Should You Still Fear Conn's Going Into Earnings?

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

Conn's (NASDAQ: CONN  ) has outperformed peers like Best Buy (NYSE: BBY  ) in recent years thanks to a successful credit program and impressive same-store sales performance in its major segments such as home appliances, furniture, consumer electronics, and home office. But it got crushed last Thursday after its credit program has backfired, causing the company to lower its earnings-per-share guidance. Yet, given the earnings performance of mattress companies like Select Comfort (NASDAQ: SCSS  ) and Mattress Firm Holding (NASDAQ: MFRM  ) , should investors fear Conn's top-line performance when it reports earnings on March 27?

A longtime advantage backfires
Essentially, the Conn's advantage in recent years has been its much-debated credit program. Unlike peer Best Buy, Conn's offers its customers in-house financing, which then makes consumers more likely to buy -- but also exposes the company to a great deal of financial risk.

Given Conn's success, including 38% revenue growth in 2013 and expected 33% growth this year, many believe that Best Buy should have followed suit in offering financing. However, on Thursday we saw why this might not be a good idea, as soaring charge-offs and delinquencies in the fourth quarter had Conn's guiding for quarterly EPS of just $0.77 versus $0.93 expected.

Therefore, investors can clearly see that Conn's growth comes at a cost, and despite an industry-high operating margin of 12.5%, investors are showing zero faith in the company's ability to reverse these bad fortunes. In particular, many think the massive losses are a result of the company's willingness to approve risky consumers just to ensure top-line growth. However, that top-line growth might also be in question.

Heavily reliant on one industry
Conn's estimates for the fourth quarter only include profit; the company did not mention its top-line performance. As an investor, this fact might be very alarming, as there are certain reasons to believe that revenue could be soft for the quarter.

With that said, mattress and furniture sales are what really drove sales growth for Conn's over the last year. In particular, the company saw 95.7% year-over-year growth in its mattress and furniture division, which accounted for more than 20% of total third-quarter revenue.

This growth was driven by very impressive 40% growth in mattress volume to complement a 19% boost in the average selling price per unit. Combined, this performance helped Conn's grow its total revenue by 50% in the third quarter. Yet fundamental reports by mattress leaders might imply that the third quarter's performance was nothing more than a fluke.

Is revenue growth also at risk?
To explain, let's take a look at the earnings from two mattress leaders.

Select Comfort missed expectations on both the top and bottom lines, as revenue grew just 4.7% in the fourth quarter to $231 million. Furthermore, the company saw its operating income decline from $19.4 million in the fourth quarter of 2012 to just $9.7 million.

Then, while Mattress Firm's comparable-store sales rose 6.5% in the fourth quarter, including 20% total revenue growth, the company noted that volume was weak and that its operating margin declined 200 to 230 basis points in the quarter. This implies that pricing was poor, which contrasts the performance of Conn's in its third quarter.

Perhaps Conn's is immune to macro conditions and the pricing environment of the mattress industry. Yet given the financial results from Select Comfort and Mattress Firm, it does look as though pricing momentum within this space did not continue into the fourth quarter of 2013.

Final thoughts
Looking ahead, many might think that Conn's 35% stock decline following its EPS warning is taking into account poor sales as well. However, it's worth noting that at 1.8 times sales, Conn's trades at a steep premium to peer Best Buy at 0.2 times revenue, thus implying it still has far to fall.

With that said, Conn's margins and financing department are the only advantages separating it from its peers, and currently these areas are under pressure. As a result, investors should exercise extreme caution going into the company's quarterly results, because while the EPS warning is already priced into the stock, this weakness may only be half of the equation for this retailer.

You can rest easy with these three stocks in your portfolio
As every savvy investor knows, Warren Buffett didn't make billions by betting on half-baked stocks. He isolated his best few ideas, bet big, and rode them to riches, hardly ever selling. You deserve the same. That's why our CEO, legendary investor Tom Gardner, has permitted us to reveal The Motley Fool's 3 Stocks to Own Forever. These picks are free today! Just click here now to uncover the three companies we love. 

Read/Post Comments (2) | 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 February 25, 2014, at 5:19 PM, Patentplays wrote:

    Perfect 20/20 on this one Brian.

    Conns is a defacto "high risk" Finance Company masquerading as a retail appliance, electronics and mattresses dealer. This is nothing new for Conns, as they did the exact same leverage move in 2006. Then the stock crashed from $43 to $4.56. It took 4 years to wash out all the bad debt, and apparently long enough for Wallstreet to forget.

    ...of course everyone has been incented to forget. How many Appliance and Electronic big box chains sky rocket from $4.40 to $78 in 3 years or less?

  • Report this Comment On February 25, 2014, at 6:00 PM, Patentplays wrote:

    In addition,

    Problems with collecting on this massive $900 million debt is nothing new. Notes taken form the 2nd Quarter Conf Call elude to someone losing the customer telephone numbers (in connection with trying to collect on credit accounts).

    "Mr. Wright continued, “The performance of our credit segment for the second quarter was below our expectations due to short-term execution issues in our collection operations. Corrective actions were taken and negative delinquency trends rapidly reversed"

    The picture becomes much clearer after last weeks report blaming "bad weather" on lack of payments. Conn's customer's cant buy stamps, or use the Internet to make payments. They have to physically present at the store to make a payment. Oddly enough "increased sales" during the quarter did not share the same problem.They managed to soldier thru the elements to make the buys.

    Conn's stores are positioned along the US Border. I suppose negative US immigration polices could be a factor in next quarters loan performance.

    Maybe an epidemic of home pets consuming the Conn's bill? Anything is possible with $900 million of below 599 credit scores.

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: 2851712, ~/Articles/ArticleHandler.aspx, 9/2/2015 9:02:19 AM

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 11 hours ago Sponsored by:
DOW 16,058.35 -469.68 0.00%
S&P 500 1,913.85 -58.33 0.00%
NASD 4,636.11 0.00 0.00%

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

9/1/2015 3:59 PM
CONN $28.23 Down -1.62 +0.00%
Conn's, Inc. CAPS Rating: **
BBY $35.44 Down -1.30 +0.00%
Best Buy CAPS Rating: *
MFRM $58.11 Down -1.98 +0.00%
SCSS $23.40 Down -0.95 +0.00%
Select Comfort Cor… CAPS Rating: ****