Image source: Conn's.
What happened
Shares of Conn's Inc. (CONN +0.00%) were moving higher today after the rent-to-own retailer delivered a better than expected third-quarter earnings report. The stock closed up 8.9% on the news.
So what
Conn's posted an adjusted loss of $0.08 per share in the period, but that was better than expectations of a $0.12 loss. Due to recent underwriting refinements, same-store sales fell 10.1%, leading to a 5% drop in revenue to $376.8 million, worse than the consensus $392.8 million. However, adjusting for the new refinements, same-store sales were down just 0.1%, meaning revenue would have been closer to the analyst estimate.
Though the new credit requirements cut into the company's retail sales, they are having the desired effect on loans, as CEO Norm Miller said: "Initial indications are encouraging as Conn's experienced meaningful reductions in early stage delinquency and first pay defaults during the fiscal 2017 third quarter." Retail gross margin also improved 40 basis points sequentially, a sign that store operations are improving in spite of slower sales.
Now what
Conn's stock crashed in 2014 as a number of its loans went bad, so enhancing its credit standards to lower delinquencies seems like a smart move. Separately, the company also implemented its Texas direct-loan program, which increased the annual percentage rate on loans in Texas, where half of its stores are, by more than 500 basis points to 27%. Management expects companywide yield to improve by 600 to 900 basis points next year thanks to such changes.
Looking ahead to the fourth quarter, management expects similar results to the third quarter: a 10% decline in same-store sales, and gross margin of 37% to 37.5%. While this year is shaping up to be a forgettable one, the retailer looks like it's on track to return to profits in 2017.
