One of last week's biggest winners was Conn's (NASDAQ:CONN), soaring 32% higher after posting a surprising profit in its latest quarter. The retailer of furniture, mattresses, and consumer electronics also offered an encouraging outlook and healthy progress on its efforts to offer direct loans in Texas and now Louisiana.
The 113-store chain's adjusted earnings of $0.05 a share turned heads, and understandably so. Analysts were holding out for a fourth consecutive quarterly deficit, targeting an adjusted loss of $0.12 per share this time around.
Conn's was able to turn its bottom line around despite another slide on the top line. Net sales slipped 5.5%, and that was with 10 more stores than it had a year earlier. Comparable-store sales plunged 8.9% during the holiday-containing quarter. The important distinction is that Conn's is making more out of less, cranking out higher-margin sales with dramatically improved net margin.
Wrath of Conn's
Conn's stock has been volatile. As big as the stock's 32% surge may sound, the shares are trading lower so far in 2017. Last week's big move up pushed the stock into the double digits for the first time in nearly two months, but this is still an investment that's fetching 86% less than it did when it peaked in late 2013.
A big reason for the renewed excitement in Conn's is the direct-loan program it received regulatory approval to run in Texas, and just last month it rolled out the same service in Louisiana. A big advantage for Conn's here is that it can charge much higher rates. More than 80% of its current originations have a weighted average interest rate of over 28%, up from roughly 22% three months earlier.
That may seem great, until you start wondering about the creditworthiness of its customers.
Then we get to the retailer's guidance. Conn's is targeting a decline in the mid-teens in comps. That's not pretty, but we should once again see the chain make more out of less. It's eyeing healthy gross margin and a sharp sequential decline in its provision for bad debts, as it targets a return to full-year profitability.
There will always be risks with the retailing niche that Conn's serves, and there is both potential and pain in the lease-to-own market, where the chain wants to expand its presence. Last week was a welcome surprise for bulls, and an unwelcome one to short sellers who were squeezed out. In any event, this is a turnaround that will take time -- and that's if we even make it that far in this climate where too many operators are in a state of retreat.