Should You Buy Conn's on the Pullback?

Conn's (NASDAQ: CONN  ) shares plunged nearly 43% year to date, with the greatest drop triggered by an increase in delinquency rates disclosed in its preliminary fourth-quarter results. Conn's competes with the likes of hhgregg (NYSE: HGG  ) and Best Buy (NYSE: BBY  ) while selling a diverse range of home appliances, home electronics, and furniture and mattresses in addition to offering in-house credit. Is this massive decline an opportunity for investors to take a position in the stock?

A closer look
Conn's started the new fiscal year with a bang, with estimate-beating first-quarter results. The company reported record earnings per share of $0.80, representing a whopping 32% increase from last year. This was driven by 33.6% year-over-year growth in net sales to $335.4 million. The top-line growth was largely on the back of a robust performance by the company's retail division, a new store model, and its credit operations.

The company reported comparable-store sales, or comps, growth of 16% on top of a 17% jump in the prior-year quarter. The trend continued in May as well, with Conn's registering 13% comps growth, indicating that the company is connecting well with its customers.

A few improvements
Conn's reversed the delinquency trend in its credit division. Delinquencies of more than 60 days declined 80 basis points from January to April and were down another 20 basis points in May. What's more encouraging is that the shift to higher sales in furniture and mattresses -- a higher-margin category -- is not putting pressure on delinquencies.

The company introduced 100% free delivery starting in May. This will make it competitive versus other players in the market and will improve the customer experience. Moreover, it is increasing the color options available for customers. Going forward, the company is expecting to double its appliances sales in three years. Moreover, the company is inching closer to its goal of achieving 35% of sales from furniture and mattresses. In addition, the Tempur-Pedic brand is off to a good start.

It plans to open 17 to 20 stores in fiscal 2015, seven of which will be opened by the end of July. Buoyed by strong results, declining delinquency rates, the performance of new brands, and planned new store openings, the company has reiterated its earnings-per-share guidance for fiscal 2015 to a range of $3.40 to $3.70 per diluted share.

Hhgregg isn't as strong
hhgregg was quick to blame the weather and a continued decline in the consumer-electronics category for its poor showing in the fourth quarter. It tried to sugarcoat its results by mentioning that comps in the appliances category have grown for 11 consecutive quarters. However, hhgregg reported a sales decline of 9.9% versus the year-ago quarter, and its loss per share came in at $0.25 as compared to a profit of $0.31 in the year-ago period. 

 Looking forward, the company is focusing on different initiatives to turn around. For example, it is in the process of transitioning its furniture assortment by increasing the number of brands in an attempt to augment the assortment at a variety of price points. In addition, it will be focusing on the appliance category, expanding credit facilities, and strengthening the e-commerce channel by focusing on omnichannel initiatives.

Best Buy's resurgence
However, as per Fool writer Timothy Green, the biggest challenge facing hhgregg is its operating expense as a percentage of sales at 30.4% versus 20.1% at Best Buy. Best Buy is gaining customers from smaller players like hhgregg.

Best Buy reported estimate-beating earnings per share of $0.33 in the first quarter. Under the Renew Blue transformation program, the company is focusing on cost reductions, accelerating online growth, improving supply chain efficiencies, and improving the multi-channel customer-experience. By the end of the first quarter, it has already achieved cost reductions of $860 million. However, revenue declined 3.3% versus the year-ago quarter to $9 billion.

The retailer's ability to ship out of all 1,400 retail stores has contributed to online growth and has increased the speed of delivery. The company is transforming its e-commerce platform with an improved homepage design, enhanced wish list, considerably richer visual and editorial content, and robust search and navigation capabilities.

Best Buy is focusing on shifting away from traditional TV advertising to more targeted and relevant digital marketing for connecting with customers. However, Best Buy's biggest threat comes from an online player like Amazon.com.

In the retail industry, brick-and-mortar stores are struggling to compete on price with online-only retailers. More importantly, the sustainability and duration of the competitive advantages of brick-and-mortar stores is a serious concern. This is where one needs to wait and see as far as Best Buy's turnaround is concerned.

The bottom line
Despite a weak stock price performance in 2014, Conn's business seems relatively solid. It is focusing on expansion, more profitable product categories, and is also reporting strong financial growth. That's why the stock looks like an enticing investment, especially because it has dropped significantly this year.

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