Conn's Inc (CONN) 2019 Q2 法說會逐字稿

Welcome to the Conn's, Inc. conference call to discuss earnings for the fiscal quarter ended July 31, 2018. My name is Doug, and I will be your operator today. (Operator Instructions) As a reminder, this conference call is being recorded.

The company's earnings release dated September 4, 2018, 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 security 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.

Good morning, and welcome to Conn's Second Quarter of Fiscal Year 2019 Earnings Conference Call. I'll begin the call with an overview, and then Lee will complete our prepared remarks with additional comments on the financial results.

Results for the second quarter of fiscal year 2019 demonstrate the powerful business model we have created and our focus on driving and achieving profitable growth. GAAP earnings per diluted share grew 279% from the prior year period to a record second quarter, a $0.53 per diluted share. The 3.5% increase in total retail sales, driven by positive same-store sales and the addition of new stores, together with record retail gross margin, and continued improvement in credit segment performance, all contributed to the significant increase in second quarter earnings. Improving profitability provides us with a greater ability to support our meaningful growth opportunity, and we continue to make investments to enhance both our credit and retail operations.

In addition to record second quarter GAAP earnings per diluted share and retail gross margin, we achieved several other milestones during the second quarter, including record credit segment revenues and a record net yield. Same-store sales, interest expense and 60-plus-day delinquency all improved to the best levels we have achieved in multiple years, and the credit segment produced the second consecutive quarter of positive operating income.

Before I go into the specific credit and retail trends that drove our strong second quarter performance and the strategies we are pursuing to continue to create value for our shareholders, I'd like to review the leadership changes we announced this morning. Since I became CEO 3 years ago, you have continually heard me talk about the importance of leadership. Conn's has a unique business model, and we need to ensure that we have the right people in the right place throughout our organization to achieve our goals. I am pleased to announce the promotion of John Davis to President of Credit and Collections. JD has played a critical role in leading our credit segment transformation and is responsible for much of our recent success within the credit business. With additional oversight now over all aspects of our credit and collections departments, I am confident that JD's experience, knowledge and drive will create additional value for our company. Today, we also announced the departure of CR Gaines as President and Chief Operating Officer of Retail, and I wish him all the best in his future endeavors. I have temporarily assumed CR's responsibilities, and an active search is underway for a permanent replacement.

Later in this morning's earnings call, I'll review some of the ongoing retail growth strategies we are pursuing and why we are so optimistic about our future. But for Conn's to be successful, we need to improve our retail execution and produce more consistent results throughout our retail operation. We are addressing these near-term execution challenges and believe our model can produce consistent annual retail growth of 8% to 10% while managing credit risk. At this level of growth, our business model is extremely powerful and creates significant value for shareholders.

So with these highlights, let's look at our second quarter results in more detail, starting with our credit business. Improving credit trends and favorable portfolio composition contributed to the second consecutive quarter of positive credit segment operating income. Our credit spread, which is the difference between interest income and fee yield and net charge-off percentage, increased to 750 basis points for the second quarter of fiscal year 2019 compared to 390 basis points in the prior year period. For the second quarter, interest income and fees were a record $80.4 million and increased nearly 16% from the prior year period as a result of higher interest rates and better charge-off performance. This drove a 260-basis-point improvement in our net yield, which was a record 21.3% for the second quarter of fiscal year 2019.

Segments of our portfolio, including current originations are already producing our 23% to 25% net yield goal and we are confident the entire portfolio will be at that level within 12 months.

I am pleased to report that our 60-plus-day delinquency rate declined 50 basis points from 9.5% in the first quarter to 9% in the second quarter, representing the first decline from the first quarter rate in 7 years. In addition, on a year-over-year basis, the 60-plus-day delinquency rate declined 140 basis points, which is the fourth consecutive quarter this rate has shown improving year-over-year trends.

Looking at re-aged accounts. At July the 31, 2018, the percentage of the portfolio previously re-aged declined 20 basis points over the past 3 months. Overall, the performance of re-aged accounts, including TDR accounts, has significantly improved. The 60-plus-day delinquency rate of TDR balances was approximately 500 basis points lower than the same period in the prior year and marks the fourth consecutive quarter that the delinquency rate was lower on this portion of the portfolio versus the prior year.

Looking at credit losses, annualized charge-offs as a percent of the average outstanding balance were 13.8%, a 100-basis-point improvement over the same period last year. It is also important to note that net charge-offs were $3 million lower this quarter compared to the prior year quarter. As expected, charge-offs were higher sequentially, primarily due to seasonality and the benefit the tax refunds have on first quarter performance. As we stated on our last call, since the fourth quarter of fiscal year 2015, we have accumulated a balance of charged-off accounts of over $700 million and therefore have a meaningful opportunity to convert charged-off accounts to recovery dollars. The investments we have made to develop a robust recovery process and infrastructure continue to pay off.

During the second quarter of fiscal year 2019, we collected $4.8 million of recoveries compared to $2.3 million for the same period last fiscal year. We believe full year recoveries will be more than $20 million in fiscal year 2019 compared to $10.9 million in fiscal year 2018 and only $5.8 million in fiscal year 2017, demonstrating the significant improvement in this area. Based on current portfolio trends, improving recovery expectations and enhanced collection capabilities, cumulative charge-offs for fiscal year 2018 continue to perform better than the prior year. As a result, we continue to expect the terminal loss rate for our fiscal year 2018 origination vintage to be in the mid-12% range. We remain encouraged by current loss trends and believe our underwriting standards are appropriately controlling risk.

Our second quarter credit results demonstrate better operating performance and favorable credit trends. For the first half of fiscal year 2019, credit segment operating income was $1.6 million compared to a loss of $13.9 million for the first half of fiscal year 2018 and a loss of $50.4 million for the first half of fiscal year 2017. This $52 million 6-month credit segment operating income improvement over the past 2 years is a result of the successful execution of our credit segment transformation plan, which has also contributed to a significant reduction in our interest expense over this period. I am extremely pleased with the continued strength of our credit segment performance, and we are well positioned to achieve our goal of a 1,000-basis-point credit spread over the next 12 months. With a well-run credit operation in place, we have the appropriate foundation to support our compelling retail growth opportunity.

So let's look at our retail performance for the second quarter of fiscal year 2019 and review why we are so excited about the tremendous opportunity to grow retail sales. Our retail performance during the quarter was driven by positive same-store sales, the contribution of new stores and record retail gross margin. Second quarter same-store sales increased for the first time in 3 years, with total retail sales up 3.5% over the prior year period. Second quarter sales increased despite weaker than expected lease-to-own sales, headwinds in the appliance category as a result of recently imposed tariffs and challenges in the mattress industry. In addition, the 4th of July holiday fell on a Wednesday, which we believe also impacted traffic during this important promotional period. Retail gross margin exceeded our expectations and was a record 41.4%. Margins continue to benefit from favorable mix within product categories, higher product margin and our focus on initiatives to improve performance and efficiencies. While we believe there are still further opportunities to expand retail gross margin on a year-over-year basis, we do not expect retail margin to increase at the same magnitude as we have experienced over the past couple of years.

With these highlights to retail performance, let's look at some of the conversion and credit utilization drivers influencing sales, our initiatives to capitalize on our compelling market opportunity and strategies to optimize the 3 components of our retail platform: marketing, merchandising and in-store execution. As announced on our last call, we hired a new Chief Marketing Officer, who is now approximately 90 days into his role. With his vast amount of experience in the durable space, he brings a fresh perspective on advancing our marketing strategies to increase consumer engagement and overall brand health. As his tenure increases, we will update investors in future quarters on how our plans are developing.

Turning to the merchandising component of our retail operation. We have assembled a strong merchandising team with significant experience across all product categories. There are meaningful opportunities to drive retail growth by refreshing and expanding our product categories, and the strategies this team is putting into action are encouraging. The turnaround of our home office category is an example of the successful execution of our merchandising initiatives. About a year ago, the merchandising team conducted a full-line review and subsequently developed a plan to refresh and improve the product assortment within the home office category. This included revamping the assortment to fit our better, best retail strategy and offering products more aligned with customer preferences. The result of our home office refresh was a 26.1-percentage-point swing in quarterly same-store sales over the last 12 months. Home office same-store sales were up 8.5% during the second quarter of fiscal year 2019 and since we implemented this refresh, we have produced 9 straight months of positive same-store sales within this category.

Over the next year, we will be focused on replicating the success of our home office refresh to other product categories. This includes a major update of our furniture assortment to drive sales in this important high-margin business. One of the first efforts in the furniture category was the successful launch of new wall art and home accessories programs in the second quarter. Additional assortment updates to our furniture category, particularly in upholstery, bedroom and dining, will occur over the next 4 quarters. Our merchandising team is also introducing new, complementary products. The recent introduction of gaming bundles across all our stores produced incremental growth in our consumer electronics category during the second quarter and this category is now well positioned headed into the important holiday season. Within our furniture business, during the third quarter, we are launching barstools across our chain, which we believe will add incremental sales to this segment of our business. We are also adding robotic vacuums across our store base and continuing to test smart home products. There are multiple opportunities to improve and expand our product assortment over the next several quarters, and I am encouraged by the successful merchandising strategies underway.

As you can see, there are a lot of positive trends within our retail segment, but to produce the low single-digit same-store sales growth we expect and believe our model can support, we need to continue to improve our retail execution. This is a top priority of the leadership team and we are focused on upgrading the quality of field management, improving associate training, enhancing the customer experience and making it easier for customers to interact with us. Important indicators of retail execution include lease-to-own sales, credit application as a percent of traffic, closing rates, attachment sales and customer ratings. Analyzing the performance of these indicators across our districts, which we define as approximately 8 to 10 stores, shows a distinct difference between our top and bottom districts.

During the second quarter, the average same-store sales performance of our top 3 districts was up approximately 6%. This compares to the average of our bottom 3 districts, which was down approximately 7%. Our top- and bottom-performing districts include both new and existing geographies, which gives us confidence that the variability between districts is primarily a function of retail execution. Strong, experienced leaders that properly motivate, train and support their team members, while holding them accountable to our sales goals and expectations, are the key drivers of top-performing districts. Therefore, we are continuing to upgrade district and store management talent by attracting, developing and nurturing managers to support our store base and improve our retail execution.

Looking specifically at lease-to-own sales, Progressive remains a committed partner, and we continue to believe lease-to-own sales can ultimately grow to 10% of total retail sales. In certain districts, lease-to-own sales are approaching this level today. However, in other districts, the penetration rate of lease-to-own transactions underperformed during the second quarter, which caused the company average to decline. I would like to call out, though, that even with the lower quarter-over-quarter rate for the second quarter, our lease-to-own sales are still over 100 basis points higher than the historical average under our previous provider, excluding the time prior -- period prior to our transition to Progressive. We are increasing the training of our sales force in driving greater accountability amongst our retail managers, which includes linking compensation with lease-to-own penetration rates. Early indications show improving results, and we expect third quarter lease-to-own penetration rates to increase from second quarter levels. We are confident our retail execution is getting better, but as our third quarter same-store sales guidance shows, it will take time to complete our retail transformation and get all of our districts aligned on performance. In addition, during the third quarter, we will begin lapping stronger same-store sales comparisons in markets impacted by Hurricane Harvey as rebuilding efforts got underway during the third quarter of the previous fiscal year. This will impact both our third and fourth quarter same-store sales comparison. There continues to be meaningful opportunities to profitably grow our retail business and investing in new stores remains an important part of our overall growth plan. During fiscal year 2019, we plan to open a total of 7 to 9 stores, including the 2 new stores we opened during the first half of the fiscal year. In the third quarter, we plan to open 3 new stores, which includes 1 store in Virginia, which we recently opened. Our new stores are performing well and providing us with increasing confidence in our retail expansion plan. As a result, we are planning to open a total of approximately 10 to 15 new stores in existing states next fiscal year. We are also upgrading our retail infrastructure to support our growth, and on August 15, we announced construction of our new state-of-the-art Houston distribution center that will increase the capacity and efficiency of our retail operations.

So to conclude my prepared remarks, before I turn the call over to Lee, second quarter results demonstrate that our business model can produce strong earnings, even without significant retail growth. We believe our retail model and credit platform can consistently support an annual retail growth rate of 8% to 10%, which includes low single-digit positive same-store sales and a mid- to high single-digit contribution from new stores. Our business model becomes extremely powerful at this level of sales, and this is what the senior leadership team is focused on achieving. Our credit business has been transformed into a sophisticated, well-run and compelling component of our overall business model, and we are applying the same disciplines and approach that drove our successful credit transformation to the retail side of our business. Therefore, I am confident we can optimize the performance of our retail business and capitalize on our sizable market opportunity. We are headed in the right direction, and we believe we are well positioned to create increasing value for our shareholders.

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

Thanks, Norm. Consolidated revenues of $384.6 million for the second quarter of fiscal year 2019 increased 4.9% from the same period last year. GAAP net income improved significantly to $17 million or $0.53 per diluted share for the second quarter of fiscal year 2019 compared to $4.3 million or $0.14 per diluted share for the prior year quarter. This represents our fifth consecutive quarter of profitability and a record second quarter GAAP earnings per diluted share.

On a non-GAAP basis, adjusting for certain charges and credits and losses from extinguishment of debt, net income for the second quarter of fiscal year 2019 was $0.57 per diluted share compared to $0.26 per diluted share for the same period last fiscal year. A reconciliation of GAAP to non-GAAP financial results is available in our second quarter press release that was issued this morning. Second quarter of fiscal year 2019 retail revenues were $296.4 million, which increased $9.9 million or 3.5% from the same quarter a year ago. For the second quarter of fiscal year 2019, same-store sales were up 0.3%. Retail gross margin as a percentage of retail revenues for the second quarter of fiscal year 2019 expanded by 160 basis points from the same quarter in the prior year to a record of 41.4%. The improvement in gross margin is primarily due to higher product margin across most product categories and continued focus on increasing efficiencies. As Norm stated, while we believe there are more opportunities to grow retail gross margin over time, we do not expect retail gross margin will improve year-over-year at the same pace and magnitude we've been experiencing over the last couple of years.

The mix of sales from the higher-margin furniture and mattress categories represented 36.3% of our second quarter of fiscal year 2019 retail product sales and 50% of our product gross profit. Retail SG&A dollars increased by 5.5% in the second quarter versus the same quarter in the prior fiscal year, while retail SG&A expense as a percentage of revenue deleveraged 50 basis points to 28%, primarily due to higher labor and store occupancy cost for new stores and an increase in the corporate overhead allocation.

Turning now to our credit segment. Finance charges and other revenues were a quarterly record of $88.2 million for the second quarter of fiscal year 2019, up 10.1% from the same period last year. The increase versus last year was due to a record yield of 21.3%, an increase of 260 basis points from last year, partially offset by a 27% decline in insurance commissions. As expected, insurance income declined over the prior year period primarily due to the decrease in retrospective commissions as a result of higher claim volumes related to Hurricane Harvey. It will continue to take several quarters of lower claim performance until we benefit from retrospective insurance commissions.

SG&A expense in the credit segment for the second quarter increased 14.3% versus the same quarter last fiscal year, and on an annualized basis, as a percentage of the average customer portfolio balance was 10.1% compared to 8.9%. The increase in credit SG&A expense primarily reflects the investments we are making to pursue our compelling recovery opportunity in increasing compensation cost and an increase in the corporate overhead allocation. Provision for bad debts in the credit segment was $50.5 million for the second quarter of fiscal year 2019, an increase of $1.2 million from the same period last year. The change reflects a greater decrease in the allowance for bad debts during the second quarter of fiscal year 2018 compared to the second quarter of fiscal year 2019, partially offset by year-over-year reduction in net charge-offs of $3 million. The bad debt allowance as a percent of the total portfolio at July 31, 2018, was 13.5% compared to 13.7% at July 31, 2017.

Interest expense for the second quarter was $15.6 million, which was a decrease of $4.5 million or 22.3% from the same period last year. This is the sixth consecutive quarter where our interest expense has declined sequentially and the lowest quarterly interest expense in the past 12 quarters as a result of continued deleveraging and reductions in our all-in cost of funds. For the second quarter, annualized interest expense as a percentage of average portfolio balance was 4.2% compared to 5.4% for the same period last year. Average net debt as a percentage of average portfolio balance was approximately 62% compared to approximately 72% for the same period a year ago. We continued to make progress on deleveraging our balance sheet, diversifying our sources of capital and reducing our all-in cost of funds. During the second quarter, by utilizing our warehouse facility, we redeemed our outstanding 2017-A Class B and C notes, which will help to further reduce our cost of funds. I am extremely pleased by the terms, investor demand and pricing of our recent 2018-A securitization, which we completed on August 15. Despite an approximately 80-point -- basis-point increase in the benchmark rates since our last ABS transaction, the all-in cost of funds only increased by 17 basis points when compared to our previous ABS transaction. ABS notes currently outstanding include all classes of our 2017-B and 2018-A notes. With the recent success of our ABL renewal and continued deleveraging, we do not expect to complete another ABS transaction during the current fiscal year. Our capital position continues to improve, and we remain focused on deleveraging our balance sheet, diversifying our sources of capital and proactively reducing our interest expense.

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

Thanks, Lee. We are extremely excited about the direction we are headed, and our strong second quarter results demonstrate the growing momentum in our business.

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

(Operator Instructions) Our first question comes from the line of John Baugh with Stifel.

Let's see, a few things. Could you first, on the Progressive commentary, would you deem the less-than-estimated performance or completely on internal execution on Conn's part or has there been anything that's changed from the Progressive side as it relates to LTO?

John, nothing has changed from the Progressive side of the house. It's a completely internal execution piece on our part.

Okay. And I think you mentioned you've already seen some execution improvement there or did I hear that -- or what precisely is the plan, what are you doing there?

Yes. What we did say in the script was we're confident the third quarter will get back above where we were in the second quarter. And it's really about -- as I talked about in the script, John, it's about people and executing on the process within the stores. As I'd shared previously, we get 600,000 declines annually within our store. There are more than ample opportunities for us to be able to capture that 10% balance of sale. It's a matter -- and by the way, we have districts that are very, very close to that 10% balance of sale as we sit here today. It's just a matter of us executing on a consistent basis and reducing that variability from our top districts to our bottom districts.

Okay. Switching gears a little bit. So your gross margin retail was outstanding and yet the categories that I think historically have had lower gross margins performed better and vice versa. So I guess, I'm trying to understand how that occurred. I understand you want to lift mattress and furniture sales from where they sit. And maybe you could go into the execution things there you touched on, a little bit more color, but I'm particularly interested in how the margin came out or where it came out given that shift?

Well, it's really a few things, John. Obviously, mattress and furniture are our highest-margin categories. But with the merchandising team and the efforts in the other categories, as I mentioned in the script, on the home office side, as we refresh that category, we were able to increase margins as we increased the number of SKUs and moved that entire category to more align with our better and best strategy. So we've seen improved margins in that category. And as we've added gaming, for example, that category -- or that product is accretive to the electronics category margin as well, so both of those things. And we continue, even within furniture and mattress, although the sales were down, the margins because of efforts we're doing with the products within those categories, we are seeing improvements in the margins there.

Okay. And then quickly, has there been any changes within your credit strategy in terms of approval rates or down payments? Or are you getting looser or tighter anywhere? Any changes?

John, it's Lee. No, look, as we've always discussed, we're always focused on ensuring that we maintain the risk level that we're comfortable taking. So I wouldn't say there's any -- we've never used the word loosening at all, nor tightening. We're just focused on maintaining the same risk level based upon our models working with KD, et cetera. So really there's no change at all.

We take the opportunity, John, on a regular basis, depending on how the portfolio's performance -- performing in different segments, be it geographies, be it new customers, existing customers, where we will adjust tightening and/or taking a little bit more opportunity, if the performance is there, that warrants -- that enables us to continue to feel comfortable that we're delivering that 1,000-plus-basis-point spread.

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

A couple of questions, if I could. Maybe first, starting with same-store sales. Clearly, you all are continuing to make progress there. A lot of moving pieces year-over-year and a lot of initiatives. I guess my first question would be, of all you have in place here in terms of merchandising, in terms of the funnel that you're working on, what, if anything, are you starting to see some real promise from? And what are you most excited about as you think about the next couple of quarters ahead here?

Well, as we talked about, Brad, in the script, and we tried to lay out on the home office category, the refresh of that category from the merchandising group, I would tell you, we believe speaks of what the opportunity is. When we turned that category around and have had 9 consecutive months now of positive same-store sales, we believe we have that opportunity to refresh major furniture subcategories of upholstery, dining and bedroom that will give us significant opportunities in the future. On the electronic side, the adding of the new products, the gaming, because of that, we were able to create -- have that category be positive same-store sales. If we had not had that product, we would have been slightly negative same-store sales in that category. And then the third piece would be retail execution. When you look at the variability that we have across our districts, very confident that we can improve there that will materially impact our performance from a same-store sales standpoint. And it's not about -- you're always going to have bottom districts and top districts, it's about reducing the range of variability from a performance standpoint that exists, especially when it's driven not by macro factors, but it's being driven by retail execution.

Great. And then, obviously, 3Q an unusual quarter that you're up against the Harvey comparison. I appreciate all the color from a guidance perspective of how you're thinking about those markets. Can you give us any color on how things have been quarter to date? And how Labor Day weekend was for you?

We don't give out intra-quarter stuff, as you know, Brad. But I will tell you, we feel confident with what we've guided to, that -- from a range on both the Harvey and the non-Harvey, that our range is appropriate with what we've laid out.

Great. And then as we think about the fourth quarter, do you think there is a similar magnitude of the headwind? Or how should we think about the Harvey comparison as we fine-tune our estimates for the fourth quarter?

Yes. I would say, directionally, at least, although we haven't obviously given fourth quarter guidance, the impact from a sales standpoint in the Harvey markets will be comparable to what we're estimating in the third quarter.

Okay, great. And if I could just squeeze one more kind of high-level question for how to think about modeling 2019 in. Clearly, you all have made a great deal of progress on the credit side of the business, now accelerating store openings. When we think about the growth rate of SG&A dollars next year versus this year, do you think, Lee, that you guys will be growing SG&A dollars more in '19 than in 2018, given that you have these 10 to 15 stores coming? Or are you lapping other expenditures, that maybe the growth rate of dollars is similar?

Yes. There's no question due to the new-store openings our dollars, due to that, will be up. Obviously, I talked about on the call, we do have increased corporate allocation falling through and that's due to increased stock comp and accrued compensation. So as we lap that, there may be a slowdown from that perspective.

Our next question comes from the line of Brian Nagel with Oppenheimer and Co.

So a couple of questions. I want to focus on the retail side of the business. First off, Norm, in your prepared comments, you talked about the divergence in performance between your top- and bottom-performing stores. I wanted to maybe dive a little bit deeper into that. Is that -- is there -- when you look at those cohorts, is there a geographic influence there or is it simply store by store? And if you look at the data, has the divergence grown more recently or has this been in place for a while?

To the first part of your question, Brian, it is not geographic in nature, nor is it new or existing markets, which is why -- I mean, it cuts across all, we have top performing in new markets and similar geographies close to one another as well as less-performing markets or districts close to it. So it's what gives us great confidence that it is an execution issue. And again, as I mentioned, this isn't a -- you're always going to have top and bottom, as you well know, Brian, it's about what that ranges from a variability standpoint and narrowing that range. And our belief is and my strong belief is that we have the opportunity to nail that range significantly. Now what I would tell you is, we've actually seen some improvement in that variability in recent months. But still, from my perspective, it's at too great of a level of variability for me to be comfortable with.

Got it. And then the second question I had, also obviously on sales. So you started to see retail sales improve. How much of a factor is pricing as we think about the drivers of sales going forward? So I look at your results, you've had this really nice trajectory in gross margins that very much persisted through the fiscal Q2. And you look at the category data and I understand that some of this is simply driven by those categories, but there's a trend there where it's weaker unit sales, higher prices. So I guess, as -- the question I have is as we look forward and then you pull your leverage to drive better sales, is pricing part of that discussion? Was there -- is there some discussion that maybe you have to be more sharper on price and lower prices in order to drive better sales?

It's really not, Brian. I mean, what we really look at and when we measure it is gross margin dollars. I would trade pricing every day of the week to get increase from a gross margin dollar standpoint, especially with the condition of where our margins are at. As you well know, Brian, our core customer at least, they don't have options, and we're competitive from a pricing standpoint with our products. We have not taken pricing in our different categories. Now what I will say is, as we've gone into, for example, into gaming or added new products, we're conscious of what products we're bringing in and what margin is associated with that to, wherever possible, make it accretive to the category overall. But we don't have, compared to traditional retailers, the same dynamic of price to margin that you see trade-off with our core customer.

Our next question comes from the line of Rick Nelson with Stephens.

I'd like to follow up on that gross margin question. Looking at the appliance category specifically, where there was flat growth but that category comprised a bigger part of your gross profit, you've had a mix shift of some sort. What exactly is driving that?

It's really not mix shift per se, Rick. A couple of things have happened there. It's really being driven by the tariffs, with the implementations, specifically, in the laundry side of the house. But there's a little bit on the refrigeration side as well. And when -- actually earlier this year, when the tariffs were pending or possible, we actually, from a purchasing standpoint, did a number of purchases at the lower-cost price that we're realizing those benefits today because we anticipated the tariffs being put in place. So that was an element of it. And frankly, we're estimating appliances for the quarter cost us somewhere around 100 to 120 basis points in same-store sales, because even though we have the higher ASP and a higher margin, the units were down because of the fact that pricing in that whole laundry category is up year-over-year. And we're seeing that not only within our business, but you're seeing that across the industry.

I got you. So as we think about same-store sales in the back half of the year, obviously, you've got lots of hurricanes, but any other puts or takes? I know, in the past, you've talked about immigration concerns. Do you think we have fully lapped that or is that a continuing headwind?

Yes, we've lapped that, Rick. We're not seeing any degradation there from an immigration standpoint from where we saw a year ago. We are -- from an appliance standpoint, we do expect, with the tariffs, to continue to see pressure from a unit standpoint within laundry and on the refrigeration side. Again, as I mentioned, we estimated in third quarter that to be 100 to 120 basis points impact. We expect that to continue in the fourth quarter. And those -- that is the primary element other than the lease-to-own opportunity that we have. And then retail execution.

And finally, if I could ask you, with store growth now ramping, looks like upper end of the guidance range that you previously reported and more stores coming next year, any early learnings? Anything you can share on your expectations for the economics of these new stores?

Rick, it's Lee. Look, we've been extremely pleased with our new stores out of the gate. And one of the things that we're very excited about, as we've talked about previously is, with our new stores, we're doing those only in existing states, using a cluster strategy, enabling us to leverage existing infrastructure and get the appropriate efficiency through our advertising, et cetera. So we're excited to be back into growth mode and, again, we'll post you guys as we go forward in that.

And are those stores expected to be dilutive initially and then start to contribute to your earnings? Or how do you see that unfolding?

A little bit dilutive at first. But as you know, the power of our model allows us to have a very short EBITDA payback, and we don't expect anything different as we go forward.

And even with the slower growth, we still see less than 12 months' EBITDA payback.

Our next question comes from the line of Bill Ryan with Compass Point.

A couple of questions. First, what is the look-back period for determining the retrospective commissions? And second, you mentioned on the call that, I believe your leverage against the portfolio is 62%. That's obviously been coming down. Is there target a level that you think that, that might approach before you may use some incremental cash flow towards other areas to -- for the shareholders? And then lastly, in relation to the appliance category, you did mention that there was some benefit to the margin on the appliance category by buying before the tariffs hit. Is that probably going to reverse out a little bit going into Q3 as well?

So Bill, it's Lee. Let me take your first question on the retrospective commission. So again, it really is a full bucket. So any losses that we incur to offset our ability to claim those retrospective commissions. So there really isn't a time period where it cuts off. Again, it's just a full netting of losses versus income. So hopefully, I have answered your question on that one.

Yes, thank you.

And then, I guess I'll go to the third question, with regards to the appliances...

Yes, on the appliance side, you're right, we will -- into the latter part of the third quarter, we will lap some of the benefits that we've got there on the prepurchases we did from an appliance standpoint. So we'll see some erosion, and by the fourth quarter, that will be completely gone. On the deleveraging...

Yes. And then, Bill, on the deleveraging question, we haven't actually put out a publicly stated goal. But as we've said on the actual conference call, we continue to be focused on continued deleveraging. Again, obviously, as you know, we are a company that has a core component that's our subprime financing, and we want to make sure that we have a very stable and solid balance sheet. So we just continue to deleverage at this point.

There are no further questions in the queue. I'd like to hand the call back over to Norm Miller for closing comments.

Thank you. I want to take the opportunity to thank our 4,500-plus associates in the company for their hard work and their contributions. I also want to thank you for your interest in our company. We look forward to sharing our results with you next quarter. Have a good day.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.