Is Conn's a Better Buy Than Best Buy and hhgregg?

Conn's (CONN -0.27%) will release its quarterly report on Thursday, and the lesser-known retailer of appliances and consumer electronics has quietly put together an impressive long-term investing record. Yet with Best Buy (BBY -0.30%) having bounced back over the past year from big losses in previous years, the future for Conn's investors hasn't stood out as much. Will smaller companies like Conn's and hhgregg (HGGGQ) keep outpacing Best Buy, or will the larger company end up having the last laugh over its rivals?

Conn's has evolved recently from being a pure retailer of appliances and electronics to becoming a credit-facilitator for those with less than perfect credit. With financing terms that go further than most retailers are willing to go to close sales, Conn's is willing to expose itself to credit risk, a move that has paid off handsomely during the recovery from the financial crisis. But if the economy turns, will Conn's find itself in a world of hurt? Let's take an early look at what's been happening with Conn's over the past quarter and what we're likely to see in its report.

Stats on Conn's

Source: Yahoo! Finance.

Can Conn's earnings keep soaring this quarter?
In recent months, analysts have gotten more optimistic about Conn's earnings, raising their October-quarter calls by $0.02 per share and their full-year fiscal 2015 projections by a nickel per share. The stock has lost its upward momentum, though, falling 12% since late August.

Conn's July quarter earnings report was to blame for the stock's declines, with a big bottom-line miss disappointing investors who had gotten used to good news from the retailer. Revenue gains of 30% confirmed that customers were continuing to shop at Conn's, but the company's credit card business weighed on profitability. That in turn called into question Conn's strategy of offering credit to those who might not be able to get it elsewhere, and although the company kept its guidance for the full year steady, investors had hoped for at least a small boost.

The challenge that Conn's has that hhgregg and Best Buy have largely sidestepped is making sure that its customers can actually pay for their purchases. Conn's gets a whopping 75% of its sales from offering customers in-house financing, making purchases possible for those with marginal credit ratings between 550 and 650. When things go well, that gives Conn's an extra revenue stream of finance-charge income that Best Buy and hhgregg don't generally get. But during tougher times, the credit exposure is an added risk that Conn's must face.

The real question is whether Conn's can benefit from improving conditions in the housing market. Investors had hoped that a big boost in home prices and home-buying activity might jump-start sales of furniture and appliances, but higher home prices also mean that buyers are stretching to afford their homes, leaving them less able to deal with payments on high-ticket furnishings as well. Best Buy still relies somewhat on appliances, but it has doubled down on mobile devices and other high-margin electronics even as Conn's and hhgregg have tried to defend themselves against online retailers by emphasizing larger items that aren't as readily shippable.

In the Conn's earnings report, watch closely at the credit-related results from the company's operations. If borrowers get into more trouble, it could spell difficulty not just for Conn's but for retailers in general, as they've counted on a healthy consumer to help boost their overall growth.

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