7 Reasons Why Conn’s Is Forecasting Better Days Ahead In Its Stores

- Apr 07, 2018-

When The Woodlands, Texas-based Conn’s posted a fiscal fourth and full-year profit earlier this week, the news came with word that fourth quarter same-store sales were off 8% and the expectation they would be off another 3% to 5% in the first quarter. The stock took a hit.

But Chairman, President and CEO Norman Miller added that the furniture, electronics and appliance retailer also ended the year with record retail gross margins and offered several reasons why Conn’s sees better times ahead for the retail side of this credit-oriented business. Here are a few takeaways from the earnings conference call:

Same store sales will be down next quarter but … The trend is good. February same-store sales were down 7.7%. March was down 3.2%. With the company guiding for a 3% to 5% decrease in the fiscal first quarter, the middle range implies a decrease of just 1% for April.

Conn’s credit picture has stabilized and brightened. Revenues from the credit segment were up 12.1%. The company’s credit spread reached its highest level in three years. Interest income is up on the higher interest rates it’s charging, and bad debt charge-offs are down. As the retailer changed and tightened its loan underwriting standards over the past two years to get to this better place, it was met with a slowdown in sales. The better credit piece is in place and under control; now Conn’s can shift more focus to driving retail growth.

It expects to say “yes” to more credit applicants. During the past fiscal year, about 1.3 million people filled out an application for Conn’s in-house financing. The retailer approved about 700,000 of them while the remaining 600,000 didn’t qualify.

“As our credit team’s tenure and experience has increased and the credit segment performance continues to improve, their focus can now evolve to finding incremental sales opportunities within the 600,000 applicants Conn’s declined,” Miller said. That’s all incremental business.

Also, those 1.3 million credit applicants were out of 22 million visitors to Conn’s stores or website. If the retailer can drive 1% to 2% more applications out of the same kind of traffic this year, that’s another 400,000 or applicants (a 35% increase) it can potentially sell.

And it's working on some things to get more already approved consumers to actually buy. Back to the 700,000 applicants who were approved for credit for a second. Miller said 300,000 of them ended up not using any of their line and the majority of the almost 400,000 customers who did use the company’s credit offering used less than half of what they were approved for. That’s another opportunity to grow sales with better retail execution, he said,

On the call, Miller said there are “multiple programs underway” to better Conn’s consumer connections. “These include optimizing our merchandising strategy, improving associate training and making it easier for customers to interact with us.” The retailer also hired a vice president of customer experience “to drive preference, loyalty and advocacy amongst our customers.”

Conn’s believes these strategies to improve retail execution can ultimately drive low single-digit same-store sales gains, he said.

The transition to a new lease-to-own partner has been completed. And that business is gaining steam. Some of the fourth quarter same-store sales decline was attributed to Conn’s transition out of lease-to-own partner AcceptanceNow (the Rent-A-Center division) and to Progressive Leasing (the Aaron’s division). Miller said Conn’s had to lap strong AcceptanceNow sales from the previous fourth quarter “as they tried to keep our business while we explored alternative partners,” so the comps were difficult to match.

It gets easier from here. And since Conn’s full transition to Progressive in May 2017, sales under the program have grown each quarter, “and we are already higher than the historic average we experienced with our former partner,” he said.

This should also help Conn’s capture some of the credit sales it hasn’t been able to close. Miller noted that a number of those approved consumers who ended up not buying last year faced high down payments because of their credit background, and couldn’t afford to lay out the cash up front.

“So that’s again a retail execution,” he said, “to move them to potentially the Progressive offering that’s only $59 down.” While the financing rate is higher than it would be under Conn’s in-house financing, “it overcomes that hurdle that the customer may not have that 10% to 20% cash out of pocket to do that purchase,” he said.

“As our relationship with Progressive continues to deepen, we expect lease to own sales to grow overtime to at least 10% of product sales,” Miller added, which would be up from 6.5% in the fourth quarter.

Focus continues on higher-margin furniture and bedding category. In the fourth quarter, Conn’s retail gross margin of 40.1% exceeded its expectations. While the retailer warned against expecting the same magnitude of margin growth it experience last year, there is room to expand, “especially as our furniture and mattress mix continues to grow,” Miller said.

Furniture and bedding represented 35.3% of product sales in the fourth quarter. That was up from 28.1% of the total just three years ago, and Chief Financial Officer Lee Wright said Conn’s believes its “longer-term goal of 45% of retail product sales from the furniture and mattress categories is achievable.”

Back in growth mode. Conn’s slowed its expansion while it got its credit house in order. A new store expansion plan calls for five to nine new locations this fiscal year -- all in its existing state market “that benefit from higher lending rates and are supported by our current infrastructure, allowing Conn's to leverage fixed warehousing costs,” Miller said. That includes stores that already opened in Killeen and San Marco's, Texas, in the first quarter.