Categories Consumer, Earnings Call Transcripts, Retail

Conn’s Inc (CONN) Q1 2024 Earnings Call Transcript

Conn’s Inc (NASDAQ: CONN) Q1 2024 earnings call dated Jun. 01, 2023

Corporate Participants:

Norm Miller — Interim Chief Executive Officer and President

George Bchara — Chief Financial Officer


Kyle Joseph — Jefferies — Analyst

Vincent Caintic — Stephens — Analyst



Good morning, and thank you for holding. Welcome to the Conn’s, Inc. Conference Call to discuss Earnings for the Fiscal Quarter ended April 30, 2023. My name is Donna and I will be your operator today. [Operator Instructions] As a reminder, this conference call is being recorded.

The company’s earnings release dated June 1, 2023 was distributed before market opened this morning and can be accessed via the company’s Investor Relations website at

During today’s call, management will discuss, among other financial performance measures, adjusted retail segment operating loss, adjusted net loss per share and net debt. Please refer to the company’s earnings release that was issued today for a reconciliation of these non-GAAP measures to their most comparable GAAP measures.

I must remind you that some of the statements made in this call are forward-looking statements within the meanings of the federal securities 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 Interim CEO; and George Bchara, the company’s CFO.

I will now turn the conference over to Mr. Miller. Please go ahead.

Norm Miller — Interim Chief Executive Officer & President

Good morning, and welcome to Conn’s first quarter fiscal year 2024 earnings conference call. I’ll start today’s call with an update on our strategic priorities before turning the call over to George, who will review our financial results in more detail.

Our first quarter results were generally in line with our expectations and reflect a challenging macroeconomic environment. Despite a difficult backdrop, we continue to position the business for a return to profitable sales growth by refocusing our efforts to better serve our core credit-constrained customers launching an in-house lease-to-own offering and expanding our e-commerce business.

During the first quarter, we successfully executed against these strategic priorities, and we have started to see progress against these initiatives. This includes growing applications, improving sales trends within our Conn’s in-house and lease-to-own segments and accelerating e-commerce sales. While we expect a challenging economic landscape to continue throughout the year, we believe we are on the right track to emerge from this period as a stronger company that is well positioned to serve the growing needs of our customers.

With this introduction, I want to highlight the progress we are making, starting with our efforts to better serve our core credit constrained customers. Since I rejoined the company in October 2022, I have consistently discussed the importance of refocusing our strategy to leverage our unique credit retail business model. I have a strong belief that our business resonates with our core customers who now more than ever need the multiple payment offerings we provide. By combining unmatched payment options across the entire credit spectrum with essential home-based product categories and an elevated shopping experience, we provide a powerful value proposition to our customers.

We have recently made two significant changes to drive sales to our core customers. First, we adjusted our marketing spend towards channels that are most effective with our credit customer and changed our marketing message to emphasize our credit-oriented value proposition. Second, as we discussed last quarter, we launched a new innovative application process that makes it easier for the millions of visitors to our stores and to our website to apply for our payment options with little to no impact on their credit score. These two changes are having a positive impact on applications and Conn’s credit sales, and we experienced a meaningful acceleration in application volume during the first quarter. Applications increased approximately 10%, which represents the first quarter of application growth in the past 16 months.

Applications are a critical leading indicator of sales and our application growth is starting to drive sales within our in-house financing, and lease-to-own segments. We have also experienced steady improvements in overall sales trends, which have accelerated since February, as our renewed marketing efforts take hold and sales benefit from our new application process, our growing e-commerce business and our refocused strategy.

In March and April 2023, monthly retail sales through our in-house financing option were positive, and this trend accelerated into May. We have maintained a consistent approach to credit underwriting and recent improvements in retail sales are being driven by the growth strategies we are pursuing. In addition, we believe demand for our payment options will continue to increase as other lenders tighten their credit standards and consumers look for solutions that spread out payments of big ticket home-related products. Sales within our lease-to-own segment are experiencing similar improvements, which helps manage credit risk and supports the success of our refocused growth strategies.

As demand from our core customer segment increases, Conn, like other retailers, is seeing evolving consumer behavior, especially from cash and higher credit quality customers. We believe this is being impacted by several factors, including lower discretionary spending for home-related products, following an extended period of excess consumer liquidity, pull forward demand and tighter underwriting in general from prime lenders. We expect these trends to impact demand from higher credit quality customers throughout the remainder of this fiscal year.

Overall, sales trends have improved or remained stable since last year’s third quarter as we refocused the business on our core credit constrained customers. Positive momentum in both Conn’s in-house finance sales and LTO sales has continued in May, but has been offset by weaker trends to cash and higher credit quality customers. As a result, total retail sales for the month of May were down approximately 14%, while same-store sales were down approximately 17%.

We believe, we are well positioned to offset the softness from cash and higher credit quality consumers later this year as we benefit from our strategic initiatives, including the recent launch of our in-house lease-to-own product known as Improvement Financial. Like other transformations the company has been through over the last 20 years, bringing the LTO business in-house has the potential to contribute to significant growth in both revenue and earnings in the coming years.

Improvement Financial allows us to provide another profitable option to target a larger addressable market, including the approximately 600,000 applicants that did not qualify for Conn’s in-house financing over the past 12 months. Since our differentiated credit retail business model enables us to capture both the retail gross margin and lease income, we believe Conn’s can ultimately approve more LTO applicants and provide greater purchasing power than other providers.

We also believe we have a compelling opportunity to drive repeat customer relationships by leveraging insight from the payment history of our LTO customers. We will use this information to graduate in-house LTO customers to future Conn’s credit customers, building deeper relationships and helping our customers improve their credit.

As we mentioned on our last call, Improvement Financial went live in early 2023 in three Houston area stores. And as of today’s call, we have expanded to 46 locations. We are taking a measured approach to implementing the program to ensure its long-term success. By the end of this fiscal year, we expect Improvement Financial will be offered across the majority of our stores and at Once mature in the coming years, we continue to believe annual LTO sales can more than double from approximately $81 million last year and grow to over 15% of our retail sales. As you can see, Improvement Financial is a transformative opportunity that we believe will unlock significant value over the coming years.

Our e-commerce expansion is the next strategic priority I’d like to review today. We continue to optimize our e-commerce strategy after last year’s successful platform conversion and recent enhancements to our application process. During the quarter, we expanded our dropship program and overall assortment, launched new AI-driven technologies and improved the photography and content of our online furniture offering.

The powerful e-commerce platform and strategy we have created produced record first quarter e-commerce sales of $22.7 million. In fact, after only a slight year-over-year increase in the previous quarter, e-commerce growth accelerated during the first quarter and increased in total by 24.6%. I am encouraged by the progress we are making and anticipate e-commerce sales this fiscal year can increase to well over $100 million. We have a tremendous opportunity to scale our online business, which we expect to grow to over $300 million in annual sales over the next several years.

Now looking at our retail footprint, during the first quarter, we decided to end our test with Belk, as we couldn’t offer their customers our in-house financing and lease-to-own payment options, limiting our sales opportunities. While we were disappointed by the outcome of the test with Belk, we have learned valuable lessons about the strength of our unmatched payment options. In addition, our leadership team continues to promote a culture focused on pursuing innovative opportunities to reach more customers.

Additionally, as we mentioned on our last call, after we opened 11 new stores planned for this year, we intend to pause new store openings over the next couple of years. With major investments across our retail and credit segments behind us, we believe we have a multi-year opportunity to drive retail growth within our existing locations and online without the need to open new stores or distribution centers. We believe this strategy will maximize profitability by increasing revenue per store and leveraging our fixed operating cost.

Before I turn the call over to George to share more details on our financials, I want to reiterate my confidence in our business. The progress we made during the first quarter, growing applications, improving sales within both our Conn’s in-house and lease-to-own segments and accelerating e-commerce sales are encouraging signs that our refocused strategies are helping turnaround our financial and operating results. I have a deep conviction that our business resonates with our customers and a strong belief in our leadership team’s ability to deliver on our strategic priorities.

With this overview, I’ll turn the call over to George.

George Bchara — Chief Financial Officer

Thanks, Norm. We are excited by the progress we are making across several aspects of our business, including growing applications, improving sales trends and accelerating e-commerce sales. We believe we have an enormous opportunity to profitably grow as we pursue strategies aimed at refocusing on our core customer.

On a consolidated basis, total revenues were $284.6 million for the first quarter, representing a 16.3% year-over-year decline. For the first quarter, the company reported a GAAP net loss of $1.47 per diluted share compared to net income of $0.25 per diluted share for the same period in fiscal year 2023. On a non-GAAP basis, we reported a net loss of $1.52 per diluted share for the first quarter, which excludes the gain related to the sale of a single store location, partially offset by store closure costs associated with the decision to end the store within a store test with Belk.

There were no adjustments to net income in the first quarter of the last fiscal year, and reconciliations of GAAP to non-GAAP financial measures are available in our first quarter earnings press release that was issued this morning.

Looking at the performance of our retail segment in more detail. Total retail revenues were $224 million in the first quarter, representing a 17.8% year-over-year decline. The decrease in retail revenue was primarily driven by a 20.1% decline in same-store sales, partially offset by new store growth. Same-store sales during the first quarter were impacted by lower discretionary spending for home-related products following an extended period of excess consumer liquidity, which resulted in accelerated sales.

Retail gross margin for the first quarter declined to 33.5% compared to 34.5% for the same period in fiscal year 2023, primarily driven by higher freight costs and deleveraging of fixed distribution costs from lower sales. We expect retail gross margin to improve over time as retail sales recover, and we realize the benefit of lower international shipping costs.

SG&A expenses in our retail segment for the first quarter decreased to $95.8 million compared to $96 million for the same period last fiscal year. Lower SG&A expenses reflect the effort of our cost savings initiatives and declines in variable costs that more than offset increases related to new store growth. Due to lower retail sales, SG&A expenses were 42.8% of retail sales for the first quarter compared to 35.2% for the same period in fiscal year 2023.

For the first quarter, retail segment operating loss was $19.7 million compared to a retail segment operating loss of $2.1 million for the same period in fiscal year 2023. On a non-GAAP basis, retail segment operating loss for the first quarter was $20.5 million compared to a loss of $2.1 million for the same period in fiscal year 2023.

Turning to our first quarter credit segment performance. Finance charges and other revenues declined 8.2% year-over-year to $61.8 million, primarily due to a decline in the average balance of the customer receivable portfolio as well as a reduction in insurance commissions. Underlying portfolio health remains stable. However, normalizing trends, current economic conditions and a more restrictive re-aged policy have impacted overall performance.

As a percent of the portfolio, the 60-day delinquency balance was 11.6% at April 30, 2023, compared to 10.3% at April 30, 2022, which benefited from excess consumer liquidity. The balance of re-aged accounts as a percent of the portfolio was 16.6% compared to 16.4% for the same period in fiscal year 2023. In addition, the carrying value of re-aged accounts continues to improve and remains at one of the lowest levels in almost a decade. For the first quarter of fiscal year 2024, net charge-offs as a percent of the average portfolio balance were 15.6%, compared to 11.9% for the same period last fiscal year.

During the first quarter, the credit provision for bad debts was $28.8 million compared to $14.6 million for the same period last fiscal year. The $14.2 million year-over-year increase in the credit provision for bad debts was primarily driven by higher net charge-offs and a smaller year-over-year decline in the customer accounts receivable portfolio.

The company reported a credit segment loss before taxes of $17.2 million in the first quarter compared to a credit segment income of $10.5 million for the same period last fiscal year. The greater credit segment loss before taxes was primarily due to higher interest expense as well as a reduction in our credit spread, which declined to 7.8% compared to 11.6% in the same period last fiscal year.

Turning now to our balance sheet. At April 30, 2023, we had $570.1 million in net debt compared to $529.9 million at April 30, 2022. Net debt as a percent of the ending portfolio balance was approximately 58% at the end of the first quarter, which remains below pre-pandemic levels, and we have no near-term debt maturities. At April 30, 2023, we had $228.1 million of cash plus availability under our $650 million revolving credit facility.

We continue to believe our liquidity and access to capital provides us with flexibility to support the current needs of our business while investing in our long-term growth initiatives, and we expect to complete our next ABS transaction later this fiscal year.

Given the uncertain economic environment and in lieu of official guidance, I want to provide an update regarding our expectations for the remainder of the year. We expect continued improvements in total retail sales and same-store sales as we benefit from the growth strategies we have discussed today.

Retail gross margins are expected to stabilize and benefit from lower freight expenses this fiscal year. We also are focused on continuously identifying opportunities to further reduce expenses. As a result, we now expect annual SG&A to increase year-over-year by $15 million to $25 million versus our prior expectation of $25 million to $35 million. This revised outlook also reflects lower expenses as a result of the decision to close all Belk locations.

We are closely monitoring the current rate environment, and we believe our annual interest expense will increase year-over-year by approximately $40 million to $45 million, as we stated in our fourth quarter conference call. We expect our effective tax rate for the remainder of the fiscal year to be impacted by further adjustments to the valuation allowance.

Finally, I want to share my thanks to all our team members for their continued hard work, service and dedication. So with this overview, Norm and I are happy to take your questions. Operator, please open the call up to questions.

Questions and Answers:


Thank you. [Operator Instructions] Today’s first question is coming from Kyle Joseph of Jefferies. Please go ahead.

Kyle Joseph — Jefferies — Analyst

Hey, good morning, guys. Thanks for taking my questions. I just want to get a sense, I would say, there were a lot of headlines around tax refunds throughout the quarter, but just give us a sense for the timing, the magnitude and how that impacted both your credit performance, the size of your loan portfolio as well as demand?

Norm Miller — Interim Chief Executive Officer & President

Yes. Good morning, Kyle. What I would say is, having been around for a number of tax seasons, if you exclude the pandemic years out, that it was an average tax season from a collection standpoint. It certainly wasn’t disappointing. It kind of met in that range of expectations. What was different was we did not see the uptick to the degree on the sales side of the house that we typically see during the peak of tax season in that late February, March timeframe. We are pleased with where the portfolio performance was through the tax season and coming out of it as it normalizes to pre-pandemic, but certainly saw headwinds from a sales standpoint with the tax season.

Kyle Joseph — Jefferies — Analyst

Got it. Thanks. And then, obviously, it sounds like you have some moving parts in terms of demand by channel. Obviously, it sounds like you are seeing some improvements in your core customer and LTO. The cash customer seems like it’s definitely under pressure. But just — and obviously, there was the pull forward into ’20 and ’21, but do you have any sense for how far away we need to get from those years for demand to recover or what the product cycle is on average for your consumer and your product kind of selection?

Norm Miller — Interim Chief Executive Officer & President

Yes, couple comments on that, Kyle. First, we absolutely have seen increasing demand with our core customer, as I mentioned in my comments, both on the Conn’s side and the LTO side, both in-house LTO and our LTO partner. If you look at the bottom of where those sales were before — right before I came back to the company, they were down anywhere from 30% to 40% same store sales, and we are seeing Conn’s and LTO not only become positive, but starting to accelerate.

The issue is, obviously, the cash and the high credit quality customer. We continue to see headwinds there, especially in the appliance category. That was where we saw the greatest pull forward from demand. We expect to see some easing of that with the cash and the high credit quality as the year progresses. And our challenge is how do we get that Conn’s and LTO business up at a faster pace to offset those headwinds that are going to persist, but I don’t think they are going to be as strong as the year unfolds. Now, part of that is we will lap easier comps here, the back half of the year from what the first quarter comps were from a material standpoint.

Kyle Joseph — Jefferies — Analyst

Got it. That’s it for me. Thanks for answering my questions.


Thank you. [Operator Instructions] The next question is coming from Vincent Caintic of Stephens. Please go ahead.

Vincent Caintic — Stephens — Analyst

Hi. Good morning. Thanks for taking my questions. First, just a kind of follow-up on the prior comments, but the — I guess, the attribution to the sales weakness overall being to the cash and the higher credit quality customers, but then pointing to the growth in in-house financing and lease-to-own. I was wondering if you could break out those numbers, the improvement in in-house financing and lease-to-own, just to get a sense of the opportunity there? And then for overall sales to improve, do you need to completely offset that cash weakness with in-house financing growth, or should we see kind of a recovery or an improvement in all the different categories? Thank you.

Norm Miller — Interim Chief Executive Officer & President

Well, the answer to the last part of your question first, Vincent, no, we are not — I mean, both the Synchrony and the cash customer — the high credit quality and the cash customers are still very important parts of our business. And we are looking to grow those as well. It’s — so we don’t need the Conn’s and the LTO to completely make up the entire business, but the headwinds are significant both from a macro standpoint, I think of what’s happening with that consumer from a discretionary standpoint, coupled with the pull forward that we saw during the pandemic.

Now, with the challenging economic times, as you know, Vincent, with our business, that actually creates opportunities, which we are seeing on the middle and the lower end of the credit stack with both Conn’s and with LTO, as other lenders tighten, which the prime lenders and a number, and the banks and other lenders tighten, that reduces opportunities for our customer, our core customer and that LTO to be able to finance products and not even discretionary, but the products that they need, that they were required to fill or replace.

So, that’s why we are seeing growth there, which is not atypical than what we’ve seen in past challenging economic timeframes that actually creates sales opportunities for those elements of our credit stack. So, having said that, as I mentioned, we’re still looking for strategies and working with our high credit quality partner to mitigate some of the headwinds that we’re seeing in that high end of the credit spectrum.

As far as the specifics, we don’t break out the sales growth on each of the categories, but we did give you an indicator we are seeing actually positive sales growth from a Conn’s standpoint year-over-year, which is fueled by the application growth, and that has been accelerating all the way through the month of May. And you are seeing that from the same store sales trend. Back in quarter three, we were down almost 30%, in quarter four down 22%, quarter one down 20%, and now in May, it’s at 17%. And what I would say is that improvement of 1,300 basis points is being driven predominantly by the Conn’s and the in-house or the LTO, both in-house and AFF, not by improvements on the cash customer and the high credit quality customer.

Vincent Caintic — Stephens — Analyst

Okay. That detail is super helpful. Thank you for that. And then second question, just wondering if you are comfortable with your credit posture right now. I saw that the net charge-offs were down 150 basis points quarter-over-quarter, so that’s good. But just wondering if you are comfortable of where your underwriting is today or if you think you might need to tighten underwriting more or how are you thinking about that? Thank you.

George Bchara — Chief Financial Officer

Yes. I mean as Norm mentioned, we feel like we had a good tax season with refunds sort of in the range of our expectation. We saw a 60-day delinquency come down quarter-over-quarter from the fourth quarter. And if you look at the year-over-year difference between 60-day delinquency, it’s actually narrowed. So, we feel like we are in a good place from a credit standpoint and from an underwriting standpoint based on where we sit here today.

Norm Miller — Interim Chief Executive Officer & President

And what I would add, Vincent, is it’s why the leased in-house LTO is really a transformative opportunity for us, because as we get all of that business in-house later this year, we constantly look at delinquencies on a day-by-day basis of what’s happening in the buckets. And the customer — the consumer out there is still challenged. There is no question about that. We see that and we are monitoring that very closely by having in-house LTO. It enables us on those edges if we start to see stress, to be able to move customers seamlessly from our in-house Conn’s financing to the in-house LTO, which longer term is, as I stated, I think, one of the more transformative opportunities strategically that we have.

Vincent Caintic — Stephens — Analyst

Okay. Thank you. And last one for me, a follow-up from the prior comment. But so underwriting seems comfortable there. I forget if there was tighter underwriting or tightening underwriting over the past year and whether or not, let’s say, as we get through the rest of this calendar year, whether we will be able to lap that tighter underwriting. And so maybe volumes improved from that point on, just if you have any comment on that?

Norm Miller — Interim Chief Executive Officer & President

Yes. What I would say, Vincent, is that we’re always looking at and making tweaks to our underwriting policy. But if you look at the last year or so, we have not made any material changes to our underwriting policy. Having said that, Vincent, as I mentioned before, our comps were down double-digits, around 10% in the first quarter, and then they went down 20% and into the high 20s as last year evolves. So, as we lap those numbers, they weren’t driven by underwriting, they were driven by strategic shift to the business away from Conn’s and in-house LTO. But as we lap those numbers, coupled with the strategic refocus, we expect to see some tailwinds from that as the year unfolds.

Vincent Caintic — Stephens — Analyst

Very helpful. Thanks so much.


Thank you. We are showing no additional questions in queue at this time. I would like to turn the floor back over to management for any additional or closing comments.

Norm Miller — Interim Chief Executive Officer & President

Thanks. First of all, we appreciate your interest in the company. I also want to take the opportunity to reiterate George’s comments and thank all of our associates across the company for their hard work in this challenging environment. They certainly make a difference. We look forward to updating you at the next quarterly call. [Operator Closing Remarks]

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