Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Will This Freak of Retail Nature Continue to Soar?

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

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.

Read/Post Comments (3) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 21, 2014, at 3:35 PM, IlluminatInvest wrote:

    You do realize that CONN's finances 80% of their customers' purchases, right? No wonder they have higher margins than their "peers", since their customers can't afford to puchase this things directly from any of the other competitors.

    Aggressive expansion of stores that sell high priced items to high risk borrowers without setting aside higher provisions for losses on the promotional zero percent interest rate loans they've been pushing lately? No thanks.

  • Report this Comment On January 21, 2014, at 6:13 PM, Jurobi wrote:

    Comparing CONN's to Best Buy isn't exactly comparing apples to apples. A store recently opened in a city near me, and, being in town I went in. While there are lots of big screen TVs and large appliances (a better selection of each than the Best Buy or SEARs, only 2-3 blocks away), 2/3 of the store was dedicated to furniture - living room and bedroom sets, and dining rooms. While the selection of furniture is smaller than the local large furniture stores, the quality was better. That is why Conn's is doing better than Best Buy or HhGregg.

  • Report this Comment On January 29, 2014, at 9:33 PM, bobbyggggg wrote:
Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2801395, ~/Articles/ArticleHandler.aspx, 8/30/2015 2:14:19 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

Today's Market

updated 1 day ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:00 PM
BBY $35.97 Up +0.17 +0.47%
Best Buy CAPS Rating: *
CONN $29.44 Down -0.54 -1.80%
Conn's, Inc. CAPS Rating: **
HGG $4.68 Down -0.20 -4.10%
hhgregg CAPS Rating: *