Conn’s, Inc. (CONN) Q4 2022 Earnings Call Transcript

Conn’s, Inc. (NASDAQ: CONN) Q4 2022 earnings call dated Mar. 29, 2022

Corporate Participants:

Chandra Holt — Chief Executive Officer and President

George L. Bchara — Chief Financial Officer

Analysts:

Rick Nelson — Stephens — Analyst

Kyle Joseph — Jefferies — Analyst

William Dossett — Oppenheimer — Analyst

Presentation:

Operator

Good morning, and thank you for holding. Welcome to the Conn’s Inc. conference call to discuss earnings for the fiscal quarter ended January 31, 2022. My name is Robert, and I’ll be your operator today.

[Operator Instructions] As a reminder, this call is being recorded. The company’s earnings release dated March 29, 2022, was distributed before market opened this morning and can be accessed via the company’s Investor Relations website at ir.conns.com.

During today’s call, management will discuss, among other financial performance measures, adjusted net income and adjusted earnings per diluted share. 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 means of federal security 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 Chandra Holt, the company’s CEO; and George Bchara, the company’s CFO. I would now like to turn the conference over to your host, Ms. Holt. Thank you. You may begin.

Chandra Holt — Chief Executive Officer and President

Good morning, and welcome to Conn’s Fourth Quarter Fiscal Year 2022 Earnings Conference Call. I’ll start today’s call with a review of the quarter and our strategic priorities before turning the call over to George, who will review our financial results.

Fiscal year 2022 was a record year for Conn’s, and I’m proud of our team’s strong execution in a very dynamic operating environment. Throughout the fiscal year, we successfully navigated unprecedented supply chain challenges and the ongoing COVID-19 pandemic, including the emergence of the Omicron variant to produce record annual earnings of $3.61 per diluted share and the strongest annual retail sales in five fiscal years. I’m encouraged by our strong fiscal year 2022 performance and excited by the direction we are headed.

At our January 2022 Investor Day, we announced a new strategic growth plan, which we believe will unlock the significant potential of our expanding retail, digital and payment offerings. We also shared our three-year financial targets which include increasing annual consolidated revenues to approximately $2 billion to $2.2 billion and achieving a high single-digit EBIT margin by fiscal year 2025.

As we follow our three-year strategic growth plan and focus on achieving our long-term financial targets, I want to use my time today to review our recent performance and the progress we are making against our strategic plan.

Fiscal year 2023 will be a transformative year as we pursue initiatives to further enhance our competitive position and support our long-term growth opportunities. The strategic initiatives we are undertaking this year include launching an in-house lease-to-own platform, re-platforming our website and preparing to rebrand our business. I will discuss these initiatives throughout today’s call.

Moving to our fourth quarter. I am pleased with the positive retail performance we achieved during the quarter as same-store sales increased 6.2% and total retail sales grew 13%. This performance is especially encouraging as we offset the demand pull forward from the traditional holiday shopping season that we discussed on our third quarter earnings call.

We also believe the emergence of the Omicron variant as well as the tightening by our lease-to-own partners negatively impacted fourth quarter retail sales. I am proud of our ability to deliver double-digit retail sales growth during the fourth quarter and throughout fiscal year 2022 as our powerful value proposition resonates with more customers and we strengthen our core retail experience.

As I mentioned at our Investor Day, we have a growing segment of customers that are choosing Conn’s because of our fast and reliable shopping experience. The customer segment represents cash and all credit card sales including our private label credit card offering and typically consists of customers with FICO scores above 650.

According to FICO, U.S. consumers with FICO scores above 650 represents 75% of the population, yet our fast and reliable customer segment represented only 39% of our total retail sales in fiscal year 2022. As you can see, the fast and reliable customer segment makes up a large part of the market, and we believe this provides us with a significant opportunity for growth. In fact, for the fourth quarter, retail sales of our fast and reliable customer segment outpaced total retail sales growth.

We are capturing more fast and reliable customers because of our white glove next-day delivery and in-house service capabilities as well as the enhancements we are making to our product development and e-commerce experience.

Looking at our core Financial Access customer segment in more detail, the Financial Access customer typically has a FICO score below 650 and represents approximately 25% of the U.S. population. This customer segment uses our in-house financing or lease-to-own offerings to complete their retail purchase. Our Financial Access customer is our largest segment and increased at a double-digit rate in the fourth quarter. We believe there are opportunities to further grow our Financial Access customer segment while prudently managing the higher risk profile of this customer.

Historically, we have relied exclusively on third-party lease-to-own partners to support our efforts, and we continue to maintain strong relationships with our existing lease-to-own partners. However, after our comprehensive review of our lease-to-own strategy, we identified a unique opportunity to acquire a technology platform that will enable us to originate and service lease-to-own transactions in-house. While it will take time to fully transition to a full in-house lease-to-own offering, we are excited about the growth opportunities today’s announcement represents. We expect to begin originating leases under an in-house lease-to-own offering during the fourth quarter of this fiscal year and to be originating the majority of lease-own transactions with our in-house offering next fiscal year. The transition will take approximately three years to be fully reflected in our financial statements, and we believe that our in-house lease-to-own offering will add approximately $25 million to annual operating income once the program is mature, helping us achieve our fiscal year 2025 revenue and EBIT margin goals.

We are excited by the opportunities this transaction will have on our business and the value an in-house lease-to-own offering will have for our customers.

Turning back to our fourth quarter retail performance. The double-digit growth from both our Fast and Reliable and Financial Access customer segments drove robust sales growth across our top product categories.

Within our Appliance category, sales remained strong during the quarter as same-store sales increased 13% over the prior year. Sales growth continues to be driven by our expanding assortment, a favorable in-stock position, rapid e-commerce growth and our next-day delivery capabilities.

In fiscal year 2022, Appliances was our largest and fastest-growing category, and we achieved record sales. As a top 10 appliance retailer in the U.S., we are doubling our efforts to drive growth within the category and expect to further expand our assortment, both in-store and online in fiscal year 2023.

Furniture and Mattress same-store sales increased 2.4% over the prior year. More than any other category, we have pivoted the Furniture assortment through creative sourcing actions to maintain a consistent flow of product and ensure a broad range of next-day delivery options for our customers.

Dreamspot, our first private label brand, continues to exceed our expectations and remains our number-one selling mattress brands in both units and dollars. In addition, our expanded mattress-in-a-box assortment continues to drive our online growth in the category.

During fiscal year 2023, we are focused on increasing our Furniture and Mattress assortment online and introducing a new private label furniture brand. Same-store sales within our Consumer Electronics category increased 2.3% over the prior year, driven primarily by higher TV, home theater and gaming sales. I am pleased with the positive trends we experienced within this category even as consumers pulled forward some of their holiday purchases into our third quarter amid supply chain concerns.

The performance of new stores is also contributing to our retail growth. For the quarter and full year, recently-opened new stores added 6.8% and 7.4% to total retail sales growth, respectively. We opened 12 stores in fiscal year 2022, primarily the state of Florida, and ended the fiscal year with a total of 158 stores across 15 states. For fiscal year 2023, we plan to open 13 to 16 new locations, all within existing markets, which will leverage fixed costs.

Looking at our supply chain in more detail. We are pleased with our domestic logistics capabilities as approximately 80% of our products are currently available for next-day delivery. Over the past year, our distribution centers provided the flexibility to maintain a high level of intact merchandise and supported our leading next-day white glove delivery offering. However, ongoing global supply chain disruptions and elevated international freight costs had a greater impact than expected on our Retail segment in the fourth quarter.

While global supply chain issues and freight costs have stabilized, they have not improved, and we expect challenges will continue throughout fiscal year 2023.

We continue to pursue actions that offset these impacts to margins by diversifying our sourcing base, flexing our assortments and reducing promotions. In addition, while we remain focused on providing our customers with compelling value, we are closely monitoring market conditions and margins across our categories and expect to continue to prudently pass along price increases to mitigate higher costs.

Our unique supply chain capabilities support many aspects of our business, including our fast-growing e-commerce business. E-commerce sales for the quarter increased 132% to a record of $24.1 million. For the year, e-commerce sales exceeded our expectations and increased 171% to an annual record of $71.3 million. The e-commerce growth we’ve experienced over the last year is a result of our investments to improve the functionality of our website while also leveraging our best-in-class next-day white glove delivery capabilities.

As we discussed at our Investor Day, we have a large opportunity to increase conversion on our website, and expanding our online assortment will be an important initiative to achieve our conversion goal. Plans for fiscal year 2023, including adding depth to our appliance category, including new colors and sizes as well as adding new categories such as Outdoor Living, Lighting and Smart Home. In fact, by the end of the first quarter, we expect to double our online assortment.

Our digital customer experience is another important driver to improve conversion and grow e-commerce sales. During the current fiscal year, we are upgrading our digital infrastructure by re-platforming our website. This transformation will occur in phases and is expected to start in the second quarter. We expect the bulk of the transition to be completed by this fall. Once finished, our customers will see a modern, enhanced website with improved functionality across their online journey.

I’ve led multiple digital transients throughout my career, and I’ve learned short-term disruptions occur even during successful implementations. As a result, we expect the growth rate of e-commerce sales to temporarily slow in this year’s second and third quarters before reaccelerating in the fourth quarter and beyond.

Ultimately, the digital initiatives we are pursuing support our vision for Unified Commerce. We believe Unified Commerce will drive the next digital opportunity for retailers because it streamlines engagement across channels and customer touch points. Conn’s is uniquely positioned to deliver on Unified Commerce because our back-end supply chain is the same for both stores and e-commerce. We recently took a significant step forward in our pursuit of becoming a leading unified commerce retailer by enabling our store associates to add online-only items to in-store transactions.

Our digital transformation and Unified Commerce initiatives support our vision to achieve over $300 million in e-commerce sales by fiscal year 2025.

Having a robust digital offering is critically important and supports our strategies to serve both our core Financial Access customer and our growing Fast and Reliable customer. To accelerate our growth and further enable our transformation, we have decided to introduce a new brand that will better position us to bring to life our value proposition. Our branding efforts are underway, and I look forward to updating investors in the coming quarters.

We are confident in the direction the business is headed and our ability to achieve our fiscal year 2025 financial targets. However, we expect a softer first half of this fiscal year as we lap government stimulus, lap more difficult lease-to-own comparisons and invest in our growth initiatives that we expect to benefit sales in the second half of the year. Growth initiatives that we expect to benefit the second half of the year include credit-related initiatives that are currently testing and expect to roll out during the second quarter, the significant expansion of our online assortment and the re-platforming of our website, which we believe will improve the customer experience and increase online conversion.

Turning to our Credit segment growth strategies and performance. Pursuing growth opportunities across the sector of payment options has de-risked our business and enhanced Credit segment performance. As a result, for fiscal 2022, we achieved an annual credit spread of 11.7%, representing the highest spread in over five years and helps drive record annual credit segment profitability.

Since optimizing our credit strategy, higher credit quality customers represent a greater percentage of Conn’s in-house finance sales. This has occurred even as these in-house finance sales have increased. In addition, these newer, higher credit quality vintages are outperforming older vintages. Our disciplined approach to risk has helped proactively manage our 60-plus day delinquency and re-aged balances. Both indicators of portfolio health remain well below pre-COVID levels.

As a percent of the portfolio, the 60-plus day past due balance was 10.4% compared to 12.4% for the same period last fiscal year. The balance of re-aged accounts as a percent of the portfolio was 16.8% compared to 25.9% for the same period last fiscal year. We continue to believe delinquency and charge-off trends will remain below pre-COVID levels based on our enhanced credit strategy and current economic outlook. As a result, I believe we are well-positioned to target an annual credit spread of approximately 1,000 basis points going forward.

With a stable credit platform in place, we are well-positioned to pursue credit strategies that enable retail growth within both our Financial Access and our Fast and Reliable customer segments. This includes providing both customer segments with a seamless online credit transaction through the digital transformation actions we are pursuing this year. In addition, we believe bringing lease-to-own transactions in-house will allow us to deliver a more seamless experience, capture a greater number of customers and financially benefit from the vertical integration of the lease-to-own business.

To conclude my prepared remarks, we are excited by the strategies we are pursuing to create sustainable value for our shareholders. In December, the Board authorized a $150 million share repurchase program, reflecting the positive momentum underway across our business and the confidence we have in our future.

As of March 25, 2022, we have repurchased 5.9 million shares of our common stock at an average price of $21.41 per share, which equates to approximately 20% of the company’s outstanding shares as of October 31, 2021. We are committed to creating value for our shareholders by continuing to prioritize initiatives that support our growth strategies, maintain flexibility to pursue inorganic opportunities and return capital to shareholders.

Since I joined Conn’s, we’ve established and communicated the new vision and strategy for the company. We’ve also focused on attracting, developing and retaining a strong and motivated team while adding significant diversity to our leadership team to better align with the diversity of our organization, our customers and the communities we serve. And now with our leadership team in place, we’re executing on our strategic plan.

Our strong fiscal year 2022 results and exciting vision for the future is possible because of the dedication and resilience of our over 4,000 associates. I want to thank our entire team for their commitment to our company, our customers and our local communities.

Now let me turn the call over to George to review our financial performance.

George L. Bchara — Chief Financial Officer

Thanks, Chandra. I’m encouraged by our record fiscal year 2022 earnings and our strong position headed into the new fiscal year.

On a consolidated basis, total revenues were $402.5 million for the fourth quarter, representing a 9.4% increase from the same period last fiscal year. We reported fourth quarter net income of $0.26 per diluted share compared to net income of $0.85 per diluted share for the same period last fiscal year.

On a non-GAAP basis, adjusting for certain charges and credits, we reported net income of $0.33 per diluted share for the fourth quarter compared to $0.91 per diluted share for the same period last fiscal year.

As a reminder, earnings last year benefited from lower costs as a result of the COVID-19 pandemic and a discrete tax benefit as a result of tax planning in connection with the CARES Act, which impacted the provision for income taxes by $12.4 million and benefited earnings by $0.42 per diluted share. Reconciliations of GAAP to non-GAAP financial measures are available in our fourth quarter earnings press release that was issued this morning.

Looking at our Retail segment in more detail, total retail revenues for the fourth quarter were $333 million, a 13% increase from the same period last fiscal year. Higher retail revenue was driven by an increase in same-store sales of 6.2% and new store growth. As Chandra mentioned, we experienced strong double-digit growth rates across both our Financial Access and Fast and Reliable customer segments during the fourth quarter, reflecting our success attracting customers across a larger addressable market.

Retail gross margin for the fourth quarter was 35.8%, a decrease of 160 basis points from the same period last fiscal year. The larger-than-expected year-over-year decline in retail gross margin was primarily driven by the impact of increased product and freight costs.

Higher retail sales continue to help leverage retail SG&A expenses during the quarter. As a percent of retail sales, SG&A expenses were 31.6% for the fourth quarter compared to 32.2% for the same period last fiscal year. Retail segment operating income was $10.9 million compared to $12.7 million for the same period last fiscal year as higher retail sales and improved SG&A leverage were offset by lower retail gross margin.

Turning to our credit segment. Finance charges and other revenues were $69.5 million for the fourth quarter. The 4.9% decline from the same period last fiscal year was primarily a result of a 10.2% reduction in the average balance of the customer receivable portfolio.

Our strong credit results continue to show that our receivable portfolio is performing well. For the fourth quarter, net charge-offs as a percent of the average portfolio balance were 9.8% compared to 14.1% for the same period last fiscal year. For the year, net charge-offs as a percent of the average portfolio balance were 11.1% compared to 16.3% last fiscal year.

During the fourth quarter, the credit provision for bad debts was $28.2 million compared to $25.1 million last fiscal year. The year-over-year increase was primarily driven by an increase in the change in the allowance for bad debts, partially offset by a decrease in net charge-offs of $16.9 million. We reported a $1.1 million loss before taxes in our credit segment compared to credit segment income before taxes of $4.4 million for the same period last fiscal year. The reduction in credit segment income before taxes was primarily due to lower credit segment revenue, higher SG&A expenses and a higher provision for bad debt, partially offset by an improvement in interest expense.

As our portfolio begins to grow, we will continue to focus on controlling risk, limiting portfolio volatility and achieving approximately 1,000 basis points of annual credit spread while supporting our long-term growth opportunity.

Consolidated SG&A expenses for the fourth quarter were $142.5 million. The $14.2 million increase from the prior year period was due to higher variable operating expenses associated with sales growth, additional new stores and an increase in advertising costs as we lapped prior year reductions due to the COVID-19 pandemic.

Turning now to our balance sheet and capital position. We ended the fourth quarter with a strong balance sheet and capital position as we continue to benefit from significant year-over-year growth in cash and third-party finance sales and robust cash collections on our customer receivables portfolio. This has produced meaningful operating cash flow over the past eight quarters.

We ended the fourth quarter with $483.4 million in net debt compared to $549.3 million at the end of the fourth quarter of last year. In addition, net debt as net of the ending portfolio balance declined to approximately 42.8% at the end of the fourth quarter compared to approximately 44.5% at the end of the fourth quarter of last year.

I am pleased with our success strengthening the balance sheet, de-risking the business and executing our growth initiatives. These efforts have built underlying strength in our business.

Before we open up the call to questions, I want to review the impacts of our recent technology platform acquisition and emerging in-house lease-to-own strategy, as well as our expectations for fiscal year 2023.

Starting with our lease-to-own transition. We expect to begin originating leases under our in-house lease-to-own offering by the fourth quarter of fiscal year 2023. From an accounting standpoint, in our consolidated financial results, revenue from sales made through our in-house lease-to-own offering will be reported as lease income recognized over the life of the lease rather than as a retail sale recognized at the time of sale. As a result, the transition from third-party lease-to-own sales to in-house lease-to-own revenue will negatively impact revenue and profitability in the first two years of the transition beginning in the fourth quarter of this fiscal year.

We also expect to incur additional costs associated with the lease-to-own platform beginning in the first quarter of fiscal year 2023 as we assume the costs associated with the lease to own acquisition and begin investing in our new in-house lease-to-own capabilities.

For fiscal year 2023, we expect the combination of the different revenue accounting and incremental costs associated with the lease-to-own business to reduce operating income by $15 million to $20 million. As in-house lease-to-own sales grow in fiscal year 2024, we expect our operating income to be negatively impacted by approximately $25 million to $30 million driven by these two factors. However, by fiscal year 2025, we believe our in-house lease-to-own offering will add approximately $25 million to annual operating income. As a result, the acquisition and transition to offering an in-house lease-to-own product will help us achieve our fiscal year 2025 financial targets.

Additional information on our lease-to-own acquisition is available in our fourth quarter investor presentation on our Investor Relations website.

Looking at our expectations for the year in more detail, we are excited by the progress we are making and the opportunities we have for growth. But as Chandra mentioned, several items are expected to impact our quarterly results during the year.

For fiscal year 2023, we expect low single-digit total revenue growth with mid-single-digit retail revenue growth and high single-digit decline in finance charges and other revenue driven by an increase in promotional financing programs. We expect operating margin for the fiscal year to be between 5% and 6%, which includes an approximately 100 basis point impact from the lease-to-own platform acquisition. We also expect interest expense to be between $25 million and $30 million.

Given the ongoing issues related to the global supply chain, we expect fiscal year 2023 retail gross margin to be down from fiscal year 2022. SG&A expenses are expected to increase in fiscal year 2023, primarily driven by the opening of new stores and continued investments in our growth initiatives. Our provision is expected to be up versus the prior year, driven primarily by portfolio growth and a smaller decline in our allowance for bad debts.

While uncertainty remains high, our guidance reflects a macroeconomic outlook consistent with recent trends and lower consumer spending, particularly for a Financial Access customer, driven by inflationary pressures and lapping last year’s government stimulus programs.

Lastly, our guidance reflects a softer first half of the year, as Chandra and I have discussed throughout today’s prepared remarks. I’m excited about the direction we are headed as our business transformation accelerates, and we execute against our fiscal year 2025 financial targets.

Finally, I want to share my thanks to all our team members for their continued hard work, service and dedication.

So with this overview, Chandra and I are happy to take your questions. Operator, please open the call up for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Rick Nelson with Stephens. Please proceed with your question.

Rick Nelson — Stephens — Analyst

Hello. Thanks a lot. So question, I guess, as it relates to your customer if you could assess the health there they’re experiencing, higher inflation gas, food prices, stimulus has wound down now, how you see the customer?

Chandra Holt — Chief Executive Officer and President

Good morning, Greg. Thanks for the question. Yes, there are a number of factors, as you mentioned, influencing consumer health right now. From what we’re seeing from a collection standpoint, we still see consumers being prudent and paying their bills, which is a great thing for our business. But they seem to be more cautious on discretionary spending right now as we overlap some of the stimulus from last year.

Rick Nelson — Stephens — Analyst

And can you talk about what you’re seeing from the sales standpoint year-to-date, and what the retail guidance-wise for same-store sales growth?

Chandra Holt — Chief Executive Officer and President

Sure. Going into this year, we expected Q1 to be our most difficult quarter for the year. We are facing two major headwinds. First, the government stimulus overlap from last year, and tightening by our LTO partners. We expect the impact of the government stimulus to lessen in Q2, and we will have easier LTO overlap starting in Q3.

To date, Q1 is down for comp, and you can see the impacts of the headwinds that I mentioned when you look at the monthly results. February, for example, was a positive 8% comp, while March, to date, is down 13% comp, and we expect the comparisons for April to be the most difficult in the quarter. That said, we have a number of initiatives that we are rolling out this year that should give us tailwinds in the back half of the year. Specifically within e-commerce, we are making a lot of progress expanding our assortment online. We should have our assortment doubled by the end of Q1, and we’re also re-platforming our website, which should be completed by this fall and give us upside and conversion on our website.

Within credit, we have a number of initiatives that we are working on, including digital ID verification and line optimization that will give us tailwinds in the back half of the year.

Rick Nelson — Stephens — Analyst

And can you discuss your ability to pass on these higher costs, higher prices to the consumer? What categories are more challenged and where are you better able to pass on those higher costs?

Chandra Holt — Chief Executive Officer and President

Yes. In terms of gross margin pressure, we really see it in the Furniture category as that is where international freight costs are impacting cost of goods, and so we’re consistently monitoring what our margins are and what the market looks like so we’re able to pass — prudently pass on price increases as we see costs elevate while still staying competitive with our competition.

George L. Bchara — Chief Financial Officer

Generally speaking, in addition to Chandra’s comments, Rick, I would say that there’s — we have more pricing power for non-discretionary goods than we do discretionary goods. And so to Chandra’s point, in the furniture category, specifically as we’re seeing costs rise or stay high as a result of international freight costs, we have somewhat less pricing power in the Furniture category.

Rick Nelson — Stephens — Analyst

Got it. Yes, that makes sense. Thanks and good luck.

Chandra Holt — Chief Executive Officer and President

Thank you.

George L. Bchara — Chief Financial Officer

Thanks, Rick.

Operator

Our next question is from Kyle Joseph with Jefferies. Please proceed with your question.

Kyle Joseph — Jefferies — Analyst

Hey. Good morning. Thanks for having me on and taking my questions. Just want to dig into the virtual lease or the lease-to-own in-housing. Give us a sense for you transition partners, I believe it was last year, and what was really the impetus for bringing this in-house? How big was the acquisition? And is there any sort of portfolio associated with the acquisition? Or is it just the technology platform?

Chandra Holt — Chief Executive Officer and President

Yes. Thanks for the question. We are very excited about our lease-to-own technology platform that we acquired. Within the acquisition, we acquired the tech, data for underwriting and people. And so we really see this as the next step to enhancing our credit business, and we’re excited about what the tech and the people and the data will bring to Conn’s.

George L. Bchara — Chief Financial Officer

And Kyle, just to add to that, it did not include the acquisition of any lease-to-own assets. I think the best way to think about this is effectively, it accelerates our timeline — a timeline to bring lease-to-own in-house by 18 to 24 months or so by acquiring the technology, data and people necessary to start this business.

Kyle Joseph — Jefferies — Analyst

Okay. Got it. And then, George, on credit, obviously, you guys talked about how repayment activity is pretty — pretty strong still, but you expect the provision to be up. Can you give us a sense for, maybe directionally, how you see NCOs, the ALLL as we go through 2023?

George L. Bchara — Chief Financial Officer

Yes. I mean, I would say consistent with our guidance, Kyle, we expect provision to be up year-over-year, and that implies that the charge-offs will be more normal this year than they were this past year. But beyond that, obviously, the macroeconomic environment remains really fluid right now, so we’re not going to provide any more specificity.

I will say, as we’re thinking about where we sit today, the portfolio has — it’s been a long time since the portfolio has been in as good of a position as we are today with re-age and TDR balances at levels that we haven’t seen in five years as a percent of the portfolio and delinquency is still well below pre-COVID levels. So we feel good about the position that we’re heading into the year, and our guidance reflects the outlook for the balance of the year.

Kyle Joseph — Jefferies — Analyst

Got it. Thanks. And last one from me. Just for the credit segment, weighing the guidance in terms of the revenue contribution, but also kind of your outlook for sales mix shift. What are your expectations for the size of the portfolio going through 2023?

George L. Bchara — Chief Financial Officer

Our guidance implies that the portfolio will grow modestly throughout the year, but obviously, that’s dependent on how much of our originations are on balance sheet or not. But we expect to see our Conn’s credit financing to stay between that 50% to 60% over the long term and closer to that 50% that year for the balance of the year.

Kyle Joseph — Jefferies — Analyst

Got it. Thanks very much for answering my questions. Very helpful.

George L. Bchara — Chief Financial Officer

Thanks, Kyle.

Operator

Our next question comes from Brian Nagel with Oppenheimer.

William Dossett — Oppenheimer — Analyst

This is William Dossett [Phonetic], on for Brian Nagel.

George L. Bchara — Chief Financial Officer

Good morning.

Chandra Holt — Chief Executive Officer and President

Good morning.

William Dossett — Oppenheimer — Analyst

So our first question, we wanted to ask about the sales deceleration in Q4, and you discussed some likely pull forward into Q3. Were the sales slowdown more of a factor of this waning demand in Q4? Or was there likely an element of supply constraints and cost potentially weighing on sales?

Chandra Holt — Chief Executive Officer and President

Yes. Good question. So we saw a couple of things happen in Q4. So first, we did experience some pull forward into Q3, which we discussed on our last earnings call. And then later in the quarter, when Omicron variant hit, we did see some consumer slowdown during that period. And then the other thing that happened during the quarter was our lease-to-own partners tightened, which also impacted the lease-to-own business. We did not see a significant slowdown from in-stocks or other factors outside of those three for the most part.

William Dossett — Oppenheimer — Analyst

Okay. Thanks. That’s helpful. And this is a bit of a follow-up to a previous question. But with what you’re seeing now within your customer base, are you seeing any indications of a weakening credit as we move further past the effects of fiscal stimulus?

Chandra Holt — Chief Executive Officer and President

So what we’re seeing right now is that customers are still prudently paying their bills, so we are overlapping some of it. But from a tax season perspective, we feel that customers are still using those tax returns to pay their bills, and so we feel confident in that space. What we are seeing from a stimulus standpoint is a pullback in discretionary spending, which we’re seeing and anticipated for Q1 of this year for our business.

William Dossett — Oppenheimer — Analyst

Thanks a lot.

Operator

We have reached the end of the question-and-answer session. I would now like to turn the call back over to Chandra Holt for closing comments.

Chandra Holt — Chief Executive Officer and President

Thank you for attending today’s call. I look forward to continuing to update investors on our progress towards our strategic plan in the coming quarters. Hope everyone has a great day.

Operator

[Operator Closing Remarks]