Conn’s (CONN) Plummets on Lower Income Forecast, Declining Credit Portfolio Quality

Shares of The Woodlands, Texas, based Conn's, Inc. (CONN), fell sharply on Tuesday against a mixed market in stocks overall. Conn's stock was down $13.83 per share, falling 30.85%, to close at $31.00, on volume of 13,842,541 shares. The company reported that second quarter adjusted per share earnings have come in well below Wall Street expectations, and that delinquencies are rising across its lending portfolio.

Founded in 1890, Conn's, Inc. is a retailer who provides consumer financing for purchases of durable consumer products.
Its product lines include a variety of seasonal products, including lawn and garden equipment, room air conditioners and outdoor furniture, and especially home appliances through its Retail segment. The Credit segment provides financing options for its in-house credit program, as well as third party financing and a third party rent-to-own program. For the fiscal year ended January 31, 2014, the company had a $93.45M profit on total revenues of $1.19 billion. The company's stock trades on the NASDAQ.

For the second quarter, ended July 31, Conn's adjusted earnings were $.50 a share, down slightly from $.52 per share a year earlier. The results however missed Wall Street expectations, that had the company at $.75 per share for the quarter. Consolidated revenues meanwhile came in at $353 million for the quarter, up 30.4% from a year earlier, but still slightly below consensus expectations.

The bigger news came from the company's Credit segment. Credit segment operating income declined $7.7 million to an operating loss of $0.2 million. Meanwhile, the percentage of the customer portfolio balance that is 60 or more days delinquent increased 70 basis points, to 8.7% as of July 31, 2014. Provision for bad debts on an annualized basis was 13.9% of the average outstanding portfolio balance in the current quarter, and 11.1% on an annualized basis for the first six months of fiscal 2015.

According to Conn's chairman and chief executive officer, Theodore M. Wright, "Overall results were not satisfactory. Our credit operations ran into unexpected headwinds, resulting in portfolio performance deterioration...delinquency unexpectedly deteriorated across all credit quality levels, customer groups, product categories, geographic regions and years of originationâ?¦We now expect future 60-plus day delinquency to increase to levels above our historical highs in the third and fourth quarter of fiscal 2015."

The company also updated guidance for the full fiscal 2015 year, updating expectations in the range between $2.80 and $3.00 per share. Just before the start of the fiscal year, forward guidance had been set at between $3.80 and $4.00 per share. The revised guidance reflects the impact of an increased provision for bad debts, as well as the issuance of $250 million in 7.25% senior, unsecured notes last July.

Tuesday's news wasn't all bad, even though Wall Street chose to ignore it. As mentioned above, consolidated revenues were up 30.4% over one year ago. More significant however, the company announced that same-store sales were up 11.7% over one year ago, which follows in 18.4% increase for the same period a year ago.

Tuesday's drop was the third largest single day drop in the company's history, and the second worst for 2014. The single worst trading day took place in February, after the company similarly issued disappointing news in regard to its retail portfolio. On a year-to-date basis, the company's stock is down 60% in 2014.

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Published on Sep 3, 2014
By Kevin Mercadante

Copyrighted 2020. Content published with author's permission.

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