Conn’s Inc (NASDAQ: CONN) Q4 2023 earnings call dated Mar. 29, 2023
Corporate Participants:
Norm Miller — Interim Chief Executive Officer
George Bchara — Chief Financial Officer
Analysts:
Kyle Joseph — Jefferies, LLC — Analyst
Brian Nagel — Oppenheimer & Co. Inc — Analyst
Vincent Caintic — Stephens Inc — 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, 2023. My name is Doug, and I’ll be your operator today. [Operator Instructions] The company’s earnings release dated March 29, 2023, was distributed before market opened this morning and could be assessed via the company’s Investor Relations website at ir.conns.com.
During today’s call, management will discuss, among other financial performance measures, adjusted retail segment operating income, 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 the 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 meaning 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 would now like to turn the conference call over to Mr. Miller. Please go ahead.
Norm Miller — Interim Chief Executive Officer
Good morning, and welcome to Conn’s fourth quarter fiscal year 2023 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. When I first spoke to investors and analysts after rejoining the company as Interim CEO in late 2022, I discussed the need to refocus our efforts to better serve our core credit constrained consumers.
To accomplish this goal, we are pursuing transformative initiatives that include refocusing on our core consumers, launching an in-house lease-to-own strategy and accelerating eCommerce growth. While we believe the economic landscape will remain challenging throughout this coming year, we believe that the strategies underway will enable us to emerge from this period stronger, more focused and better positioned to create lasting value for our customers, employees and shareholders.
So with this introduction, I want to focus my prepared remarks on the actions we are pursuing to turnaround our recent performance and drive long-term growth. I am extremely confident in the direction we are headed driven from the strong foundation of our credit segment, our compelling retail credit business model and our large market opportunity.
Conn’s leading credit organization is the result of the investments we made over a multiple years to create sophisticated underwriting, collection and marketing capabilities. This solid foundation enables us to navigate normalizing credit trends and a difficult economic environment, while simultaneously pursuing our growth strategies, including our emerging in-house LTO opportunity.
The strength of our credit business combined with our differentiated business model also enables Conn’s to offer unmatched payment options that are aligned with growing consumer needs and favorable demographics. Within the 15 states in which we operate today, nearly half of consumers have credit scores that fit our Conn’s credit and LTO payment options. In addition, the national average credit score in the United States in calendar 2022 was unchanged following the multiple years of unprecedented credit score growth. With high inflation and growing economic uncertainty, we expect consumers’ credit scores will decline in 2023 for the first time in over a decade.
As a result, we believe our multiple payment offerings are needed now more than ever and we are focused on helping provide flexible and affordable payment options to our customers. Our large addressable market also creates a compelling customer funnel that today represents approximately 28 million total visits to either one of our stores or to our website over the last 12 months. We believe this provides significant growth opportunities across all aspects of our customer funnel that include growing the number of visitors who apply for credit, increasing approval rates and amounts and expanding our customers’ use of their available credit.
Since becoming a public company, almost 20 years ago in late 2003, I believe Conn’s has undergone two major strategic transformations. The first was in 2012 when the company went through a retail transformation that resulted in a move away from small, less profitable, cash-and-carry merchandise towards large ticket essential products for the home, including expanding our furniture assortment. These changes contributed to significantly higher retail sales and retail gross margin.
The second transformation was under my leadership in 2016, when we began making significant investments in our credit operation and changed the lending model in multiple states that enabled us to increase interest rates to appropriately price the credit risk of our customers. These changes contributed to a significant improvement in the profitability of our credit segment and created a solid foundation to support credit-driven growth initiatives.
I believe that our in-house lease-to-own strategy will be the third strategic transformation we will undergo since becoming a public company and is critical to unlock the full potential of our customer funnel. I am pleased to report that we recently launched our in-house lease-to-own product as improvement financial, a brand name that is different from our core retail business. Like the other transformations, the company has been through over the last 20 years, bringing the lease-to-own business in-house has the potential to contribute to significant growth in both revenue and earnings in the coming years.
Over the near term, it will allow us to provide another profitable option to better serve the approximately 600,000 applicants that did not qualify for Conn’s in-house financing over the last 12 months. Since our differentiated retail credit business model enables us to capture both retail gross margin and lease income, we believe Conn’s can 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 gaining access to the payment history of LTO customers. We will use this information to convert in-house LTO customers to future Conn’s Credit customers. This will allow us to develop longer customer relationships by graduating customers to more attractive, lower price financing options, while also helping customers improve their credit.
After several quarters of development, improvement financial went live in February 2023 in three Houston area stores and we have recently expanded to 10 locations. By the end of this fiscal year, we expect improvement financial will be offered across the majority of our stores and at conns.com. While it’s too early to provide information on the performance of our new in-house LTO offering, we are excited by the potential to add incremental sales and earnings to Conn’s.
This past year, LTO sales were approximately $81 million and represented just over 7% of retail sales. As our in-house LTO program matures, we believe annual LTO sales can more than double and grow to over 15% of our retail sales. As we convert third-party LTO sales to in-house LTO transactions, we expect our operating income this fiscal year to be negatively impacted by approximately $15 million. However, as the program matures, we believe our in-house LTO offering will add over $20 million to annual operating income. As you can see improvement financial is a transformational opportunity that we believe will unlock significant value. I look forward to updating our shareholders on the progress of this program over the coming quarters.
Next, I want to provide an update on the successful transition of our eCommerce business. Over the past 18 months, we completely re-platformed our website and created a modern online shopping experience that is supported by a broader assortment. Even as we undertook the difficult task of converting our eCommerce platform and enhancing our digital capabilities, we were able to grow eCommerce sales by 10.8% to an annual record of $79 million this past fiscal year. Going forward, we continue to believe we have a large opportunity to grow online sales and we are committed to driving traffic and increasing conversion. eCommerce sales are up 21.5% through the first seven weeks of the quarter and we believe eCommerce sales of this fiscal year can increase to over $100 million. Longer term, we continue to believe eCommerce sales can grow to over $300 million annually.
Our eCommerce platform has also benefited from the recent implementation of an innovative digital application, that changes two major aspects of the process. First, we no longer require a hard credit inquiry to provide a credit decision before shopping. Hard credit inquiries can affect the customers’ credit score. Customers, particularly non-prime customers are often wary of completing an application, knowing that their credit may be affected.
In this new process, a credit decision is provided through a soft credit inquiry prior to shopping with little-to-no impact on the customers’ credit score, which removes a significant friction point from the application and shopping process. Second, customers no longer go through a series of credit decisions individually applying for each credit program. Instead, once a customer completes a common application, they see a dashboard of qualifying offers, which allows them to see and select the payment option that best fits their individual needs. This new digital application removes another significant friction point from the application process and provides our customers with additional information to make informed purchase decisions. Since launching our innovative digital application process, we are seeing application traffic increase which we believe ultimately supports sales opportunities across our customer funnel.
Our refocus on our core consumer to more targeted marketing, combined with a refreshed eCommerce platform are beginning to drive application growth. The year-over-year change in applications has been narrowing over the past six months and March will be the first month applications are up year-over-year in almost 18 months. Applications are a critical leading indicator of sales and I am encouraged by these improving trends.
Turning to new store growth, we ended fiscal year 2023 with a 168 locations, which included 11 new stores and one close location, and we continue to test our store within a store strategy with Belk. This fiscal year, we expect to open 11 stores and two distribution centers, all of which were previously committed. After these stores and distribution centers open, we plan to pause new store openings over the next couple of years to focus on better serving our core credit constrained consumers, capitalizing on our in-house lease-to-own strategy and accelerating eCommerce growth. With major investments across our credit and retail segments behind us, we believe we have a multi-year opportunity to drive retail growth within our existing stores 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 costs.
Finally, given the uncertain economic environment and in lieu of official guidance, I want to provide some details on recent sales trend and considerations for the year. Since the third quarter sales trends have improved or remained stable as we have refocused the business on our core credit constrained consumer. These trends continued into the first quarter with total retail sales down 18.6% quarter-to-date. Looking forward to the remainder of the fiscal year, we expect retail sales to improve on a sequential basis as we benefit from the growth strategies we have discussed today.
Looking at other areas of our income statement, we expect retail gross margin to stabilize and benefit from lower freight expenses this fiscal year. After reducing SG&A by approximately $18 million last fiscal year, primarily through cost savings initiatives, we expect annual SG&A expenses to increase year-over-year by USD25 million to USD35 million. This expense growth is primarily associated with the 22 new stores that will have opened between last fiscal year and this fiscal year. It’s also important to note that we currently expect our annual interest expense to increase year-over-year by approximately USD40 million to USD45 million as a result of wider credit spreads and higher benchmark rates.
Before I turn the call over to George to share more details on our financials, I want to reiterate my confidence in our business. Conn’s continues to have a strong value proposition, a solid foundation and compelling future. I believe we have the right strategies in place to drive top line sales and improve our financial results, especially as retail trends normalize. We can and should win in any environment and the leadership team and I will hold the company accountable to this belief.
As we refocus on execution in the business, I am confident we can turn around 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. While this past fiscal year was challenging and we expect this current year to be impacted by continued economic uncertainty, changes in consumer behavior and our in-house lease-to-own transition, we are excited by the strategies underway to drive profitable growth.
On a consolidated basis, total revenues were $334.9 million for the fourth quarter, representing a 16.8% year-over-year decline. For the fourth quarter, the company reported a GAAP net loss of $1.79 per diluted share compared to net income of $0.26 per diluted share for the same period in fiscal year 2022.
For fiscal year 2023, total revenues were $1.3 billion, representing a 15.6% year-over-year decline. The company reported a GAAP net loss of $2.46 per diluted share for fiscal year 2023, compared to net income of $3.61 per diluted share for fiscal year 2022. On a non-GAAP basis adjusting for certain charges and credits, we reported a net loss of $1.53 per diluted share for the fourth quarter, compared to net income of $0.33 per diluted share for the same period in fiscal year 2022.
For fiscal year 2023, we reported a net loss of $2 per diluted share compared to net income of $3.71 per diluted share for fiscal year 2022. 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 fourth quarter retail segment performance in more detail. Total retail revenues were $270.8 million in the fourth quarter, representing an 18.7% year-over-year decline. Lower retail revenue was driven by a decrease in same-store sales, which was primarily driven by lower discretionary spending for home-related products and comparatively higher same store-sales in the prior year due to the impact of stimulus benefits. These decreases were partially offset by new store growth.
Retail gross margin for the fourth quarter declined 210 basis points to 33.7%, compared to 35.8% for the same period in fiscal year 2022. The decrease in gross margin was 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 realized the benefit of lower international shipping costs. We estimate that the higher freight costs have impacted retail gross margin by approximately 150 basis points to 200 basis points and will reverse over time as we continue to receive new inventory at lower freight costs.
SG&A expenses in our retail segment for the fourth quarter decreased 2.2% to $103.1 million compared to $105.4 million for the same period last fiscal year. Lower SG&A expenses were due to cost savings initiatives and declines in variable cost that more than offset increases related to new store growth and eCommerce investments. Due to lower retail sales, SG&A expenses were 38.1% of retail sales for the fourth quarter compared to 31.6% for the same period in fiscal year 2022.
For the fourth quarter, retail segment operating loss was $19.5 million compared to retail segment operating income of $10.9 million for the same period in fiscal year 2022. On a non-GAAP basis, adjusted retail segment operating loss for the fourth quarter was $11.7 million, excluding charges and credits for asset disposal and store closure costs. This compared to non-GAAP adjusted retail segment operating income of $13.6 million for the same period in fiscal year 2022, which excludes charges and credits for non-recurring excess import freight costs related to congestion in U.S. ports.
Turning to our fourth quarter credit segment performance. Finance charges and other revenues were $64.1 million, a 7.8% year-over-year decline primarily due to a decline in the average balance of the customer receivable portfolio. It is important to note that recent credit performance is up against large scale stimulus programs which supported better payment, delinquency and charge-off performance over the past two years. 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-plus day past due balance was 12.7% at January 31, 2023 compared to 10.4% in fiscal year 2022, which benefited from stimulus programs. The balance of re-aged account as a percent of the portfolio was 16.5% compared to 16.8% for the same period in fiscal year 2022. In addition, carrying value of re-aged account continues to improve and remains at one of the lowest levels in almost a decade. For fiscal year 2023, net charge-offs as a percent of the average portfolio balance were 14%, compared to 11.1% for the year ended January 31, 2022. Our credit spread for fiscal year 2023 was 9.1% compared to 11.7% in fiscal year 2022.
During the fourth quarter, the credit provision for bad debt was $44.1 million compared to $28.2 million for the same period in fiscal year 2022. The $15.9 million increase in credit provision for bad debt was primarily driven by higher net charge-offs. The company reported a credit segment loss before taxes of $27 million in the fourth quarter compared to a credit segment loss of $1.1 million for the same period in fiscal year 2022. The greater credit segment loss before taxes was primarily due to a smaller portfolio and a higher provision for bad debts.
Our fourth quarter and full-year effective tax rate were 8% and 10.7% respectively. These effective tax rates were lower than the statutory tax rate, primarily because of a non-cash valuation allowance that we recorded in the fourth quarter against our deferred tax asset.
Turning now to our balance sheet. At January 31, 2023, we had $576.6 million in net debt compared to $483.4 million for fiscal year 2022. Net debt as a percent of the ending portfolio balance was approximately 56.2% at the end of the fourth quarter, which remains below pre-pandemic levels. In addition, we have no near term debt maturities and last summer, we successfully completed our 11th ABS transaction since reentering the ABS market in 2015. We expect to complete another ABS transaction later this fiscal year.
On February 21, 2023, we entered into a $100 million three-year term loan that was used to pay down the balance of our ABL facility and provided us with additional liquidity as we execute our turnaround strategies. As of March 24, the company had $209.2 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.
Before we turn the call over to questions, I want to review the accounting treatment of our in-house LTO transition. As we have stated before, in our consolidated financial statements, revenue from sales made to our in-house LTO 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 the transaction.
Therefore, as this year progresses, you will see lower LTO retail sales flow through our income statement and a growing base of lease revenue. This will temporarily impact profitability as Norm stated in his prepared remarks. As lease revenue scales and our transition matures, we will benefit from highly profitable LTO economics. Finally, I’m going to share my thanks to 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:
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Kyle Joseph with Jefferies. Please proceed with your question.
Kyle Joseph — Jefferies, LLC — Analyst
Hey, good morning. Thanks for taking my questions. Appreciate the kind of the color you gave on quarter to date. But just wanted to hear what you guys are seeing in terms of tax refund this quarter to date and how that’s impacting both the demand and credit performance?
Norm Miller — Interim Chief Executive Officer
Yeah. Hey, Kyle. Good morning. What I would say is that, our tax season so far we’ve seen the reports nationally that the average refund is down 10%, 11%. But what I would say is, what we’re seeing from a tax season standpoint, certainly from a portfolio standpoint is within our range of expectations of where we expected the tax season to be. We have not seen as much of a pickup from a demand standpoint on the sales side, especially if you look at pre-pandemic years of what you typically get. So, I think it’s impacting the sales side from our perspective at least more than it is the portfolio, overall pretty pleased with where it is from a collection standpoint today.
Kyle Joseph — Jefferies, LLC — Analyst
Yeah. Thanks. And then on the in-house LTO option, historically you provided kind of the three channels, in-house financing, third-party financing and third-party LTO. Are we going to get a fourth kind of channel disclosure there or will it be part of the in-house financing breakdown?
Norm Miller — Interim Chief Executive Officer
No. We will break it out separately. The in-house LTO versus the Conn’s financing. They won’t be rolled together, we will reflect them separately.
George Bchara — Chief Financial Officer
Yeah. I think to Norm’s point, Kyle, we’re going to try to provide detail about the P&L impact as this materializes over the next 18 months. And we’ll obviously share that in our upcoming disclosures.
Kyle Joseph — Jefferies, LLC — Analyst
Got it.
Norm Miller — Interim Chief Executive Officer
And frankly, Kyle, although we didn’t say it in the prepared comments. We expect to transition here over this year the majority of the business, but we still expect to have some portion of our lease-to-own business with our third-party partner and even past this fiscal year, it will depend on how the performance goes. But from my perspective, there is a value on having a champion challenger. So we can benchmark ourselves on our LTO performance versus what we’re seeing from our third-party partner.
Kyle Joseph — Jefferies, LLC — Analyst
Got it. Thanks very much for taking my questions.
Norm Miller — Interim Chief Executive Officer
Thanks, Kyle.
Operator
Our next question comes from the line of Brian Nagel with Oppenheimer. Please proceed with your question.
Brian Nagel — Oppenheimer & Co. Inc — Analyst
Hey guys. Good morning.
Norm Miller — Interim Chief Executive Officer
Good morning, Brian.
George Bchara — Chief Financial Officer
Good morning.
Brian Nagel — Oppenheimer & Co. Inc — Analyst
So, I want to — just on the LTO opportunity, I know we’ve talked about so well, Norm. But as you look at — thanks for all the color. But I guess what I’m looking at is, how should we think about the risk profile, the risk of this — for Conn’s [Phonetic] versus either using the partners you’ve been doing or a normal sale using your credit operation?
Norm Miller — Interim Chief Executive Officer
Sure. Well, from a risk standpoint, if you — on the investor deck that we sent out this morning, you’ll see that we — in the past 12 months, it’s been at a lower level or lower run rate, but we still had 1.1 million total applications this — in the past 12 months. Now, the number should be higher than that and historically it has been as we refocus on the Conn’s customer here, we expect that number to increase here this fiscal year and beyond. But out of that 1.1 million customers that submitted applications, whether in our store or online, we approved 460,000, meaning we declined 640,000 applications.
So, that is really what the opportunity is and our — from a risk standpoint, we would not want to take risk with Conn’s financing with those customers because of their credit performance. But — and we — as you know, our yield in our spread is about 1,000 basis points and our net yield is about 23%. With the lease product, the implied yield — we don’t quote a yield because it’s a lease product, not a loan product. But if you calculate it, the APR, it would be in the 130%,140% range. So, you have much greater spread to be able to take more risk with that customer.
In addition, remember our third-party partner on the lease-to-own which it’s very profitable to them. All they get is the lease revenue of the product. We get the retail product margin. As we do it in-house, we’ll get both the retail product margin in that 33% to 37% range, plus we’ll get the lease revenue over time as well, which gives us the opportunity to go deeper potentially, say, yes to more customers and to put that in perspective, every 1% that we can increase approvals, that’s another 6,400 applications on the lease-to-own that we could approve potentially that our third-party partner couldn’t. And if you look at, I’ll take a very conservative balances average ticket, a $1,200 that’s $7 million annually in revenue with 1% increase from an approval standpoint.
So the opportunity, both from a profitability standpoint, as well as a sales standpoint. That’s why I said, I truly believe it, we will look back two years from now, three years from now and see this is one of the strategic transformations of the company over the last 20 years.
Brian Nagel — Oppenheimer & Co. Inc — Analyst
Got it. That’s very, very helpful. I appreciate that. And then just shifting gears a bit, I guess, George, you mentioned in your comments about the freight costs. We’re hearing this now something similar across retail, where more and more companies like yourself set a line of sight to decline in shipping costs. So I guess the question I have is, how do you think about — how big is that opportunity here as 2023 progresses and when should it kick in? And then from Conn’s perspective, what will you do with that sales? Will that be a margin driver, to a certain extent, could you reinvest it back into price?
George Bchara — Chief Financial Officer
Yeah. As I said in my prepared remarks, we estimate that the impact on gross margin is between 150 basis points and 200 basis points on total retail gross margin. Now from a category standpoint, all of that is coming from furniture. But we’re still in — we’re seeing improvements in gross margin in furniture, but still receiving inventory at now lower freight costs. So it’s going to take 12 months or so before we see the full benefit of freight costs going back to where they were pre-pandemic. From a profitability standpoint or where those dollars go, we would expect that to drive higher retail gross margin on the business going forward.
Norm Miller — Interim Chief Executive Officer
And we are seeing current freight costs get approach very close to where they were pre-pandemic. The items being shipped the day from Asia, certainly. But remember, we have to work through the inventory that we have — that has at a higher average weighted cost, that George is talking about, that will take a number of months to work through.
Brian Nagel — Oppenheimer & Co. Inc — Analyst
Got it. And if I could — can I just open one more question. Just tell me no, if I can’t. But, I mean, this overall environment. So, you’re looking at your — and I know there’s a lot of choppiness, we’re looking at your sales, it seems like I think you commented sales have seemed to stabilize lately. What are you seeing this and as far as the macro backdrop, your core consumer at this point? Has there been any shift over the last, say, few or several months?
George Bchara — Chief Financial Officer
Yeah. What I would say is, we are seeing increased demand with — the lower you move in the credit spectrum with Conn’s financing and LTO, although that customer is, I think is more stressed currently, their need for credit and their demand for credit, we have seen over the past — since I’ve returned in the past, 90 days to 120 days demand there increase. Now part of that is being driven, we’ve shifted focus from a marketing standpoint. I mean, that’s where our bread is buttered, that’s where — that’s what differentiates us ultimately in the marketplace is our ability to offer financing on essential products for the home that customers don’t have as many alternatives and frankly they have less alternatives today than they add six months ago or 12 months ago because of tightening higher up the credit spectrum. So, we are absolutely seeing increased demand with the Conn’s financing in LTO side of the house.
Brian Nagel — Oppenheimer & Co. Inc — Analyst
I appreciate all the color. Thank you.
Norm Miller — Interim Chief Executive Officer
Thanks, Brian.
George Bchara — Chief Financial Officer
Thank you, Brian.
Operator
Our next question comes from the line of Vincent Caintic with Stephens. Please proceed with your question.
Vincent Caintic — Stephens Inc — Analyst
Hey, good morning. Thanks very much for taking my questions. First question on the credit side of the business. Just wondering how you’re thinking about how credit will perform as we go into the fiscal 2024 period? And kind of specifically as to lease-to-own business ramps up, how does the accounting work for that, because I understand the lease revenues comes over time. But just wanted to understand how maybe credit shows up? Thank you.
George Bchara — Chief Financial Officer
Let me take the second question, Vincent, on the accounting. The way today when we record a third-party LTO transaction, we record revenue from that sale and we get the margin in the period in which the sale is incurred. Just like we would for any of the other payment types. But in a third-party — when it’s in-house rather, we no longer recognize anything when we sell the transaction, when we sell the product and instead we will recognize lease revenue over the life of the lease and that would be offset by depreciation on the leased merchandise. So, you’d have lease revenue in revenue, and then you’d have another line item that’s lease depreciation and write-off that would flow through our financial statements. Does that answer your question?
Vincent Caintic — Stephens Inc — Analyst
Yeah. That’s helpful. Any broad — kind of broader business thoughts on credit for the year?
Norm Miller — Interim Chief Executive Officer
Yes. I would say, I’m cautiously optimistic as we sit here today. I’m pretty pleased, Vincent, with where the portfolios perform in. Although, our charge-offs were a little elevated here in the fourth quarter, that was not unexpected. And we actually communicated that in the third quarter my first call back, we expected that based on, as — it’s really a normalization. It’s not something that is atypical that we would see once you get past the stimulus side of the house.
And if you look at the way we’re underwriting, 70% of the customers that we’re approving currently in the portfolio are at the higher-end of our Conn’s spectrum of customers, higher credit quality within that Conn’s spectrum if you will, which is those are much higher levels than we have done historically pre-pandemic. So, we’re I feel very confident, optimistic now the concern is the macro side of the house, how that unfolds. Clearly, we don’t know and what will happen with unemployment and how long does inflation and higher rates persist. But as we sit here today and we look at delinquencies, we look at all forward leading indicators of the existing portfolio, pretty pleased with where the portfolio sits as we sit here today. And as I mentioned to Kyle, the tax season has been a pretty solid one for us here two-thirds of the way through it.
Vincent Caintic — Stephens Inc — Analyst
Okay. That’s very helpful. Thank you. And my last question just on the financing, the funding and the liquidity side of the business over the past month there has been some concerns. Just broadly with financial institutions and some of these banks are having issues. So, just wondering if that’s affecting Conn’s and all. And if how we should think about funding the liquidity needs through this year? Thank you.
George Bchara — Chief Financial Officer
Yeah, Vincent. This is George. Not really. We don’t really keep large deposit balances in any of our bank. So that’s not a concern. We’ve got a strong base of a banking group and our ABL facility. The only real impact that we’ve seen over the last few weeks is that spreads in the ABS market have widened a bit. But it has not changed the fact that the market is still open and we could do a transaction if we needed to. I mean, our plan is that we will do at least one transaction sometime later this year from an ABS standpoint and that — those somewhat wider spreads are reflected in our interest expense outlook that Norm shared in his prepared remarks.
Vincent Caintic — Stephens Inc — Analyst
Okay, great. That’s very helpful. Thanks very much.
Operator
That’s all the time we have for questions. I’d like to turn the call back to Mr. Miller for closing remarks.
Norm Miller — Interim Chief Executive Officer
Thank you. First of all we appreciate all of our associates across the enterprise and their hard work and dedication each and every day. And also appreciate your interest from a shareholder standpoint. We look forward to sharing our first quarter results here in the next couple of months. Have a great day.
Operator
[Operator Closing Remarks]