Conn's, Inc.
Q1 2022 Earnings Call Transcript

Published: 3 Jun 2021

[Operator:]

Good morning and thank you for holding. Welcome to the Conn’s, Inc. Conference Call to discuss Earnings for the Fiscal Quarter Ended April 30, 2021. My name is Melissa and I will be your operator today. As a reminder, this conference is being recorded. The company’s earnings release dated June 3, 2021 was distributed before market opened this morning and can be accessed via the company’s Investor Relations website at ir.conns.com. During today’s call, management will discuss among other financial performance measures, adjusted net income and adjusted earnings per diluted share. Please refer to the company’s earnings release that was issued today for a reconciliation of these non-GAAP measures to their most comparable GAAP measures. I must remind you that some of the statements made in this call are forward-looking statements within the meaning of the federal securities laws. These forward-looking statements represent the company’s present expectations or beliefs concerning future events. The company cautions that such statements are necessarily based on certain assumptions, which are subject to risks and uncertainties, which could cause actual results to differ materially from those indicated today.

[Norm Miller:]

Good morning and welcome to Conn’s first quarter fiscal year 2022 earnings conference call. We generated the highest quarterly net earnings in our 131-year history, which reflects our team’s success pursuing our strategic growth initiatives and stronger consumer demand driven by recent government stimulus. The underlying health of our business is extremely strong, with the best same-store sales growth in over 7 years and the most profitable credit segment performance that we have ever achieved. These trends combined to drive record quarterly adjusted earnings of $1.55 per diluted share. Our strong retail and credit operating performance demonstrates the benefits of last year’s prudent actions to de-risk and reset our business. As we emerge from the COVID-19 crisis, we are well-positioned to simultaneously grow retail sales while controlling credit risk. We have made significant progress achieving this goal during the first quarter. Compared to the same period last fiscal year, first quarter total retail sales increased 26.5%. Same-store sales increased 19.4% during the quarter, exceeding our expectations and on a 2-year basis, were up 1.8% as our team capitalized on robust consumer demand, the benefits of recent government stimulus and the continuing execution of our strategic growth initiatives. We achieved a strong retail sales growth while at the same time improving credit segment performance. Customer accounts 60 plus days past due at April 30, 2021 declined by 49.4% and re-aged customer accounts declined by 45.1%. I believe our strong first quarter retail and credit segment performance is a milestone in our evolution and reflects the meaningful and long-term opportunities we have to grow our business. I am particularly pleased by the significant increase in first quarter same-store sales, which occurred despite a year-over-year decline in sales financed by our in-house credit offering as our underwriting strategy remain conservative in response to the pandemic. I believe this speaks to the strength of our value proposition and our ability to expand and diversify our customer base as we continue to target a larger addressable market. Underlying trends throughout our business remain positive. We believe we are well-positioned to offset the waning benefits of government stimulus by pursuing opportunities to grow Conn’s in-house credit and third-party lease-to-own sales and benefit from our rapidly expanding e-commerce and omni-channel initiatives. Early indications for the second quarter are encouraging. And for the month of May, same-store sales were up approximately 10%, driven by robust Conn’s in-house credit and third-party lease-to-own sales. We believe fiscal 2022 will be a strong year for Conn’s and we expect annual same-store sales to be up high single-digits.

[George Bchara:]

Thanks, Norm. I am encouraged by the strong start to the year and by the positive momentum underway in our business. On a consolidated basis, total revenues were $363.7 million for the first quarter, representing a 14.7% increase from the same period last fiscal year. We reported GAAP net income of $1.52 per diluted share for the first quarter compared to a loss of $1.95 per diluted share for the same period last fiscal year. On a non-GAAP basis, adjusting for certain charges and credits, we reported record net income of $1.55 per diluted share for the first quarter compared to an adjusted loss of $1.89 per diluted share for the same period last fiscal year. Reconciliations of GAAP to non-GAAP financial measures are available in our first quarter earnings press release that was issued this morning.

[Operator:]

Thank you. Our first question comes from the line of Brian Nagel with Oppenheimer & Company. Please proceed with your question.

[Brian Nagel:]

Hi, good morning.

[Norm Miller:]

Good morning, Brian.

[George Bchara:]

Good morning.

[Brian Nagel:]

First off, congratulations on a really strong quarter, nice work. Amazing. So I have a few questions here. One, I mean, we talked a bit – Norm, we’ve talked a bit about the efforts of Conn’s to really cater to a new customer, and you mentioned it here again today. As we pull out of this, the COVID crisis, and hopefully, we get into an economy and society back to some sense of normalcy. How are you – what will the efforts of Conn’s look like to continue to cater to or speak to those newer customers, the customers that do not use or don’t look to utilize the Conn’s credit?

[Norm Miller:]

Good question, Brian. So one of the things the pandemic, as we have talked previously about has caused is, we’ve realized, as the pandemic has unfolded, that our value proposition – because of our pricing, our next-day delivery, our in-house service, is a very attractive value proposition for that cash customer, that prime customer in addition to Conn’s financing and the lease-to-own. And you saw that in this quarter with our cash, credit card and third-party finance sales growing 70% year-over-year in the quarter. And mind you, some of that, we were lapping increased numbers of the first quarter last year as the pandemic underwent with that customer. So from a merchandising and marketing standpoint, we continue to stay very focused on the addressable market that we believe is out there across the credit spectrum. And what we’re excited about is not only do we believe we can continue to capture that customer, but because of our tighter underwriting here, significantly tighter underwriting, as you know, over the past 12 months. And we’ve just started taking some additional risk here at the end of the first quarter and now into the second quarter, we believe we can capture a significant portion of those Conn’s finance customers that we were declining in the past back over the coming year because our Conn’s business was down 20% plus in the – throughout the pandemic. So we believe we can capture much of that business back while simultaneously addressing that much larger market with cash and credit card. And now with the new lease-to-own partners, the combination of Conn’s and lease-to-own in the lower end of the – mid to lower end of this credit spectrum in conjunction with that larger addressable market at the higher end, we believe positions us extremely well here, not only for the balance of this year but going forward into the future.

[Brian Nagel:]

That’s really helpful. As a follow-up, just on – I guess this is more focused on the credit side. So this we understand. So you’ve started to take, like you said, take more risk on. Is there a way to benchmark that? I mean, so your risk tolerance, so to say, is now where it was – where was it? And how much further does it have to go? And then the follow-on to that I have because I hear what you’re saying that the credit operation now is even stronger. So you’re taking out more risk, but you’re able to manage that risk even better. So then how – I recognize you haven’t given any, I think, long-term guidance on this, but how should we think about some of the key credit metrics we watch, whether it be 60-day delinquencies or something else? How should those track even as you take more risk on?

[Norm Miller:]

Yes. Good question. Again, Brian. So what’s really exciting as we’re taking more risk here is that we’re taking risk with higher credit quality customers than we have in the past. And the reason that we’re able – the reason we’re doing that or able to do that is we don’t have to go as far down the credit spectrum with Conn’s financing because our lease – the two lease-to-own partners that we’ve added, we’re letting them pick that lower credit quality customer up that in the past, when we’ve taken more risk, we’ve gone deeper in the credit spectrum. Now we’re just going broader at a higher credit quality. And you can see that with our FICO scores. Prior to the pandemic, Conn’s – if you looked at the FICO score for Conn’s financing, it was running about 607, 608 on an average. And our FICO scores during the pandemic with the tightened underwriting ran about 617, 618. And now that we’ve started to take what I say more risk broader at that with that higher credit quality that the FICO scores are not dipping down. We’re staying at those higher FICO scores. And the reason that we can do that is because the lease-to-own partners were actually taking less risk lower on because the lease-to-own partners are capturing that at a much higher degree than what they ever have in our history. And that’s why our lease-to-own business, which was up 38% in the fourth quarter is up 80%. And it’s accelerated here in the first quarter. So we can – I hate to use this, but we can have our cake and eat it too. We can get the higher credit quality on the Conn’s side, but also cannot lose those customers on the lower credit quality side because of our lease-to-own partnerships have strengthened so much with the addition of the two partners. As far as credit delinquencies, look, the portfolio clearly has never been in the condition that it’s been in as it sits in today at any time in my 6 years here, and arguably, as good as any time in the company’s history. And the metrics that I would stay focused on, I would encourage investors to stay focused on is if you look at 60-day delinquencies, they are down materially. If you look at re-aged accounts, they are down lower materially. TDR, troubled debt restructuring accounts are down materially. Charge-offs are moving down significantly as well. So, if you look at those metrics going forward, our expectation is that we can maintain a very strong credit portfolio simultaneously while growing the business through Conn’s financing, through lease-to-own partnership as well as at the higher end of the credit spectrum as well.

[George Bchara:]

Thanks Brian. This is George. I would just add to that, that sometimes, when we think about taking more risk, it means higher losses. That is not what we are talking about here. We are referring to a dynamic where we are growing the sale of our Conn’s in-house financing without actually taking higher losses because we are going deeper on the – we are capturing more of our share of wallet of the higher credit quality customer rather than going further down the credit spectrum.

[Brian Nagel:]

Got it. Well, thank you and again congratulations.

[Norm Miller:]

Thanks, Brian.

[Operator:]

Thank you. Our next question comes from the line Rick Nelson with Stephens Inc. Please proceed with your question.

[Rick Nelson:]

Thanks. Good morning and my congrats to a great start to the year. To follow-up on new strategies, taking in more risk with the in-house credit book, I am curious how much of a same-store sales driver those new customers are and how that’s impacting some of the credit steps for its payment default, for example?

[Norm Miller:]

Yes. So, if you look at the first quarter results, you saw that our Conn’s finance sales were still down year-over-year 2% with the same-store sales performance that we had. I will tell you, April, we saw Conn’s financing for just the month of April, it was – they were actually positive sales year-over-year. So, we started to see benefit as we were taking – again, when we say more risk, it’s not further down the credit spectrum, Rick, which is what we have historically done in the past. It’s about capturing more of the wallet with the higher credit quality. We are actually taking less risk than we probably ever have from Conn’s financing lower down the credit spectrum because of the strength of the lease-to-own partners. We are letting them capture that business because of their profitability model, which enables us to go broader at the higher end of the spectrum. As far as from an initial delinquency and FPD, we are very pleased with what we are seeing. And as I mentioned with – on the prior call with Brian, if you look at our FICO scores, and we don’t underwrite specifically to FICO, obviously, we have our own proprietary underwriting models. But FICO, this is an indicator of overall portfolio credit quality, you are seeing that we are maintaining a record high for Conn’s financing FICO score originations at similar levels that as we saw during the pandemic, which is when we have seen this extremely strong performance from a credit portfolio. So, our expectation is we can continue to capture incremental Conn’s finance sales here going in through the second quarter and on the balance of the year and do that while maintaining credit risk at an acceptable level.

[Rick Nelson:]

Any thoughts, Norm, on how credit was 49% of the sales this quarter? Any thoughts on where you will see that going with the new strategies?

[Norm Miller:]

Yes. Good question, Rick, because what I will say is we are focused internally. And as you know – we are not focused as much on the balance of sale. We are letting that fall wherever it falls. What I would say is pre-pandemic, our Conn’s financing was north of 70%. I don’t expect it to be – to ever get back to those levels, primarily because we don’t want to grow Conn’s financing at the expense of taking sales from lease-to-own or one of the other segments on the credit spectrum. What we want to do is our expectation is we believe we can materially grow lease-to-own. We can grow Conn’s financing. We can grow higher credit quality as well as cash and continue to have cash and credit card deliver at a high balance of sale level over double of what it has been historically. And so – but at the end of the day, I mean, that’s a long answer to your question. I would expect Conn’s financing to be somewhere between 50% and 60% on a consistent basis going forward. But again, we are not targeting a specific BOS and LTO with our lease-to-own or any of the credit spectrum. Our mindset is we are agnostic from a credit standpoint. We want to – we believe we can grow all 4 segments. And whatever works for our customer is what we want to be able to provide them. And they – in many of our customers’ cases, they have multiple options. They may have a Synchrony option, a Conn’s option, a lease-to-own. We want to be able to provide them whatever option works best for them, be it in the store or online.

[Rick Nelson:]

Thanks for that. That makes sense. So, like to follow-up. I know interest receivables, that stepped up pretty significantly in both sequentially and year-over-year. Is that part of the new strategy to attract these higher-quality customers?

[George Bchara:]

Yes, it is. It’s a combination of both seeing a higher credit quality customer come through our door and us deliberately targeting a greater share of that customer’s wallet.

[Rick Nelson:]

Got it. Thanks a lot.

[Norm Miller:]

Thanks, Rick.

[Operator:]

Thank you. Our next question comes from the line of Brad Thomas with KeyBanc Capital Markets. Please proceed with your question.

[Brad Thomas:]

Hi, good morning and let me add my congratulations as well on the quarter and momentum in the business. I wanted to continue similar line of question around how to think about the credit segment going forward, both financially and strategically, how you are thinking about it. When I look at the peak P&L for the credit segment, obviously, you had a provision that was a big good guy here this quarter for you. But I think even if you adjust for that, we would now have three quarters of the last four quarters where you have had pretax income positive for the credit segment, which is really quite a feat. Normally, it’s been a money-losing business for you to support the retail business and the overall company. I guess I would be curious your thoughts on what the level of profitability you all might try to optimize around or what might be sustainable going forward as we think about the credit segment?

[Norm Miller:]

Yes. That’s a good question, Brad. So what I will say is, we are still very focused on 1,000 basis points of spread. And we are focused on – I am not necessarily driving profitability out of the credit. If we can capture more retail sales on the Conn’s financing side, we are going to do that prudently. And as you heard me in both our comments as well as in some of my answers to the questions here that we are really – as we are taking risk here, we are doing it in a very different fashion than we have historically, certainly, in the 6 years that I have been here with the company and that we are not going deeper in the credit spectrum because what we don’t want is we believe we don’t want an issue in the future where, because of risk we are taking, that it comes back to bite us from a credit standpoint down the road. So, our intention is to make – to push that credit risk on those lower credit quality customers to the lease-to-own partners and for us, with our Conn’s financing to go with a greater share – to capture a greater share of wallet with a higher credit quality customer. Now when that happens, we are not going to – that will create opportunities potentially for the credit business to make money and be profitable. Because you are right, even if you adjust for the macro adjustment from an allowance change, because of the performance of the portfolio and the strength of the portfolio, it created nice tailwinds from a profitability. So, the bottom line is what I would say is there is opportunity for us to make money in the credit business going forward. I won’t say that, that is I wouldn’t take that if we have opportunity to grow the retail business and do that in a smart manner from a Conn’s financing standpoint. But if we do not, then we will certainly take the profitability term the credit side of the house.

[Brad Thomas:]

That’s great. And a couple of housekeeping items here on the quarter and also a little bit longer term in nature. But the lease-to-own, rent-to-own, came in over 12% of sales, I think historically, you had targeted getting it to over 10%. How are you thinking about the opportunity and what the targets are going forward here?

[Norm Miller:]

Yes. We are really trying to move away from, Brad, any balance of sale target. I know I had 10% out there for several years that we worked to achieve. We are more focused on that dollar increase because we don’t want to capture lease-to-own balance of sale because we are taking it from Conn’s financing or another part of the business. So, what we are more focused on as a team and in the business is how do we grow in raw dollars materially, our lease-to-own business, our Conn’s financing. From a dollar standpoint, our high credit quality as well as our cash and credit card customers. So you are right, our balance of sale was 12%. But it could actually go down if Conn’s financing grows faster than lease-to-own, but our dollars could actually go up. And that’s what the expectation is. We want the dollars in each of the category to go up because we put in the bank dollars. We don’t put balance of sale. Does that make sense?

[Brad Thomas:]

Actually, it makes perfect sense. And then just a last one for me. We obviously – it was a unique quarter with all the stimulus dollars that were out there. Is there any way to quantify what kind of an impact it had on the retail and credit side of the business? I know it’s probably impossible to know for sure. But do you have any estimates for the impact?

[Norm Miller:]

It’s a good question. Clearly, it had an impact on both the credit side with our cash collections as well as on the retail sales side of the house. It’s very, very difficult for us to quantify. Not that we haven’t looked at it in a variety of different ways, but what I would say is it certainly has had a positive impact. But what we are excited about is even as the stimulus starts to wane and some of the unemployment goes away with the opportunity in Conn’s financing and that we believe we have inherent within the business, we are very bullish about what the balance of this year and going forward, what the business model portends for us to be able to capture even beyond this fiscal year.

[Brad Thomas:]

That’s great. Thanks so much.

[Operator:]

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I will turn the floor back to Mr. Miller for any final comments.

[Norm Miller:]

First of all, I want to thank again, echo my comments and George’s on the call to thank our 4,500 associates across the company for their hard work throughout the pandemic, as our stores stayed open and they weathered through it. We wouldn’t have had the quarter and the year that we have had without their hard work. So, thank you to them. We also appreciate everybody’s interest in the business, and we look forward to sharing our second quarter results with you in a few months. Have a great day, everyone.

[Operator:]

Thank you. This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.