Conn's, Inc.
Q4 2021 Earnings Call Transcript

Published: 31 Mar 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 January 31, 2021. My name is Daryl and I'll be your operator today. During the presentation, all participants will be in a listen-only mode. After the speakers' remarks, you will be invited to participate in a question-and-answer session. As a reminder, this conference call is being recorded. The Company's earnings release dated March 31, 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.

[Norm Miller:]

Good morning, and welcome to Conn's fourth quarter fiscal year 2021 earnings conference call. Over the past 12 months, we took decisive actions focused on supporting our associates, customers, and communities while de-risking our business, enhancing our balance sheet, and expanding our digital and e-commerce capabilities. These actions combined with the resiliency of our business model and the dedication of our associates directly contributed to our ability to successfully navigate the COVID-19 pandemic. We have emerged from the pandemic stronger, more efficient, and better positioned to compete in a rapidly changing market, and this year is off to a strong start. We believe we are at a turning point in our growth strategy as we continue to leverage our market-leading in-house and third-party credit offerings, increase digital and e-commerce investments, expand our brick-and-mortar footprint, and enhance our merchandising and marketing strategies. Before I go into more detail about our strategic initiatives, I wanted to provide several fourth quarter and fiscal year highlights. We ended fiscal year 2021 in a strong financial and operating position, and positive trends accelerated during the quarter. Fourth quarter GAAP earnings increased approximately 400% to $0.85 per diluted share, primarily due to a lower provision for bad debts as our credit performance continued to improve as well as the tax benefit related to the CARES Act. Customer accounts 60-plus days past due at January 31, 2021 declined by 24% from the prior fiscal year. Re-aged customer accounts declined by 33% and the weighted average monthly payment rate increased by approximately 10% for the year ending January 31, 2021. Improving credit trends reflect the intended outcome of the previously discussed de-risking efforts we implemented last year in response to the COVID-19 crisis, which also prudently reduced retail sales financed through our in-house credit offering. These actions also had a positive impact on our balance sheet and capital position. In addition, net cash provided by operating activities increased by $382 million year-over-year to $462.1 million.

[George Bchara:]

Thanks, Norm. I want to start by highlighting the positive transformation we have made to our balance sheet, including deleveraging the business and repositioning our capital structure over the past year. The business generated $462.1 million in operating cash flow in fiscal year 2021, which was a $382 million increase from the prior fiscal year. This increase was a result of the significant year-over-year growth in cash and third-party finance sales, strong cash collections on our customer portfolio and less originations as a result of our tighter underwriting. We have used this increase in operating cash flow primarily to pay down debt. We ended fiscal year 2021 with $549.3 million in net debt compared to $945.3 million at the end of the prior fiscal year.

[Operator:]

Thank you. We will now be conducting a question and answer session. Our first question is coming from the line of Brian Nagel with Oppenheimer. Please, proceed with your question.

[Brian Nagel:]

Good morning, guys.

[Norm Miller:]

Good morning, Brian.

[Brian Nagel:]

Thanks for taking my question. Congratulations on a really nice job managing a tough year.

[Norm Miller:]

Thanks.

[Brian Nagel:]

The first question, now looking back at my notes, it's kind of a follow-up to the question I've been asking every quarter now, but I'm going to ask again. So, with regard to retail, so Norm you really talked again about just the more conservative posture that Conn's has taken. George, I think you alluded maybe in your comments, maybe some letting up in that, but the question I have is that at what point would -- hopefully the economy will start to pull out of COVID crisis -- now at what point do you foresee Conn's again getting more aggressive with issuance of credit? And then a second to that is, as you as you look at these results and even the acceleration in sales here in early fiscal year, how much do you think sales have been held back by how tight you've been with credit, and I have some follow ups.

[Norm Miller:]

Sure. So as you know Brian, this year going back to March a year ago, we've taken a very conservative approach with Conn's financing and impacted restricted sales well north of 20%. Now, during that time frame, we've been putting together starting last summer actually, some new modeling, a significant energy and effort so that when the time came and we saw the economy improving, we would be prepared to be able to take more risk with better modeling and better underwriting to be able to drive sales with less risk. We have begun testing from a strategy standpoint on some of those models. It's a very limited basis. It's not impacting sales much at this point. Very limited here in the first quarter, but we would expect by the second quarter to really start being able to realize increased sales and start capturing back some of that 20% plus of the Conn's financing that we restricted sales this past year. The improvement in same-store sales that we've seen and the acceleration here in the first quarter is not being driven by the Conn's financing. We're still running in the 50% range of balance of sale versus the high 60%-70% pre-pandemic. It's really being driven by continued very strong performance in cash and credit customers, the high credit quality, and as we highlighted on the call, Brian, our lease to own , which is up 40%, as we've added two additional lease to own partners in the past three months to help capture what we believe is an under-penetrated consumer in our stores. So, we're extremely bullish as we start to take advantage of the significant opportunities we believe we have with Conn's financing here in the second quarter and beyond. That will be a nice tailwind for us from a sales standpoint, balance of the year. But most importantly, I think is we've really changed our mindset from a total addressable market pre-pandemic. We've realized with cash customers for the past year, having risen from 8% balance of sale pre-pandemic to 20% balance of sale; and Synchrony, our high credit quality customers increasing as well. We recognize that not only do we have a differentiator from a Conn's in-house financing standpoint, but our entire credit spectrum with lease to own high credit quality and cash, we have the opportunity to grow sales in each of those four categories, and that's really what we're focused on for the balance of this year, but Conn's financing will remain the cornerstone of our business.

[George Bchara:]

Yes, Brian, and I would just add, as we look forward for the current year, we really expect the growth for the current year to come from the Conn's financing segment, as well as the lease to own segment while we maintain the success that we've had with the cash in higher credit quality customer.

[Brian Nagel:]

Now that's extraordinarily helpful. I appreciate all the color there. And now, a quick follow-up if I could. You talked about the acceleration in sales here early in the current fiscal year, again which you just mentioned, obviously, a lot of that relates to the improvements you've made in the business, but to what extent do you think this last round of stimulus could be helping Conn's? To the extent it is, how would you think about that factoring into maybe in the near-term sustainability of what you're seeing on top line?

[Norm Miller:]

It's had a limited effect to this point, because from the stimulus, it's only impacted the last 10 days or so of 12 days of March. We had strong performance in February. There was some stimulus impact in January. That certainly helped us. We did have a positive comp in January, as well as we mentioned in the notes, but the stimulus certainly has helped the back half of March and we expected it to help us in April as well.

[Brian Nagel:]

Great, thank you very much. Congratulations. Best of luck in the new year.

[Norm Miller:]

Thanks, Brian.

[Operator:]

Thank you. Our next question is coming from the line of Kyle Joseph with Jefferies. Please, proceed with your questions.

[Kyle Joseph:]

Hey, good morning, guys. Congratulations on navigating a challenging year. Just hoping to get just a follow up in terms of the cadence of same-store sales. You talked about positive in January and positive quarter to-date. Can you just give us a sense for how same-store sales compared in February versus March? I do recognize the storm activity was in February, that's a leap year comp and also stimulus in March, but I'm just trying to get a sense for where we really started lapping the underwriting changes you guys undertook in calendar year 2020, and I want to see what comps look like in March.

[Norm Miller:]

Yes. Actually, we combined it because there was written volume in February. It's after the storm that it recovered. And frankly, the underwriting changes we took, we didn't implement until a week ago at the very end of March. So, there's really no underwriting, very limited underwriting a few days, actually a week in March that impacted from last year from a same-store sales standpoint.

[Kyle Joseph:]

Got it. And then good growth in in Least To Own. It sounds like you've added some new partners there. I think 10% has been kind of the target. It sounds like it's above that quarter-to-date. With the additional partners what sort of number do you think is appropriate there?

[Norm Miller:]

Yes, we've been talking about 10% target for a while now and have always believed that was kind of the minimum threshold from a balance of sales standpoint. What I would say is, as I mentioned in the call, we're at 12% balance of sale quarter-to-date or approximately. Our focus is really not on a balance of sale because as this year unfolds and we see Conn's financing being able to capture more sales, we don't want Least To Own sales at the expense of Conn's financing, but we don't want Conn's financing, at the expense of the other credit segment. So, we're really focused on instead of a target from a balance of sales standpoint, the Least To Own sales are up 40% as we mentioned in the call. And that's really what we're focusing on, is total dollar growth. We don't want to shift within the segments of the pie. We believe we have the opportunity from an addressable market standpoint to grow all the segments of the pie and that's really what we're more focused on as opposed to some arbitrary balance of sale number.

[Kyle Joseph:]

Got it. And then one last one for me. For George, obviously there were a lot of moving parts of the allowance last year with CECL and the pandemic. But longer term if we were in kind of a more steady state economic environment, can you give us a sense for where you picture the allowance trending over time?

[George Bchara:]

Sure. I would certainly say that for the current year, Kyle, we would expect the allowance both dollars and percent to come down and that's going to be driven by a few factors. The first is the fact that our expectation for the year is that the portfolio will continue to improve in terms of 60 days plus balances, balance of re-aged accounts and so forth. And that is one of the contributing factors to a decline in the allowance. The other factor that I would point to you here as you look at the allowance for the current year, is the economic component. And as we continue to move through this cycle with improving unemployment rate forecasts, that will have or could have a positive benefit on the allowance for loan loss balance. And so both of those factors, both the portfolio and the economic factor, our expectation is that those will be drivers of the reduction in the allowance balance for the current year.

[Kyle Joseph:]

Very helpful. Thanks for answering my questions.

[Norm Miller:]

Thanks, Kyle.

[Operator:]

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

[Brad Thomas:]

Hi. Thanks, guys. And let me add my congratulations on your execution in 2020. I just want to follow up on the last question about how you're thinking about losses and provisions. I'm curious how you view some of the uniqueness of this recession that we've gone through. It's been sort of the unrecession where you've seen payment rates be better than usual and of course, there's been a tremendous amount of stimulus. So I'm curious if you think about us lapping that, how you factor that into your expectation for losses?

[George Bchara:]

Sure. Certainly the accounts that we've originated since March of last year has been under a materially-tighter underwriting regime than they were pre-pandemic. And as we look at losses for the current year, that's going to be the biggest driver of our lower loss expectations for FY 2022 compared to FY 2021. Having said that, we are certainly benefiting now from additional government stimulus, as well as just the fact that consumers have been spending less on discretionary purchases over the last year. But on balance, we expect that the losses will come down year-over-year, driven by our tighter underwriting.

[Brad Thomas:]

Great. And at a high-level -- it's very encouraging to hear about the trends in same-store sales and your optimism for growth this year. Is there any way you could help us think about some of the major puts and takes here? I mean, clearly there's an opportunity to have your inventory in a better position going forward and if you go deeper into your underwriting, that can be a tailwind. Of course, on the flip side of some of the categories that you're in had a very good 2020. So at a high-level, can you help us think more through some of those puts and takes?

[Norm Miller:]

Yes. Sure, Brad. A couple things first. If you look at it from a credit standpoint, filter first, we saw a significant growth in cash sales and in high credit quality sales with Synchrony this past year, and our expectation is we would not see those as high growth categories. However, we do expect to be able to continue to service that customer at an elevated level from where we were pre-pandemic. The opportunities credit-wise are on the Least To Own side of the house. We expect to continue to be able to build on what we've seen over the past three to four months there. And clearly as I mentioned earlier, from a Conn's financing standpoint, that's our biggest opportunity from a growth standpoint. If you look category-wise from a more challenging standpoint, Home Office was very strong the first half of the year. So we expect that to be a headwind. That is our smallest category, but we saw triple digit improvements, increases in March through the June-July time frame there. Mattress and furniture categories, the more discretionary categories, because they are more heavily Conn's financing. Those were down significantly last year. So we expect from a product category standpoint, to have significant upside in those two categories. Appliances as you heard on the call have been very robust, even pre-pandemic. So that will be more challenging to maintain that growth rate. And now I will say a lot of the growth rate is being driven by ASP as much as units as the manufacturers have dramatically reduced the amount of promotions that are going on in that category. We've seen a significant improvement from an ASP standpoint. As I mentioned on the call, we're expanding our appliance assortment in a number of areas as well because that category has resonated so well with our consumers. So we believe that that's going to provide us some additional tailwind there to help mitigate the overall pressure that may exist in that category, the back half of the year. And then if you layer on top, supply chain issues have been a problem from almost every category that have pushed or impacted our ability to capture the sales that were there. We expect the supply chain challenges to persist at least through the second quarter, but our expectation is in the back half of the year that that should alleviate to some degree which should give us tailwinds from a supply chain standpoint in almost every category.

[Brad Thomas:]

That's very helpful, Norm. If I could squeeze one more in here just about SG&A, you're off to a great start here in the year from the store opening standpoint with six more stores. Store counts up I think a little bit over 9%. I presume that some costs need to go back into the P&L here. How should we be thinking about modeling SG&A at least directionally going forward here?

[George Bchara:]

Yes. Certainly with our expectation of opening nine to 11 stores this year, that will be one contributing factor of an increase in SG&A expense. But the other factors that I would point to here is that we continue to make investments in technology and commerce, and that's going to drive an increase in SG&A expense compared to last year. Also recall that starting now, last year, we made some significant cuts to expenses that were reflected in our P&L for most of the year last year. So this year and FY 2022, we start to lap those reductions.

[Brad Thomas:]

And George, is there an ability to keep sales as a percentage of sales close to flat or get some leverage? Or do you think that the setup here with the per-year with the store growth on lapping some of the cuts from last year, that show up for perhaps a little bit of deleverage in 2021?

[George Bchara:]

I think this year, we will deleverage…

[Norm Miller:]

It should be next year we should start to…

[George Bchara:]

But next year and beyond, we start to leverage.

[Brad Thomas:]

Very helpful. Thank you, all, so much, and good luck.

[Norm Miller:]

Thanks, Brad.

[Operator:]

Thank you. Our next question is coming from the line of Rick Nelson with Stephens. Please, proceed with your question.

[Rick Nelson:]

Thanks and my congrats on a very strong results. The 3% same-store sales quarter to date, can you talk about what you're lapping February, March, a year ago? And do you in fact compare this and does it get easier as we push into April?

[Norm Miller:]

Yes. So last year from a February standpoint, I don't have February and March combined. But in February, we were down high single digits last year. And in March, we really didn't start lapping the pandemic to the last, or the pandemic didn't really come in full force until this last week in March -- the last 10 days or so. And really, the month of April is when it was in full force.

[George Bchara:]

Yes, as you recall, Rick, we were down 17.6% comp sales last year in the first quarter. Most of that came in April, when we started to see the impacts of the pandemic and our type of underwriting.

[Rick Nelson:]

Can you quantify that decline you saw in April last year?

[Norm Miller:]

I'm sorry. Can you say that again, Rick? Can we quantify what?

[Rick Nelson:]

Can you quantify the April decline that you saw last year?

[George Bchara:]

We don't typically give out monthly sales numbers. What I would say, Rick, is substantial decline in the first quarter last year was driven by April.

[Rick Nelson:]

Okay. And curious about the past, also, you see underwriting standards. You could provide some color around the results of those tasks and maybe what it could potentially mean for the same-store sales? I know, you're fully lapping now the tighter underwriting but in fact, if you more broadly roll out is easier standards, what that could mean for comps?

[Norm Miller:]

Yes. So the modeling, the testing that we're doing now is really validating and confirming the estimates that we have from the modeling that we're doing. So it's early too early to project what that will actually contribute from a sales standpoint. But what I would say is we're very focused. We recognize that we've taken out 20% of Conn's financing, even though we continue from an approval standpoint and a usage standpoint. And that's both in decline

[Rick Nelson:]

Just to follow up, you caught where the current credit proportion would go, it was 52% of sales this past year?

[Norm Miller:]

It's a good question. Trust me, we've had a lot of dialogue that internally about that and what I would tell you, Rick, is we're focused less on the balance of sale. We're seeing that more as an outcome as opposed to a target. What we're looking for is we want Conn's sales overall to grow. But again, I don't want to get 65% of Conn's financing at the expense of taking it from not growing the cash customers, not growing the Lease To Own. It's about growing total dollar sales from an overall addressable market standpoint across the credit spectrum. What I will say is although I'm not putting limits of, it needs to be a certain percentage or a certain level. We think it's going to be ultimately will probably end up being in the high 50s, low 60s, probably not back to the level that it was but the overall dollars will be greater even though the balance of sale will be less because of the growth in the other categories. And what I would say is, we highlighted with what has transformed from a balance sheet standpoint over the past year by having aggressive growth in the other categories, Lease To Own, high credit quality. We de-risk the portfolio by having a bit smaller overall as a percentage of the business, Conn's portfolio. It also generates a lot of cash as you've seen over the past 12 months to be able to basically pay down our high yield notes and do it just from the cash we generate from the business. It's pretty remarkable to have our debt as a percent of revenue lower than it's been in seven years. The balance sheet I would argue is stronger than it's been any time since the company's been public, frankly, certainly in the six years that I've been here. This transformation of the business of being able to have Conn's financing as our cornerstone, but a little bit smaller part of the business from an overall sales standpoint and grow on those other segments have real advantages from cash flow on a balance sheet standpoint and a risk standpoint as well in the future of the unknown of what happens with the portfolio in a macro economic recession or an issue if there's a recession in the future.

[George Bchara:]

Yes. Rick, I would just add that the key theme for us coming out of this pandemic is that our value proposition really resonates with customers that we don't necessarily need to finance ourselves and so as we think about the business strategically going forward, we expect to see a more balanced mix of financing types across our revenue.

[Norm Miller:]

With Conn's financing still being at least half of our business.

[Rick Nelson:]

Thanks a lot and good luck.

[Operator:]

Thank you our next question is coming from the line of Bill Ryan with Compass Point. Please, proceed with your question.

[Bill Ryan:]

Thanks and good morning. A couple of questions. One, you know you talked about your cash position really building up, you're sort of delivering the balance sheet. Everything looks really good. Is there any thought down the line? I know you did it a couple years ago, about some potential capital return coming in the future, given the cash position and the outlook that you're talking about. And then the second thing, just in reference to a question that you answered a little bit earlier, it sounded like you may have done a little bit more of a roll out of some of the new underwriting models in very late March. Just wanted to get some clarity on that, if you did. Thanks.

[George Bchara:]

Sure, yes. So in terms of the balance sheet, as Norm mentioned, our balance sheet is in a better position than it has been in a long time. And that gives us a lot of flexibility. Having said that, we continue to see strong returns from investments in the business -- whether that's new stores, or now are increasing investments in e-commerce. And so our primary focus is to continue to invest in the business. Having said that, we will continue to evaluate all other options from a shareholder return standpoint, including M&A, share buybacks and anything else.

[Norm Miller:]

The other question you asked, Bill, as far as the testing on the Conn's financing, the testing we're doing here in March is a very, very small percentage having a very limited effect from a sales standpoint. The testing we're doing is really just to confirm what our modeling and what we will occur so that we're positioned to be able to expand later in April and most predominantly in the second quarter, the Conn's financing to start taking back some of the opportunities that were tied around last year. But it had a very limited impact -- very, very limited impact from a sales standpoint here in the first quarter.

[Bill Ryan:]

Okay, thank you.

[Operator:]

Thank you. There are no further questions at this time. I would like to turn the call back over to Norm Miller for any closing remarks.

[Norm Miller:]

Thank you. First, I want to again, send out a note of appreciation to our 4,400 associates across the company for their hard work not only this past quarter, but throughout this very challenging year. Our success in navigating the pandemic would not have happened without their hard work. And we also appreciate your interest in the company and we look forward to talking with you in a couple months with our first quarter results. Have a great day.

[Operator:]

Thank you for your participation. This does conclude today's teleconference. You may disconnect your lines but this time. Have a great day.