Conn's, Inc. Earnings: Can the Electronics Retailer Bounce Back?

On Monday Conn's (CONN 4.88%) will release its quarterly report, and investors are nervously waiting to see if the electronics and appliance retailer can improve on its poor performance last quarter. Even as big-box electronics giant Best Buy (BBY 0.25%) saw similar disappointment in its holiday quarter results, Conn's faces the challenge of greater competition from Lowe's (LOW 0.63%) and other home-improvement chains cashing in on the recovery in the housing market.

Conn's plays an important niche role in the electronics and appliance retail space, as it aims at a more narrowly focused customer base than either Lowe's or Best Buy. In particular, Conn's benefits greatly from providing in-store financing for many of the products it sells, and when times are good for the low- and middle-income consumers who can't necessarily get credit from outside sources, Conn's can see big earnings growth from serving that market. Yet the strategy also means that Conn's faces credit risk. 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.

Source: Conn's.

Stats on Conn's

Source: Yahoo! Finance.

Can Conn's earnings pick up steam?
In recent months, investors have had mixed views of Conn's earnings, raising April-quarter estimates by $0.04 per share but cutting full-year projections both this year and next by modest amounts. The stock has bounced back sharply from its losses earlier in the year, rising 35% since late February even though it still trades far below where Conn's started the year.

Conn's fourth-quarter results caused consternation even before the quarterly earnings report officially came out, as the company's stock tanked after giving preliminary guidance that disappointed shareholders. Conn's warned that adjusted earnings per share would come in 15% to 20% below what investors were expecting, and it gave negative guidance for the current fiscal year that fell 8% to 15% below consensus views. Conn's argued that high delinquency rates among its customers were partially to blame for the shortfall, and weak demand signaled that its customer base didn't have the capacity to spend as much as the company would have liked. Those results were consistent with what Best Buy showed in its holiday quarter, especially given all the promotional activity from other players in the electronics space.

By the time Conn's actually made its report, though, investors had gotten more comfortable with the company. Even though earnings and revenue were weak as expected, Conn's was somewhat more upbeat about the creditworthiness of its customers, and shares soared as a result. The ability to extend credit is a key differentiator for Conn's versus Best Buy, Lowe's, and other companies, as Conn's has traditionally served customers who wouldn't be able to get financing elsewhere.

Conn's also stands to gain from continued strength in the housing market. Just as Lowe's and other home-improvement specialists have ridden higher home prices to success, so too does Conn's have the potential to bolster its own revenue as shoppers get more comfortable spending on their homes with appliances, electronics, and other accessories to improve their standards of living.

In the Conn's earnings report, watch to see if the company can sustain its marked-down guidance for the full fiscal year. If its customers' credit continues to get healthier, then Conn's could have more room to run higher.

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