The strategy at Conn’s to grow sales of its most profitable product lines have proved successful for the specialty retailer, which marked its 12th consecutive quarter of increasing same-store sales. But overall results were unsatisfactory, because provisions for credit losses were higher than expected, resulting in portfolio performance deterioration.
“Over the last five months we have successfully opened an additional 14 stores, in 11 markets. We are reaching customers that were underserved before, giving low-income consumers the opportunity to purchase quality, durable, branded products for their homes at affordable monthly payments,” said chairman and CEO Theodore M. Wright.
The company reported an increase of 30.4% to $353 million in consolidated revenues for the quarter. Same-store sales increased 11.7%, on top of an 18.4% increase a year ago. Retail gross margin increased 250 basis points to 40.8%. Furniture and mattress sales increased 60.6% and accounted for 30.8% of total product sales.
Credit segment operating income declined $7.7 million to an operating loss of $0.2 million. Provision for bad debts on an annualized basis was 13.9% of the average outstanding portfolio balance in the current quarter and 11.1% on an annualized basis for the first six months of fiscal 2015. The company, therefore, updated its guidance for full fiscal 2015 to a range of $2.80 to $3 adjusted earnings per diluted share — this updated range primarily reflects the impact of higher expected provision for bad debts and the issuance of $250 million in 7.25% senior unsecured notes in July 2014.
“Despite tighter underwriting, lower early-stage delinquency and improved collections staffing and execution, delinquency unexpectedly deteriorated across all credit quality levels, customer groups, product categories, geographic regions and years of origination. Tighter underwriting and better collections execution did not offset deterioration in our customer’s ability to resolve delinquency,” said Wright about the company’s credit losses. “Delinquency rates improved through May and increased modestly in June, consistent with typical seasonal trends. However, over 60-day delinquency rates unexpectedly deteriorated a combined 90 basis points in July and August. We now expect future 60-plus day delinquency to increase to levels above our historical highs in the third and fourth quarter of fiscal 2015. Early stage delinquency remains lower than historical averages through August.”
In response to higher delinquency, the company is reducing the level of no-interest programs and raising the interest rates in some markets to increase portfolio yield.
“As it has been for half a century, our combined retail and credit business model proved its strength and resiliency. Retail profitability cushioned the impact of credit performance volatility inherent in subprime consumer credit. Had we not pushed ahead to expand our retail sales, we would not have mitigated negative credit trends by strongly growing retail profits,” added Wright. “We remain confident in the business model.”
The company opened eight Conn’s HomePlus stores in seven new markets in the quarter.