Conn's Inc (CONN) 2018 Q3 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 October 31, 2017. My name is Chelsea, 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 7, 2017, distributed before market opened this morning, 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 federal securities laws. 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; and Lee Wright, 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 Third Quarter of Fiscal Year 2018 Earnings Conference Call. I'll begin the call with an overview, and then Lee Wright will complete our prepared remarks with additional comments on the financial results.

Our third quarter performance was at the high end of the expectations we outlined in October and demonstrates the continued success of Conn's transformation. During the quarter, we achieved a record net yield, a growing credit spread, strong retail gross margins and a significant decline in the 60-plus day delinquency rate, representing the first decline in 4 years.

We accomplished these results despite the disruption Hurricane Harvey caused during the quarter. The transformation underway demonstrates the growing flexibility of Conn's business model that allows the company to successfully operate through business disruptions like Hurricane Harvey.

I am pleased to report that our platform is stronger today than at any other point since my tenure began over 2 years ago. With credit results showing a clear path towards achieving 1,000-basis-point spread, our performance is improving. And we are dedicating more of our energy to developing growth-producing strategies aimed at expanding our differentiated business model to a larger number of customers and a growing store base.

I am confident in the direction we are headed, and I am encouraged by the long-term opportunities Conn's has to create sustainable growth and profitability. Our retail performance remained strong despite limited new store openings and the impact of Hurricane Harvey. In addition, certain markets around the Mexican border and in the southern part of Texas remain soft, which we believe is caused by statements coming out of the Nation's Capitol regarding immigration policy.

In total, Conn's lost approximately 100 selling days as a result of the hurricane. Beginning in mid-September, Conn's started to experience positive sales trends as sales within Southeast Texas benefited from rebuilding activities. In addition, as Lee will outline in his remarks, during the third quarter of fiscal year 2018, same-store sales trends in markets outside of Hurricane Harvey have started to improve as the company lapped meaningful underwriting refinements made last fiscal year.

Looking at our lease-to-own strategy, sales through our new Progressive offering represented 5.7% of total retail sales in the third quarter, up from 3.8% of total retail sales in the second quarter. Since we began transitioning to Progressive's offering, lease-to-own sales have grown each quarter as Conn's execution, experience and integration improved.

Lease-to-own sales for the fourth quarter of last fiscal year were 9.3% of total retail sales and benefited as our former lease-to-own provider tried to keep our business while we explored alternative providers. We remain confident lease-to-own sales can represent at least 10% of our retail sales. But as we have shared previously, it will take some time to scale to this level. As a result, there will be a near-term headwind to same-store sales as we lap prior periods of higher lease-to-own sales.

For the month of November, same-store sales were down approximately 8%. As we complete our transformation and lap the headwinds to sales we have discussed throughout the year, we continue to believe our differentiated business model and market opportunity can produce positive same-store sales in the future.

Retail gross margins continue to benefit from favorable mix within product categories, higher product margins and our focus on initiatives to improve performance and efficiencies. For the third quarter of fiscal year 2018, retail gross margins of 39.8% exceeded our expectations and increased 230 basis points from the prior fiscal year period.

Moving on to our credit segment. We are successfully executing strategies to strengthen our credit segment performance as demonstrated by a credit spread this quarter of 460 basis points, which is the best credit spread Conn's has achieved in the past 11 quarters and is up 70 basis points sequentially from the second quarter.

During the quarter, direct loan programs were successfully implemented ahead of schedule in Oklahoma and Tennessee, which represent the last 2 states to transition to higher-rate direct loan programs. As a result, October and November's total originations had a weighted average interest rate of 27.9%, up from 21.4% in July of last fiscal year.

Since Conn's first implemented the direct loan program in Texas in October of last fiscal year, net interest income and fees have increased approximately 27% from $58.4 million for the 3 months ended October 31, 2016, to $74.1 million for the 3 months ended October 31, 2017. Over the last 12 months, programs to improve yield represent a cumulative increase of $35.7 million in net interest income and fees despite a 2.6% decline in the average portfolio balance over the same time frame.

As you can see, programs to increase net interest income and fees are producing their intended results and are having a powerful impact on improving the performance of our credit segment. We expect favorable trends will continue as the portfolio seasons, and we move towards our expectation of achieving a net yield of between 23% and 25%.

As you can see in the data we provided today, the percent of applications approved and utilized has declined to 29.1% at the end of the third quarter as a result of a growing percentage of web-based applications, which typically have lower overall approval rates. Online applications have increased from approximately 45% of total applications in quarter 3 of last year to 52% in quarter 3 of this year.

Conn's is attracting more online traffic as customers benefit from applying for credit in the comfort of their own home. This allows Conn's to reach a larger audience and engage with a greater number of potential customers. Conn's diversified financing options allows the majority of customers who apply online or in our stores the opportunity to finance purchases at Conn's, and we are working to increase conversion rates.

We have historically discussed using the 60-day delinquency balance and rate as indicators for improving credit performance. As we mentioned on our last call, the 60-day dollar balance in August declined versus the prior year period for the first time in almost 5 years.

For the third quarter, the 60-day delinquency balance declined approximately $21 million, and the 60-day delinquency rate declined by 110 basis points to 9.9% at October 31, 2017, from 11% at October 31, 2016. This is the first year-over-year decline in the 60-day delinquency rate in 4 years and represents a significant milestone for the company. Improving delinquency trend is a direct result of the investments made to our credit platform and the enhancements to our underwriting model.

Other metrics are also demonstrating improvements in account quality. Excluding Harvey's impact in August, first pay default and delinquency rates on originations from July of last year through September of this year are lower compared to the corresponding period in the prior year. In addition, the payment rate during the third quarter was up 4 basis points to 4.80% compared to the prior year period despite the disruption caused by Hurricane Harvey. This is the fifth consecutive quarter where Conn's payment rate has increased year-over-year.

As our results show, third quarter credit trends reflect growing momentum in our transformation, and we remain confident that our current credit strategies appropriately manage our credit risk. The programs that we have put in place over the past 2 years are benefiting performance, and we believe that we are underwriting accounts today at loss rates of approximately 12% to 13%.

As expected, the amount of re-aged accounts as a percent of the portfolio increased during the third quarter, primarily as a result of Hurricane Harvey, but we believe this will not have a material negative impact on future credit performance. Approximately 30% of Conn's portfolio is in markets impacted by the hurricane. However, we believe only a portion of these accounts were directly impacted by the storm. The requirement that all in-house credit customers have property insurance helped insulate the company's net exposure to credit losses and provided protection for our customers.

Customers were still impacted by the storm, though, and may have experienced a temporary reduction in wages, job loss and shift in priorities. In the markets affected by Harvey, banks and other finance companies offered various degrees of financial relief to their customers such as free unilateral extensions for up to 3 months to multi-month payment grace periods and automatic payment holidays.

Conn's was disciplined in its approach and sought to show appropriate compassion to impacted customers while staying very focused on our credit performance. For Conn's customers impacted by Hurricane Harvey, we offered 1 month paid or free due date extensions, which are programs permissible under our existing credit policy.

In order to be eligible for hurricane relief, though, we required that customers speak to us directly, state that they were impacted by the hurricane and demonstrate a willingness and ability to continue to meet their obligations. We believe that these concessions provided affected customers with necessary flexibility during this challenging time and minimized our exposure to credit losses from the hurricane.

With this as a background, the re-aged receivable balance as of October 31, 2017, included $71.8 million in first-time re-aged accounts related to customers in geographies designated by FEMA as disaster areas. This represents approximately 16% of the portfolio in markets impacted by the hurricane. In addition, during the third quarter, we saw an increase in the use of Conn's existing 2-payment update program, including unilateral extensions, which also contributed to the increase in the balance of re-aged accounts during the quarter.

Finally, as you can see in our historic re-aged trends, re-aged volume is typically higher during summer months versus other parts of the year. Adjusting for re-aged accounts and Harvey-impacted markets, the re-aged balance as a percent of the customer-receivables portfolio would have been approximately 19% at the end of the third quarter.

We continue to closely watch portfolio performance, and we are proactively monitoring the cohort of accounts impacted by Hurricane Harvey to ensure performance falls in line with our expectations. As of October 31, approximately 92% of the customers in the Harvey-impacted area that were re-aged for the first time during the third quarter were meeting their monthly obligations.

We believe that the increase in our allowance for bad debt associated with Hurricane Harvey, adequately provisions for the increase in expected incurred losses as a result of the hurricane. While positively impacted by the increase in re-aged accounts associated with Hurricane Harvey, we believe that the 60-plus delinquency rate, when adjusted for historical re-aged growth rates and average roll rates, still would have been approximately 30 basis points better than the prior year.

It is important to note that customers in Harvey-impacted areas, including those accounts that were re-aged, are currently performing better than the overall portfolio in terms of payment and cure rates. This performance provides us with a strong conviction that the current underwriting standards are helping to improve credit trends.

Moving on to losses. Fiscal year 2017 loss rates continue to be impacted by first half originations that did not benefit from the stricter underwriting we implemented late in the second quarter of fiscal year 2017. In fact, the first half of fiscal year 2017 are some of the worst performing vintages Conn's has ever originated. And current losses associated with these vintages are higher than prior years at corresponding periods.

In addition, recoveries on losses for the first half of fiscal year 2017 originations, while increasing steadily, have taken longer to build than originally expected. However, as I have outlined throughout today's call, new originations are performing better than prior year periods. And the cumulative loss for accounts originated in the second half of fiscal year 2017 was 4.7% versus 6.5% for the first half of fiscal year 2017 originations at the corresponding period. And early indications of first half of fiscal year 2018 originations are even better.

Originations made after the underwriting changes took effect in late second quarter of fiscal year 2017 accounted for approximately 77% of the portfolio as of October 31, 2017, and portfolio performance is expected to benefit from continued originations under these tighter standards. Our guidance for fourth quarter provision represent a significant decrease from the prior year's results and reflects improving trends of newer originations and overall better portfolio performance.

For the entire fourth quarter, we believe we will be writing new loans at the 1,000-basis-point spread objective as a result of the new direct loan programs in Oklahoma and Tennessee and expected loss rates of new originations of approximately 12% to 13%. This spread, combined with the contribution of insurance income, provides Conn's with the flexibility to successfully navigate events like Hurricane Harvey as well as the ever-changing economic, regulatory and credit trends while maximizing financial performance.

To conclude my prepared remarks, third quarter results demonstrate that the transformation underway in our credit business continues to gain momentum. With improving credit segment performance, we are working on growth-producing strategies, which include better ways to segment and analyze underwriting to drive incremental sales opportunities, grow lease-to-own sales to at least 10% and enhance our customer experience.

In addition, we have developed a new store growth plan that includes opening 5 to 9 new locations next fiscal year. All of these new stores will be in existing states that benefit from higher rates and are supported by our current infrastructure, allowing Conn's to leverage fixed distribution, warehousing and transportation costs.

We believe the enhanced credit platform we have created can successfully manage risks while supporting our controlled growth plan and retail expansion. I am excited about the opportunities in front of the company as we shift even more of our focus to driving retail growth while proactively continuing to manage credit risk.

With this, let me turn the call over to Lee.

Thanks, Norm. Consolidated revenues of $373.2 million for the third quarter of fiscal year 2018 decreased approximately 1% from the same period last year. Net income improved significantly and was $0.05 per diluted share for the third quarter of fiscal year 2018 compared to a loss of $0.12 per share for the prior year quarter. As highlighted in this morning's earnings release, this represents our second consecutive quarter of profitability, which is the first time we have achieved this since the first and second quarters of fiscal year 2016.

On a non-GAAP basis, adjusted for charges and credits and loss on extinguishment of debt, net income for the quarter was $0.18 per diluted share compared to a loss of $0.08 per share for the same period last year. GAAP net income for the third quarter of fiscal year 2018 included a $5.9 million noncash charge to write off the investment of a software project that was abandoned during the quarter related to the implementation of a new point of sale system. The majority of the capital expenditures on this project was made prior to fiscal year 2017.

Third quarter of fiscal year 2018 retail revenues were $291.9 million, which declined $16.5 million or 5.3% from the same quarter a year ago while same-store sales declined 7%. At October 31, 2017, core stores represented approximately 52% of our store base. Single stores in new markets represented about 29% of the same-store base. The remaining 19% of our same-store base represented new stores in new markets with existing locations, resulting in the cannibalization of sales on these locations.

For the third quarter, same-store sales for core stores were down 7.5%, single stores in new markets were down 6.1% while stores in cannibalized markets were down 5.5%. For the third quarter of fiscal year 2018, same-store sales across all store categories improved significantly from second-quarter levels as we lapped last year's underwriting changes and started to benefit from the rebuilding efforts in communities affected by Hurricane Harvey. For the third quarter of fiscal year 2018, same-store sales in the markets impacted by Hurricane Harvey were down 1.3% while same-store sales outside markets impacted by the hurricane were down 9.3%.

Despite lower year-over-year revenues, retail gross margin, as a percentage of retail revenues for the third quarter of fiscal year 2018, expanded by 230 basis points from the same quarter in the prior year to a third-quarter record of 39.8% and matching the all-time quarterly record we achieved last quarter. The improvement in gross margin is primarily due to improved product margins across all product categories, favorable product mix and continued focus on increasing efficiencies.

The mix of sales from the higher-margin furniture and mattress category represented 36.8% of our third quarter of fiscal year 2018 retail product sales and 52.3% of our product gross profit. The percentage of sales from furniture and mattresses increased 560 basis points since the third quarter of fiscal year 2015 when furniture and mattresses represented 31.2% of product sales. We continue to believe the longer-term goal of 45% of retail product sales from the furniture and mattress categories is achievable.

Retail SG&A increased by 1.1% in the third quarter versus the same quarter in the prior year, which included $1.2 million of expenses incurred, net of estimated insurance proceeds related to Hurricane Harvey. On a consolidated basis, SG&A included $1.6 million of expenses incurred, net of estimated insurance proceeds related to Hurricane Harvey.

Retail SG&A as a percentage of sales deleveraged 170 basis points from the same quarter last year to 27.6% due to lower sales. Although we deleveraged on a percentage basis, our absolute SG&A spend only increased by $900,000 compared to the prior year, even with additional stores and the incremental spend related to Harvey. We offset our increased store occupancy cost from a higher store base through cost and efficiency savings in other areas.

Turning now to our credit segment. On an as-reported basis, finance charges and other revenues was a quarterly record of $81.3 million for the third quarter of fiscal year 2018, up 18.8% from the same period last year despite a 3.7% decline in the average portfolio balance. The increase versus last year was due to a record yield of 19.8%, an increase of 480 basis points from last year, offset by a 28.7% decline in insurance commissions.

As expected, insurance income declined over the prior year period. This was due to the decrease in retrospective commissions as a result of higher claim volumes related to Hurricane Harvey. It will take several quarters of lower claim performance for Conn's to benefit from retrospective insurance commissions.

SG&A expense in the credit segment for the quarter decreased 2.9% versus the same quarter last year, and as a percentage of the average customer portfolio balance annualized, was 9.1% compared to 9% for the same period last fiscal year.

Provision for bad debts from the credit segment was $56.3 million for the third quarter of fiscal year 2018, an increase of $5 million from the same period last year. The 9.8% increase in the credit segment provision was primarily the result of sequential growth in the portfolio, higher net charge-offs and an increase of $1.1 million due to the qualitative reserve related to Hurricane Harvey. We believe the current provision and allowance for bad debt adequately reserves for future losses associated with Hurricane Harvey.

As of October 31, 2017, we had $12.7 million in cash and approximately $110.5 million of immediately available borrowing capacity under the revolving credit facility. Additionally, we had $284.8 million that could become available upon increases in eligible inventory and customer receivable balances under the borrowing base.

Our ABS notes are performing in line with our expectations. As we mentioned last quarter, on August 15, we closed on a new warehouse facility. This new facility further diversifies Conn's funding sources and provides additional flexibility to fund the business. This warehouse facility was used to redeem the outstanding balances of our 2016-A Class B and C notes.

By redeeming these high-cost notes through our lower cost of funds warehouse facility, we expect to save approximately $2 million of interest expense over the life of these receivables. ABS notes currently outstanding include our 2016-B Class A and B notes; and our 2017-A Class A, B and C notes. We anticipate completing 1 additional ABS transaction before the end of this fiscal year.

Interest expense for the third quarter decreased $5.4 million or 22.9% from the same period last year to $18.1 million. This is the fourth consecutive quarter where our interest expense has declined sequentially and the lowest quarterly interest expense in the past 8 quarters as a result of continued deleveraging and reductions in our all-in cost of funds.

For the third quarter, annualized interest expense as a percentage of the average portfolio balance was 4.9% compared to 6.1% for the same period last year. Average net debt as a percentage of average portfolio balance was approximately 69% compared to approximately 77% for the same period a year ago. We believe that this is the strongest capital position Conn's has had since the new management team came to the company 2 years ago.

With this overview, I'll turn the call back over to Norm to conclude our prepared remarks.

Thank you, Lee. Third quarter results demonstrate that momentum in our transformation is accelerating. As I stated earlier in today's call, this is the strongest position Conn's has been in since I joined the company over 2 years ago. I am confident that we have successfully created a strong, profitable and differentiated business that is well positioned to create long-term value for our customers, associates and shareholders. I am excited to begin shifting even more of our focus to driving retail growth while our enhanced credit infrastructure continues to proactively manage credit risk.

With that, operator, please open the call up to questions.

(Operator Instructions) And our first question comes the line of Rick Nelson with Stephens Inc.

I'd like to follow up on the November same-store decline of 8%. How much of that relates to the lease-to-own transaction -- or transition? And are you still lapping credit tightening? Any commentary about hurricane-affected markets would be helpful.

Sure, Rick. First of all, on your question on the lease-to-own impact. To directly answer it, it's about 240 basis points impact for the quarter -- I'm sorry, for the month, in November, year-over-year. But just to step back for a minute to clarify in the lease-to-own piece, because there's going to be noise as we mentioned in the script here over the next couple of quarters. If you look historically, prior to October of last year, in the 2 years prior to that our lease-to-own as a balance of sales ran in the 5.3% on an average basis and was fairly consistent.

So what occurred in October and November last year, as you're aware, when we were looking at other alternatives because we didn't feel like we were capturing enough of that opportunity for our customers, we saw our previous provider, the number spiked in the late third quarter and especially into the fourth quarter, early part of the first quarter. And that's created the headwind here as we ramped up with our new partner, Progressive, in the month of November. And it will continue to be a headwind to an even greater extent, we expect, in the fourth quarter.

Having said that, our numbers for Progressive for the third quarter were still at 5.7%. So even though we have a headwind versus the short spike that we had last year with our old partner, we're above the historical 2-year run rate with Progressive already. It has continued to build, and we remain confident that we can get that minimum of 10% balance of sale sometime in the next fiscal year.

And so you're tracking down 8. You're guiding to mid-single-digit decline. Do the compares get easier? Or what is driving that relative improvement?

Yes. They're actually staying about in that same 200 to 300 basis points down for the quarter. The improvement that we're expecting is both Harvey build, and as Harvey continues to accelerate coming into the quarter, we would expect some tailwind from that.

Got you. Also any overall commentary on the health of your credit customer? I noticed the static loss expectation that ticked up a little in the re-aging account even if we adjust for the hurricane impacts. It looks like it ticked up a bit.

Yes. I mean, from an overall standpoint, clearly, the subprime consumer has -- certainly has a greater access from a credit standpoint. And we're obviously very conscious of that. But I would not say it's an area that we have any significant alarm. Clearly, something that we continue to monitor.

When you look from a portfolio standpoint, the performance of the portfolio in the back half of 2017, and clearly now, 9 months into 2018 from an underwriting standpoint, I'm very confident of where that portfolio is performing as we outlined in the script. And that represents almost 80%, 77% of the portfolio as we sit here today. So I'm very bullish about what that portfolio looks like going forward. And it's reflected by both the first payment defaults.

Although there was a tick up in the month of August because of Harvey, 14 out of the last 15 months, first payment defaults have been lower year-over-year. As I mentioned, 60-day delinquency for the first time in 4 years, the rate was better year-over-year by 110 basis points. And even if you discount for the Harvey re-age factor, the rate still favorable by 30 basis points year-over-year. And the dollar amount favorable by $21 million year-over-year.

So if you think about losses as a train, the first car in that train is first payment defaults. Those continue to perform significantly better year-over-year. 60-day delinquency, as I mentioned, follows that, and that's performing better. From that, will come charge-offs and, ultimately, provisions. So I won't say -- our customer lives in recession all the time. So that subprime consumer, we're very conscious of that. But do we have greater concern or alarm as we sit here today, I wouldn't -- than we have previously, I would say, "No, that's not the case."

Great. Thanks for that color. Finally, if I could ask about your pursuit now of store growth. Historically, those new stores have experienced higher losses. I'm curious how you're going to mitigate that as we push forward?

Well, part of the reason that we talked about and shared 5 to 9 new stores. There's 2 reasons for that. One is, clearly, we needed time to be able from a pipe -- a flow standpoint because it takes a while from a leasing and an opening standpoint to get stores open. That's one element of it.

But the other element of it is very conscious about the mix of new customers and how we -- how many we bring those in, what states we bring those in at, what the rates of those states are. And we'll be monitoring that very closely. And it's partly why our partnership from a lease-to-own standpoint is so important because, frankly, the credit risk that we're willing to take as we open new stores, now these are going to be in existing geographies, which will be helpful from a new mix customer standpoint. But even having said that, we will monitor that closely to ensure that new customer mix doesn't create similar issues to what we had in the past that destabilizes the credit portfolio.

And our next question comes from the line of Brian Nagel with Oppenheimer.

So my first question is -- it's maybe somewhat of a follow-up to what Rick was asking. But as we look at the fourth quarter, as you -- you indicated that sales in the month of November were down 8%. The guidance implies somewhat of a rebound from that. And then you mentioned that the Harvey build should be a part of that. I guess the question I have is, why would Harvey-recovery-related sales build through the quarter? I guess it would be my assumption that maybe they'd be strongest early in the quarter. So maybe just to understand that better.

Well, part of the issue -- we're not seeing as strong a rebound from the Harvey standpoint as we have with previous storms, Brian. And frankly, even some of the insurance claims, the percentage of insurance claims that we're seeing taking up, more folks are opting for the payment than what they have historically, at least, out of the gate. And we think that's because of the type of storm Harvey is, being a water event versus a wind event. There's still a lot of rebuilding that's going on. And our expectation is that build will occur later than what we've seen in some of the previous storms.

Got it. That makes sense. And then, Norm, maybe a longer-term question again on retail though. And clearly there has been an improving trajectory in the retail business. As we look out '18, '19 beyond, there should be some tailwind from potentially more aggressive new store openings. But how else do you think about the driver, so to say, behind potentially better sales? What's going to happen here to drive -- to start driving those retail sales better other than just simply easier -- easy comparisons?

That's a very good question, Brian. Something we're very, very focused on. And frankly, what excites me most about the business from an opportunity standpoint, not just new store growth and white spaces you so adequately talked about. Our opportunity there is pretty staggering. But if you look even within our existing stores and you look at the third quarter, from a total application standpoint, and that's both web and in-store, we had a total of 320,000 applications. People that took the time to fill out an application in our store or on the Web, trying to get credit from us. Out of that 320,000 of applications, we approved 170,000.

So 150,000 were declined, which is, when you look just at the declined piece, the opportunity from both Progressive in our existing stores as well as why we put such a significant investment in the credit team from an underwriting, from a modeling and a data analytics standpoint is how do we find those pockets of customers within those 150,000 declines that we should be saying yes to. But because of the lack of sophistication and investment in the past, we weren't able to say yes to. And then -- so that's a significant opportunity, clearly in and of itself.

But even looking at the 170,000 approved, 95,000 were actually used so -- applications. So 75,000 applications online and in the store combined were approved and not used. Now some of that is because they may have required a down payment. Again, there is underwriting impact that if we could -- as we get more sophisticated underwriting-wise, we can target those customers within it that are acceptable credit risks that potentially could be a lower down payment, or we could offer something different to them to get them to use it. But there's a significant number that whether they're on Web or in the store, that from a retail execution standpoint and offering standpoint that we have significant opportunity to be able to convert those to sales.

So when you look at both the decline and the approved-not-used, it's 0.25 million customers that took the time and energy to fill out an application just in the quarter, that we have opportunity to grow sales. And look, we don't have to get 50% of that. If you do the math, try converting 10% of that, 5% of that, materially moves our sales execution and performance. And that's really what our focus is within our existing stores in addition to building out the new markets as well. We don't have a traffic issue. We just have, from a credit modeling standpoint, to be able to capture more of those customers, to be able to say more yes to more of those customers gives us ample opportunity to grow the business.

And our next question comes from the line of Brad Thomas with KeyBanc Capital Markets.

A couple of questions if I could. Maybe just starting with a big picture question that I tend to get asked pretty regularly. You all have raised the interest rate. And I often am asked, does that increase the likelihood that the customer is not going to be able to make all the payments? I think that the numbers you cite here today with the delinquency show you're improving trends with your customers in terms of their ability to make payments. But I was just wondering if you could just speak to that specifically as you look at some of those newer agreements that you have in the states where you've raised the rates.

Brad, that's a good question. But no, we don't see any impact on the higher rates for our customers. And what we've talked about before is for our customers, they are very focused on the payments that fit within their budget. And that's what they're really watching as they look at the purchase, et cetera. So that's not having an impact. And again, one of the nice things is with our direct loan program, that's rolled into with our new underwriting model that we've put into place at the end of the second quarter last year. So again, we're seeing really no impact there. And actually, it's getting better, so.

Great. And then with respect to the opportunity on the portfolio yield. You pointed out in Slide 23 of the deck today, targeting the net yield to go to the 23% to 25% range. Is that still in line with the 600 to 900 basis point improvement that you've talked about? Or are you starting to feel like you could hit the higher end of that range or even a higher number than a 900 basis point improvement.

Hey, Brad, we -- well, we actually had raised -- we originally, as you recall, so that's 600 to 900; we raised it to 700 and 900. So we did increase that, but that's reflected in the 23% to 25%. What I think is important to note is as we said in the call today, that we are actually writing to that and feel very comfortable hitting that on a run-rate basis. So what we're writing today, we're at that 1,000-basis-point spread that puts us in the 23% to 25%. And again, as we talked about our losses, at that 12% to 13% range. So again, we're getting that 1,000-basis-point-plus spread, which is so important, so critical. And at this point, it's really just time and math to let it season into the portfolio, so we get the full benefit, which is, again, why you're seeing the tick up of our credit spread quarter-over-quarter. You will continue to see that roll through.

Great. And then moving over to SG&A. As we think about opening 5 to 9 stores next year, what do you think the growth of SG&A might look like in 2018 to help to support that store growth?

Well, we're not going to talk about 2018 guidance. But in general, again, we put out the Q4 guidance. A couple of things I wanted -- because it's a good question on G&A. It's important. You can see, obviously, from our guidance, our midpoint, you're going to see an increase in G&A. Obviously, we continue to invest in systems and people to become more sophisticated in all fronts here as a company. But as the new stores do roll in, we will see some incremental SG&A. But it really is going to depend on -- again, we haven't released the timing of our new stores. As Norm mentioned, we were working on that backlog, et cetera. So -- but there will be a tick up, but we're not giving specific numbers related to that.

Are there any rules of thumb that we might be able to use in terms of the cost per store that we might see next year? It sounds like they should be very efficient in markets that you're already in. But any guideposts for us at this time, Lee?

Yes. I mean, it's not -- again, remember, our stores -- we have our managers that are on salary. But most of our sales force is on commission. So it's really more of the variable cost, and you should get the benefit, obviously, as the sales come through. So it's not as incrementally automatic on the fixed cost basis from that perspective, so.

And part of the thing, Brad, from the past, where we did see SG&A increases was when you're opening 20, 25, you need new store opening teams because you're opening multiple stores in a month. And so at least this first year out, again, we haven't communicated because we don't know exactly the timing, which is why we gave the range of stores. But trying to be thoughtful and methodical about how we open them because as Lee mentioned, it's not a -- it's the opening costs that will create any SG&A headwinds, especially when you are doing multiple stores that -- for this fiscal year, you'll see a slight tick up, but we should be able to manage it. As you start getting into more than 1 store a month, at some point in the future, we'll share with you, model-wise, what that cost would be.

Great. And if I could squeeze one more in, just from a merchandising standpoint, it looks like you all switched from being -- having a mattress assortment of Tempur and Sealy brands to Simmons and Serta brands. Is that accurate? Any other color you can provide on maybe opportunities in that product category? And then any other merchandising changes that you'd highlight for us?

Sure. Well, typically, I don't like to comment on vendor partners and that. But since you have brought it up and it has been noted by a couple of different folks, just to give a little color and background. We began the mattress business almost 15 years ago in 2004. And Serta Simmons was our original partner when we put mattresses on the floor. We brought Sealy on the floor in 2012 and Tempur in 2014. We did reduce some SKUs from a merchandising standpoint to be more effective on the floor back in early part of 2016. And at the same time, we did go exclusive at that point with Tempur, Sealy. We made the decision as of November of this year to transition to Serta.

Clearly, we can't get into the details with it. But it was because of a -- from a financial standpoint, the benefit for the customer and for the company was such that it was something that -- felt like we needed to do. So that is -- it is an accurate statement as of November of this year that Serta Simmons is our exclusive partner on the floor.

And our next question comes from the line of John Baugh with Stifel.

This is Dillard Watt on for John. I wanted to just talk a little bit more about the re-age increase. You walked through a few things, and to be honest, I, perhaps, missed a couple of the explanations as I was writing down my notes. But you did note it still was, I think a few hundred basis points higher sequentially, even excluding all of the Harvey impacts. So anything you might be able to help us with to explain that? I don't know if you changed the policy at all elsewhere? Or maybe if you could just, once again, walk us through the big increase in the re-age balance?

Sure. No problem. So the -- as we mentioned in the script, first, the majority of the increase was the Hurricane Harvey-impacted areas from a re-aged standpoint. There was also an increase in the 2-payment update that we have. It's not new within our credit policy. It's something that we've had. And just from a clarification for folks that may not be aware of what that is, a customer has to make good with 2 payments consecutively in order to qualify for a re-age. And they are limited on how many re-ages they could do within any period of time than a 12-month period via our credit policy. And we did see a slight tick up in that area as well.

Okay. On the credit insurance piece, any help you might be able to give us, I guess, a few quarters out on how that ultimately rebounds. I can certainly back in to what it might be here for the fourth quarter based on expectations of the credit yield as well as you've given guidance for the total revenue number. But I'm just thinking how next year, kind of directionally, would it still be down year-over-year kind of through the first half and then maybe rebound on the much easier numbers in the second? Is that the right way to think about the credit insurance piece?

That's not a bad way to think about it, Dillard. Directionally, that's probably relatively accurate. It's just, again, as we've talked about it, it takes time to get back to a point where you're making the actual retrospective payments out. Because obviously, we're at a debt period of our retrospective commissions. You've got to build back that funnel back up and pay off that and until you actually start seeing the profit-sharing. So because of the magnitude of Harvey and the insurance payouts it just takes time to get back to a payment-sharing period.

Got you. Okay. And then lastly, it looks like your inventory was up pretty good year-over-year. I don't know if there are any changes to the timing of how you are ordering your inventory maybe in advance of the holiday season. It wasn't really -- I don't think -- I doubt you're doing much in terms of getting ready to stock up new stores, but maybe you are.

No, Dillard. It's a good question. We -- it had nothing to do with new stores. It's just some seasonal increase, obviously. A little bit of newness that we're bringing into from a merchandising standpoint. So kind of all those combined.

And the hurricane.

Yes. Obviously, the hurricane, too, as well and making sure that we're fully stocked in those markets.

And I'm showing no further questions at this time. I would now like to turn the call back to Norm Miller, CEO, for any closing remarks.

Thank you. We appreciate everybody's attention and interest in the company, and we look forward to talking with you with our fourth quarter results. We wish everyone a happy and healthy holiday season. Thank you.

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