Will This Freak of Retail Nature Continue to Soar?

Compared to Best Buy and hhgregg, Conn's is defying logic, but should you be a buyer?

Jan 20, 2014 at 2:00PM

If you can find a retailer that's growing with good margins in this retail environment, then buy, hold it tight, and enjoy large returns. This philosophy explains why shares of Conn's (NASDAQ:CONN) are trading higher when peer Best Buy (NYSE:BBY) is sinking. However, given the large losses from the likes of Best Buy and hhgregg (NYSE:HGG), is Conn's still a buy?

Why a freak of nature?
Simply put: Conn's is a freak of nature. In a retail environment where goods are sold at break-even prices, and more consumers are gravitating toward e-commerce, Conn's has managed to grow solidly and produce margins that haven't been seen for the better part of the last decade.

If we look at Conn's last quarter, it grew revenue by 50.6% and continued its hot-streak of multiple quarters with same-store sales growth greater than 20%. Moreover, Conn's produced a gross margin of 40.1%, which was a 460 basis point rise over the prior year. With that said, a margin such as this implies that Conn's has a great competitive edge, and its growth is reminiscent of what we see with start-up companies.

Yet, Conn's isn't a new company -- it has been around for more than a century -- and earns its high profits by simply meeting the demand of today's consumer, something Best Buy and hhgregg might want to follow.

Specifically, Conn's does a few things differently than its peers. First, Conn's offers deliveries of its larger products. Second, Conn's offers a rent-to-own program, which is historically a risky business that is more of a hassle than it's worth. Yet, so far, it has worked well in the company's favor.

Lastly, Conn's has a very successful consumer-credit business, which generates substantial revenue and produces large margins. It is this business that really separates Conn's from Best Buy and hhgregg, as Conn's doesn't only loan to customers with perfect credit but also those with limited and even suspect credit histories.

These services combined are why more and more consumers are rushing in the doors of Conn's and how it's weathered the e-commerce storm.

On its own playing field
As previously mentioned, Conn's is on its own playing field, with nothing to compare; one look, or read, at what Best Buy management had to say about holiday sales further shows the almost unimaginable difference between these two companies

Here's the headline numbers from Best Buy: The company saw a 0.9% decline in comparable-store sales and now expects a 175 to 185 basis point decline to its fourth-quarter operating margin. Moreover, this is a company that over the last 12 months has produced an operating margin of 2.3% and in 2014 is expecting year-over-year revenue growth of just 0.3%.

For peer hhgregg, its net sales rose 7.6% during the holiday season, but comparable sales were lower by a whopping 11.2%. In 2014, hhgregg is expected to grow 1.2% and has an operating margin at 2%, which is very similar to Best Buy.

These numbers make Conn's look that much more impressive, as its 33% expected growth and 12.5% operating margin can not be duplicated. However, is it still a buy?

Is Conn's still a buy?
Best Buy rallied an incredible 240% in 2013 without any meaningful improvements. Essentially, Best Buy rallied because it was cheap, and investors/analysts believed that a turnaround was possible.

After Thursday's debacle, Best Buy now trades at 0.27 times sales; hhgregg is about half the price at 0.14 times sales, and both trade at forward P/E ratios below 15. Conn's, on the other hand, is a bit pricier, trading at 2.3 times sales and 17.5 times forward earnings.

Clearly, the reason that Conn's is priced higher is because of its growth, thus allowing for a valuation premium. In the last year alone Conn's has soared 140%, meaning that for gains to continue Conn's must keep growing.

As of now, the company's 20%-plus comps growth and its industry-best margins make it deserving of the premium, and with growth expected to continue, it's hard to imagine the stock trading significantly lower in the immediate future.

With that said, Conn's is an interesting stock to follow. While similar stores suffer, it continues to thrive. Yet, the real question is how long this trend can continue; Conn's will likely continue to soar so long as it maintains its fundamental performance, which as of now appears to be at least one more year.

Bottom line: A thriving retailer with strong growth and an industry-best margin is worth the premium.

2 more retailers to bet on for 2014
To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.

Brian Nichols owns Conn's. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers