Specialty retailer Conn's (CONN +0.00%) reported record quarterly earnings per share in its fiscal second quarter of 2020, in results released before markets opened on Tuesday. The furniture, appliances, and consumer credit chain also signaled imminent relief from a weight on comparable-store sales. We'll discuss the all-important metric of comps below, along with other crucial details from the quarter. Note that all comparative numbers that follow refer to those of the prior-year quarter.
Conn's: The raw numbers
| Metric | Q2 2020 | Q2 2019 | Change |
|---|---|---|---|
| Revenue | $401.1 million | $384.6 million | 4.3% |
| Net income | $19.9 million | $17.0 million | 17.6% |
| Diluted EPS | $0.62 | $0.53 | 17% |
Data source: Conn's.
What happened with Conn's this quarter?
- Retail sales rose 3.3% to $306.1 million, led by new store openings. The company added four locations during the quarter, bringing its total to 131.
- Additional sales from new locations compensated for a decline in same-store sales. Comps were pressured by areas hit by Hurricane Harvey; stronger sales over the last two years in these markets have made for tough comparisons this year, as recovery activities from the 2017 storm wind down. Comps in Harvey-impacted markets slumped by 9.3%, while all other markets collectively managed a comps increase of 0.4%.
- Retail gross margin slipped by 90 basis points to 40.5%.
- Conn's consumer credit segment improved revenue by 7.5% to $94.8 million. Management attributed the increase primarily to robust origination of Conn's high-yielding direct consumer loan product, and higher average customer receivable balances.
- The consumer credit segment's provision for bad debts decreased by 1.5% to $49.8 million. Coupled with higher revenue and lower selling, general, and administrative (SG&A) expenses as a percentage of fee income, the lower loss provision helped cut the segment's pre-tax quarterly loss roughly in half, to $8.7 million.
- Consolidated SG&A expense crept up just 40 basis points despite the company's higher quarterly sales, to 31.8%. Conn's exerted tight cost discipline across the board, as consolidated operating margin improved by 20 basis points to 10.4%.
- Conn's overall net income and EPS also benefited from lower interest expense, which declined by $1.2 million to $14.4 million, due to early retirement of debt in the previous year.
- The company repurchased $34.3 million of its own shares during the second quarter, marking its first share buyback during the fiscal year.
Image source: Getty Images.
What management had to say
In Conn's' earnings press release, CEO Norm Miller detailed factors behind the company's performance, and pointed to significantly higher comps in the coming quarters. Miller also announced Conn's plans for expansion into a vibrant market. This information, along with strong earnings and a healthy outlook, propelled shares 18% higher in the afternoon trading session on Tuesday, as investors warmed to its viability as a consumer goods investment for the back half of the year. Miller said:
Retail sales growth as a result of new store openings, strong retail profitability, and favorable credit performance drove record second-quarter earnings of $0.62 per diluted share. Our e-commerce sales are quickly ramping, and we are well positioned to serve our customers online as we expand our geographic footprint. During the second half of this fiscal year, we expect to lap the benefits Hurricane Harvey rebuilding efforts had on same-store sales, which have impacted the year-over-year sales comparison over the past four quarters.
With strong operating performance and financial results, I am excited to announce our plans to enter the Florida market next fiscal year. We believe that the State of Florida can support over 40 Conn's HomePlus locations once fully penetrated. Positive momentum is accelerating across our business, and we believe fiscal year 2020 is shaping up to be a year of strong earnings and operational growth.
Looking forward
Looking ahead to the fiscal third quarter, Conn's expects year-over-year retail sales growth of 4% to 8%, and comps results between a 3% decline and a 1% gain. Markets impacted by Harvey are anticipated to post a comps decline of between 4% and 8%, while all other markets are slated to see comps results between a 2% decline and a 2% gain.
Consumer segment revenue is pegged to land in a range of $94 million to $98 million. Conn's doesn't provide forward EPS or net income guidance, but it does outline expected SG&A expense, which should fall between 32.25% and 33.25% of total revenue next quarter.
