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Conn's, Inc. Reports Third Quarter Fiscal 2017 Financial Results

THE WOODLANDS, Texas--(BUSINESS WIRE)--Conn's, Inc. (NASDAQ:CONN), a specialty retailer of furniture and mattresses, home appliances, consumer electronics and home office products, and provider of consumer credit, today announced its financial results for the third quarter ended October 31, 2016.

"Our credit operation is already benefiting from the fiscal 2017 underwriting refinements. Initial indications are encouraging as Conn's experienced meaningful reductions in early stage delinquency and first pay defaults during the fiscal 2017 third quarter. In addition, we successfully implemented our Texas direct loan program ahead of schedule - it was fully operational across all 55 Texas locations by the end of October. As a result of the rollout, all of November's Texas originations were under the direct loan program, which improved the APR on new originations to over 27%, an increase in excess of 500 basis points compared to September. We expect the direct loan program, planned changes in other states, and changes to no-interest programs will increase Conn's overall yield by 600 to 900 basis points on new originations by the end of fiscal 2018," commented Norm Miller, Conn's Chairman, Chief Executive Officer and President.

"The recent enhancements to our underwriting model affected the third quarter's same store sales by approximately 1,000 basis points and were the primary drivers of the 10.1% reduction in same store sales. Adjusted for recent underwriting enhancements, same store sales would have been a decrease of 0.1%, buoyed by favorable trends across many categories including furniture and mattress, appliances, and consumer electronics. While the near-term reduction to retail sales was anticipated, we believe the long-term benefits of improving credit quality and performance will meaningfully increase Conn's future overall profitability. Slower portfolio growth, combined with the decision to shift long-term no-interest programs to Synchrony, impacted the 60-day delinquency rate for the quarter. The 60-day delinquency rate at the end of the fiscal 2017 third quarter adjusted for these items was 10.9% of the total outstanding loan balance, compared to 10.8% for the same period last fiscal year.

"The provision for bad debt for the fiscal 2017 third quarter benefited from improving portfolio performance, declining 11.4% from the same period last year, which represents the first year-over-year provision reduction in the past four quarters. Seasonality and a cohort of late-stage delinquency from originations prior to our underwriting changes are likely to impact credit results in the fourth quarter. The performance of new originations is encouraging as our turnaround initiatives take hold and are expected to benefit next year's credit results.

"In October, we closed our third ABS transaction since September 2015 and sold the 2016-A Class C Notes at a premium. With each successful transaction, Conn's has continually reduced its cost of funds in the ABS market. We expect further reductions to our borrowing costs as investors gain experience with the company's receivables and our credit performance continues improving.

"Conn's retail operation continues to perform well despite the significant impact underwriting refinements have had on sales. During the fiscal 2017 third quarter, retail gross margins improved 40 basis points from both fiscal 2017 second quarter and fiscal 2016 third quarter levels. The increase in retail gross margins is a result of improving product assortment, and warehousing and delivery efficiencies. For November, same store sales were down approximately 8%, primarily as a result of the recent underwriting refinements. The implementation of Conn's direct loan program in Texas has not meaningfully impacted retail sales, while it has started increasing yield.

"We remain focused on improving the performance of our credit operation and returning Conn's to profitability, while ensuring our retail business is well-positioned to compete in an evolving and competitive retail environment. It will take time for these turn-around initiatives to impact the company's financial results, but I remain confident we are headed in the right direction," concluded Mr. Miller.

Third Quarter Results

Net loss for the quarter was $3.8 million, or $0.12 loss per diluted share, compared to a net loss for the prior-year quarter of $2.4 million, or $0.07 loss per diluted share. On a non-GAAP basis, adjusted net loss for the quarter was $2.5 million, or $0.08 adjusted loss per diluted share, which excludes charges and credits. This compares to adjusted net earnings for the prior-year quarter of $0.6 million, or $0.02 adjusted earnings per diluted share, which excludes charges and credits and loss on extinguishment of debt.

Retail Segment Third Quarter Results (on a year-over-year basis unless otherwise noted)

Total retail revenues were $308.4 million for the third quarter of fiscal 2017, a decrease of $14.7 million, or 4.5%, primarily a result of the decline in same store sales partially offset by new store openings. Sales were negatively impacted by underwriting changes made in the fourth quarter of fiscal 2016 and during fiscal 2017. For the third quarter of fiscal 2017, retail segment operating income was $33.9 million, and adjusted retail segment operating income was $35.9 million after excluding net charges of $2.0 million primarily associated with impairments from disposals, legal and professional fees related to our securities-related litigation, charges for severance and transition costs due to changes in the executive management team.

The following table presents net sales and changes in net sales by category:

Three Months Ended October 31, % Same store
(dollars in thousands) 2016 % of Total 2015 % of Total Change Change % change
Furniture and mattress $ 98,898 32.1 % $ 105,735 32.7 % $ (6,837 ) (6.5 )% (13.5 )%
Home appliance 85,785 27.8 $ 86,434 26.8 $ (649 ) (0.8 ) (6.5 )
Consumer electronics 65,670 21.3 70,263 21.8 (4,593 ) (6.5 ) (9.9 )
Home office 22,747 7.5 26,108 8.1 (3,361 ) (12.9 ) (15.5 )
Other 4,956 1.6 4,582 1.4 374 8.2 (3.9 )
Product sales 278,056 90.3 293,122 90.8 (15,066 ) (5.1 ) (10.6 )
Repair service agreement commissions 26,354 8.5 26,038 8.1 316 1.2 (6.2 )
Service revenues 3,623 1.2 3,474 1.1 149 4.3
Total net sales 308,033 100.0 % 322,634 100.0 % (14,601 ) (4.5 ) (10.1 )%
Other revenues 337 416 (79 )
Total revenues $ 308,370 $ 323,050 $ (14,680 ) (4.5 )%

The following provides a summary of items impacting the performance of our product categories during the third quarter of fiscal 2017 compared to the prior-year period:

  • Furniture unit volume decreased 13.7%, partially offset by a 6.8% increase in average selling price;
  • Mattress unit volume decreased 7.3%, partially offset by a 4.8% increase in average selling price;
  • Home appliance average selling price decreased 6.0%, partially offset by a 5.6% increase in unit volume. Total sales for laundry increased 3.2%, cooking decreased 7.0%, and refrigeration decreased 2.0%;
  • Consumer electronic unit volume decreased 11.8%, partially offset by a 6.9% increase in average selling price. Television sales decreased 5.7% as unit volume decreased 11.6%, partially offset by a 6.7% increase in average selling price; and
  • Home office unit volume decreased 12.2% and average selling price decreased 1.0%.

Credit Segment Third Quarter Results (on a year-over-year basis unless otherwise noted)

Credit revenues decreased 5.2% to $68.4 million. The decrease in credit revenue was the result of lower credit insurance commissions due to higher claim volumes in...