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Conn's Inc (NASDAQ:CONN)
Q3 2020 Earnings Call
Dec 10, 2019, 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 Conn's Inc. Third Conference Call to discuss earnings for the fiscal quarter-ended October 31st, 2019. My name is Rob and I'll be your operator for today. During the presentation, all participants will be in listen-only mode. After the speakers' remarks, you will be invited to participate in the question-and-answer session. As a reminder, this conference call is being recorded.

The Company's earnings release dated December 10th, 2019, was distributed before market open this morning, and can be accessed via the Company's Investor Relations website at ir.conns.com. During today's call, management will discuss, among other financial performance measures, adjusted EBITDA, adjusted net income and adjusted earnings per diluted share. Please refer to the Company's earnings release that was issued today for a reconciliation of these non-GAAP measures to their most comparable GAAP measures.

I must remind you that some of the statements made in this call are forward-looking statements within the meaning of the 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, Lee Wright, the Company's COO, and George Bchara, the Company's CFO. I would now like to turn the conference call over to Mr Miller. Please go ahead, sir.

Norman L. Miller -- President, Chief Executive Officer and Chairman

Good morning and welcome to Conn's third quarter of fiscal year 2020 earnings conference call.

I'll begin the call with a strategic overview, then Lee will provide additional details on the quarter, before turning the call over to George, who will complete our prepared remarks with additional comments on the financial results.

Strong credit results, combined with our highly profitable retail business, resulted in a 13% increase in third quarter earnings per diluted share. Year-to-date earnings have increased 26% to $1.74 per diluted share, and our year-to-date adjusted EBITDA has increased nearly 8% to $156 million, producing an adjusted EBITDA margin of approximately 14%. Our strong year-to-date earnings demonstrate the power of our business model, despite challenging retail sales.

Almost four years ago, we communicated our long-term credit strategy, aimed at producing a credit spread of approximately 1,000 basis points. I am pleased that our credit spread was above this level during the third quarter, which produced positive credit segment income for the first time in 5.5 years. Our credit model is the foundation of our business and enables our unmatched value proposition for our core customer. As our credit strategy matures, we will remain disciplined in our approach to protect the overall health of the business, while pursuing initiatives aimed at optimizing retail sales.

We are disappointed that our third quarter same-store sales declined 8.4%, which reflects the impact of prudent underwriting adjustments and unprecedented market dynamics within our consumer electronics category. During the third quarter, we began to see deteriorating performance of certain segments of the portfolio. We made the necessary adjustments to maintain our long-term credit spread of approximately 1,000 basis points, which negatively impacted same-store sales by approximately 4% to 5%. Compounding the impact to third quarter retail sales was a combination of significant price deflation for premium large screen televisions and an increase in production of large screen TVs by second- and third-tier manufacturers. These market dynamics disproportionately reduced large screen TV prices and also enabled customers to use cash or existing financing options to purchase large screen TVs elsewhere, which further impacted same-store sales by approximately 3% to 4% during the quarter.

Producing positive same-store sales, while remaining disciplined in our credit strategy, is a top priority of the leadership team. As Lee will review in his remarks, we have implemented several strategies to offset current market conditions and we are pursuing multiple retail growth initiatives.

Unit expansion is an important component of our growth plan and the performance of our new showrooms remained in line with our expectation as they contributed over 7% to retail growth during the third quarter. This year, we have successfully opened 14 new showrooms, and plan to open 16 to 18 new showrooms next fiscal year, including our first locations in the state of Florida. We are excited about our expansion plans as our showrooms are extremely profitable, have a quick payback and have historically produced compelling return.

The leadership team and our Board of Directors are significant shareholders of the Company, and we share investors' disappointment with our sales performance during the third quarter and the pace of our retail transformation. Our focus on better-best products for the home and affordable financing options are the cornerstone of our unique value proposition for a large population of consumers across the country.

In addition, our disciplined credit strategy, combined with our strong capital position and highly profitable business model, provides us with significant flexibility to successfully navigate current market conditions, while supporting our long-term growth plan. While the remainder of this fiscal year will be challenging, we believe we will emerge well-positioned to achieve an 8% to 10% retail growth rate during next fiscal year and we are confident we can sustain this level of growth for many years to come.

So, with this overview, let me turn the call over to Lee, who will provide more details on our third quarter operating results.

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

Thanks, Norm. I'll begin my prepared remarks, outlining our credit segment performance and the drivers affecting retail sales, before reviewing the near- and long-term initiatives, we have developed to turnaround our retail performance.

Third quarter credit segment results were very strong. Our credit spread was over 1,000 basis points during the third quarter, as a result of a record net yield of 22.1% and favorable charge-offs of 11.4%. As a result, we achieved our first credit segment income in 5.5 years. The continued improvements in our credit performance validates our credit strategy, supports our unique and hybrid business model, and has significantly reduced our cost of funds.

In addition, as our credit model matures, we are well-positioned to pursue opportunities to reinvest our excess credit spread into strategies aimed at growing retail sales. It is paramount that we remain disciplined in our credit strategy as we pursue a growth-oriented retail plan and expand our online presence. New customers and online applicants have become the fastest-growing segments of our customer funnel, which is an encouraging trend, and will help us expand our base of high-quality recurring customers. However, as we have stated historically, new customers and online applicants have higher initial losses compared to existing customers and it is important to control the proportion of new customers in our portfolio.

During the third quarter, we began to see the performance deteriorate in new customer accounts and accounts from online applicants that were originated earlier this fiscal year. First payment defaults and 60-plus day delinquencies began to increase, and we made prudent underwriting adjustments to mitigate the impact of these higher-risk vintages and tightened standards primarily on new customers and online applicants. We estimate these actions reduced third quarter same-store sales by approximately 4% to 5%. We expect fourth quarter same-store sales will also be impacted by these underwriting changes, which is included in our same-store sales guidance.

As you can see from the credit spread this quarter, the business can support additional credit risk and our ability to achieve 1,000 basis points of credit spread was a result of the credit decisions we have made over the last three years. We understand it may be counterintuitive to tighten credit, when we achieve the highest credit spread in six years, but as our financial performance demonstrates we are focused on pursuing a conservative credit strategy, especially as our retail expansion accelerates.

We continue to refine the balance between our retail and credit segments, and we will proactively adjust our underwriting standards as we did in the third quarter, when portfolio trends outperform or underperform our expectations. Our disciplined credit approach will maintain the health of our overall business. We believe the proactive credit decisions we made in the third quarter, combined with the significant improvements we continue to make in our underwriting and collection capabilities, will help us quickly offset the higher amount of third quarter 60-plus day delinquencies.

However, our near-term provision and allowance will be higher as we account for charge-offs associated with accounts originated prior to the third quarter. Enhanced collection recovery capabilities will also help us offset the impact of higher new customer originations and we continue to make improvements in our pre- and post-charge-off collection efforts. Year-to-date recoveries have increased 31.3% to $18.8 million, which includes recoveries of $6.2 million in the third quarter. I am also pleased by the pricing of our recent November ABS transaction, which further validates our credit strategy. We will remain disciplined in our credit strategy as the overall health of our portfolio continues to benefit from higher yields, better underwriting, and improved collections.

Moving on to our retail business. In addition to the impact on sales of underwriting changes, we also experienced challenging market conditions throughout the third quarter, primarily within our consumer electronics category, lingering impact from lapping the rebuilding efforts associated with Hurricane Harvey and the impact on same-store sales of cannibalization from new stores.

Same-store sales within our consumer electronics category declined 25.6% during the third quarter, reflecting two compounding factors. First, significant price deflation for premium large screen TVs reduced average selling prices during the quarter. According to NPD data, the average selling price of TVs during the three months ended October 31, 2019, was $376, compared to Conn's average selling price for televisions of $1,176, which is over three times higher than the industry average and demonstrates our better-best premium product focus. More importantly, average selling prices for the entire TV category declined over 8% during this period, while average selling prices for TV screen sizes of 65 inches and above, which is the segment of the TV market we primarily focus on, were down nearly 22%.

Second, we also saw units decline as the lower price points of large screen TVs made cash purchases more accessible to our core customer, decreasing the need for financing. We estimate that the market dynamics in the consumer electronics category impacted same-store sales by approximately 3% to 4% during the quarter, demonstrating the impact this one category had on third quarter sales performance.

A challenging market environment also exists within our gaming category as manufacturers, including Sony and Microsoft, announced the next-generation consoles will be released next year, which we believe is affecting demand for current models this year. In addition, a large component of our gaming strategy is focused on attaching a gaming console with the sale of a new television. As TV sales declined during the quarter, they have also impacted our sales of gaming consoles. With the launch of new consoles, we believe sales within this category will improve later next year as consumers upgrade or purchase new models. We expect sales of TVs and gaming consoles will continue to negatively affect our consumer electronics category with an even greater impact in the fourth quarter, because of the higher mix of sales from this category during the holiday season.

Appliance sales helped offset the challenges, we faced in other categories, as same-store sales increased 5.5% during the quarter and total sales increased 13.6% or by nearly $11 million. We remain well-positioned within the appliance market because of our large selection of brand name products, next day delivery, and in-house service offering. And we are optimistic about our near- and longer-term opportunities to expand our market share. In addition, appliances are currently the largest contributor to our growth in e-commerce sales.

Speaking of e-commerce, e-commerce sales increased 350% to $3 million from the prior-year period, helping to offset the overall decline in same-store sales. While still a smaller portion of our overall sales, we are excited by the opportunities we have to interact with our customers online. We've developed a unique and differentiated e-commerce offering because of our next-day delivery, logistics and fulfillment capabilities, as well as our full spectrum of financing options.

Looking at trends within our Hurricane Harvey markets, last year's rebuilding efforts continued to affect retail sales, which speaks to the severity and magnitude of the storm and the disruption to the replacement cycle within our important Southeast Texas markets. The gap between our Harvey and non-Harvey markets continues to decline and was 6.1% in the third quarter, compared to 9.7% in the second quarter. For the fourth quarter, we expect our Hurricane Harvey markets will continue to be impacted by pulled-forward demand, but the gap should decline further. Therefore, we will no longer break out the impact of Hurricane Harvey in our quarterly same-store sales guidance.

We are also starting to experience some cannibalization from opening new showrooms in existing markets. We estimate that the impact of cannibalization on third quarter same-store sales was approximately 1% to 2% and we expect to continue to see cannibalization impact same-store sales in the coming quarters.

As a result of Tropical Storm Imelda, we closed 23 stores, our distribution service centers and the corporate office in Southeast Texas during the third quarter of fiscal year 2020. While dangerous levels of rainfall and flooding impacted certain markets, the storm moved through quickly and did not have a material impact on retail sales during the third quarter of fiscal year 2020. However, we did provide credit relief to customers, impacted by the storm, which contributed $7.3 million to the increase in reages for the quarter.

As you can see, third quarter retail sales were impacted by several different factors. We have several initiatives under way to mitigate the near-term weakness, we are experiencing in retail sales. Overall, we are focused on positioning Conn's for long-term success and consistent retail performance by increasing our product and service offering, promoting our leading financing options, and expanding our retail footprint.

During the third quarter, we successfully piloted flooring products across our three Beaumont showrooms, and as a result, we are expanding the pilot across our Houston market, which combined represents approximately 20% of our store base. The $15 billion residential flooring market in the US supports an inventory-light business model and has strong gross margin. Flooring is expected to roll out across many of our markets in the coming quarters. Once fully implemented, we believe this segment could contribute approximately $15 million of annual retail sales and we believe it will be accretive to our retail gross margin.

Flooring is the first step in a broader strategy to expand our reach into other large ticket or professionally installed home product categories. A process is under way to identify and evaluate additional categories that complement our merchandising strategy of selling aspirational home goods that typically require financing.

Over 92% of our retail sales continue to be financed by one of our three financing options, demonstrating the unique value of our business model, and we continued to make progress expanding our relationships with our third-party financing partners. The balance of sales through our partnership with Synchrony Financial increased nearly 300 basis points from the same period a year ago to 18.5% of total retail sales in the third quarter. However, we are disappointed with the penetration of lease-to-own sales because we believe sales through this financing option should be at least 10% of total retail sales, given our credit waterfall, compared to our actual result of 7% in the third quarter.

Internal initiatives are under way to improve our execution and we are also working with our lease-to-own partner to achieve this goal. Looking at our geographic expansion strategy, new showrooms are performing in line with our expectations. We successfully opened 14 new showrooms in existing states during the current fiscal year, compared to seven, last fiscal year. We expect new showrooms will contribute to same-store sales growth in future quarters as they mature and benefit from recurring customer sales. Next year, we plan to open 16 to 18 new stores, including approximately eight new locations in Central Florida. We believe once fully penetrated, Florida will become our second largest state with approximately 40 showrooms.

As you can see, we are actively pursuing a methodical expansion strategy, focused on becoming a national retailer, and investments in our physical and digital platforms are required to support this growth. Our third quarter retail gross margin of 39.2% remained strong, but was below our expected rate of at least 40%, primarily due to the decline in same-store sales and higher-than-expected one-time expenses associated with the Houston distribution center relocation. The year-over-year decline in retail gross margin was due primarily to the benefit of increases in appliance retail pricing related to tariff adjustments and the associated forward buys of inventory during the third quarter of fiscal year 2019, coupled with increased logistics cost to help support future growth. Our new state-of-the-art Houston distribution center opened during the third quarter and we will start incurring additional expenses in the coming quarters associated with the development of our new Florida distribution center.

To conclude my prepared remarks, despite the near-term market impacts to our business, we are focused on pursuing our long-term growth opportunities, while remaining disciplined in our credit strategy. Underlying business trends and new store performance continue to support our model, aimed at achieving total annual retail sales growth of 8% to 10%, an annual credit spread of approximately 1,000 basis points, and annual retail gross margin of at least 40%. We believe we will achieve these results during next fiscal year and we are focused on producing consistent, sustainable, and highly profitable financial results for many years to come.

With this overview, let me turn the call over to George to review our financial results in more detail.

George L. Bchara -- Chief Financial Officer

Thanks, Lee.

On a consolidated basis, revenues increased 1% to $377.7 million for the third quarter of this fiscal year from $373.8 million for the same period last fiscal year, despite the 8.4% decline in same-store sales, as the contribution to revenue from new stores and increases in finance charges and other revenue more than offset the same-store sales decline.

Total revenue growth helped drive an increase in GAAP net income of 3.5% to $15.1 million from $14.6 million for the same period last fiscal year. GAAP net income per diluted share increased 13.3% to $0.51 for the third quarter of fiscal year 2020. On a non-GAAP basis, adjusting for certain charges and credit, net income for the third quarter of fiscal year 2020 was $0.61 per diluted share compared to $0.59 per diluted share for the same period last fiscal year.

Adjusted EBITDA was $51.8 million or 13.7% of total revenue for the third quarter, compared to $51.8 million or 13.9% of total revenue for the same period last fiscal year. Reconciliations of GAAP to non-GAAP financial measures are available on our third quarter earnings press release that was issued this morning.

Looking at our retail segment in more detail, total retail revenues for the third quarter decreased 1.3% to $280.3 million from the same period last fiscal year. As it relates to ongoing trade negotiations and tariffs, we continue to believe existing and currently planned tariffs will not have a material impact on our retail performance. Retail SG&A expense was $87.1 million, an increase of $6.2 million from the same quarter in the prior fiscal year, while retail SG&A expense as a percentage of retail revenue deleveraged 260 basis points to 31.1%, primarily due to increased cost for new stores, as well as other investments, we are making to support our growth. As we continue to accelerate the pace of new store openings, we will deleverage from an SG&A standpoint.

I also want to mention that we have successfully implemented our new loan management system, which follows the successful upgrade of our core finance and HR platforms. The investments, we are making to our back-office systems, are part of a broader technology-focused transformation to support not only our footprint expansion, but also e-commerce growth. It's important to note that investments associated with new distribution centers, accelerated new store growth, Florida expansion and technology investments will continue to weigh on profitability throughout next year. While these investments will temporarily impact our overall level of profitability, this and next fiscal year, they are necessary as we execute the next phase of our business strategy, focused on retail growth.

Turning to the credit segment, finance charges and other revenues were a quarterly record of $97.4 million, up 8.5% from the same period last fiscal year. The increase versus the third quarter of fiscal year 2019 was primarily due to a 40-basis-point increase in the portfolio yield to 22.1%, as well as higher retrospective insurance income compared to the prior fiscal year period.

Third quarter net annualized charge-offs, as a percent of the average outstanding balance, were 11.4%, a 90-basis-point improvement over the prior fiscal year period, and the lowest level of quarterly charge-offs in five years. Provision for bad debts in the credit segment was $42.1 million for the third quarter of fiscal year 2020, a decrease of approximately $5.2 million from the same period last fiscal year, primarily due to strong portfolio performance. The allowance for bad debts and uncollectible interest, as a percent of the total portfolio, was 13.3% at October 31, 2019, which was down approximately 30 basis points from the prior fiscal year period.

SG&A expense in the credit segment for the third quarter on an annualized basis, as a percentage of the average customer portfolio balance, was 9.8%, compared to 9.9% in the same quarter last fiscal year. Interest expense for the third quarter was $15.1 million, which was down slightly from the same period last fiscal year. For the third quarter, annualized interest expense, as a percentage of the average portfolio balance, was 3.8%, compared to 4% for the same period last fiscal year. Average net debt, as a percentage of the average portfolio balance, was approximately 61%, compared to approximately 60% for the same period last fiscal year.

Looking at our ABS program, we closed our 2019-B transaction in November, the second transaction of the year, and I am extremely pleased with the pricing and structure we were able to achieve as a result of portfolio performance and strong transaction execution. The ABS transaction was $486 million with an all-in cost of funds of approximately 4.46%, representing an 80-basis-point reduction from our 2019-A transaction completed earlier this year, and the lowest all-in cost of funds we have achieved since the Company reentered the ABS market in September of 2015.

We also changed the agent bank on our $650 million revolver from Bank of America to JP Morgan and backfilled Bank of America's commitment in November. The agent bank on our revolver is an important business partner and we made this voluntary change to ensure we have strategic partnerships with our banks that are committed to our industry over the long term. We are pleased to see the level of commitments from both existing and new banks during this process.

Through Friday, December 6, we have repurchased approximately 3.5 million shares of our common stock at an average price of $19 per share for a total of $66.2 million, which has reduced the amount of our shares outstanding by nearly 11%. With a strong balance sheet in place and diverse sources of capital, we are well-positioned to continue to organically grow and navigate near term challenges.

Finally, I want to provide an update on the upcoming Current Expected Credit Loss Accounting Standard, which is commonly referred to as CECL, that we are required to adopt on February 1, 2020. The new accounting standard changes the method of accounting for our allowance for bad debts from an incurred loss to an expected loss model, which will generally require that we increase the reserve on our customer receivables from one year of incurred losses to lifetime expected losses. We currently estimate that adopting CECL will increase our total allowance for bad debt by 40% to 60%, based on the portfolio composition and economic outlook, as of October 31, 2019. The ultimate amount that will be recorded on February 1, 2020 will be dependent on our portfolio composition and economic outlook at that time. As a final note, CECL is simply an accounting change and does not affect the cash flow or fundamental economics of our business.

With this overview, Norm, Lee and I are happy to take your questions. Operator, please open the call up to questions.

Questions and Answers:

Operator

Thank you. At this time, we'll be conducting a question-and-answer session.

[Operator Instructions]

Thank you. And our first question is coming from the line of Rick Nelson with Stephens. Please proceed with your question.

Rick Nelson -- Stephens -- Analyst

Thanks, good morning. So, Norm, you reiterated your planned rate to 10% long-term revenue growth, and that's inclusive of fiscal '20? And I'd like to know what your same-store sales assumptions are, taken[Phonetic] into that for fiscal '20?

Norman L. Miller -- President, Chief Executive Officer and Chairman

The fiscal '21.

Rick Nelson -- Stephens -- Analyst

Fiscal '21, excuse.

Norman L. Miller -- President, Chief Executive Officer and Chairman

Fiscal '20 is the year we're in now. As you know, at Conn[Phonetic] fiscal year starts on February 1. You're talking about next year.

Rick Nelson -- Stephens -- Analyst

Yes, exactly.

Norman L. Miller -- President, Chief Executive Officer and Chairman

Yes. So, still believe strongly that 8% to 10% of our total retail sales growth is achievable. In fact from a new store growth standpoint, we're at the 7% range as we sit here today. Inclusive in there would be low-single-digit same store sales would be -- would continue to be my expectation of 1% to 2% same-store sales, with that new store growth gets us to that 8% to 10% range.

Rick Nelson -- Stephens -- Analyst

What are the big swing factors? It sounds like you've tightened up on underwriting, and if TV[Phonetic] challenges would appear that they would linger into the new year, what are the offsets? I guess.

Norman L. Miller -- President, Chief Executive Officer and Chairman

Okay. So, first from an electronic standpoint, as we shared in our prepared comments, the electronics impact was 3% to 4% in the third quarter. The difference between the same-store sales, where we finished in the third quarter, and what our guidance -- the midpoint in our guidance in the fourth quarter, is almost predominantly all driven by the increase in consumer electronics mix in the fourth quarter. The other drivers, from an underwriting and a lease-to-own standpoint and a cannibalization standpoint, stay similar from third to fourth quarter. So, as we look forward to next year, we will continue to have some headwinds from an electronic standpoint into the first and second quarter, but as a mix, it becomes a much smaller. So, the impact to it would be significantly less than up to 6% to 7% hit here in the fourth quarter that it's causing.

From an underwriting standpoint, it's a combination of two things going on there with that 4% to 5% impact that we talked about in the prepared comments. First, we tightened about 100 basis point to 200 basis points in the middle part of the quarter -- but -- because we saw FPDs and 60-day plus get higher than where we were comfortable with. But at the same time as the quarter evolved, we saw that new and existing customer mix shift even greater, at least in the third quarter, that caused that underwriting impact to be up to 4% to 5% for the full quarter -- because as we underwrite for new customers, both online and in store, they are always at a tightened underwriting as compared to our existing customer base. We don't anticipate that underwriting impact to continue throughout next year. We've already seen existing customer mix come back stronger. So, we will have some underwriting hit or impact in the first quarter, but we expect, especially with the new underwriting model that we've put in place and as our spread is above that 1,000 basis points, it gives us opportunities and we still have more opportunity from a spread standpoint from where we're at today. We expect to be able to mitigate those underwriting changes that we took in the third quarter to get back to flat from that perspective.

We also have the e-commerce, the new products. We expect them to contribute 1% to 3% in themselves -- those two items from a same-store sales standpoint, this coming fiscal year.

Rick Nelson -- Stephens -- Analyst

And would you expect online applications are going to continue to grow? And if that's the case, wouldn't you assume you'd have to do more tightening as we push forward.

Norman L. Miller -- President, Chief Executive Officer and Chairman

It's a good question, Rick. We have to separate online applicants versus our online business e-commerce. I mean, they're both coming online. But we are already very tight from a full underwriting standpoint and full business standpoint. So, the growth you're seeing is already -- it's we're already at a very, very tight underwriting standard with the e-commerce that you've seen to this point. The issue has become, if you look when I came to the Company 4.5 years ago, 70% of our applications were completed in store, 30% online. As we sit here today, that has flipped 180 degree, 70% of our applications are online, 30% of them are in store approximately. So, that's where the impact is from an underwriting standpoint -- where we saw the impact in the third quarter. We can still grow the e-commerce business with tight underwriting, we think, significantly from where we're at today.

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

Hey, Rick and it's Lee. One thing on e-commerce that's important to know is that we are seeing from an FPD and delinquency, it's actually better from the e-commerce perspective than the overall Company, which again is such an important channel for us, and we'll continue to push forward as we go into the future here.

Norman L. Miller -- President, Chief Executive Officer and Chairman

And the reason it's better is we're tighter underwrite -- number one, we're tighter from an underwriting standpoint, and a significant number of the customers that are doing business with us completely online are appliance customers or those categories that are better-credit categories for us as well.

Rick Nelson -- Stephens -- Analyst

Are you still planning $6 million to $7 million first year[Phonetic] sales volume for the new stores or is it something less because of that tightening?

Norman L. Miller -- President, Chief Executive Officer and Chairman

As we sit here today, it's still in that range. It varies. I would say, it's somewhere between $5 million and $8 million, depending on if it's in an existing state or a brand new state. But we haven't done anything dramatically. Obviously, as we tightened with new, be it online or in store, there are ramifications there that may get it toward the lower end. But again, everything we're opening, as you know Rick, -- we're profitable at $3.5 million to $4 million in revenue with our stores. And even if we're tighter -- a little bit tighter coming out of the gate with the new stores, as we -- we only have a couple of them here that out of the pipeline. But as they mature, we expect that revenue and we get some recurring customers in that store base, we expect that growth ultimately to mature to the $8 million to $10 million in revenue on a per store basis, which may take us a little longer to get there. But that's been the case as we've been tightened underwriting even before the third quarter. That's been the case for the past year.

Rick Nelson -- Stephens -- Analyst

Okay, fair enough. Thanks and good luck.

Norman L. Miller -- President, Chief Executive Officer and Chairman

Thanks, Rick.

Operator

Our next question comes from the line of John Baugh with Stifel. Please proceed with your question.

John Baugh -- Stifel -- Analyst

Thank you and good morning. So, maybe you could clarify was it buckets or was it across the whole customer profile, where you changed underwriting and how much you changed in those? And it sound like there was an initial change during the quarter, and then, you increased it during the quarter. So, just a little more color around that, please.

Norman L. Miller -- President, Chief Executive Officer and Chairman

Sure, John. It's all around new customers almost -- and new retail as well as predominantly new web. And when I say web, I don't mean necessarily e-commerce, I mean web applicants. We segment the customer base into a variety of different segments, but four primary segments are retail new, retail existing, web new, web existing. And that is one of the major layers that we look at across the entire portfolio. And in the third quarter, the underwriting change we did, predominantly web new was is in the range of 100 basis points to 200 basis points. But as we saw that mix change, the impact of that 100 basis points to 200 basis points became greater, not because we took a second bite at the apple, it's just because of the mix shift from both retail to new continued to increase or was higher than we modeled or forecasted and projected. So, that's what resulted ultimately in that 4% to 5% impact from an underwriting standpoint for the quarter.

John Baugh -- Stifel -- Analyst

Okay. And is there a way to look at or assess for, I don't know, your existing customers I guess or non-new -- with[Phonetic] first payment defaults or 60-day delinquencies you did? I'm trying to get a sense of how extracting new -- how the book portfolio performed?

Norman L. Miller -- President, Chief Executive Officer and Chairman

Yes. I mean, we absolutely we don't share that John, the FPD and the 60 day. That's how we take actions. And part of on Lee's prepared comments, I mean, on the surface, it sounds contrary that we've had the best credit performance in six years, yet we've done some underwriting tightening. It sounds contrary on the surface. But it's because the spread and the credit performance that we're seeing today is -- it's a lagging indicator, the leading indicator as you know is FPDs and 60-day delinquencies. And we see that typically in 60 to 120 days from an underwriting standpoint. We start to see those vintages come in, we take action and we do it regularly. But we saw a more of a softening on the new side of the house, new web especially. We're getting an abundance of customers there. Frankly, if you saw the number in the reporting that we issued out -- that we will issue, the number of applicants are up significantly, which is a good thing for the business.

There is demand for it -- for our products. It's just they're predominantly -- there is a significant number of them in that web new arena that we have to be very prudent. And we're being very conservative from an underwriting and a credit standpoint, I'd rather have short-term pain, and certainly, we feel that here today to ensure that the stability of the portfolio, I'm very, very comfortable going forward or where that's at.

John Baugh -- Stifel -- Analyst

So, I don't expect a number now. And do you think that[Phonetic] the existing portfolio is or is not changed in terms of performance?

Norman L. Miller -- President, Chief Executive Officer and Chairman

No, it's not changed. The performance is very -- it's not a macro issue from an existing customer standpoint at all.

John Baugh -- Stifel -- Analyst

Okay. And then quickly on consumer electronics. I understand the gaming comment, but I don't cover the category and the significant deflation at big screen TV. I would presume that a. it continues, and b. we're going to -- there's just no new product cycle like big screens that will drive CE in the next year or two. So, I assume that that will get worse albeit just on a smaller base and therefore less impactful. Is that the way you guys are looking at it?

Norman L. Miller -- President, Chief Executive Officer and Chairman

Yes, I mean it will linger. It won't be at this level as we lap these numbers. I mean, the dynamics of what we saw this quarter, because we saw some softening on the CE at the end of the first quarter and the second quarter from a price standpoint. But it was really post Labor Day -- the Labor Day event and post Labor Day, when we saw the ASP is, as Lee talked about in his prepared comments on 65 inch and above, is down over 20%, 22%; three times the rate of ASPs in general from an NPD standpoint, TV wise. Now ASPs in TVs have been coming down for multiple years. It was the magnitude that they came down and specifically in the category that we primarily focused on from a better-best standpoint.

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

Hey, John, it's Lee. As you look forward, one of the things that's coming through and you're seeing is the 8K. That's the new technology development for consumers. It certainly has some great screen technology. So, there are differentiating factors that will allow us to keep playing in that bigger screen size, better technology aspirational products that we talk about, but obviously in this third quarter and fourth quarter, we had obviously taken a hit with the influx of second- and third-tier products at that 65-inch screen size etc that you saw.

Norman L. Miller -- President, Chief Executive Officer and Chairman

We don't anticipate it to be a growth category for us here for -- with the current technology, but we don't expect to see, especially as we lap into next year. And we will see some softness as we saw in the first and second quarter, but not nearly to the magnitude we believe that we're seeing today.

John Baugh -- Stifel -- Analyst

Okay, thanks. Good luck.

Norman L. Miller -- President, Chief Executive Officer and Chairman

Thanks.

Operator

The next question is from the line of Brian Nagel with Oppenheimer. Please proceed with your question.

Brian Nagel -- Oppenheimer -- Analyst

Hi, good morning. Thanks for taking my questions.

Norman L. Miller -- President, Chief Executive Officer and Chairman

Good morning.

Brian Nagel -- Oppenheimer -- Analyst

So, Norm, you may have just touched on this, but I want to ask it again. As we look at the, I guess, credit issues in the quarter and the commentary that you and your team made regarding tightening, did that reflect --- do you think what you saw there, which you reacted to reflected more of a Conn's issue or is there something that's starting to crack that you're seeing in credit overall from a macro standpoint?

Norman L. Miller -- President, Chief Executive Officer and Chairman

Yes, I really think it's our issue, Brian. I don't think it's -- we're not seeing it on a macro. We're not seen it from a collection standpoint. That's typically where -- our antenna is up because as we start to -- if we would start to see something from a macro standpoint and a recession standpoint, that's typically where you would see it on the delinquency side there. And it is predominantly on the new side of the house. You would see it on the existing side as well and we are not seeing that on the existing customer base. It's been fairly stable there. It's purely the mix of new web and new retail versus existing. And frankly, part of it is our learning curve as we've, over the past four years, invested significantly within the credit business and the underwriting team, and we accelerate retail growth, so we're inherently getting more new customers into our mix from the start.

And then, that consumer behavior mix of moving from retail to web standpoint, for us, we're still learning through that process of being able to underwrite as effectively to maximize the sales potential there and not jeopardize the credit portfolio. And as I said before, being being fairly conservative as we go through this to make sure that we get that right mix, because we have more than enough customers, both coming online and in the stores submitting applications, we just have to underwrite them effectively. And that's why we highlighted the lease-to-own at 7%. That's strategically just a huge, huge opportunity. Communicated many times that 10% is the number. And to me, that's not the ceiling, that's the floor of where we should be at. We should be a minimum of 10% lease-to-own, based on the credit quality customers that we see within there from an opportunity standpoint.

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

Hey Brian, it's Lee. Just to come back to your original question on the consumer and the health of consumers. I said in my prepared remarks, they are feeling relatively flush[Phonetic] and that's what we're seeing from the consumer electronics, where you've got the price points of these large screen TV is coming down to a level where they truly can buy them with cash, you don't have to finance them. So, to your question, it really, as Norm answered, it's more of our phenomenon than a consumer health issue.

Brian Nagel -- Oppenheimer -- Analyst

Got it. That's really helpful.

Then, so the second question I had on the consumer electronics, and it's particularly the dynamic that we're seeing in televisions. So, I think Norm, as you mentioned, it's a price deflation of TVs is by no means a new phenomenon. It seems like it accelerated here. Is there anything, given the Conn's business model, the customer you serve, the projects that you've in new stores[Phonetic], is there anything you can do from a merchandizing standpoint to contend with this lower-priced alternative at other venues, or is it just a matter of comfort to wait through this with on the TV category?

Norman L. Miller -- President, Chief Executive Officer and Chairman

I mean, it's very difficult, Brian. Because I mean we've been more aggressive. We have some opening price points to use them to get customers into the showroom. The issue is its debt[Phonetic]. The deflation is so great, if it was on the margin, we can mitigate. And frankly, we saw that earlier in this past fiscal year at the magnitude that we're seeing at 20%, 25% down. And frankly, it's not just the price deflation. It is the number of second- and third-tier manufacturers that we're doing no business a year ago in the 70 inch and 75 inch and above, even 65 inch, very limited as they've entered into the market, because the price points are there for them to be able to compete. You've seen a lot of those. Our customers are, -- we know, we've got survey and information from our customers saying, geez, I don't have to finance for a 65 inch. I mean, there were 55 inch and 65 inch TVs under $300, under $400, through Black Friday. And our customers, at that price point, don't need to finance them and have the cash to be able to buy that outright.

George L. Bchara -- Chief Financial Officer

Hey, Brian, this is George. I would just add that obviously we're continuing to focus on additional products that we can add to our floor. Lee mentioned in his prepared remarks, flooring, and what we think that can be from an opportunity standpoint, as well as some of the complementary categories in that space. So, we certainly recognized the challenges in the CE space, and specifically the television market and are focused on introducing new category, new products to offset those sales.

Norman L. Miller -- President, Chief Executive Officer and Chairman

But as you know Brian, you've been covering retail for a long time. I mean, it is not a new phenomenon from a TV cycle standpoint. TVs, even in our lower quarters, there is still 23% to 25% of the mix of our products. They're not going away. It's -- you go through these cycles and it has happened before, where until some new technology comes in, you see a leveling off. But we don't expect that category to go away. We don't see it as being a growth category. 8K may mitigate to some degree, but it's still an important driver from a traffic standpoint and important element from an overall category -- that would like to minimize or mitigate the size it is with some of the home services and other products that we're going into, to make it less painful when there are these downturns. But, it is a part of the evolutionary process with TVs through the years.

Brian Nagel -- Oppenheimer -- Analyst

Guys, there is one more quick and I appreciate all the color. One more question, I know we've had this discussion in the past. But you clearly you've done a -- it's an absolute, phenomenal job in preparing the credit business and here we saw it in the quarter, profitability, and then tracking above that 1,000 points spread. When you use a team and you're talking[Phonetic], I mean, does the topic of maybe be too tight on credit come up -- that you would maybe be pushing this too far to this credit really need to be[Phonetic]. I know it's this quarter-to-quarter fluctuations, but does credit need to be a profitable business or could you loosen up credit in order to drive better retail results?

Norman L. Miller -- President, Chief Executive Officer and Chairman

That's a good question, Brian. We do have very robust conversations around that. Part of it is, I mentioned, I will acknowledge having lived through the struggles we had, when the credit business brought the Company to the precipice 4.5 years, five years ago. I'm very conscious of that. And I am pushing JD and the credit team all the time to find ways to where we can say yes. Lee talked about the yield, record yield. We still have more opportunity there. We think there is another 100 basis points to 150 basis points that will season from a yield standpoint. And I would -- you heard on the recoveries, there is opportunity from a charge-off standpoint. So, not only do we have opportunity with the spread we're at, but we still see that spread -- opportunities to rise, to increase, on both ends of that spread.

Having said that, in the short term, I'm being fairly conservative until I'm certain that the things we're doing it doesn't do us any good to be in a position today than a year from now that we're in a better position retail wise, but we pay for that nine months, 12 months, 15 months down the road. So, it is that balancing act. And I will tell you, the team is very conscious, it's not an easy thing to do, it's not the easiest business model. But I am completely confident we have the right people and the right strategies to do it. And look, we went through some bumps four years, 4.5 years ago, as we were getting the credit business into a stable place, as we worked through the strategy there. And we're going through some bumps here on the retail side, but I'm as confident and as bullish today as I ever have been that we can grow this business low-single digit same-store sales, 8% to 10% top line, and maintain that credit business in a stable place.

Brian Nagel -- Oppenheimer -- Analyst

Again, I appreciate all the color. Thanks.

Norman L. Miller -- President, Chief Executive Officer and Chairman

Thanks, Brian.

Operator

Our next question is from the line of Kyle Joseph with Jefferies. Please proceed with your question.

Kyle Joseph -- Jefferies` -- Analyst

Hey, good morning. Thanks for taking my questions. Most of them have been covered.

I just wanted to talk about the financing mix of the portfolio and the trends you're seeing there? Obviously, you've seen good growth in the Synchrony channe, where it sounds like the lease-to-own channels kind of come down or underperforming your expectations. Can you just discuss what's going on there? How much you guys control? And how much of that is a macro factor? And how much of that is specific to underwriting by those respective partner?

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

Yes. So I'll start with the Synchrony piece. You're right. I mean, we've seen our Synchrony business in the past year go up by almost 300 basis point. And it speaks to the demand across the entire credit spectrum of our products. We now have about -- including cash customers, about 25% or one in four of our customers are our prime or cash customers. We've worked very closely with Synchrony to integrate them on our website. And it's the benefit of having an in-house credit team because we can talk directly with their credit team, a lot of the retailers, they are both progressive on the lease-to-own. And Synchrony on the prime side of the house, they are not typically interacting with retailers that have a credit and an underwriting team and can work with them to be able to drive the performance. So, pleased with where we at with Synchrony. Still think, there's some upside there, but a very solid performance. It's been disappointing on the lease-to-own side. And I would tell you, I don't think it's a macro issue at all, Kyle. I think it's an execution issue and half the issue is on our side and execution in the showroom of converting those customers, we declined. And then, some of it rest with our partner as well, that we talk with them on literally almost a daily basis of where we need to go. There is a number of initiatives that they have in the hopper that they're working on to move that needle. There is a number of things we're working on as well. But I will tell you at the end of the day, it is truly an execution issue on the lease-to-own, there is nothing macro we see going on there.

Kyle Joseph -- Jefferies` -- Analyst

Got it. Thank you. That's it from me.

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

Thanks, Kyle.

Operator

Our next question is from the line of Bill Ryan with Compass Point. Please proceed with your question.

Bill Ryan -- Compass Point -- Analyst

Thanks and good morning. It's obviously very good that you caught the credit inflection point relatively early. But I was wondering if you could give us a little bit more granular color on the specific underwriting changes that you made? Did you tighten up on down payment terms, debt to income ratios, or whatever it may be?

And the second part of that question, why are the new customers of today performing somewhat worse than, let's just call, the new customers of yesterday that prompted the tightening? Obviously, there's been some change in behavior. Thanks.

Norman L. Miller -- President, Chief Executive Officer and Chairman

Sure, Bill. So, first, on the actions that we took, it was kind of yes and yes on a number of the things that you talked about. I mean when we tighten, we tighten by increasing down payment, we tighten from a leverage standpoint, we tightene by just declining outright and lowering credit limits. All three of those are actions that we take to impact credit availability that we provide, and ultimately that we will reduce from a sales standpoint. And new customers, and Bill, you understand the subprime customer fairly well, new customers have historically, and we've communicated that many times and this isn't a Conn's phenomenon, this is a subprime phenomenon. They default at twice the rate of existing customers.

Part of the challenge that my predecessor had and the business had four or five years ago was they grew the new customer mix between comps and new stores at a rate that we saw a new customer mix get up into the 60-plus percent of the total mix versus it's in -- for the last 12 months, it's in the 49% range for us right now. But it was down in the 30s, before we started growing, before we started accelerating new store openings. And the key is keeping it at that mix from both the new customers coming in as well as what's changed Bill is the consumer behavior. Customers that used to come into our store to fill out an application, more of them are going online. And frankly, we've made it easy for them because they can fill out an application, not hit their credit score. I think we can do a soft poll and they can see exactly what they qualify for. So, there is a bit of self-selection that occurs there because if a customer before that was coming into the showroom in order to get that information because it's only been about a year and a little over a year that we've been doing that, where we could do a soft poll, and they could see what they qualified for, now they can go online. In the past, they would come into store, we could convert them to a lease-to-own and have a better chance when we could see that customer face to face. As that mix has moved online, it creates more challenges for us. From an execution standpoint, if that customers decline or they're approved with the down payment, how do we get them into the store to be able to try to convert them to progressive or even to Conn's with the down payment.

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

And Bill, its Lee. Look, it truly is a balance and we're trying to navigate that balance very carefully. As you bring in new customers, you've got to bring in new customers. You're never truly going to know, even with the best underwriting models until you get them on board, you're going to suffer some losses that is kind of a customer acquisition cost in a sense that you suffered through. But you can't let in so many and suffer those losses that destabilize the portfolio. So, that's the balance. We're constantly trying to weigh here as we go forward.

Bill Ryan -- Compass Point -- Analyst

Okay, thank you.

Operator

Next question comes from the line of Brad Thomas with KeyBanc. Please proceed with your question.

Brad Thomas -- KeyBanc -- Analyst

Yes, hi, good morning. Thanks for taking my question.

Wanted to first ask about the outlook for retail gross margin? And I was hoping you could talk a little bit about how you're thinking about that in the fourth quarter and what drivers or headwinds that we're seeing here now? How much of that may continue into 2020 as we refine our models?

Norman L. Miller -- President, Chief Executive Officer and Chairman

Yes. So, sure, Brad. So, for the fourth quarter, we guided 39.5%. I think it's at the center point of the guidance, which is a little under what our long-term expectation is at the 40%. It's really two things predominantly driving that. One is from a logistics standpoint, as we opened and we talked about in the prepared comments, the Houston DC and transition there. We're also opening a Louisiana DC and it won't be the fourth quarter, it will be more of the first half of next year, the Florida DC, those will all weigh short term on the margin a bit. I think it was about 60 basis points, this past quarter, is what the impact was from a logistics standpoint.

And then the other element that's driving it frankly is the lower sales from a same-store sales standpoint, de-lever that some. And those two are the primary drivers. There is nothing systemic that's occurred from a product standpoint or a pricing standpoint that would reflect that decline in margin.

Brad Thomas -- KeyBanc -- Analyst

Got you. That's helpful, Norm. A question that we've been getting with respect to the rent-to-own business is, has the growth of progressive in other retailers affected you? And I was curious if you had a chance to try to do the analysis on a state-by-state basis, as the Best Buy has rolled out, as Lowe's is starting to roll out, are you seeing any impact from them now offering progressive on your business?

Norman L. Miller -- President, Chief Executive Officer and Chairman

To sit here and say, there is no impact, I don't think we can say that. I do think, as more retailers, not only Best Buy, but others out there -- and frankly I believe ultimately almost every retailer will have a lease-to-own partnership or virtual lease-to-own process. So, I think there has been some that certainly has made it more challenging.

But having said that, if you go to the Investor Deck on Page 7 and you look at the number of applications we get, in fiscal '19, we got 1.2 million applications. It's actually a little more than that from a run rate standpoint, that our applications are up. We're declining somewhere in the neighborhood of 600,000 to 650,000 people on an annual basis. So, there is more than enough fish and opportunity for us to be able to get to that 10% lease-to-own, even with some of the macro things happening with other retailers from our perspective.

Brad Thomas -- KeyBanc -- Analyst

Got you. And Norm, if I understand you correctly, it feels like we can kind of compartmentalize a couple of issues here that seems to be of the more transitory in nature with adjusting your approvals on online customers and the headwinds in the consumer electronics industry. But as we've talked about in the Q&A here, it does feel like that some of those will continue here through 2020. I guess, my question would be, as you guys plan for calendar 2020 for next year, are there any adjustments that you are looking at making at this point? And how you go to market, the timing of store openings, etc, anything you're looking at changing because of how the back half is playing out here?

Norman L. Miller -- President, Chief Executive Officer and Chairman

It's a good question, Brad. That's why we communicated, we're still opening more stores. We haven't changed that at all. It's that 16 to 18 is what we're targeting for next year, above the 14 we opened this year. Moving forward with Florida, when you look at the macro categories, I mean lease-to-own, there is clearly several hundred basis points of opportunity there minimum from our standpoint. The underwriting, we will see that in the fourth quarter and there will be some, probably in the first, in the early part of the year. Frankly, I don't expect that underwriting impact to last throughout next year. With the spread that we continue to see increasing and the opportunities we have there, I think we will be able to mitigate that as the second quarter and the rest of the year unfolds. The electronics category, we did see some of that this past year in the first and the second quarter. I think there will still be a little bit there, that will have some headwinds, but not nearly to the degree you've seen in the third and the fourth quarter.

And then you add on to that, in addition to the lease-to-own opportunity, the opportunities we have with the new products, the opportunities from an e-commerce standpoint, I feel very comfortable that next year, we will still -- during the year -- we will be at that low-single-digit same-store sales toward the back half of the year as the year unfolds and have that 8% to 10% total retail growth.

Brad Thomas -- KeyBanc -- Analyst

Got it. That's helpful. Thank you so much and good luck with the rest of the holiday season.

Operator

Thank you.

We have reached the end of the question-and-answer session. Now I'll turn the call over to Norm Miller for closing remarks.

Norman L. Miller -- President, Chief Executive Officer and Chairman

Thank you. I want to say -- first of all thank you to our 5,000 associates around the Company that work very hard to deliver performance for our customers and meet expectations every day. We appreciate the work they do and we also appreciate your interest in the Company and look forward to talking with you at the end of the fourth quarter. This concludes the call.

Operator

Thank you. You may now disconnect your lines at this time. Thank you for your participation.

Duration: 67 minutes

Call participants:

Norman L. Miller -- President, Chief Executive Officer and Chairman

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

George L. Bchara -- Chief Financial Officer

Rick Nelson -- Stephens -- Analyst

John Baugh -- Stifel -- Analyst

Brian Nagel -- Oppenheimer -- Analyst

Kyle Joseph -- Jefferies` -- Analyst

Bill Ryan -- Compass Point -- Analyst

Brad Thomas -- KeyBanc -- Analyst

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