How Bad Credit Is Crushing Conn's, Inc. Stock

Revenue growth can be a telltale sign of a thriving business. But that certainly doesn't mean the market will applaud growth at any cost.

Credit: Conn's.

Case in point: Shares of Conn's (NASDAQ: CONN  ) plummeted more than 30% in Tuesday's early trading after the specialty retailer saw second-quarter revenue climb 30.4% year over year, to $353 million, or roughly in line with analysts' expectations. Some of that growth came from the opening of eight new Conn's HomePlus stores in seven markets during the quarter, while same-store sales simultaneously climbed 11.7%. For perspective, that marks the 12th consecutive quarter of increasing comps for Conn's retail operations.

However, Conn's adjusted earnings fell to $0.50 per diluted share, which was well below analysts' expectations for earnings of $0.76 per share.

So, what happened? According to Conn's CEO Theodore Wright, the blame lies with Conn's floundering consumer credit operations. Wright elaborated:

Overall results were not satisfactory. Our credit operations ran into unexpected headwinds, resulting in portfolio performance deterioration. Despite tighter underwriting, lower early stage delinquency and improved collections staffing and execution, delinquency unexpectedly deteriorated across all credit quality levels, customer groups, product categories, geographic regions and years of origination.

Worse yet, Conn's sees future 60-day plus delinquencies increasing to levels above historical highs in the third and fourth quarters. As a result, Conn's now expects full-fiscal year adjusted earnings in the range of $2.80 to $3.00 per diluted share -- a significant reduction from its previous guidance range of $3.40 to $3.70.

Don't be too surprised
At the same time, however, this isn't entirely shocking. After all, Conn's self-described business approach centers on first reaching the underserved segment of low-income consumers, then using its credit operations to give them the opportunity to purchase high-quality, big-ticket items like furniture, mattresses, electronics, and appliances with extremely low monthly payments. In the end, the fallout of a large number of those consumers defaulting on their credit obligations may as well have been taken directly out of the "risks" section of Conn's most recent annual report.

This doesn't mean Conn's is simply sitting on its heels as the situation worsens. "In response to the higher delinquencies," Wright says, Conn's is not only tightening underwriting, but also "reducing the level of no-interest programs and raising the interest rates in some markets to increase portfolio yield."

Of course, that approach is also a double-edged sword. An average of 70% of Conn's retail sales go through its in-house credit programs, and large portion of that credit portfolio goes to sub-prime borrowers. By tightening underwriting, reducing no-interest programs, and raising rates, Conn's could very well be dropping the fridge on its coveted revenue growth down the road.

In the end, though today's huge plunge might seem like an overreaction on the surface, that's why I can't blame the market for taking a huge step back from Conn's today. For now, I'm perfectly content watching Conn's from the sidelines.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Read/Post Comments (2) | Recommend This Article (3)

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 September 02, 2014, at 1:21 PM, Pricha100 wrote:

    Great summary! Much better at explaining the situation than any articles i've seen on other websites.

  • Report this Comment On September 02, 2014, at 2:11 PM, TMFSymington wrote:

    @Pricha100, Thanks for the kind words (and Fool on!).

    Steve (TMFSymington)

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: 3088532, ~/Articles/ArticleHandler.aspx, 10/20/2014 5:43:13 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...


Advertisement