Conn's Q4 Earnings Conference Call: Full Transcript
Good morning and thank you for holding. Welcome to Conn's Incorporated conference call to discuss the earnings for the quarter and fiscal year ended January 31 2016 my name is Jonathan and I'll be your operator today. During the presentation all participants will be in a listen-only mode after the speakers remarks you will be invited to participate in the question-and-answer session. As a reminder, this conference call is being recorded. The company's earnings release dated March 29, 2016 distributed before the market open this morning, and slides that will be referenced during today's conference call 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 the Securities and Exchange act of 1934. 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, Mike Poppe, the Company's COO; and Tom Moran, the Company's CFO.
I would now like to turn the conference call over to Mr. Millar. Please go ahead, sir.
Norm Miller: President and Chief Executive Officer:
Good morning and welcome to Conn's fourth quarter fiscal 2016 earnings conference call. I will begin the call with an overview and then Mike Poppe will discuss our retail and credit performance for the quarter. Tom Moran will complete our prepared remarks with additional comments on the financial results and our balance sheet.
The key points of my comments are highlighted on slide two in the earnings call slide. Since becoming CEO in September 2015 I have been fully involved with our operations, I have visited a number of our stores, distribution centers as well as our call centers. I have interacted with many of our employees, vendors, lenders and shareholders. As I engaged with our different stakeholders I find that I am increasingly confident in our differentiated business model our growth opportunity and most importantly the value we provide our customers.
Conn's has a significant market opportunity which we believe will allow us ultimately to become a national retailer.
The company's key initiatives are centered around our commitment to executing on this differentiated business model which delivers unique value to our customers. As a result we are building the foundation to support not only fiscal 2017 growth but also a long-term plan. Fiscal 2016 was a challenging year and we're not satisfied with the financial results we issued this morning.
However the company continues to produce strong adjusted EBITDA results delivering nearly $150 million during fiscal '16 consistent with prior year's performance. We continue to work our way through the significant growth and new customers we attracted during fiscal 2014 to fiscal 2015. Year-over-year improvements and our 60 plus delinquency rate have been slow to develop. I share and our shareholders frustration as we expect to be see more rapid improvement this year but as we have stated in the past, growth in our portfolio have slowed masking the underlying improving trend.
Despite fiscal 2016 decline in profitability I am encouraged with direction we are headed we are working hard to produce consistent and predictable earnings. We have learned valuable lessons about managing risks while growing our brand with new customers. I am pleased Conn's had successfully reentered the ABS market and most recently completed a rate of transaction our first in 2012.
We have developed the plan that will put Conn's back on a path to sustainable long-term profitability and growth in the coming quarters. I'd like to use my portion of this morning calls to discuss the decisions and strategy we are implementing to not only improve our recent performance but also positioned Conn's for long-term success. We have a strong retail strategy and continue to execute against our plan in the fourth quarter of fiscal 2016 the retail segment expanded with new store growth successfully opening two new stores bringing the total for the year to 15 stores. Our stores have robust economic typically achieving four wall EBITDA payback in six month or less.
Retail gross margin improved 40 basis points year-over-year to 36.1%.
The same-store sales excluding the impact of our strategic decision to exit video game product, digital cameras and certain tablets were up 3.6%. Our strategy to drive the furniture and mattress business is continuing to pay off with increase sales in these category, and benefiting retail gross margins on the sales mix shift.
We continue to believe 45% of our product sales can ultimately come from furniture and mattresses and we are making progress towards this goal.
For fiscal 2016 furniture and mattress sales increased by almost 21% and representing 31% of our total sales. To implement our successful retail strategy on a national level Conn's need the scalable infrastructure to support its growth. Over the past two years we have enhanced our store layout merchandising and marketing strategy distribution network, collections systems, compliance organization and access to capital.
During fiscal 2017 we will continue making improvements to additional strategic investment in IT, credit and people. We expect to leverage these additional expenses to improve performance execution and gross margins. Before I review some of our main operating initiative for fiscal 2017 I would like to put our recent growth in perspective.
In just three years Conn's has expanded from 68 stores in only three states to 103 stores in 12 states. The portfolio has more than doubled in size as revenues have grown 86.5% from $865 million in fiscal 2013 to over $1.6 billion at the end of fiscal 2016. To appropriately manage an increasingly large and complex organization we are upgrading our IT infrastructure and are enhancing our data analytics capabilities.
The company has hired and integrated a number of key Executives and enhance talent at all levels of the organization to help support growth. During the upcoming year we will continue to invest in attracting entertaining quality talent in all areas of the business including expanding our credit risk team. Over the past few years we have proactively updated our under writing policy and we'll continue to make appropriate adjustments to manage risks as result of changes in economy customer behavior the regulatory environment in our business. Since much of future growth is rely on new customers we have to ensure we are accessing credit risks appropriately.
In the fourth quarter of fiscal 2016 we implemented the first phase of our early pay default scoring model. While early indications are positive we need more time to ensure the changes are delivering the expected results. We are also making additional enhancements during the fiscal 2017 first quarter to reduce the credit risks specifically related to new customers. We are also optimizing our underwriting model and I have identified opportunity that will increase origination to some existing customers.
We expect the moderate effect on sales as a result of these changes as well as those we implemented during the fourth quarter.
Additionally we have implemented changes to our no-interest programs to improve portfolio yield and returns on capital. All long-term no-interest programs are being offered to as of early February. We do not expect this change to have a significant impact on profitability, but it will improve returns on capital as we recapture the capital invested in similar accounts on our books today.
Additionally we are removing no interest program eligibility for certain higher risk customers. We are not anticipating a meaningful impact on sales as a result of these changes. Overtime though we expect these changes will improve our yield by approximately 150 basis points. Credit is fundamental part of our business model we know we must improve our performance in this segment and maintain an appropriate balance between retail growth and credit risk.
While we focus on executing the initiatives I have discussed we will reduce our store opening plan this year to 10 to 15 new stores with long-term expectation to grow revenues 10% to 15% per year. Finally the Company continues to have many talented individuals to the organization. We've grown our employee base by 66% over the past two years.
We will continue to add dedicated Associates as well as motivated leaders to execute our plan. Conn's Associates are one of our most valuable assets, I'd like to thank all of them for their hard work and dedication day in and day out. Let me conclude my prepared remarks by saying we are focused on moving forward to capitalize on our long-term potential. We have created a path forward that positions us to execute our growth strategies while reducing risk and enhancing shareholder value.
I will now turn the call over to Mike.
Michael J. Poppe: Executive Vice President and Chief Operating Officer:
Thank you, Norm. Starting with our retail performance, same-store sales excluding the excited product categories were up 3.6% for the quarter driven by furniture and mattresses. Strength in furniture and mattresses is partially offset by softness in home appliances and consumer electronic sales.
As we show on slide 3, of the earnings deck total sales growth for the quarter was driven by furniture and mattresses up 28% and home appliances up 5%. These are our two highest margin and best credit quality product categories.
In addition sales of repair service agreements were up 24% due to increased product sales mix driven higher average selling price of these agreements an increase retrospective commissions. On the other hand we experienced sales declines from categories where we made the strategic decision to exist certain products. Including Tablet, which are part of home office and video game product and digital cameras which are part of consumer electronics.
Same-store sales for fiscal '16 were up 0.5% in line with our full year guidance. Retail gross margin increased over the prior year due primarily to the increase proportion of sales from repair service agreement. Slide 4, in the presentation recap product gross margin which were down 60 basis points as a percentage of product revenue. This was driven by margin rate declines in furniture and mattresses and home appliances.
These declines were due primarily to investments in price to drive volume and exit low performing lower price furniture products and some one time inventory handling costs. Partially offset by the favorable product sales mix shift toward higher margin furniture and mattress category. Consumer electronics margin rates improved during the quarter benefiting from a sales mix shift, the higher end TVs which delivered better margins and the elimination of low margin gaming equipment and digital cameras.
From a marketing perspective, we continue to invest in digital marketing including testing new email campaigns. Additionally given the volume of direct mail we have said over the past couple of years we are completing additional analysis in testing to improve the effectiveness and efficiency of our program to ensure we are allocating our marketing spend properly.
Inventory increased year-over-year as we expanded our assortment and in-stock levels for furniture and open new stores. We significantly reduced inventory levels during the fourth quarter compared to end of the third quarter and are comfortable that our sales and purchasing plans will bring inventory inline in early fiscal 2017 without impacting margins.
During the past quarter we opened two new stores in Tulsa and Albuquerque markets. We have opened three new stores so far in the first quarter to kick off our plans to open 10 to 15 new stores this year. On slide 5 is the average FICO score the portfolio for the last four years. The portfolio has been in a narrow range of credit stores and remained there last quarter.
The FICOs score of all originations in Q4 fiscal '16 was 614 compared to 611 in Q4 in the prior year.
As Norm noted, during the fourth quarter we began implementing our new early pay default model and changes that didn't filed customer underwriting. We are in the process of completing our updated origination scoring model and strategy, we expect to test the new model and strategy during April before completing the implementation. In late March and early April we are making adjustments to our origination policies. We have identified opportunities to reduce risks primarily related to new customers.
Changes will result in modifying our credit limits down payments and cash option eligibility to reduce risk for some customers while declining other unprofitable customers.
Additionally we have identified some profitable segments of existing customers with FICO scores over 500 that will start approving. The combined impact of these and the fourth quarter changes is expected to reduce sales around 4%. The goal of our ongoing underwriting analysis is to provide enhance segmentation of the application population to allow us to more precisely isolate low performing segments to populations, and identify additional pockets of profitable customers to improve.
We will continue to monitor portfolio performance and make prudent underwriting adjustments when appropriate. Portfolio delinquency continues to show stabilization, slower portfolio growth is benefiting the underlying performance of the portfolio, but has a negative effect on the reported delinquency in charge-off rates.
First quarter of fiscal '17 delinquency is expected to decrease seasonally. February greater than 60 day delinquency was down from January to 9.3%. The portfolio had grown at the same pace as it did in the prior year. The 60 plus delinquency rate would have been at least 20 basis points lower than reported February.
While still higher than a year ago slide six, shows that the existing customer mix trends and origination has flatten down.
It is important to note that we typically see an increase in repeat customers transactions during the fourth quarter. Looking at net charge-off performance the rate for the quarter was higher than the prior year due largely to the slower portfolio growth. Which impacted charge-off rate by about 80 basis points. We remained focused on delivering outstanding value and a great experience to our customers by continuing to improve execution in our retail and credit operations.
Now I will turn the call over to Tom Moran. Tom?
Tom Moran: Executive Vice President and Chief Financial Officer:
Thanks Mike. Adjusted diluted earnings for the three months ended January 31, 2016 were $0.11 per share this excluded net charges of $3.9 million or $0.08 per diluted share on after tax basis from a sales tax auto reserve legal and professional fees related to the exploration of our strategic alternatives and securities related litigation.
For the retail segment of the business; total revenues for the fourth quarter and fiscal 2016 were $376.9 million which was in increase of $25.3 million or 7.2% versus the same quarter a year ago. This growth reflects the impact of a net addition of 13 stores over a year ago with negative same stores sales of 1.7% including the impact of the exited product categories. We want to call your attention to the change we made during the fourth quarter of fiscal year 2016 in our accounting presentation for delivery transportation and handling cost.
Under the new method these cost are included in cost of goods sold where as previously they were presented separately as an operating expense. We believe that including these expenses in cost of goods sold better reflects the cost of generating related revenue and results in more meaningful presentation of retail gross margin. This change also enhances the comparability of our financial statements with many of our industry peers.
We have also revised our retail gross margin calculation to include service revenues as well as cost of service part sold. We have applied both of these changes with respectively. Retail gross margins improved by 40 basis points versus prior year to 36.1%. This improvement was driven by the impact of repair service agreements which benefited from higher retro or backend payments as well as higher average selling price on the front end due to mix.
Our long-term retail gross margin goal on a revised basis of presentation is 39%. We have continued delivering year-over-year improvements and this goal is achievable considering the following: our increasing sales of furniture and mattress, which have a higher margin; our decreasing share of revenues from lower margin small electronic and home-office; and improving warehouse utilization.
Slide 7 of the earnings presentation shows retail costs and expenses. Starting with the top row, we show that cost of goods including warehousing and occupancy costs leveraged by 20 basis points as a percent of total retain revenue, declining to 63.8%. This improvement resulted from the drivers as we just discussed for retail gross margins.
Retail SG&A was 23.2% for the quarter compared to 22.9% for the same period a year ago. The 30 basis point increase was driven by the impact of new store openings, which drove the 40 basis point increase in occupancy and contributed to the 40 basis point increase in advertising. Those increases were partially offset by a 30 basis point decline in compensation and benefits on store payroll leverage.
Taking a look at the credit segment, finance changes and other revenues were $79.9 million for Q4 of fiscal 2016, up $4.8 million or 6.4% versus Q4 of last year. This was driven by a 17.6% increase in the average balance of the portfolio, partly offset by a decline in interest income and fee yield.
Drivers of that decline included: first, the introduction of 18 and 24 month equal payment no interest finance programs beginning in October of 2014 to certain higher credit quality borrowers; second, a higher provision for uncollectable interest; and third, our discontinuation of charging customers certain payment fees.
SG&A expense in the credit segment for the quarter grew 22.5% versus the same period last year, driven by the addition of collections personnel to service the 17.6% year-over-year increase in the average customer portfolio balance, together with anticipated near-term portfolio growth.
Credit SG&A as a percentage of average total customer portfolio balance de-levered by 30 basis points versus last year. Provision for bad debts for the three months ended January 31, 2016 was $64.5 million, an increase of $6.4 million from the same prior year period.
Key factors in determining the provisioning for bad debt included the following: first, the 17.6% increase in the average receivable portfolio balance, a 5.4% increase in the balances originated during the quarter compared to the prior year quarter, an increase of 20 basis points in the percentage of customer accounts receivable balances greater than 60 days delinquent to 9.9% at January 31, 2016 as compared to the prior year period, and the balance of customer receivables accounted for as troubled debt restructurings increase to $117.7 million or 7.4% of the total portfolio balance.
As a result of these factors, the provision for bad debt as a percent of the average portfolio balance was 16.6% compared to 17.6% in the fourth quarter of last year.
For the fiscal 2016 fourth quarter, interest expense increased by $14.5 million year-over-year, driven largely by our re-entry into the ABS market, which increased the average debt balance outstanding and contributed to an increase in the effective interest rate.
For the quarter, interest expense as a percent of the average portfolio balance was 6.2% with average debt as a percent of the average portfolio balance of approximately 77%.
We view the higher borrowing costs associated with our ABS transaction as a temporary cost of reenter into this market this will give us a more diversified capital structure to support the growth of our business.
As we become a repeat ABS sure within establish performance record we expected our borrowing cost in this transactions will improve in the future as they have for other companies that have access this market. Turning now to balance sheet and liquidity inventory was up 27% to last year and increased year-over-year as we expanded our assortment and in stock levels for furniture and the product mix shift over the furniture which has slow returns as well as the impact of new store openings.
As Norm touched on earlier in the call last week we closed another securitization transaction announced on March 14 2016 we issued two classes of assets of weighted asset back fixed rate notes with the Class A notes rated as investment grade by the face amount of the notes issued was approximately $494 million on an aggregate outstanding customer receivables portfolio balance of $705 million.
We received upfront proceeds of approximately $478 million net of transaction cost and reserves. The notes have an all in cost to funds of approximately 7.8% after considering all underwriting discounts and expenses. The Class C notes and Class R notes are currently being retained by a subsidiary of Conn's and maybe issued in the future.
Looking at slide 8 in the presentation. Our liquidity and capital flexibility has improved substantially following the ABS transaction which we closed earlier this month. On a pro forma basis reflecting the completion of this deal as of January 31 2016 we would have had a $160 million in cash $125 million in ABL net availability and an additional $684 million in ABL committed growth capacity.
During Q4 we repurchased 4 million shares of common stock for $100 million this brings total share repurchases for fiscal '16 to 5.9 million shares for a total of $151.6 million.
At this point I'd like to turn the things back over to Norm for some final comments.
Thanks, Tom. I'd like to take just a few minutes before we open it up to questions, just to review highlights of our performance which severs as the foundation for our long-term growth plan, and it's showed on slide 9, in the earnings call slide.
During the past fiscal year we've delivered positive same-store sales excluding exited categories. Our trends in delinquency have stabilized due to changes we have made in underwriting and collections. We continue to build a diversified capital structure towards successfully completed weighted ABS transaction and our leveraging () for a portion of our no interest financing which will reduce capital requirements while improving returns.
We are modestly lowering growth plans for the business to focus on improving our retail and credit execution and improve our infrastructure to support our longer-term growth opportunity.
Finally the business continues to reflect strength in key areas including solid store economic and stable adjusted EBITDA results delivering nearly a 150 million annually for the past two years. All of these actions give us the stable foundation we need, to support future profitable growth.
I'd like to close by recognizing Theo Wright, our Non-Executive Chairman who intends to retire from our Board of Directors at the end of this current term.
Theo's departure is part of a long plan leadership succession develop by the Board, which included my appointment as CEO and President this past September, and was based on his desire to devote more time and attention to other personnel and business interest. We are deeply appreciative of Theo's many years of service to Conn's as a Board member and as Chairman and CEO.
We are now happy to open it up for questions.
Question & Answer
Certainly. [Operator Instructions] Our first question comes from the line of John A. Baugh from Stifel. Your question please.
John A. Baugh: Stifel, Nicolas & Company, Inc.:
Thank you. Good morning, and thanks for taking my questions. Just a couple of things quickly.
I noticed the approval rate was down, I think, year-over-year from roughly 45% to 40%, and that was at the end of January or the January quarter, and some of these changes I think you have mentioned that will drive a 4% drop in sales, or made I think more later than that. So can you correct me if I am wrong on that, and it looks like when you take that drop in approval rate times the increase in applicants, you actually had a net approval decline of about 4% in the January quarter account. So I wonder if I get all that math right, and what the implications are for approval rates going forward.
Michael J. Poppe:
So there were, to your point, John, there were two factors. You pointed out one and it was only in for part of the quarter and that would be underwriting changes we made around thin files and beginning to test in our early pay default models. And then second was we talked about last quarter, the marketing change we made to drive increased application volume and saw a lot of application volume increase through the web, which has a higher decline rate, lower approval rate than our in-store application.
So, part of it just had to do with the source of the application growth.
And I will say we are seeing some general weakening from across the credit performance from a customer's standpoint, a softening I would depict it as across all segments of customers. But the significant portion is the increase from a web standpoint point versus the in-store applications.
John A. Baugh:
Yeah, and Norm, that seems to match, I guess, here again, doing the math right. And I know you are making a change prospectively moving Synchrony type business back out. But looks like your average FICO score was relatively unchanged year-over-year and if I'm not mistaking, your brining on of Conn's books higher FICO score customers during that period.
Does that speak to some general weakening of these existing customer in the portfolio since we originated?
If you look at this history from a FICO score standpoint, we did see a benefit this year by a couple of points from the movement of bringing those high FICO score customers on books. But if you look historically, I mean, it affects it by 3 or 4 to 5 total points at the end of the day. But that's not the material driver that's driving that weakness.
John A. Baugh:
Okay. And then just two other quick ones if I could, could update us on the payment rate covenant and sort of where we sit on that? I know seasonally it gets better in April quarter, but just a broad view on that. And then, I noticed the re-age balance was up almost 50% year-over-year and the portfolio growth was obviously less in that.
Were there any changes in the re-age policy? Thanks again.
Michael J. Poppe:
Yeah, from a payment rate standpoint, we were in compliance in the fourth quarter and in fact season, we would expect to see the normal seasonal -- so, payment rate in the fourth quarter was just a little over 4.5%. And then from a re-ageing standpoint, no changes in our re-ageing policies or practices to speak of, and from a seasonal standpoint it kind of follow the normal seasonal pattern just has to do more with attracted delinquencies have been elevated for a period of time here.
John A. Baugh:
Thank you John.
Thank you. Our next question comes from the line of Brad Thomas, from KeyBanc Capital Markets. Your question please.
Brad Thomas: KeyBanc Capital Markets:
Yeah, hi Good morning and thank you for taking my question. My first question is on new store productivity you made some comments about it in your prepared remarks what I could I was hoping you could just give us an update on how you are thinking about new store productivity from revenue perspective given the current underwriting policies and the markets that you'll be entering and then secondly from a bigger picture perspective actually we'll be thinking of new stores is being something that could be additive to earnings in that first year is that something that it is diluted and if so could you quantify? Thank you so much.
Sur Brad. First if you look at our new store sales with some of the underwriting changes that we made as well as we have slightly altered our grand opening schedule plan we spread out over more a month in fiscal year '16 versus '15. Now we feel our first year monthly sales on new stores averaging about 780,000 in fiscal '16 versus about 830,000 for stores opened in fiscal year '15. As we implement some additional underwriting changes for new customers we would expect to see that come down to some degree.
However having said that we're most of the new stores that we're opening the 10 new stores will be within existing markets if you will. So will -- a number of those customers will be existing customers that will come into those stores within the market place as well, and our expectation is that from our four wall EBITDA profitability standpoint we don't expect the material difference from a profitability in return standpoint economically it may move it a month or two but still very, very strong store economic.
Michael J. Poppe:
Yes, we haven't seen that EBITDA payback period moved meaningfully it stayed within that three to six months range we've seen historically and then I just add long-term we still expect the store revenue potential to be similar to what we think today it's just the time to get there may be slightly longer.
So be in a little more cautious with new customers to ensure that we are balancing from a credit risk standpoint appropriately.
Michael J. Poppe:
The other thing we are doing from an economic standpoint with new stores is the opening this year are focusing on existing markets so that we leverage the existing distribution and then it's more efficient from an advertising perspective as well.
Great, that's helpful, and then you obviously referenced some investments that you will be making in IT and some other areas. I guess could you give us some examples of whereas IT investments could start to give you some benefits to the customer, and to the extend. You want to quantify what investments you are making as that's important for the P&L any color will be appreciate. Thank you.
Absolutely Brad, we are anticipating to invest about $5 to $7 million over the next 12 to 18 months as I have mentioned in three primary areas, credit where we will be investing an additional staffing to assist with building more sophisticated modeling, forecasting, monitoring capabilities.
From an IT standpoint, investing in both people and systems to enhance our business capabilities and really improve from a customer experience standpoint, and build out the infrastructure and make ongoing enhancements as well from a compliance standpoint from an IT perspective. And lastly, the third element was HR. We're looking to build the team up, we need to enhance our recruiting, our retention and leadership development capabilities to ensure that as we look forward into fiscal year '18 and beyond, we have that foundation and that infrastructure in all three critical areas that will enable us to accelerate or increase our growth plan.
Great. Thank you.
Thank you. Our next question comes from the line of Peter Keith from Piper Jaffray. Your question please.
Good morning guys. Actually this is John on for Peter, thanks for taking our questions. First off, I guess looking at your interest expense for fiscal '17, it looks like the last couple of quarters you have been running around about an 8% rate. Are there any parameters you can provide for this full year and is that kind of roughly in line with what we should be expecting or any detail you could give there?
Yes, the way you can frame up our interest expense really going forward is just think about the debt that we will be carrying as a percent of our average customer portfolio balance. So just the leverage figure which we cited in Q4, which was fully reflective of moving into the ABS inclusion in our structure. So we had that ratio of about 77%.
So if you look at that and then look at the rates that we have on the different buckets of our financial structure, the ABLs, the high yield notes and then the ABS as we're disclosing, the cost funds as we go into it, you can sort of build a portfolio of what our debt looks like and that's probably a good way if you need to estimate our interest expense, you will need to have an assessment of where you think the portfolio is going to go, but that gives you the pieces to build it up.
Okay. And then I guess my second question is as far as with these pricing investments, I guess you guys made in furniture and mattresses and then also in appliances in the fourth quarter, I know that impacted the product margins. Do you feel at this point now you're competitively priced and was that kind of a one-time thing you think in the fourth quarter, do you expect the pressure on margin to continue as we go forward to next several quarters?
We don't anticipate that similar pressure on margin continue here at least over the next several quarters. We feel we're very competitive from a pricing standpoint and some of the things we did eliminate some SKUs and changed some SKU assortments, and exiting that from a clearance standpoint to get those exited SKUs out is really what drove as much of that margin decline as anything, but that's an one-time, we don't that see going forward.
Okay, great. And then just one last quick one, on the residual from your first transaction, do you have any update there on a potential sale on all or part of that residual?
Michael J. Poppe:
Yeah, given the volatility there's been in the capital markets here in the first part of the year and in the ABS market and the way that spread, has widened, it now would not be conducive to trying to effectively market a residual and in fact we and several other issuers have even retained subordinated trenches of bond offering just because of the price widening of spreads and pricing in the markets recently.
Now having said that so the performance our first ABS transaction has continue to perform exactly what we very close to what we have laid out, and as the residual holder to February we received a $26 million of cash flow and as a servicer an additional $28 million for a total of $54 million. So the fact that residual has performed as we have laid out was very helpful as we went into the market for the rated transaction to build confidence and increased our investor base going forward because of our performance with that first transaction.
Great. Thank you good luck for the rest of the year.
Thank you. Our next question comes from Brian Nagel from Oppenheimer.
Brian Nagel: Oppenheimer:
Hi. Good morning, and thank you for taking my questions. So first question, I know you give a lot details in your prepared comments but as we look at the fourth quarter results here, and particularly the credit metrics on your P&L progression. Is there anything in there that we should view as more or less one time in nature as we think about this trajectory for a mass provision going into the next year.
Michael J. Poppe:
In the fourth quarter no nothing particularly one time in nature. I think which are the thing is as we made the underwriting changes this past year and the additional changes we are making it takes time for that to season into the portfolio, along with the slower growth we saw in the later part of this year and the lower projected growth pace this year will change the customer mix and one of the biggest drivers of losses is just a the customer mix and the number of new customers being originated in the portfolio given that they have a loss rate that's nearly two times that of the repeat longer term repeat customer
Got it thanks Mike. And then second question with respect to the securitization so Conn's has recently completed securitization you talked a little bit about that. So my question is maybe a couple of parts but with the likely timing and I understand lot of this market depend in such but what's the likely timing of the next securitization and then as we're looking as investors were looking at this securitization what should we look for expect to see in terms of indications that the strategy is working the securitizations are becoming easier less expensive for Conn's?
Well I initially start, we expect to execute one to two additional securitization before the fiscal year is over some of that will be depended in some parts of what's happening from an overall capital market standpoint and to the second part of your question concerning what look at to determine whether or not the strategy is working longer term on our entry into ABS market would be what at the end of the day what our cost are and the cost to borrowing and leverage amounts are going forward with future transaction clearly as we entered into the market with the second transaction we had a very different capital market than we did last August and September with the first securitization but even with that more volatile capital market we were able to improve from a performance standpoint all-in costs at the end of the day. And longer-term, it would be our exception to drive our all-in cost, not down to the ABL cost, if you will, but in that 4.5% to 5% range would be where we would expect longer-term.
Michael J. Poppe:
And some other bigger accomplishments in this transaction is because one, it was rated, we did get the investment grade rating, that opened up the investor base to a lot of different investors that wouldn't participate in an unrated transaction and we attracted a very different longer-term and money manager investor base versus the predominantly hedge fund investor base in the unrated transaction. And then when you look at the spread on our deal versus similarly rated transactions for others in the recent last couple of months, our pricing compares very favorably to these other transactions. Everybody saw a significant spread lightening and some more than -- had a bigger impact than even we saw.
Got it. And just one more quick question, if I could, different topic but I don't recall if you have addressed it in your comments or not, but any differences or any further shift in the performance of the markets that are more oil-depended for Conn's?
John A. Baugh:
We've continued to see a relative stability in that performance. We keep watching it closely, but no real trend changes in that that we've seen.
Okay. Thank you.
Thank you. Our next question comes from the line of Rick Nelson from Stephens. Your question please.
Rick Nelson: Stephens:
Thanks, good morning. Just to follow-up on that question about the energy market, your comments about kind of relative stability, is that true both from a sales standpoint as well as credit standpoint or they are different?
Michael J. Poppe:
Yeah, that is true from both perspectives. We haven't seen any signs at this point in delinquency that the energy-impacted markets are performing any differently than our other markets and I am speaking specifically to sales.
Having said, Rick, it's hard to -- on the delinquency standpoint, we really believe that unemployment is a better trend that would indicate where we would have real concern from a delinquency standpoint in those markets. So we monitor unemployment pretty closely and we haven't seen significant degradation there. But that's what we are on the watch out to determine if we're going to see softening interest there.
Thanks for that color. Also, like to ask you about buybacks. After the first securitization, it was fully capped up, if you could talk about where you are now with the authorization and the liquidity or financial wherewithal given some of your bank kind of requirements or what you could potentially do?
Yeah, currently, we finished short term, we are not anticipating any future buybacks certainly over the next couple of quarters. And really it's just on the conservative nature of -- from a capital standpoint, liquidity standpoint, with the volatility of the markets as we went out with this second ABS transaction, we are being very cautious and ensuring that we have ample cushion from a liquidity standpoint and a capital standpoint to be able to grow the business.
Okay, thanks a lot, also I finally if I could ask you the same-store sales guidance that you have provided. Is that where you are tracking to date?
For the month of March it's actually we are tracking a bit softer than what we had provided from an overall guidance standpoint we expect March same-store sales to be down low to mid-single-digits driven by couple of things. First, the underwriting changes that we had discussed both () implemented in the fourth quarter and some impact on the additional underwriting changes that we are implementing here in the month of March.
Secondly Easter holiday where our stores were closed actually fell in March this year versus April last year, and that's about a $4 million impact, and lastly the month started off from a macro standpoint just softer but having said that in the past two weeks we've seen significant improvement from the sales standpoint even with the underwriting things that we are putting in place where they have been flat up low single-digit to last couple of weeks. All in we still expect for the months to be in low to mid-single-digit same-store sales down for the month of March.
Thanks for that color, and good luck guys. Thanks.
Thank you. Our next question comes from the line of David Magee from SunTrust. Your question please.
David Magee: SunTrust:
Hey Good morning everybody. First question has to do with just the EBIT margin visibility this year you mentioned the industrial investments of $5 million to $7 million I think. Given the improvement that you're expecting do you still think that or do you think that EBIT margins might be flat or higher year-over-year this year?
Can you repeat the question, it was breaking up a little bit.
It's breaking up, can you repeat it.
Yes sorry I again with regard to the EBIT margins visibility this year given the additional investments do you think that the gross margin improvement will be off setting in that regard and so either margins will be flatter or any color there would be helpful?
Overall we would expect them to be close to flat year-over-year.
And what are you seeing with regard to incremental pressures this year?
Most -- the significant portion of our sales force from a retail standpoint is commission sales, so we don't see significant impact there on the collection side of the credit side we haven't seen any materially at least in the markets that we operating to make any note of.
Thanks and last question what is your sense for with inline to my cross this year with regard to delinquencies, do you still think mid-year is an appropriate target for that?
You know, it's a little hard to predict David specially with the slowing the growth of the business moving high FICO score business to Synchrony and then what we've seen in the macro environment with the way the subprime credit is performing broadly in the macro environment has been weaker of late. It's hard to predict where the crossover point would be, but we are making those additional underwriting changes we think are prudent to make sure that we are delivering profitable business and a profit we will make to customers.
Okay, fair enough. Thanks, guys.
Michael J. Poppe:
Thank you. And this does conclude the question and answer session of today's program. I'd like to hand the program back to management for any further remarks.
Thank you. We appreciate everybody's participation and we look forward to talking with you next quarter and sharing our results. Thank you.
Thank you, ladies and gentlemen for your participating in today's conference. This does conclude the program. You may now disconnect. Good day.
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