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Credit Drives Conn's Earnings Growth. Will the Run Continue?

Overall, it's been a rough earnings season for many retailers. A harsh winter, combined with soft consumer spending, has eaten into the top line of many chains. However, some have managed to buck the trend. Conn's (NASDAQ: CONN  )  operates as a retailer of consumer durables and electronics, but also has a consumer credit segment. Both have done surprisingly well for the quarter, overall results certainly outpacing rival Best Buy  (NYSE: BBY  ) , which is currently involved in a large-scale turnaround effort. It seems as if being able to acquire credit in Conn's locations is boosting the company's sales.


Big beat
Conn's came out with some excellent numbers for its first-quarter report. Earnings per share of $0.80 easily topped the $0.73 consensus, rising a huge 31% year over year. Revenue shot up by 33.6% to $335.5 million, also well over calls for $328.5 million. Same-store sales, widely regarded as one of the most important retail metrics, soared 15.6% for the quarter. While this is down slightly from last year's 16.5% increase, it's still a remarkably solid figure.

Looking at results by product category, the numbers would suggest that people are investing more in their homes. Furniture and mattress sales skyrocketed nearly 65%, now accounting for nearly one-third of overall revenue and around 42% of net income due to higher margins on these products. Home appliances were up by 21% and home theater and portable audio sales increased by a very healthy 42%. Surprisingly, computer sales rose by 60%, while tablet sales declined by 15%, which is unusual in today's mobile-computing universe.

What's particularly impressive about the report is that the company managed to deliver an increase in electronics sales, which is very rare in today's consumer spending environment. Same-store sales growth for the electronics segment rose 3%. Best Buy, one of the company's competitors in the electronics and appliance space, certainly hasn't managed to record this type of growth in the category recently.

Following these first-quarter results, the company reaffirmed its full-year guidance for EPS of $3.40-$3.70 with same-store sales growth of between 5% and 10%. Conn's has several positives going forward, including the discontinuation of lawn equipment sales, which carries a fairly low margin, and a shift toward higher margin mattresses and furniture. Based on the most recent results, as well as the favorable outlook and a move toward higher-margin products, things look pretty good for the company as we move into the rest of the fiscal year.

Credit making the difference?
The main factor that sets Conn's apart from other retailers in its category is the fact that it offers in-house credit, which makes it easier for consumers to purchase goods in its store locations. This was also one of the best-performing segments by revenue, with credit revenue up nearly 39%. After a period in which the percentage of loans late by more than 60 days rose by 8.8% due to the harsh winter and associated energy costs, things seem to have normalized again, the rate dropping to 7.8% by the end of May.

Perhaps the ease of acquiring goods on credit in Conn's locations is what drove the company to perform so much better than Best Buy, which hasn't exactly been reporting staggering figures lately. Nevertheless, Best Buy is still afloat, which is more than can be said for some companies in the industry. For its latest quarterly report, earnings were more or less flat, while total revenue declined 3%. Same-store sales were down 1.9%, and according to management, things aren't expected to improve much over the next two quarters.

Analysts are divided as to Best Buy's prospects going forward. Some believe that the company is meaningfully turning things around with product launches such as the new iPhone toward the end of the year expected to boost sales. Also, the company's supporters believe that investments in the online channel and customer experience are likely to pay off. Critics on the other hand maintain that the company's turnaround efforts are a case of 'too little, too late', and that online sales will drive the chain to extinction. It seems too early to tell looking at the company's most recent figures.

The bottom line
In a tough sector that's currently feeling the pinch of a weak consumer spending environment, Conn's managed to deliver an excellent performance, beating on the top and bottom line as the consumer credit division seems to be boosting overall sales. Going forward, an increased offering of higher-margin products should allow the company to continue its solid run. Compared to rival Best Buy, which is still struggling in many areas, Conn's seems to have found a formula that works.

Conn's electronics sales are up. Will this new product boost sales further?
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Daniel James

I'm primarily a value and fixed-income investor with a background in cultural anthropology. As a writer for the Fool, I focus mainly on the consumer goods sector, also dabbling in technology occaisionally. When not pouring over the world's stock markets, I like to read, travel and make music.

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