Conn's Q4 Earnings Improve Y/Y but Miss Ests - Analyst Blog

The consumer durable product specialty retailer, Conn's Inc. CONN, yesterday came up with fourth-quarter fiscal 2014 results, wherein its adjusted earnings soared 37% year over year to 74 cents per share. The improved bottom-line results were mainly driven by strong top-line growth and effective cost management. However, quarterly adjusted earnings fell short of the Zacks Consensus Estimate of 78 cents per share.

Consolidated revenues for the quarter increased 44.3% year over year to $361.1 million, primarily driven by solid performance at the company's retail segment and the new store model. However, it missed the Zacks Consensus Estimate of $363.0 million.

The company has two operating segments, namely Retail and Credit. The fourth-quarter performances of these two are discussed below.

Segment Discussion

Under the Retail segment, Conn's offers consumer durable products in the United States, including home appliances, furniture and mattresses as well as consumer electronics. The segment's total revenue for the quarter rose 44.7% to $302.1 million from $208.7 million in the comparable year-ago quarter, primarily aided by solid store performance.

Same-store sales (comps) for the quarter registered whopping growth of 33.4%. The company witnessed double-digit comps rise at every major category. Month-wise, Conn's comps for November, December and January increased 33%, 37% and 18%, respectively. January comps were adversely affected by a severe winter.

Retail gross margin for the quarter improved 370 basis points (bps) to 40.6%, primarily driven by solid top-line growth. Selling, general and administrative (SG&A) expenses as a percentage of sales leveraged 300 bps to 24.6%. Consequently, the segment's adjusted operating margin increased 680 bps to 16.3%. The adjusted operating margin excludes the benefit related to facility closures.

Revenues from the company's Credit segment grew 41.9% year over year to $59.1 million, mainly backed by higher average receivable portfolio balance outstanding. The customer portfolio balance increased 44.1% to $1,070.0 million from $743.3 million in the fourth quarter of fiscal 2013. However, the company registered an adjusted operating loss of $1.9 million for the quarter, against an operating profit of $13.6 million in the year-ago quarter. The loss was primarily due to a rise of $25.4 million in the provision for bad debts to $38.1 million.

Interest and fee income yield from the portfolio contracted 60 bps year over year to 18.2% in the reported quarter. However, on a sequential basis, fee income yield rose 40 bps. Further, Conn's witnessed a rise in delinquency rate (percentage of customer portfolio balance over 60 days), which increased to 8.8% from 7.1% a year ago and 8.5% in the previous quarter.

Fiscal 2014 Performance

Total revenue for the fiscal increased 38% to $1,193.8 million from $865.0 million in fiscal 2013. However, the top line missed the Zacks Consensus Estimate of $1,196.0 million. Adjusted earnings for the period came in at $2.57 per share, up 57.7% from fiscal 2013 earnings of $1.63. However, it fell short of the Zacks Consensus Estimate of $2.62 per share.

Liquidity Position

Borrowing outstanding under the company's asset-based loan facility as of Jan 31, 2014 was $536.3 million while it has an immediately available borrowing capacity of $157.9 million. Furthermore, the company may avail an additional credit facility of $155.8 million if its inventory and customer receivables increase to a certain level.

In a separate announcement, Conn's revealed that it has an additional $30.0 million credit facility, which increases its borrowing capacity to $880.0 million under the asset-based loan facility.

Fiscal 2015 Outlook

The company has reiterated its earnings guidance range for fiscal 2015. It continues to expect earnings in the range of $3.40–$3.70 per share in the fiscal while diluted share outstanding will be approximately 37.4 million. Currently, the Zacks Consensus Estimate for the fiscal stands at $3.56 per share.

Comps are anticipated to grow in the range of 5% to 10%, much lower than fiscal 2014 due to tough comparisons. Retail gross margin is expected in the band of 39%–40%. Moreover, store openings are projected to be between 15 and 20. Credit portfolio interest and fee yield will be approximately 18% while provision for bad debts is forecasted to be in the range of 8% to 10%. SG&A expenses as a percentage of sales is guided at 28%–29%.

Further, management revealed that its recently implemented modification in underwriting standards is paying off. Moreover, the delinquency rate has been declining since the fourth quarter-end and the company's credit recovery is gaining momentum.

A positive outlook for fiscal 2015 and encouraging remarks by management regarding the improving delinquency rate spread positive sentiment among investors, resulting in a 13% rise in the company's share price yesterday.

Other Stocks to Consider

Currently, Conn's carries a Zacks Rank #4 (Sell). However, some better-ranked stocks in the retail space that warrant a look include Spartan Stores Inc. SPTN, Etablissements Delhaize Fr DEG and The Kroger Co. KR. While Spartan Stores sports a Zacks Rank #1 (Strong Buy), Etablissements and Kroger have a Zacks Rank #2 (Buy).