costs.

In addition, we will continue to provide detailed data on our turnaround strategies and the investments we are making to improve performance. Although I am not pleased with our results this quarter, I do not believe they are indicative of where the business is actually performing. I am pleased with the progress we are making, although it is clearly not fast enough.

Now I will turn the call over to Mike.

Thank you, Norm. Starting with our retail performance, as shown on slide 5 of the earnings deck, with the addition of 17 net new stores in the past 12 months, total sales growth for the quarter was driven by furniture and mattresses up 18%, and home appliances up 5%. These are our two highest margin and best credit quality product categories.

In addition, we experienced growth across all other categories except for consumer electronics. Sales of consumer electronics declined 7% as a result of our strategic decision to exit video game products and digital cameras, but were also impacted in the quarter by lower television volumes due to the effect of key model transitions. Repair service agreement commissions were up 18% due to higher penetration, increased retail sales, and improved program performance resulting in higher retrospective commissions.

Same-store sales for the first quarter of FY17 were down 3.4%. Excluding exited products, same-store sales were down 1.3%. The second quarter will be the last quarter influenced by the exited products and we expect same-store sales to be reduced by approximately 50 basis points as a result of this change.

Sales for the quarter were also impacted by underwriting changes made during the last two quarters. The combined impact of these changes reduced sales by approximately 300 basis points in the first quarter. Retail gross margins decreased compared to the prior year due primarily to lower product margins.

Slide 6 in the presentation recaps product gross margins, which were down 230 basis points as a percentage of product revenue. This was driven by margin rate declines in home appliance as well as furniture and mattresses.

These declines were due primarily to investments in appliance pricing to drive volume and some one-time inventory handling costs partially offset by favorable product sales mix shift toward our higher margin furniture and mattress category. Additionally, furniture margins were impacted by our return to normal promotional pricing strategy this year compared to maximizing margins last year as a result of inventory shortages due to the port strike.

Inventory increased year over year as we expanded our assortment and in-stock levels for furniture and opened new stores. Additionally, the prior year was impacted by the port strike that resulted in shortages of furniture inventory. Inventory levels declined 10% during the quarter compared to the end of the fourth quarter, and we are comfortable that our sales and purchasing plans will bring inventory in line with sales growth this summer without impacting margins.

During the first quarter we opened a total of five new stores including two locations in Louisiana as well as stores in Nevada, South Carolina and Tennessee. We expect to open 10 to 12 new stores this year, with three to four locations in the second quarter including two openings last week in Mississippi and North Carolina.

On slide 7 is the average FICO score of the portfolio for the last four years. The portfolio has been in a narrow range of credit scores and remained there last quarter, reflecting the consistency of underwriting over time. The FICO score of all originations in Q1 of FY17 was 609 compared to 617 in Q1 of the prior year.

This change is driven large by our decision to use the Synchrony program to offer all long-term no-interest financing promotions. As Norm noted, during the first quarter we made additional changes to our underwriting model to reduce credit risk, specifically related to new customers. These changes, in addition to the refinements we made in fourth quarter, included modifying our credit limits, down payments and cash option eligibility to reduce risk for some customers while declining other unprofitable customers.

Additionally, we identified some profitable segments of customers that we started approving. Underwriting changes and the shift of long-term no-interest promotions to Synchrony had a significant impact on originations as a percent of sales financed by Conn's in the first quarter of FY17, which was 75.5% compared to 85.4% for the same period last year and 79.8% in the fourth quarter of FY16.

As a result, new customers as a percentage of the originations during the quarter shown on slide 8 declined slightly to approximately 51.7% during the first quarter versus 52.3% for the prior year period, despite opening 17 new locations over this period. As a result of the reduced origination volume and the seasonal impact of tax season collections, during the first quarter of FY17 the portfolio contracted $50 million, or 3.2% since January 31, the first quarterly reduction the portfolio has experienced in four years, since the April 30, 2012 quarter.

Our reserving methodology looks at losses that will occur over the next 12 months out of the existing portfolio of loans. And as a result, provisioning considers not only new originations but originations from prior-year periods. The slower portfolio growth combined with losses from higher growth periods is amplifying our provision rate.

As these prior-year originations flow through the portfolio, growth becomes more stable and trends improve from tighter underwriting, we believe our provision rate will improve. For now, as growth slows, our provision rate will be higher despite underlying stabilization of new originations and the expected benefits of recent underwriting changes.

The losses we are experiencing from FY14 to the first half of FY16 were originated when Conn's was growing at a significantly faster rate and under different underwriting standards. To be clear, this is a timing issue, not a change in our expectations about the ultimate loss performance of these originations vintages.

We believe the FY14 and FY15 vintages will end up being [deep] loss periods, with terminal net loss rates in the high 13% to low 14% range. Given how highly seasoned these vintages are, only 2.9% of FY14 remains outstanding with a life-to-date net static pool loss rate of 13.2%. Only 18.8% of FY15 remains, which is 90 basis points less than FY14 at the same time in its life, and has a life-to-date net static pool loss rate of 10.7%.

Overall, our portfolio delinquency continues to show stabilization. As expected, first-quarter FY17 delinquency increased sequentially -- decreased sequentially. April greater than 60 day delinquency was down from January to 8.6%.

If the portfolio had grown at the same pace as it did in the prior year, the 60 day-plus delinquency rate would have been at least 10 basis points lower than the comparable prior-year period. Looking at net charge-off performance, the rate for the quarter was higher than the prior year, due largely to the slower portfolio growth which impacted the charge-off rate by about 110 basis points.

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'll turn the call over to Tom Moran. Tom?

Thanks, Mike. We reported a loss for the three months ended April 30, 2016 of $0.32 per share. This excluded net charges of $0.5 million, or $0.01 per share on an aftertax basis, primarily from legal and professional fees related to securities-related litigation.

For the retail segment of the business, total revenues for the first quarter of FY17 were $319 million, which was an increase of $20.4 million, or 6.8% versus the same quarter a year ago. Retail gross margins declined by 150 basis points versus prior year to 35.8% for the reasons Norm and Mike noted earlier. We continue to believe our business model can produce a long-term retail gross margin of 39%, and this would be as a result of first, increasing sales of furniture and mattresses which have a higher margin, decreasing share of revenues from lower margin small electronics and home office, and finally improving warehouse utilization.

Slide 9 of the earnings presentation shows retail cost and expenses. Starting with the top row we show the cost of goods, including warehousing and occupancy cost, deleveraged by 150 basis points as a percent of total retail net sales increasing to 64.2%.

Retail SG&A was 25.1% for the quarter compared to 22.8% for the same period a year ago. This 230 basis point increase was driven by the impact of new store openings, which drove the 110 basis point increase in occupancy and contributed to the 110 basis point increase in advertising. Taking a look at the credit segment, finance charges and other revenues were $70.1 million for Q1 of FY17, up 5.5% versus Q1 of last year.

This was driven by a 14.1% increase in the average balance of the portfolio, partly offset by an 80 basis point decline in interest income and fee yield. Drivers of that decline in yield included, one, increased impact of our non-interest bearing programs including equal payment no-interest programs offered beginning in October of [2014] to certain higher credit quality borrowers. Secondly, there was a higher provision impact for uncollectible interest.

SG&A expense in the credit segment for the quarter grew 21.2% versus the same period last year, driven by the addition of collections personnel to service the 14.1% increase -- 14% year-over-year increase in the average customer portfolio balance. Credit SG&A as a percentage of average total customer portfolio balance delevered by 50 basis points versus last year.

Provision for bad debts for the three months ended April 30, 2016 was $57.8 million, an increase of $10.3 million from the same prior-year period. Key factors in determining the provision for bad debts included the following. First, the recognition of expected losses from higher growth periods, including customer receivables originated during FY14 through the first half of FY16.

Secondly, a 14.1% increase in the average receivable portfolio balance resulting from new store openings over the past 12 months. And third, the balance of customer receivables accounted for as troubled debt restructurings increased to $123.5 million, or 8% of the total portfolio balance, and this drove $1.5 million of additional provisions for bad debts. As a result of these factors and the strengthening portfolio balance, the provision for bad debt as a percent of the average portfolio balance was 14.8% compared to 13.9% in the first quarter of last year.

For the FY17 first quarter interest expense increased by $16.5 million 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 our effective interest rate. For the quarter interest expense as a percent of the average portfolio balance was 6.6%, with average debt as a percent of the average portfolio balance of approximately 79.6%. With four months of receivables originated on our balance sheet since the last ABS transaction, we are looking at completing another transaction within the next few months.

Turning now to balance sheet and liquidity. Slide 10 in the presentation shows our liquidity compared to the same period last year. As of April 30, 2016 we had $12 million in cash, $162 million in ABL net availability, and an additional $568 million in ABL committed growth capacity.

Our 2015 and 2016 ABS transactions are performing in line with our expectations. As the residual holder through April 30, 2016, we have received $27 million of cash flow, and as the servicer an additional $45.5 million. We are monitoring the capital markets closely and expect to complete one to two additional ABS transactions in FY17.

We will continue to monitor the capital markets and evaluate opportunities to sell the residuals from our ABS transactions. On May 20, 2016 we filed an 8-K with amendments to our revolving credit facility to adjust certain covenants in order to manage our financial flexibility during this transitional year. We have an excellent relationship with our lending group and appreciate their long-standing support.

Finally in an effort to assist analysts and investors with modeling elements of our business, we are expanding the amount of guidance we are providing. In the press release today as part of our update, we've added quarterly guidance for the following metrics. SG&A rate as a percent of total revenues, provision for bad debt as a percent of the average portfolio balance, and total interest expense.

On a personal note I wanted to express what a privilege it's been to serve as CFO of Conn's and to work with Norm, Mike, and the rest of the talented Management group. I really enjoyed my time here. I look forward to working closely with Lee and the financial team to ensure a seamless transition.

Now I'll turn things back over to Norm.

Thanks, Tom. I would like to note that we will not be participating in investor conferences over the next few months while our new team members get up to speed on our business and we focus on improving financial results. I also want to close by thanking Tom for his efforts during his time with the Company.

With that, operator, we're ready to take questions.

Certainly.

(Operator Instructions)

Our first question comes from the line of John Baugh from Stifel. Your question, please.

Good morning. Thanks for taking my questions. Could we start, I noticed there was an increase in originations to zero to 550 FICO scores. I believe you had a strategy where you're going back and lend to some of those customers who were previous or existing customers. Is that explain the solely the increase reflected in that number?

There's a couple of points to make on that, John. One is, it's seasonal. You can see it's actually down year over year during tax season. As people get their refunds we do see an influx of lower credit quality and no-score customers that we don't see other times of the year.

So it's actually 120 basis point decline year over year and then also with the movement of the high FICO score business to Synchrony, that decreased as a portion which just naturally pushes up the lower score as a percentage. But it's not a significant impact from our underwriting changes resulting in that change in zero to 550.

Okay. I wanted to focus, I guess, on the gross margin deterioration, both the furniture and mattresses as well as in appliances. Norm, I think you gave some color on what's going on there. But I'm curious. I saw the average ticket was down in furniture and mattress and of course we know that the warehouse distribution cost embedded in that number, too. I'm just kind of curious as to where you see pure product gross margin going in both those categories, furniture and mattresses and appliances going forward?

I'll start with on the furniture and mattress side. We did have some headwinds in the first quarter relative from an SG&A and distribution standpoint that, as I highlighted in the script, we've done some things to offset some of those costs that we expect that to come back, not to be an ongoing expense going forward.

From an actual product standpoint, from a furniture and mattress standpoint, remember we were lapping last year the port strike that was in place during the first quarter and as a result of that we did very little promoting on furniture, our standard typical promoting on furniture and mattress, I mean, furniture products specifically, because of the lack of product that we had. So part of that erosion that we're seeing in this first quarter is we did typical promotions versus a lack of promotions last year that's creating -- that created some of that downward pressure. But we expect that, again, to normalize here in the second quarter as we lap that port strike.

Okay. And on the appliances, pretty big deterioration there. And you mentioned having to, I guess, drop price to move volume. I've always thought as your business model as being somewhat price protected because your customer needs the credit program, and this would imply otherwise.

So maybe some color on what you see going on in appliances, and again what you see happening prospectively? Also, you mentioned somewhere in there an inventory handling issue or something. I don't know what that was related to.

I'll take the appliance piece first. Just to be clear, we're not changing our promotional strategy. What we did was we impacted our pricing for our non-advertised products and we tested for three to four months pricing non-advertised products at a lower available price to see if we could get a sales benefit to offset loss of margin. And as a result, we did not see that benefit from a sales standpoint.

So we reverted back to our prior in-store pricing policy, which we believe, and we're seeing that impact already here in the second quarter, that will bring our gross profit margin back up to more historical levels. We do offer price matching for those models. So we feel like we could still be competitive on those non-advertised products and not give up the margin, because we just simply didn't get the sales impact from a tradeoff standpoint.

Regarding the SG&A, we did mention we had shrink in specifically one warehouse facility that we tightened our processes up across the board, and we don't anticipate seeing that on an ongoing basis. It was a one-time hit.

Okay. My last question before I defer to others is on SG&A. Appreciate your giving us the Q2 help on that total number as a percentage of total revenue. Any thoughts on the second half of the year? I looked in last year's second half, was I believe, 65 basis points higher than the first half and I know there were a lot of moving parts with SG&A, but any help there? Thank you.

I think, John, at this time it's a little early for us to give guidance, as Norm talked about in his script. We're going through some -- it's a transformational year for us. We're bringing in some new people into the organization and we'd hesitate to give too much guidance on where we'll be in the back half as we invest in credit risk management and IT and some of the other opportunities we've discussed.

Suffice to say, John, though, that our intention, which is why we gave guidance here, is to give more direction going forward, and hopefully more clarity on exactly what's happening in advance and why.

Thank you, and good luck.

Thank you.

Thank you. Our next question comes from the line of Rick Nelson from Stephens. Your question, please.

Good morning. You mentioned at FY14, FY15 static losses. You think those will top out high 13%s, low 14%s. How do you see the 2016 originations in terms of static loss?

Yes, Rick. It's Norm. I'll start it and then I'll hand it to Mike. It's very, very early from a FY16 standpoint. Clearly, there's only one data point out there a quarter, and it actually has shown a slight tick-up from FY15 at the same point. However, we believe with the underwriting changes that we've taken and the discontinued products in FY16 and those actions, we still expect FY16 to be slightly inside FY14 and FY15.

That's right. And if, for example, the exited products really are only impacting the back half of the year and there is still through the end of April, there's still several months of originations at the end of FY16 that we haven't had our first charge-off yet. So it's not seasoned enough, as Norm points out, to really have a good view. But our current expectation is still that FY16 will be slightly inside of FY14 and FY15's performance.

Thank you for that color. Also, curious about Texas and your oil [palette] exposure up here. Seeing any significant deviation there from a credit loss standpoint?

From a credit standpoint, right now we're still -- those markets are still performing relatively in line with the portfolio. We haven't seen a significant deviation yet, but we're continuing to watch closely. The Houston market specifically, which is the bulk of it, continues to be one of our lowest delinquency rate markets in the Company. And has stayed in that range of being at the better end of performance.

From a bigger picture standpoint, is the goal to bring the credit operation to break-even and profits generated at retail, or what's the end game objective here?

Yes, Rick. From a longer-term standpoint, that is the longer-term objective to get the credit business back to breaking even. Certainly making, even making a little bit of money and really using the combination of the credit and the huge profitability that we generate from the retail model to generate the return for the shareholder at the end of the day.

And what sort of time line would you have in mind? Would that be a 2018 possibility?

Yes. What I would say is that, as I talked about in my comments and as we're addressing both the losses, the three elements of the credit business, the losses, the yield, as well as the borrowing cost very aggressively across the board, our expectation is that we see material improvement in performance in all three by the end of FY17 heading into the early part of FY18 and be well on that path to dramatically improve profitability and performance on the credit business in FY18.

And the implications, then, for retail as you continue to tighten on the credit side?

Clearly, as we've communicated previously, as we tighten from an underwriting standpoint we are, in the second quarter, as we've communicated, expecting to see a 650 to 700 basis point impact from sales. Having said that, with the appointment of John Davis and continued investment within our credit analytics and the credit team, we believe there are opportunities for us to expand sales in segments that we're turning down right now from an underwriting standpoint that, as we improve the sophistication of our credit team, that will enable us potentially gain incremental sales in areas that we're not capturing today and help mitigate some of the tightening that we're doing on the expected credit losses.

And still focused on getting static pool losses in that 10% to 12% range and besides the underwriting part of just the slowdown in growth will help that because the customer base will shift to more existing customers that will give us an additional benefit from a loss standpoint.

Thanks for that. (Inaudible) could ask -- can pick this up, but could you report on May same-store sales and delinquency this morning, or will that come at a different time?

We did not. We're scheduled to report it early next week. However, I will say just from a preview standpoint, I guess sales-wise, since obviously we know the month is completed, that there is a slight timing issue year over year.

Memorial Day this year fell a week later than it did prior year. So there is a slight amount of sales that are -- a small amount of sales that are going to be realized in June this year that were actually written over the Memorial Day weekend, holiday weekend. If we true-up for that, I will say that our sales, same-store sales, we expect to be, or will be in line with what we had communicated earlier, which are down mid- to low single digits.

Okay. Great. Thanks a lot, and good luck.

Thank you.

Thank you. Our next question comes from the line of Brian Nagel from Oppenheimer. Your question, please.

Hi. Good afternoon. So wanted to start with maybe a bigger picture question, just on credit and today's announcement. I guess it's mostly for Norm. Having followed Conn's for a while, and if we look at, I think, issues in your credit segment really started to come to light maybe a few years ago and since that point, there's been a number of announcements from Conn's and initiatives to tighten up credit. And seemingly those initiatives have not worked as well as they were intended to do and then we get today's announcement, where once again we're restructuring, for a lack of a better term, the credit business.

My questions is, Norm, as you look back, still being relatively new to the Company, where did the prior initiatives over the past one, two, three years fall short? And then what's really the difference today as we look at what you'll be doing to fix the credit business versus what you had done previously?

Sure. First, I would say a couple of things. I kind of touched on it a little bit in my comments. If you go back two or three years, there has been an overall deterioration in the quality of credit from a customer standpoint when you look at performance that frankly from a macro standpoint, even if customers in the 600, 650 and higher FICO scores that we have approved historically at a 97%-plus, 95% to 97% rate. If you look at how those customers have performed over the last three to four years, their performance has deteriorated. And any underwriting changes that we have done wouldn't have caught that at that point because we approved those customers at a very, very high rate.

What I would say is, because we didn't have the level of sophistication from a credit underwriting and a credit modeling analytics standpoint, that's really the greatest impact that has impacted our ability to be able to respond to both the macro environment of what's going on in a more rapid mindset, or a more rapid approach. And really what is, as you heard with John Davis being appointed as the new Chief Credit Officer, and additional investments within the credit team, our additional modeling that we've rolled out over the last six months with the early pay default model, the new originations model that's going to roll out here in the next few weeks.

It's a far more segmented model, far more sophisticated model. It's those efforts from a credit underwriting standpoint that will enable us to understand if there are macro things going on to be able to respond to that in a more rapid fashion, as well as to be more selective about, and be able to more effectively identify those segments that are not profitable that we could cut out from an origination standpoint upfront. So it's really the investment on the credit side of the house and with the credit team that frankly we under-invested as an organization that's spending a great deal of energy and effort and resources to beef that up going forward.

That makes sense. When we think about the investments that you're talking about here in the call and the press release, are those -- is it more, is it -- I guess as we think about the investment, what's likely to weigh upon results for the next few quarters or so. Is that more -- is it more skewed towards actual dollars spent on infrastructure, or is it more a reflection of ongoing weakness in the credit business as you make these changes?

It's more on the investment. The challenges from a financial standpoint, we are still seeing as part of the reason the loss provision was -- is where it is, even though we're seeing stabilization of the underlying delinquency trends is we are still getting flow-through of those high loss -- high growth periods in fiscal year -- late FY14 and FY15 that are coming through. But it's really the investment on the credit side that's, certainly from an SG&A standpoint, that's impacting the financials within the credit business. I'm not sure if that answered your question or not.

No, it did. It did. It did. So as far as the time line goes then, I would think you have a pretty good handle on how those investments will flow in and impact the P&L.

We do.

Okay. Then the final question before I turn it over to someone else. With respect -- you commented during this process, which again I think makes a lot of sense, to slow growth but you're continuing to open stores. Am I missing something there, that when you're talking about slowing growth it's not necessarily related to stores? Or are we likely to see store growth slow in some significant way as you work through maybe some of the deals you already signed?

It is exactly what you said on the latter. The stores we're opening now are all stores that we had signed and planned to open, and actually had been under construction before we made the decision, before I made the decision to slow growth from the 20 to 25 stores down to the, now it will be the 10 to 12. As you noticed, we already opened five. We're going to open three to four in the second quarter. So basically all -- they're almost all will be opened here by the end of the second quarter.

So the slowing growth you'll see will really come the back half of this year and frankly still evaluating what the new store growth plan will be for FY18 and beyond. But I'm prepared to continue to keep a measured slow pace, even slower than this year, if necessary, until we see the credit performance turning and in a position to be able to increase store growth.

What I would say is, even for the new stores that we're opening, when you look at the 650 to 700 basis points impact on sales, a significant portion of that is on new customers. So we're impacting, even for the new stores that we're opening, they're not building revenue nearly as quickly as they have in the past because we're being more selective from a new growth standpoint with those new customers to make sure that the customers we are underwriting are going to perform from a loss standpoint and a profitability standpoint at a higher rate than new customers have historically, if that makes sense.

And one more. I guess I had one more small one. Would the effort you're undertaking now in your credit business, does it all change the timing of your future securitizations?

The slowing growth, the fact that we're, both from an underwriting standpoint as well as moving the long-term interest programs over to Synchrony and slowing that portfolio growth, gives us more flexibility with when we go to market from an ABS standpoint. And we're clearly looking at that to understand what's happening from a yield standpoint and performance-wise in the capital market, and ensuring that we attempt to manage our borrowing cost as effectively as we can. At the same time as ensuring that we remain as a regular participant in the ABS market, because it is an access for capital that we need on an ongoing basis.

Got it. Thank you.

Having said that, we still expect to do one to two more transactions in the ABS market through this year.

Thanks a lot.

Thank you. Our next question comes from the line of Brad Thomas from KeyBanc Capital Markets. Your question, please.

Yes, thank you. Good morning. And thank you for all the detail. Just a follow-up on that last topic. As you think about improving profitability perhaps in the short term and slowing growth, while recognizing that you want to build a track record within the ABS market. Do you have any more thoughts on perhaps ratcheting back the percentage of your receivables and it being funded by the ABS market? It would seem to be a nice short-term opportunity to reduce your cost of funding.

I mean, I guess to the extent you've looked at it today, do you have a sense of perhaps how much you might be able to ratchet that back? Do you do one or two securitizations a year instead of three or four? And would that be enough still to build a track record? Any thoughts on that would be greatly appreciated.

I'd say, Brad, this is Mike. It's probably getting -- once a year is probably not enough for us, but two to three times a year, and with the slower pace of growth, we can certainly slow down the pace, or the time between transactions. But also continuing not just to build the track record, also with the agencies and showing that continued path of reducing the rate and improving structure over time will be making sure there's regular access.

But you're right, we don't have to go four times a year to do that. And we will have the slower growth, we can leverage the capacity into the ABL facility a little longer than we would have if we had a faster growth pace in the portfolio. That would certainly bring down our average cost of funds.

Got you. And so just through the balance of this year, is that contemplated at all in terms of your guidance or expectations to perhaps not go out and securitize all your receivables in some of those next few transactions?

I think it would be more a balance of, as you do a deal you probably sell most of what you have on the balance sheet. It would be the frequency of transactions. So that the average balance in securitization versus ABL, the mix would change from an average basis. But you'd probably continue to clear out the portfolio and just build in the ABL longer.

Got you.

It's a similar (technical difficulties).

And frankly, Brad, with the slowing portfolio, part of the challenge we have to balance against is the size of the transaction when you go to the market. You start getting north of $500 million or $600 million for a transaction, it becomes more challenging to complete that transaction in the ABS market. But, as we had mentioned, with slowing portfolio and moving the long-term no-interest to Synchrony, the size of the portfolio gives us more of an opportunity to slow that pace down and leverage the ABL in the shorter term and reduce our borrowing cost in the short term.

Thank you. Very helpful. Sticking on the credit side. I know you're reviewing a lot of things and bringing in new team members to help enhance what you do on the credit side. Norm, one of the things that's changed within Conn's over the last, call it five years, is that average balance per customer that I think today is about $1000 higher than it was five or six years ago. How important is it for you to adjust that lever within the credit business?

It is one of the critical areas that we look at for add-in. Frankly, one of the segments that we -- when we did the underwriting changes back in March, it is one of the levers that we looked at to both reduce overall limits that we provided to folks, increase down payments, specifically along the mindset for higher risk customers of what should that average balance be to maintain an appropriate level of risk for the Company. So a very, very important piece.

Great. And then just lastly from me on the topic of same-store sales. I understand the adjustment in your guidance for the year. As we think about expectations for 2Q, 3Q, 4Q, can you gives us a little bit more color on maybe quantifying what range might be reasonable to expect for 2Q where the comparison is so much more tough relative to how to think about 3Q and 4Q?

I'm hesitant to give anything for third and fourth quarter at this juncture. I will say that I still feel that the guidance that we've given for the second quarter at the down mid- to low single digits is appropriate. And certainly as I had mentioned before, what we've seen in May came right in line with what we expected with the underwriting changes that we put in place. It's an area, obviously with John coming in from a credit standpoint and as we continue to increase our sophistication from an underwriting standpoint, that we continue to examine as well as looking at the macro, what's happening from a macro standpoint, not just in the oil markets but overall. But comfortable now, at least for the second quarter at that. But I'm hesitant to do any -- to provide any guidance past that second quarter as we sit here today, Brad.

Got you. And I think the press release calls out down mid- to low single digits for the year. You think that's reasonable for the second quarter based on what you're seeing so far, as well?

I do.

Very helpful. Good luck with all the changes. And thanks so much for my questions.

Thank you, Brad.

Thank you. Our next question comes from the line of Peter Keith from Piper Jaffray. Your question, please.

Hi. Thanks. Good morning. Thanks for taking my questions. On the comp headwind that you're anticipating from some of the underwriting changes, you've given us 650 to 700. Is that going to be all-in for rest of year, or will some of the April changes increase that range?

The 650 to 700 incorporates kind of all three. The fourth quarter as well as what we did in March and April full-in is in that 650 to 700 basis points. Nothing incremental, at least at this point, in addition to that.

Right. And we're not, I think we said in the call, we're not expecting a meaningful impact from the changes that we're going to put in with the new score card and underwriting strategy. That's more, as Norm pointed out, it's much more highly segmented model. It's more about being able to identify low performing segments and eliminate them and replace them with quality segments we were previously declining that will swap to a similar approval rate and sales rate, but improve underlying credit performance.

Okay. Thank you. If we go back a year ago, there were some efforts to tighten, as well as you were exiting some higher risk categories and you were at that point bringing the Synchrony customers, or some of them onto your books. But it looks like your expectations now for last year's originations have deteriorated a little bit. I guess you're not calling it that the static loss rate should be slightly inside FY14 and FY15. And I guess I thought before you would have anticipated that could be in that 10% to 12% range. So are you seeing something with FY16 here that has gotten worse and is now causing you to make further infrastructure investments?

I will say, Peter, I don't -- I think what we've said about 2016 is we thought it would be better. But I don't think we ever anticipated it being hundreds of basis points better than 2014 and 2015.

Okay.

We still expect it to be better and when we say slightly, hopefully it will be better than slightly, but right now we guide to -- we still believe it will come in better than 2014 and 2015. Until it seasons more and we've kind of seen the flow-through of all the vintages for a few quarters of origination months from last year, it's hard to set exactly where we think it will end up. Based on the way we underwrote, having the high FICO scores, et cetera, the expectation is still that we will see better performance than 2014 and 2015.

Okay. Maybe I can maybe ask it a little bit different way, too. The Company bought back a significant amount of stock late last year in the low $20s and it seemed now with six months forward that there's been a lot of change and a lot of deterioration in earnings and EBITDA. I guess I'm still not clear.

Is this because maybe the macro environment had deteriorated and that's pressured some of your customers? Or has been revealed that maybe the infrastructure is insufficient, and therefore you need to make more investments than you were originally anticipating?

I'll start. More the second, that there has been some deterioration from a macro customer standpoint that, frankly as I highlighted in my comments, that we didn't have the sophistication from a credit and analytics standpoint to be able to see that, see around the corner, to the degree that frankly we need to have going forward. And as a result of that, that's at least in part why the incremental additional investment that we're doing from an underwriting standpoint to be able to have that appropriate balance from a credit and a retail business standpoint and enable us to more effectively be able to see around the corner and predict, and at least respond proactively when we start to see changes from a macro behavior occurring within our customer base.

Okay. Thank you very much for the feedback.

Thank you. Our next question is a follow-up from the line of John Baugh from Stifel. Your question, please.

Yes. I was just wondering when you plan to file the 10-Q? And you sort of answered my question, I guess, on the longer-term thoughts around store openings. But it sounds relatively flat for the time being until you see improvement on credit. Would that be a fair way to summarize that? Thank you.

First, the 10 will be filed today. Secondly, yes, as we get through the leases that we had already committed to and have begun construction, the intention going forward is limited new store sales growth until the credit business not only turns but begins to show the traction necessary to get me comfortable that we could start adding on from a new customer standpoint.

And Norm, does that -- because I think part of the rational for opening stores was you'd opened DCs and/or warehouse capabilities and you wanted to leverage those. So how does that interplay affect gross margin going forward if you're not going to leverage those costs with new revenue?

I will say first of all, everything that we're opening are in markets where we're able to leverage our distribution costs as well as our marketing, both of which you saw -- you heard in the first quarter and you'll see with the 10 -- had deleveraged because of -- from an SG&A standpoint. So the new stores we're opening are focused specifically in those markets that enable us to leverage that going forward and anything that we would open going forward would be in similar vein that we would be looking at continuing to be able to leverage our existing distribution and marketing cost, frankly.

Great. Thank you.

Thank you. And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to CEO, Norm Miller. Please go ahead.

Well, we appreciate everybody's interest in the Company. And we look forward to speaking to you next quarter. Thank you.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.