It's been a little more than a year since Fool staffers Andy Cross and Bill Barker visited a conference in New Orleans and were presented with an investment report from Tulane University students entitled: "Conn'stant Growth Ensures Bright Future." Since then, Conn's (NASDAQ:CONN) stock has fallen 14% in value. Will tomorrow's fiscal Q1 2008 earnings report turn the students' chagrined frowns upside down?

What analysts say:

  • Buy, sell, or waffle? Half a dozen analysts follow the electronics retailer, and buy ratings outnumber holds 2-to-1.
  • Revenues. On average, analysts expect 6.5% sales growth tomorrow, to $204.7 million.
  • Earnings. Profits are predicted to grow a penny to $0.48 per share.

What management says:
Like just aboutevery otherretaileron Earth, Conn's reported its quarterly sales results on May 8, giving us a sneak peek at tomorrow's news. As it turns out, analysts were very close to right on the sales numbers -- they just got the figures wrong. Conn's grew its sales not 6.5%, but 5.6% compared with last year's Q1, as an expanding store base (six more stores than this time last year) was bogged down by negative same-store sales of 0.3%.

Electronics sales exhibited strong growth at 10% year over year, but sales of lawn and garden merchandise grew 17%, and the surprise best-seller, furniture, rose 150% in comparison to fiscal Q1 2007. CEO Thomas Frank predicted "increased sales growth for the remainder of the year" as Conn's opens another six to eight new stores.

What management does:
It'll need the growth, too, to jump-start profits. Because as far as profits go, the firm is grossing about 1.3 fewer pennies on each dollar of sales compared with a year ago, generating an operating margin that's lower by about 100 basis points and a net margin that's lower by 60 basis points. The good news: These margins are still superior to what larger and better-known big-box rivals like Wal-Mart (NYSE:WMT), Circuit City (NYSE:CC), and Best Buy (NYSE:BBY) are pulling down, thanks to Conn's financing unit.

Margins

10/05

1/06

4/06

7/06

10/06

1/07

Gross

35.8%

35.3%

34.9%

34.4%

34.2%

34.0%

Operating

9.3%

9.3%

9.1%

8.5%

8.1%

8.3%

Net

5.8%

5.9%

5.9%

5.6%

5.4%

5.3%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
For clues to where Conn's margins might be heading, we turn next to the firm's balance sheet. There we find flat accounts receivable (good), but 13% growth in inventories (bad). Inventories are growing much faster than sales, which were up just 1% year over year in the second half of fiscal 2007. The longer this trend continues, the greater the pressure for Conn's to sell merchandise cheaply -- shaving its margins in the process -- to move goods off of the warehouse shelves and into consumers' living rooms.

Need more context for tomorrow's news? Find it in:

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Fool contributor Rich Smith does not own shares of any company named above.