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Conn's (NASDAQ:CONN)
Q4 2018 Earnings Conference Call
April 5, 2018 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and thank you for holding. Welcome to the Conn's Incorporated conference call to discuss earnings for the fiscal quarter ended January 31, 2018. My name is Crystal, and I'll be your operator today. [Operator instructions] As a reminder, this conference call is being recorded.

The company's earnings release dated April 5, 2018, distributed before market opened this morning, can be accessed via the company's Investor Relations website at ir.conns.com. I must remind you that some of the statements made in this call are forward-looking statements within the meaning of federal securities laws. These forward-looking statements represent the company's present expectations or beliefs concerning future events. The company cautions that such statements are necessarily based on certain assumptions, which are subject to risks and uncertainties, which could cause actual results to differ materially from those indicated today.

Your speakers today are Norm Miller, the company's CEO, and Lee Wright, the company's CFO. I would now like to turn the conference call over to Mr. Miller. Please go ahead, sir.

Norm Miller -- President, Chief Executive Officer, and Chairman

Good morning, and welcome to Conn's fourth-quarter fiscal year 2018 earnings conference call. I'll begin the call with an overview and then Lee will complete our prepared remarks with additional comments on the financial results. I am pleased to report on the progress we made during fiscal year 2018 to execute our strategies aimed at improving our financial performance while creating a platform that supports our significant long-term growth opportunity. The return to full-year profitability was an important milestone in our corporate evolution and demonstrates that our turnaround strategies have taken hold.

Conn's has built a strong credit platform with an appropriate pricing structure that also prudently and proactively manages credit risk, which has put this segment on a clear path toward even better financial performance. We will leverage this improved capability to support future retail growth opportunities, and I am encouraged by the long-term direction Conn's is headed as we focus on creating sustainable growth, profitability, and value for our shareholders. I'll start my prepared comments with an update on several of the important strategies that have been under way over the past year before talking about our retail performance. I'll finish my remarks by reviewing some of the many opportunities we have in front of us to grow our retail segment.

Conn's credit segment ended fiscal year 2018 on a much stronger footing compared to the prior fiscal year, when the credit segment lost nearly $194 million. Higher finance charges, stronger portfolio fundamentals, controlled expenses, and lower borrowing costs all contributed to an $84.1 million improvement in the loss from the credit segment. As a reminder, we started implementing programs to enhance our yield in the middle of fiscal year 2017. During the third quarter of fiscal year 2018, we completed all current programs to improve yield, and approximately 90% of our fourth-quarter originations were at the higher rates.

The weighted average interest rate of originations made during the fourth quarter of fiscal year 2018 was 27.9%, compared to 21.4% for the second quarter of fiscal year 2017, which was before we started programs to enhance yield. As the benefits of these programs have seasoned into our portfolio, interest income and fees have increased approximately 20.6% to $78.2 million for the three months ending January 31, 2018, while the average portfolio balance has declined 2.6% over the same time period. Over the past 12 months, Conn's added $50.6 million of interest income and fees as a result of successfully increasing yield. As you can see, programs to increase net interest income and fees are producing their intended results and are having a powerful impact on improving the performance of our credit segment.

We ended the fourth quarter of fiscal year 2018 with a record net yield of 20.5%, representing a 400-basis-point improvement from the quarter ending January 31, 2017. We expect favorable trends will continue as our portfolio seasons and we move toward our expectation of achieving a net yield of between 23% and 25%. Looking at the performance of our receivable portfolio, fourth-quarter results continue to show strengthening trends. We have historically discussed using the 60-day rate as a leading indicator for improving credit performance.

Conn's 60-day delinquency rate declined approximately 80 basis points from the prior-year period, representing the second consecutive quarter that this rate has declined. Other metrics are also demonstrating improvement in account quality. First-pay default trends continue to improve, and in 18 of the past 19 months, the rate of first-pay defaults is lower compared to the corresponding period in the prior year. The only month where we experienced an increase was in August, which reflects the impact from Hurricane Harvey.

The payment rate also improved during the fourth quarter and was up 14 basis points to 4.80% compared to the prior-year period. This is the sixth consecutive quarter where Conn's payment rate has increased year over year. As many of you know, Houston is Conn's largest market. While Hurricane Harvey took a destructive toll across the region, the local economy has quickly rebounded.

During the last three months of the calendar year, tens of thousands of new jobs were created in Houston as a result of the rebuilding efforts, which combined with improving oil prices and a pro-business environment, has helped the local economy. In addition, annual employment growth throughout the state of Texas remained strong. And in January 2018, the state experienced its 93rd consecutive month of employment growth. We continue to believe the increase in our allowance associated with the hurricane that was recorded in the third quarter adequately provisions for the storm's expected losses.

As our results show, fourth-quarter credit trends reflected growing momentum in our transformation, and we remain confident that our current credit strategies appropriately manage credit risk. The programs we have put in place over the past two years are benefiting current performance, and we believe that we are underwriting accounts today at loss rates of approximately 12% to 13%. Looking at loss trends, fiscal year 2018 cumulative loss rate for the year of origination represents the first year-over-year decline in the past six years, and we anticipate further improvements. The cumulative loss for accounts originated in the second half of fiscal year 2017 was 8%, compared to 13.2% for accounts originated in the first half of fiscal year 2017, and early indications of the first half of fiscal year 2018 originations are even better.

Originations made after the underwriting changes took effect in late second quarter of fiscal year 2017 accounted for approximately 82% of the portfolio as of January 31, 2018, and portfolio performance is expected to benefit from continued originations under these tighter underwriting standards. Our guidance for first-quarter provision represents a continued decline from the prior year's results and reflects improving trends of newer originations and overall better portfolio performance. Throughout fiscal year 2019, we expect our credit spread will continue to benefit from higher yields and improving credit performance. We have a strong credit platform with a clear path toward achieving our 1,000-basis-point spread objective.

As we stated in the past, this spread, combined with the contribution of insurance income, provides Conn's with the flexibility to successfully navigate unexpected events like Hurricane Harvey as well as the ever-changing economic, regulatory, and credit trends, while maximizing financial performance. The final component in our credit-segment transformation has been the significant reduction to our borrowing costs. Over the past 12 months, Conn's has successfully reduced its annual interest expense by nearly 19%, or $18.5 million, as a result of lower outstanding debt and significant improvements in our ABS cost of funds. We anticipate positive interest from ABS investors will continue as Conn's credit spread widens and financial results improve even further.

As Lee will review in his prepared remarks, our latest ABS transaction represents the highest advance rate and lowest all-in cost of funds Conn's has achieved since the company reentered the ABS market. Throughout fiscal year 2019, Conn's will continue to focus on reducing leverage, improving cash flow, and lowering our total interest expense. Credit-segment results demonstrate that the strategies to improve performance have taken hold and have transformed the direction of our business. Over the past 12 months, we have reduced the loss from the credit segment by 43.4% or $84.1 million, primarily as a result of a $42.9 million increase in finance charges and other revenues, a $25.3 million reduction in provision for bad debts, and an $18.5 million reduction in interest expense.

The credit segment is on a clear path toward even better financial performance as the legacy accounts run off the portfolio and are replaced with accounts benefiting from tighter underwriting standards and higher yields. We are encouraged by the direction our credit segment is headed and the platform we have built to support our compelling growth opportunity. With this overview, let's look at our retail performance for fiscal year 2018 and review why we are so excited about the tremendous opportunity to grow retail sales. Conn's retail performance was strong throughout fiscal year 2018, despite a number of planned and unplanned items affecting retail sales.

Fiscal year 2018 retail sales were impacted by changes in underwriting, which proactively slowed sales. In addition, the transition in our lease-to-own partner, limited new-store openings and challenges in certain markets along the Mexican border and in the southern part of Texas, which we believe were caused by statements coming out of the nation's capital regarding immigration policy, also impacted our sales. As expected, several additional items caused same-store sales to decline 8% during the fourth quarter, which included challenging market conditions within the TV category and the previously announced vendor transition in our mattress category. Approximately 280 basis points of the decline in fourth-quarter same-store sales was due to the continued transition of the Conn's lease-to-own program from Acceptance Now to Progressive.

We lapped strong Acceptance Now sales in the fourth quarter of fiscal year 2017 as they tried to keep our business, while we explored alternative partners. Even though lease-to-own sales were down, I am pleased with the continued growth we are experiencing with Progressive as Conn's execution, experience, and integration improves. Sales to our new Progressive offering represented 6.5% of total retail sales in the fourth quarter. Since we started our full transition to Progressive in May of last fiscal year, sales have grown each quarter, and we are already higher than the historic average we experienced with our former partner.

Turning to retail-segment profitability, Conn's ended the year with record retail gross margins, which continue to benefit from favorable mix within products -- product categories, higher product margins, and our focus on initiatives to improve performance and efficiencies. For the fourth quarter of fiscal year 2018, retail gross margin of 40.1% exceeded our expectations and increased 120 basis points from the prior fiscal-year period. It is important to note, however, that while we think there are more opportunities to expand retail gross margins, especially as our furniture and mattress mix continues to grow, we do not expect retail gross margins will have the magnitude of growth the company experienced throughout this past fiscal year. As shown in our press release this morning, we expect first-quarter same-store sales to be down 3% to 5%.

We are pleased with the ongoing improvement in our same-store sales performance, which reflects stronger February and March sales trends. For the month of February, same-store sales were down 7.7%. The largest component of this decline was the 410-basis-point year-over-year headwind from our lease-to-own transition, as lease-to-own sales peaked at 12% in February of last year, compared to 7.9% in February of this year. In addition, February sales were still impacted by softness in certain markets along the Mexican border, in the southern part of Texas, as well as by a challenging TV category.

For the month of March, same-store sales were down 3.2%, partially due to the 120-basis-point year-over-year headwind from our lease-to-own transition, as lease-to-own sales were 8.7% in March of last year, compared to 7.5% in March of this year. In addition, March sales were impacted by continued softness within the TV category. So with this overview, let's look at some of the opportunities Conn's has to grow our retail segment going forward. Conn's unmatched value proposition, combining a differentiated credit offering and compelling retail experience, provides the company with a significant opportunity to profitably grow retail sales and become a national retailer.

Conn's business is hard to replicate online or through a traditional retail model, and we are unaware of another retailer that combines our geographic footprint, quality product offering, and multiple financing options. During fiscal year 2018, out of the over 22 million visits to our website or one of our retail locations, approximately 1.3 million people took the time to fill out an application for one of our in-house financing options. We approved approximately 700,000 of these applications, with the remaining 600,000 unable to qualify for Conn's credit. This creates a unique and compelling sales funnel to grow retail sales by converting more of the traffic that is already visiting one of our stores or interacting with us online.

We are focused on two key strategies; how do we say yes to more of the applicants that we are currently saying no to, and how do we connect with potential customers to apply for credit or use more of their approved credit. Let's start with underwriting. Over the past year, our credit team was primarily focused on building a sophisticated credit platform and implementing strategies to reduce losses. As our credit team's tenures and experience has increased and the credit-segment performance continues to improve, their focus can now evolve to finding incremental sales opportunities within the 600,000 applicants Conn's declined last fiscal year.

John Davis, the company's chief credit officer, and his team are actively analyzing and modeling applications to find additional customers, which we expect will produce incremental sales in future quarters without increasing credit risk. In addition, having a committed, well-capitalized, and fully integrated lease-to-own partner provides additional payment options for our customers. As our relationship with Progressive continues to deepen, we expect lease-to-own sales to grow over time to at least 10% of product sales on an ongoing basis. The other key strategy to grow sales is focused on enhancing our retail execution.

Of the 700,000 applications for our in-house credit that we approved this past year, 300,000 did not use any of their approved line of credit and the majority of the almost 400,000 customers that used our credit offering used less than half of what they were approved for. Creating an inviting retail environment that provides customers what they want when they want it and at a fair price is critical to the success and viability of any retailer. In addition, offering an exceptional level of service promotes a strong customer relationship that radiates in our markets, builds customer loyalty, and drives additional purchases. There are multiple programs under way that we believe will have a strong impact enhancing our connection with customers.

These include optimizing our merchandising strategy, improving associate training, and making it easier for customers to interact with us. We also recently hired a VP of customer experience to drive preference, loyalty, and advocacy among our customers. These are some of the many strategies we are implementing to improve our retail execution, which we believe can ultimately drive low-single-digit same-store sales growth. The final piece of our growth strategy is retail expansion.

We have developed a new-store growth plan that includes opening five to nine new locations this fiscal year. All of these stores will be in our existing states to benefit from higher lending rates and are supported by our current infrastructure, allowing Conn's to leverage fixed warehousing cost. During the first quarter of fiscal year 2019, we have already opened two locations in Killeen and San Marcos, Texas. We believe the enhanced credit platform we have created can successfully manage risk, while supporting our controlled growth plan and retail expansion.

To conclude my prepared remarks, fourth-quarter results demonstrate that the turnaround plan we implemented over the past two-plus years has clearly taken hold. Today, Conn's has a strong platform that provides the company with the ability to develop proactive strategies aimed at profitable growth and retail expansion, while providing the company with the flexibility and resiliency to successfully navigate unexpected events like Hurricane Harvey. Our success depends on more than just the products we sell in our stores. A critical component of our strong platform is the leadership team we have assembled.

Conn's has a differentiated and complex business model, which requires a unique and experienced leadership team. Our team represents proven and motivated leaders who are experienced managing both national retail organizations as well as consumer finance companies. The success of our turnaround is a direct result of their experience, guidance, and hard work, and this is the foundation for our future accomplishments. Overall, we have more than 4,000 associates across 14 states, and I'd like to use this opportunity to thank all of them for their daily commitment representing our great company.

We have undergone a significant transformation, and speaking on behalf of the board of directors and the entire leadership team, we appreciate everyone's hard work. I am extremely excited about the direction Conn's is headed and the compelling opportunities we have to grow our business. With this, let me turn the call over to Lee.

Lee A. Wright -- Executive Vice President and Chief Financial Officer

Thanks, Norm. Consolidated revenues of $420.4 million for the fourth quarter of fiscal year 2018 decreased approximately 2.9% from the same period last year. Net income improved significantly to $3.2 million, or $0.10 per diluted share, for the fourth quarter of fiscal year 2018, compared to a loss of $74,000, or $0.00 per share, for the prior-year quarter. This represents our third consecutive quarter of profitability, and for fiscal year 2018, Conn's achieved GAAP net income of $0.20 per diluted share versus a loss of $0.83 per share in fiscal year 2017.

On a non-GAAP basis, adjusted net income for the fourth quarter of fiscal year 2018 was $0.56 per diluted share, compared to $0.05 per diluted share for the same period last fiscal year. Adjusted net income reflects a $13.1 million charge as a result of the Tax Cuts and Jobs Act and other charges and credits. A reconciliation of GAAP to non-GAAP financial results is available in our fourth-quarter press release that was issued this morning. Going forward, the Tax Cuts and Jobs Act will reduce Conn's effective tax rate to an approximate rate between 23% and 25%, compared to approximately 35% and 37% historically.

In addition, most capital expenditures will be 100% deductible, which will lower the company's cash taxes. We believe the Tax Cuts and Jobs Act will also have a positive impact for many of our customers as a result of lower tax rates, a larger standard deduction, and an increase in the child tax credit. Fourth quarter of fiscal year 2018 retail revenues were $334.5 million, which declined $21.7 million, or 6.1%, from the same quarter a year ago. For the fourth quarter of fiscal year 2018, same-store sales were down 8% and were impacted by the factors Norm referenced earlier in the call.

For the fourth quarter of fiscal year 2018, same-store sales in the markets impacted by Hurricane Harvey were up approximately 0.4%, while same-store sales outside markets impacted by the hurricane were down approximately 11.3%. Despite lower year-over-year sales, retail gross margin as a percentage of retail revenues for the fourth quarter of fiscal year 2018 expanded by 120 basis points from the same quarter in the prior year to a quarterly record of 40.1%. The improvement in gross margin is primarily due to improved product margins across all product categories, favorable product mix, and continued focus on increasing efficiencies. As Norm stated, while we believe there are more opportunities to grow retail gross margins over time, we do not expect retail gross margins will improve at the same pace and magnitude Conn's experienced this past fiscal year.

The mix of sales from the higher-margin furniture and mattress category represented 35.3% of our fourth quarter of fiscal year 2018 retail-product sales and 50.1% of our product gross profit. The percentage of sales from furniture and mattresses increased 720 basis points since the fourth quarter of fiscal year 2015, when furniture and mattresses represented 28.1% of product sales. We continue to believe the longer-term goal of 45% of retail-product sales from the furniture and mattress categories is achievable. Retail SG&A dollars increased by 1.9% in the fourth quarter versus the same quarter in the prior fiscal year, while retail SG&A as a percentage of sales deleveraged 190 basis points due to lower sales from the same quarter last fiscal year to 24.8%.

Although we deleveraged on a percentage basis, our absolute SG&A spend only increased by $1.6 million compared to the prior fiscal year, even with additional stores. We typically start incurring certain costs associated with new stores approximately six months ahead of opening. With five to nine new stores planned this fiscal year, there will be additional expenses needed as we prepare to open these locations. We remain focused on strategies to control SG&A expenses.

However, the company will be making investments in new stores along with continued enhancements to our business platforms to ensure our ability to successfully manage future growth. When analyzing our SG&A expenses, I'd like to remind everyone to look at the SG&A dollar trends as well as the percentage of sales guidance we included in our press release. Turning now to our credit segment. On an as-reported basis, finance charges and other revenues were a quarterly record of $85.9 million for the fourth quarter of fiscal year 2018, up 12.1% from the same period last year despite a 2.6% decline in the average portfolio balance.

The increase versus last year was due to a record yield of 20.5%, an increase of 400 basis points from last year, partially offset by a 35% decline in insurance commissions. As expected, insurance income declined over the prior-year period, primarily due to the decrease in retrospective commissions as a result of higher claim volumes related to Hurricane Harvey. It will continue to take several quarters of lower claim performance for Conn's to benefit from retrospective insurance commissions. SG&A expense in the credit segment for the fourth quarter increased 9.4% versus the same quarter last fiscal year, and as a percentage of the average customer portfolio balance annualized, was 9.2%, compared to 8.2% for the same period last fiscal year.

The increase in credit-segment SG&A compared to the prior fiscal year is primarily attributable to higher legal expenses we incurred as we placed additional resources into our legal and bankruptcy collections efforts, which, as we've discussed previously, are expected to continue to drive improved recoveries on our charge-off accounts. SG&A was also impacted by investments made to the credit underwriting and analytics team. Provision for bad debts in the credit segment was $54.7 million for the fourth quarter of fiscal year 2018, a decrease of $17.4 million from the same period last year. The 24.1% decrease in the credit-segment provision was primarily the result of improvements in the credit quality of the portfolio and lower net charge-offs, partially offset by higher growth in the portfolio and an increase in TDR balances.

We continue to believe the current provision and allowance for bad debt adequately reserves for future losses associated with Hurricane Harvey. As of January 31, 2018, we had $9.3 million in cash and approximately $208 million of immediately available borrowing capacity under our revolving credit facility. Additionally, we had $463 million that could become available upon increases in eligible inventory in customer receivable balances under the borrowing base. Our ABS notes are performing in line with our expectations, and I am extremely pleased with the December 20, 2017, closing of a new $572.2 million securitization.

With the concurrent issuance of the class A, B, and C notes and their transaction, the initial advance rate of approximately 85.5% is the highest the company has achieved since reentering the securitization market in 2015. This is also the second consecutive transaction where Conn's concurrently issued all three classes of notes, reflecting strong investor demand. The all-in cost of funds including transaction cost was approximately 5.4%, representing the lowest all-in cost Conn's has experienced since reentering the ABS market. In addition, this was a 74-basis-point improvement since our previous transaction.

During the first quarter of fiscal year 2019, Conn's used its warehouse facility to redeem the outstanding balances of our 2016-B Class B note. ABS notes currently outstanding include all three classes of our 2017-A and our 2017-B notes. During fiscal year 2019, we anticipate completing up to two ABS transactions. Interest expense for the fourth quarter decreased $7.1 million, or 28.2%, from the same period last year to $18 million.

This is a fourth consecutive quarter where our interest expense has declined sequentially and the lowest quarterly interest expense in the past 10 quarters as a result of continued deleveraging and reductions in our all-in cost of funds. For the fourth quarter, annualized interest expense as a percentage of average portfolio balance was 4.8%, compared to 6.5% for the same period last year. Average net debt as a percentage of average portfolio balance was approximately 69.5%, compared to approximately 74.6% for the same period a year ago. Conn's capital position continues to improve, and this is the strongest capital position Conn's has had since the new leadership team came to the company two years ago.

With this overview, I'll turn the call back over to Norm to conclude our prepared remarks.

Norm Miller -- President, Chief Executive Officer, and Chairman

Thanks, Lee. Fourth-quarter results demonstrate that our transformation has taken hold, and the momentum in our business is accelerating. There have been a lot of improvements to our business model that have occurred over the past two-plus years, and I appreciate everyone's patience and understanding during this transformative period. We have successfully created a strong, profitable, and differentiated business that is well-positioned to create long-term value for our customers, our associates, and our shareholders.

I am excited about the direction we are headed as we shift even more of our focus to driving retail growth, while our enhanced credit infrastructure continues to proactively manage credit risk. With that, operator, please open the call up to questions.

Questions and Answers:

Operator

Thank you. And our first question comes from Brian Nagel from Oppenheimer. Your line is open.

Brian Nagel -- Oppenheimer & Company -- Managing Director

Hi, good morning.

Norm Miller -- President, Chief Executive Officer, and Chairman

Good morning, Brian.

Brian Nagel -- Oppenheimer & Company -- Managing Director

Congrats on the continued progress and thanks for all the detail in the call.

Norm Miller -- President, Chief Executive Officer, and Chairman

Sure.

Brian Nagel -- Oppenheimer & Company -- Managing Director

My questions. I just want to focus on the retail side of the business. So, first, if you start, Norm, you laid out -- in your prepared comments, you laid out a nice improving trajectory from Q4 into the first couple of months here of your fiscal Q1. Maybe if we could just start with what -- is there any particular factor that's helping to drive that? And then, second, from a longer-term perspective, you talked about getting, as retail improves getting to this low-single-digit-type comp growth, how should we think about the timing of that? And, in order again, with all the initiatives that you've laid out, are there certain initiatives there that can take hold first to drive it faster?

Norm Miller -- President, Chief Executive Officer, and Chairman

Sure, Brian. First, as I laid out in the call, you saw the progression from an improvement on same-store sales in February at down 7.7 and March at down 3.2. And with the guidance that we gave in the earnings release that 3% to 5% down, that implies, at the middle of that range, a 1% decline for the month of April, which we feel confident about, early here in the month of April. And that really is being driven by a couple of different factors.

One is, in the fourth quarter, as I mentioned, we had the mattress conversion that was about a 90-basis-point-impact on same-store sales. The lease-to-own in the fourth quarter was about 300 basis points, in the first quarter, net-net. Now in February, it was the biggest gap, in April, it's actually slightly favorable. So net-net for the quarter, lease-to-own is basically flat year over year.

It will be the first time -- first quarter since we made the transition that we won't have headwinds there. And then we're -- we will have lapped the immigration and the consumer stuff that we saw in the first quarter last year that we estimate somewhere between 100 to 200 basis points. And again, as we're -- with the implied number that we presented for the month of April to get the full-quarter same-store sales guidance in that 3% to 5% range, we feel pretty confident where it's at. The other piece I will mention that we talked about in the script was the headwinds from a TV standpoint.

As you know, our electronics category, unlike some other retailers, is almost exclusively TV, it's 90% of the business. And as you know, Brian, that category, without any newness over the last two years, is significantly under pressure nationally. We're feeling that same impact in the fourth quarter that was about 300 basis points. We estimate that to be a couple-hundred basis points in the first quarter.

Now, to your second question on the funnel. We tried to lay out on Slide 16 of the investor deck and also on the script why we're so bullish about what our opportunities are that have -- clearly, we want to drive traffic, and whether it's through our website or our stores. And we have strategies in place to do that. But even within the existing traffic that we have, there's significant opportunities, and to try to quantify what some of those are, as we mentioned, only 1.3 million out of the almost 23 million -- over 22 million people that visited our website or came in our store actually submitted an application for our in-house credit.

So just in that bucket alone, if we drive just 1% -- 1% to 2% more applications, so that's another 400,000 applications out of those 22 million visits. That increases our total applications by almost -- by over one-third, by 35%. And then when you look at the declines, as I mentioned, out of the 1.3 million that submitted it, 700,000 actually were approved. A little over 600,000 declined.

And out of that 610,000 declined, if we get just 2% more, and in my script I talked about saying yes to more customers we're saying no, and that's probably the biggest short-term opportunity we have because we're able to leverage, No. 1, a credit infrastructure that we've invested in over the past two years in our underwriting team, the models they are using, the sophistication, the alternative data sources, finding customers that actually are good credit that we should be saying yes to, but because of our lack of sophistication in the past, we weren't able to segment them to that degree. We have significant opportunity, we believe, there. And then obviously, the Progressive lease-to-own, moving that toward 10%-plus from a balanced-sales standpoint.

And again, just to quantify, if we get 2% improvement on the declines, that's 4.5% positive same-store sales for us, just in that element of the sales funnel. And then out of the 700,000 that were approved, as we mentioned 400,000 used some portion of their credit. On average it was about 47%. Every 1% that we're able to drive that usage up -- and, again, we're comfortable doing that from an underwriting standpoint because as we've done the underwriting process on each individual customer, we approve them a credit limit that we're comfortable that they have the ability and the capability to repay us -- so if we drive that utilization rate from 47% to just 50%, so about 3%, that's worth 5% in same-store sales to us just in that element of the bucket.

And then the 300,000 people that we approved, and they did not use their -- any of their credit, that's clearly a significant opportunity for us. And we have -- a number of those are online. So part of that is retail execution, getting them into the store and to be able to shop, and having that communication with them when we have several multiple strategies that are in place to drive that. And the other piece with it is a number of those customers may have had down payments that were 10% or 20% because of their credit background.

And they couldn't afford that -- although they were approved, they couldn't afford the down payment. So that's again, a retail execution to move them to potentially to Progressive offering that's only $59 down. Clearly, a higher rate of financing, but it overcomes that hurdle that the customer may not have that 10% to 20% cash out of pocket to do that purchase. So I know that's a lot of information, but what I really wanted to try to highlight was, there are so many opportunities we see within the existing traffic that's coming in our stores to drive sales that we feel very bullish about the prospect of getting to low-single digits here in fiscal year '19 and the balance of the year.

Brian Nagel -- Oppenheimer & Company -- Managing Director

That's great, Norm. Really appreciate all the color. Thank you.

Norm Miller -- President, Chief Executive Officer, and Chairman

No problem. Did I answer all your questions?

Brian Nagel -- Oppenheimer & Company -- Managing Director

You did. [Inaudible] You got your point done, thank you.

Operator

Thank you. And our next question comes from Brad Thomas from KeyBanc Capital Markets. Your line is open.

Bradley B. Thomas -- KeyBanc Capital Markets -- Director

Yeah. Hi, good morning, Norm and Lee. And let me add my congratulations as well on a great year here for the company.

Norm Miller -- President, Chief Executive Officer, and Chairman

Thanks, Brad.

Bradley B. Thomas -- KeyBanc Capital Markets -- Director

I wanted to maybe follow up a bit on Brian's question about the outlook for same-store sales and zoom in on maybe the rent-to-own business and the cadence there. It seems to me that this month of April could be very good for you as you lap such an easy comparison last year. And so I guess I was just hoping to get your perspective on how we should think about how that RTO business contributes to Conn's sales overall? So if you're tracking in the 7% of sales range now, you're lapping a period where you were closer to 2%. I mean, should we be thinking of that as a month where you have a 500-basis-point tailwind to same-store sales? Is it really additive? Or is there an element where it could be a substitute for other sales? How should we think about that?

Norm Miller -- President, Chief Executive Officer, and Chairman

Well, that's a good question, Brad. There is an element, as I talked before, the trade-off between Conn's financing and Progressive that there is some trade-off there. But suffice to say that here in the month of April and even early into the second quarter, we'll have some nice tailwinds from the lease-to-own. And again, we're in that 7.5%-to-8% range as we sit here today over the last several months, as I mentioned in the script, and still feel very confident we can get to, ultimately by the end of this fiscal year, into that 10% balance of sale from a company standpoint overall with Progressive.

Bradley B. Thomas -- KeyBanc Capital Markets -- Director

That's great. And then looking at one of the other puts and takes on same-store sales, how are you thinking about the outlook here for the Harvey markets versus the non-Harvey-affected markets in 1Q and through the balance of the year?

Norm Miller -- President, Chief Executive Officer, and Chairman

Yes. I mean we're seeing a narrowing significantly over the last several months. In the month of March at that 3.2%, the Harvey markets were up 3% and the non-Harvey, just a little bit, they were down 5%. So -- and that gap is the smallest gap that has been there since the hurricane, and we've continued to see that narrow.

So our expectation here is -- now we are seeing -- our core market in Houston because of the economy, as I mentioned in the script, the oil and gas market rebounding. We are seeing positive trends even in areas not impacted by the hurricane and stores not impacted by the hurricane, some tailwinds in our largest market because of the overall economy. But we see a narrowing of that Harvey impact here through the end of the first quarter and probably getting very, very close there in the second quarter to one another.

Bradley B. Thomas -- KeyBanc Capital Markets -- Director

Great. And then, Lee, on the finance charges, you commented about the insurance commissions, and how that affected your finance income in the fourth quarter. I know we can devise it from the 10-K once we get it. But can you provide us with the numbers for the interest income line item, the insurance commissions line item, any other line item for 4-Q if you have those?

Lee A. Wright -- Executive Vice President and Chief Financial Officer

Yes, the -- I mean the biggest one is the one you're referencing is the insurance income was down over $4 million for the quarter-over-quarter period, which again -- that was 35% down I referenced in the call. So that obviously had a big impact on us, and -- as we look to our FC&O income.

Bradley B. Thomas -- KeyBanc Capital Markets -- Director

Great. And that was what, around $12 million or so last year if I got that right?

Lee A. Wright -- Executive Vice President and Chief Financial Officer

That's right. Yes. That's exactly right. It was $11.7 million going down to $7.6 million.

Bradley B. Thomas -- KeyBanc Capital Markets -- Director

OK. And how are you affecting -- expecting that to play out in 1Q? Will that continue to be a headwind for you?

Lee A. Wright -- Executive Vice President and Chief Financial Officer

It is. It's going to be a headwind, honestly, almost for the entire year. That's is something until we basically refill the bucket for all the claims that we incurred on the Harvey, and then we'll start to be able to recognize that income again. So it's just something we have to work off basically the entire year.

We may see some help us [ph] in Q4, but it's going to take most of the year.

Bradley B. Thomas -- KeyBanc Capital Markets -- Director

Great. And then from a yield perspective, if you adjust that out, you guys are happy with what you're seeing from a yield perspective? That's clocking in the way you had forecasted? Is that right?

Lee A. Wright -- Executive Vice President and Chief Financial Officer

Yes, no, we're very happy with the continued yield improvement as we always talk about, as we've raised the rates in all four of our states in direct loan and then some of the other states are run cap [ph]. We now have 90% of our states at the higher rate. And now it's just a question of time and math as it rolls through the portfolio. And so we're just going to continue to see increased yield.

As we talk about in the investor deck, again our goal getting that 23% to 25%, we feel very comfortable that we're just on the path to get there.

Bradley B. Thomas -- KeyBanc Capital Markets -- Director

Great. Thanks for all the clarification and congrats again on the momentum.

Lee A. Wright -- Executive Vice President and Chief Financial Officer

Thanks. [Inaudible]

Operator

Thank you. And our next question comes from Rick Nelson from Stephens. Your line is open.

Nick Zangler -- Stephens -- Analyst

Hey, you guys. How's it going? Nick Zangler on for Rick here.

Lee A. Wright -- Executive Vice President and Chief Financial Officer

Hi, Nick.

Nick Zangler -- Stephens -- Analyst

I'm going to jump into the credit side here. And I'll speak slowly here to get it down. But -- so focusing on the F '17 vintage, so 10.6% of the receivables have now charged off. If I take a look at the two prior vintages at this same point in the life cycle, they walk up another 5%, 8% over the remainder of their life cycle to get to their terminal static loss rate projection.

And so the F '17 projection right now is the upper 13%. So let's call like 13.8%. That walks up another 3.2% to get to that terminal loss rate again, whereas the last two originations walked up -- or vintages walked up another 5.8% from this spot. So basically, the question is what gives you the confidence that F '17 vintage, doesn't continue to walk up over the current guide, which is the upper 13%? And what can I see and what can I look at to kind of help me bridge that walk to your current guide?

Norm Miller -- President, Chief Executive Officer, and Chairman

Well, yes. That's part of the reason we forked that out in the first half of fiscal year '17 versus the back half of fiscal year '17, I don't know if you caught that, Nick, in the script or not. But we talked about what the losses were. It's a dramatic difference between the first half and the second half.

Now granted, the first half has had longer to bake than the second half, so there's some natural higher numbers you'd have there. But not to the tune of 8% to 13%-plus that we talked about in the script. The back half of '17 is when we put the new credit scorecard in place, and the fundamental performance of the portfolio since then is what drives our high confidence level of where the static loss rates will be. Then the second piece with it is -- ultimately for fiscal '17.

And the second piece with it is the recoveries. We talked about the recoveries being up just in the fourth quarter, up almost 300% over the quarter a year before with a number of the strategies that we put in place. And all of those will have a direct impact ultimately on that static loss rate. It's one of the reasons the credit SG&A was up year over year is as we bring aboard legal and bankruptcy agencies to help us from a recovery standpoint.

We pay them upfront, and it's on a contingent basis, but you see the benefit from a recovery and the return on investment on those dollars is well worth those dollars. But going back to your comment, the back half of fiscal year '17, much, much better performance and the recoveries is what gives us the confidence where the static loss rate ultimately will come in at.

Nick Zangler -- Stephens -- Analyst

And then the '18 vintage then, I guess our first data piece there, 1.2% has charged off thus far. And that represents an improvement from this time and the prior vintage at 1.5%. Just curious on that 1.2%, is that a clean number? Is that inflated by anything? Are you -- is that the number that you were expecting? And obviously, because that's going to walk up to 12% to 13%, but are you confident and feel good about that number, that early indicator?

Norm Miller -- President, Chief Executive Officer, and Chairman

We do feel good about the number. It is slightly elevated because we changed a year ago from a bankruptcy standpoint, just from an accounting standpoint, the way we accounted for bankruptcies. But -- so it's up. It would have been more like 1% as opposed to the 1.2% apples-to-apples to the other prior years.

But having said that, very comfortable with first-payment default, 60-day delinquencies. We have 18 out of 19 months now with first-payment defaults lower year over year and very, very pleased with the strength and the quality of the portfolio in fiscal year '18.

Nick Zangler -- Stephens -- Analyst

Great. And can you remind me, do the static loss rate goals, do they still incorporate incremental charge-offs associated with the hurricane? Is that reflected in those goals?

Norm Miller -- President, Chief Executive Officer, and Chairman

It does -- I mean, it's incorporated in, the $1.1 million is included in the loss in -- on our projected loss rates. And we provision for the third quarter, we have not adjusted that provision. That subjective provision since we put it in place in the third quarter.

Nick Zangler -- Stephens -- Analyst

Understood. And then I guess finally, if I could just touch on reaged, and I'm sorry if I missed it, but reaged balance picked up 50 basis points to 24.3%. Any details on the increase there? Can you remind us what percentage of that is represented by the hurricane? And then also, just a reminder on how customers can leave and exit the reage bucket?

Norm Miller -- President, Chief Executive Officer, and Chairman

Well, to answer your last question first, they don't leave the reage bucket, once you reage at any point in it, you stay identified as the reage customer. So the significant upset that you saw in the third and the fourth quarter -- from the third and the fourth quarter was because -- the vast majority of that was Hurricane Harvey. Now those customers are actually performing and paying as good or better than the rest of the portfolio since the reaging. But they have two years left on their loan, they will stay in that reage bucket until they charge off, which, clearly, we don't want them to do that, or until their loan is paid off.

So you'll see that charge-off numbers at an elevated percentage until.

Lee A. Wright -- Executive Vice President and Chief Financial Officer

Re-age number

Norm Miller -- President, Chief Executive Officer, and Chairman

I mean reage number until the Hurricane Harvey fully seasons, which could be two years from now.

Nick Zangler -- Stephens -- Analyst

Great. Thank you very much, guys. Good luck.

Norm Miller -- President, Chief Executive Officer, and Chairman

Thank you.

Operator

Thank you. And our next question comes from John Baugh from Stifel. Your line is open.

John Baugh -- Stifel Financial Corp. -- Managing Director

Thank you and congrats on all the hard work on the credit side. I did want to ask about, I think your customer accounts active was down approximately 9% year over year, if I did the math right. And again, I think your weighted average months since origination in the portfolio is up about 6%. So if we put those two together, I guess, does it not imply that we've got fewer customers coming in, which I know is somewhat reflected in the comp number? I'm just trying to get at that dynamic, obviously, the percentage of approval of applicants is significantly down year over year.

And that's one factor I'm just curious as to factors playing there.

Lee A. Wright -- Executive Vice President and Chief Financial Officer

Yes. Hey John, it's Lee. Look, obviously, as you said, with the same-store sales down, we have a lower number of customers and obviously one of the things we are seeing is a slight uptick in the overall balance of those existing customers. But nothing that's surprising to us.

And as you really mentioned, the key factor is we restricted the underwriting, tightened that and walked people through. But, again, that all flows through to the credit side, which as we talked about, let's get that stabilized and then obviously we spent a lot of time on this call, let's really -- we're really focused on our retail side and the same-store sales growth from that perspective.

John Baugh -- Stifel Financial Corp. -- Managing Director

Good. And is the mattress transition done, No. 1? And what are you seeing if it is done, in terms of that category comparing to your prior merchandise assortment there?

Norm Miller -- President, Chief Executive Officer, and Chairman

It's almost done. I mean all of the new partner is on the floor, completely floored. We do have some clearance stuff still to work through. But that should be done here in the next month or two.

It's nothing material. You certainly won't see same-store sales impacted like we did in the fourth quarter. And, frankly, we're seeing that category perform very, very well. We're very pleased coming out of the gate with the move, and how our customers have received our new partner and the new product.

John Baugh -- Stifel Financial Corp. -- Managing Director

OK. And my last question, I guess is on the yield. I assume the goal on 23%, 25% on gross -- well I guess you call it net yield -- but, has not changed. How -- if that's the case, give me a timeline, and I'd love it quarterly for this year, but give us some kind of sense and we can I guess back into the Q1 guidance with your insurance comments of what the yield needs to be.

But I'm just trying to get a sense for where you are in cycling off the old loans versus the new. Obviously, originations are very high with the new program. But any color there would be great.

Lee A. Wright -- Executive Vice President and Chief Financial Officer

Yes. I think, John, the best way to think about it -- and I know, you asked, we don't give quarterly, I mean, you should think about the middle of next year when we really get there. And -- so that's probably the best guidance we can give you at this point.

Norm Miller -- President, Chief Executive Officer, and Chairman

And to Lee's point, just on the -- it's a material impact, the insurance piece on the top, I mean, $3 million to $4 million a quarter and we're going to feel that. That's $15 million, $16 million over the course of the year that we will feel that from an insurance standpoint.

John Baugh -- Stifel Financial Corp. -- Managing Director

OK. Just following up on the yield. I mean, 23% to 25% is a pretty good range. I guess without pinning you down on which one it's going to be, what would be the factors that would make it 23% versus 25%?

Lee A. Wright -- Executive Vice President and Chief Financial Officer

Well, there's obviously a lot of variables that go into this, John. But if you think about it, it's how much comp [ph] do we give, what's the utilization of that comp? Obviously, you have to factor in where your ultimate charge-offs come out. It's a bunch of variables.

Norm Miller -- President, Chief Executive Officer, and Chairman

It's even sales by state.

Lee A. Wright -- Executive Vice President and Chief Financial Officer

That's right.

Norm Miller -- President, Chief Executive Officer, and Chairman

I mean, as we go in with new stores depending on -- our rates, although 90% are higher, they still vary from 27% to 29.99%. Even mix between the various states from a sales standpoint will have an impact on whether it's 24%, 24.5%, 23.8%, where it falls in that range.

Lee A. Wright -- Executive Vice President and Chief Financial Officer

Great. Thanks for the color and good luck.

Norm Miller -- President, Chief Executive Officer, and Chairman

Thanks, John.

Lee A. Wright -- Executive Vice President and Chief Financial Officer

Great. Thanks, John.

Operator

And I'm showing no further questions from our phone lines. I would now like to turn the conference back over to Norm Miller for any closing remarks.

Norm Miller -- President, Chief Executive Officer, and Chairman

Thank you. We appreciate everyone's interest in the organization and being able to share with you our fiscal year 2018 fourth-quarter results. And we look forward to speaking with everyone at the end of the first quarter. Have a great day.

Operator

[Operator signoff]

Duration: 60 minutes

Call Participants:

Norm Miller -- President, Chief Executive Officer, and Chairman

Lee A. Wright -- Executive Vice President and Chief Financial Officer

Brian Nagel -- Oppenheimer & Company -- Managing Director

Bradley B. Thomas -- KeyBanc Capital Markets -- Director

Nick Zangler -- Stephens -- Analyst

John Baugh -- Stifel Financial Corp. -- Managing Director

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