Conn’s, Inc. (NASDAQ: CONN), a specialty retailer of furniture and mattresses, home appliances, consumer electronics and home office products, and provider of consumer credit, today announced its financial results for the quarter ended October 31, 2020.
“Our third quarter results highlight the resilience of our unique hybrid retail and credit business model and the ability to de-risk our credit business while still supporting retail demand through our diverse credit offerings. As a result, we experienced another quarter of robust year-over-year growth of cash and third-party retail sales, which increased 32.7% over the prior fiscal year period and reflect strong demand for home-related products. We are also quickly expanding our digital and omnichannel capabilities to meet surging online trends and e-commerce sales increased nearly 61% during the quarter,” stated Norm Miller, Conn’s Chairman and Chief Executive Officer.
“The performance of our credit segment throughout the COVID-19 crisis demonstrates the success of the adjustments we made earlier this year to mitigate the potential impacts on our business of high unemployment and economic uncertainty. While retail sales financed by our in-house credit offering declined 27.9% from the prior fiscal year, our credit segment is benefitting from newer, higher quality originations and the highest rate of cash collections in over ten fiscal years. In addition, the reduction in the portfolio balance, driven by strong cash collections and higher cash and third-party sales, has contributed to significant year-to-date and third quarter operating cash flow and strengthened our balance sheet.”
“Same store sales improved sequentially reflecting the progress we are making to capture retail sales opportunities while prudently managing credit risk. I am proud of our response to the unprecedented challenges we have faced throughout the COVID-19 pandemic and our continued commitment to protect the health and safety of our employees, customers, and communities. This is a testament to the experience of our senior leadership team, the dedication of our employees and the value our credit and retail products provide our communities. As we successfully navigate this difficult period, I remain confident in the direction we are headed,” concluded Mr. Miller.
Third Quarter Results
Net income for the three months ended October 31, 2020 was $7.4 million, or $0.25 per diluted share, compared to net income for the three months ended October 31, 2019 of $11.5 million, or $0.39 per diluted share. On a non-GAAP basis, adjusted net income for the three months ended October 31, 2020 was $7.4 million, or $0.25 per diluted share. This compares to adjusted net income for the three months ended October 31, 2019 of $14.4 million, or $0.49 per diluted share, which excludes facility closure costs and write-off of software costs.
Retail Segment Third Quarter Results
Retail revenues were $259.9 million for the three months ended October 31, 2020 compared to $280.3 million for the three months ended October 31, 2019, a decrease of $20.4 million or 7.3%. The decrease in retail revenue was primarily driven by a decrease in same store sales of 10.9% and a decrease in repair service agreement commissions, partially offset by new store growth. The decrease in same store sales reflects proactive underwriting changes, combined with industry wide supply chain disruptions in certain product categories, each of which was the result of the COVID-19 pandemic.
For the three months ended October 31, 2020 and 2019, retail segment operating income was $15.2 million and $19.6 million, respectively. On a non-GAAP basis, adjusted retail segment operating income for the three months ended October 31, 2020 was $15.2 million. On a non-GAAP basis, adjusted retail segment operating income for the three months ended October 31, 2019 was $22.2 million after excluding impairments from exiting certain leases upon the relocation of three distribution centers into one facility and a gain from the sale of a cross-dock.
Credit Segment Third Quarter Results
Credit revenues were $74.2 million for the three months ended October 31, 2020 compared to $95.8 million for the three months ended October 31, 2019, a decrease of $21.6 million or 22.5%. The decrease in credit revenue was primarily due to a decrease of 16.0% in the average balance of the customer receivable portfolio, a decrease in insurance commissions due to a decline in the balance of sale of our in-house credit financing and a decrease in insurance retrospective income. The decrease was also due to a decline in the yield rate to 21.1% during the three months ended October 31, 2020, 60 basis points lower than the three months ended October 31, 2019. The decline in yield rate was primarily due to an increase in delinquencies.
Provision for bad debts was $27.4 million for the three months ended October 31, 2020 compared to $45.4 million for the three months ended October 31, 2019, a decrease of $18.0 million. The decrease was driven by a greater decrease in the allowance for bad debts during the three months ended October 31, 2020 compared to the three months ended October 31, 2019. The decrease in the allowance for bad debts was primarily driven by the year-over-year decrease in the customer accounts receivable portfolio.
Credit segment operating income was $8.9 million for the three months ended October 31, 2020, compared to $10.7 million for the three months ended October 31, 2019. On a non-GAAP basis, adjusted credit segment operating income for the three months ended October 31, 2020 was $8.9 million. On a non-GAAP basis, adjusted credit segment operating income for the three months ended October 31, 2019 was $11.9 million after excluding impairments of software costs for a loan management system that was abandoned during the third quarter of fiscal year 2020 in connection with the implementation of a new loan management system.
Additional information on the credit portfolio and its performance may be found in the Customer Accounts Receivable Portfolio Statistics table included within this press release and in the Company’s Form 10-Q for the quarter ended October 31, 2020, to be filed with the Securities and Exchange Commission on December 8, 2020 (the “Third Quarter Form 10-Q”).
Showroom and Facilities Update
The Company opened two new Conn’s HomePlus® showrooms during the third quarter of fiscal year 2021 and has opened one new Conn’s HomePlus® showrooms, its first in Florida, during the fourth quarter of fiscal year 2021, bringing the total showroom count to 144 in 15 states. During the remainder of fiscal year 2021, the Company plans to open two new showrooms, bringing the total for fiscal year 2021 to nine new showrooms.
Liquidity and Capital Resources
As of October 31, 2020, the Company had $276.9 million of immediately available borrowing capacity under its $650.0 million revolving credit facility, prior to giving effect to a minimum liquidity requirement of $125.0 million pursuant to the third amendment to our revolving credit facility. The Company also had $107.8 million of unrestricted cash available for use.
Operating cash flow increased 316.6% year-over-year to $385.5 million for the nine months ended October 31, 2020 driven by growth of cash and third-party sales, strong cash payment rates on our customer receivables portfolio and a decline in Conn’s in-house credit originations. The increase in operating cash flow contributed to a reduction in net debt.
On October 16, 2020, the Company completed an ABS transaction resulting in the issuance and sale of $240.1 million aggregate principal amount of Class A and Class B Notes secured by customer accounts receivables and restricted cash held by a consolidated VIE, which resulted in net proceeds of $238.5 million, and an all-in cost of funds of 4.84%. Class C notes in aggregate principal amount of $62.9 million were also issued in the ABS transaction and were retained by the Company.
About Conn’s, Inc.: Conn’s is a specialty retailer currently operating 144 retail locations in Alabama, Arizona, Colorado, Florida, Georgia, Louisiana, Mississippi, Nevada, New Mexico, North Carolina, Oklahoma, South Carolina, Tennessee, Texas and Virginia. The Company’s primary product categories include:
- Furniture and mattress, including furniture and related accessories for the living room, dining room and bedroom, as well as both traditional and specialty mattresses;
- Home appliance, including refrigerators, freezers, washers, dryers, dishwashers and ranges;
- Consumer electronics, including LED, OLED, QLED, 4K Ultra HD, 8K and smart televisions, gaming products and home theater and portable audio equipment; and
- Home office, including computers, printers and accessories.
Additionally, Conn’s offers a variety of products on a seasonal basis. Unlike many of its competitors, Conn’s provides flexible in-house credit options for its customers in addition to third-party financing programs and third-party lease-to-own payment plans.
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