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Conn's Tumbles on Growing Credit Losses

By Timothy Green – Mar 29, 2016 at 12:53PM

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The retailer's in-house credit business doubled its losses during the fourth quarter, driving a steep decline in profits.

Image source: Conn's.

What: Shares of furniture, appliance, and consumer electronics retailer Conn's (CONN 0.10%) tumbled on Tuesday following the company's fourth-quarter earnings report. A steep drop in profit, driven by higher losses in the company's credit business, outweighed any positive news. At 10:45 a.m. ET Tuesday, the stock was down about 22%.

So what: Conn's reported quarterly revenue of $456.8 million, up 7% year over year, and slightly above the average analyst estimate. Same-store sales slumped 1.7% during the quarter, although excluding exited product categories, same-store sales rose 3.6%. The furniture and mattress category was a standout, with same-store sales rising 15.2%, while consumer electronics same-store sales plunged 13.3%.

Conn's reported adjusted net income of $0.11 per share, down from $0.46 per share during the prior-year period, and well short of analyst expectations of $0.28 per share. On a GAAP basis, Conn's reported earnings of just $0.03 per share. The retail business enjoyed a slight year-over-year increase in operating profit, but the credit business was a disaster, posting a pre-tax loss of $43.2 million, up from a loss of $20.8 million during the prior-year period.

These losses were driven by an increase in the allowance for bad debts, as well as a decrease in portfolio yield. The 60-day delinquency rate rose to 9.9% at the end of the quarter, up 20 basis points year over year. Conn's expects same-store sales to range from down low single digits to flat in fiscal 2017, in part affected by underwriting changes the company plans to make, while 10 to 15 new stores will drive total revenue growth in the mid to high single digits.

Now what: While Conn's retail business is putting up decent numbers, the credit business is what drives retail sales for the company, and growing losses are a concern. Any tightening of lending standards could have a negative impact on sales, since Conn's finances nearly 80% of sales through its own in-house credit business.

Going forward, Conn's will need to find a balance between its retail and credit operations. If Conn's can't return its credit business to profitability, it will be difficult to argue that its business model makes much sense. CEO Norm Miller, who took over the company in September, is optimistic that Conn's can be turned around. "I've been CEO since September 2015 and over this short tenure I am increasingly confident in Conn's differentiated business model, growth opportunities, and value to customers. I'd like to thank all of Conn's stakeholders for their support during my transition, and I look forward to sharing our success with our shareholders as we focus on putting Conn's back on a path to sustainable long-term profitability and growth in the coming quarters."

Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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