Conn's, Inc.
Q4 2015 Earnings Call Transcript

Published: 29 Mar 2016

[Operator:]

Good morning and thank you for holding. Welcome the Conn’s Incorporated Conference Call to discuss the earnings for the Quarter and Fiscal Year Ended January 31, 2016. My name is Jonathan and I will 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 the question-and-answer session. As a reminder, this conference call is being recorded. The Company’s earnings release dated March 29, 2016 distributed before the market open this morning and slides that will be referenced during today’s conference call can be accessed via the Company’s Investor Relations website at ir.Conns.com. I must remind you that some of the statements made in this call are Forward-Looking Statements within the meanings of the Securities and Exchange act of 1934. 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. Your speakers today are Norm Miller, the Company’s CEO; Mike Poppe, the Company’s COO; and Tom Moran, the Company’s CFO. I would now like to turn the conference call over to Mr. Millar. Please go ahead sir.

[Norman Miller:]

Good morning and welcome to Conn’s fourth quarter fiscal 2016 earnings conference call. I’ll begin the call with an overview and then Mike Poppe will discuss our retail and credit performance for the quarter. Tom Moran will complete our prepared remarks with additional comments on the financial results and our balance sheet. The key points of my comments are highlighted on slide two in the earnings call slide. Since becoming CEO in September 2015, I have been fully involved with our operations. I visited number of our stores, distribution centers as well as our call centers. I have interacted with many of our employees, venders, lenders and shareholders. As I engaged with our different stakeholders, I find that I’m increasingly confident in our differentiated business model, our growth opportunities and most importantly the value we provide our customers. Conn’s has a significant market opportunity, which we believe will allow us ultimately to become a national retailer. The Company's key initiatives are centered around our commitment to executing on this differentiated business model, which delivers unique value to our customers. As a result, we are building the foundation to support not only fiscal 2017's growth, but also our long-term plan. Fiscal 2016 was a challenging year and we were not satisfied with the financial results we issued this morning. However, the Company continues to produce strong adjusted EBITDA results delivering nearly $150 million during fiscal 2016 consistent with the prior year's performance. We continue to work our way to the significant growth in new customers we attracted during fiscal 2014 and fiscal 2015. Year-over-year improvements in our 60 plus day delinquency rate have been slow to develop. I share in our shareholders' frustrations as we expected to see more rapid improvement this year, but as we have stated in the past, growth in our portfolio has slowed maxing the underlying improving trend. Despites fiscal 2016 decline in profitability, I’m encouraged with the direction we are headed, we are working hard to produce consistent and predictable earnings. We have learned valuable lessons about managing risk while growing our brand with new customers. I am pleased Conn’s has successfully reentered the ABS market and most recently completed a rated transaction our first since 2012. We have developed a plan that will put Conn's back on a path to sustainable long-term profitability and growth in the coming quarters. I would like to use my portion of this morning's call to discuss the decision and strategies we are implementing to not only improve our recent performance, but also position Conn's for long-term success. We have a strong retail strategy and continue to execute against our plan. In the fourth quarter of fiscal 2016, the retail segment expanded with new store growth, successfully opening two new stores bringing the total for the year to 15 stores. Our stores have robust economics typically achieving four-wall EBITDA payback in six months or less. Retail gross margin improved 40 basis points year-over-year to 36.1%. Same-store sales excluding the impact of strategic decision to exit video game products, digital cameras and certain tablets were up 3.6%. Our strategy to drive the Furniture and Mattress business is continuing to pay off with increased sales in these categories and benefiting retails gross margins on the sales mix shift. We continue to believe 45% of our product sales can ultimately comes Furniture and Mattresses and we are making progress towards this goal. For fiscal 2016, Furniture and Mattress sales increased by almost 21% and represent 31% of our total sales. To implement our successful retail strategy on a national level, Conn’s needs a scalable and infrastructure to support its growth. Over the past two years, we have enhanced our store layout, merchandizing and marketing strategy, distribution network, collection systems, compliance organization and access to capital. During fiscal 2017, we will continue making improvements to additional strategic investments in IT, credit and people. We expect to leverage these additional expenses through improve performance, execution and gross margins. Before I review some of our main operating initiatives for fiscal 2017, I would like to put our recent growth in perspective. In just three-years, Conn’s has expanded from 68 stores in only three states to 103 stores in 12 states. The portfolio has more than doubled in size as revenues have grown 86.5% from $865 million in fiscal 2013 to over $1.6 billion at the end of fiscal 2016. To appropriately manage an increasingly large and complex organization, we are upgrading our IT infrastructure and are enhancing our data analytics capability. The company has hired and integrated a number of key executives and enhanced talent at all levels of the organization to help support growth. During the upcoming year, we will continue to invest in attracting and retaining quality talent in all areas of the business, including expanding our credit risk team. Over the past few years, we have proactively updated our underwriting policies and we will continue to make appropriate adjustments to manage risk as a result of changes in the economy, customer behavior, the regulatory environment in our business. Since much of our future growth is reliant on new customers, we have to ensure we are assessing credit risk appropriately. In the fourth quarter of fiscal 2016, we implemented the first phase of our early pay default scoring model, while early indications are positive, we need more time to ensure the changes are delivering the expected results. We are also making additional enhancements during the fiscal 2017's first quarter to reduce the credit risk, specifically related to new customers. We are also optimizing our underwriting model and have identified opportunities that will increase origination to some existing customers. We expect a moderate effect on sales as a result of these changes, as well as those we implemented during the fourth quarter. Additionally, we have implemented changes to our no-interest programs to improve portfolio yields and returns on capital. Our long-term no-interest programs are being offered to Synchrony as of early February. We do not expect this change to have a significant impact on profitability, but it will improve returns on capital as we recapture the capital invested in similar accounts on our books today. Additionally, we are removing no-interest program eligibility for certain higher risk customers. We are not anticipating a meaningful impact on sales as a result of these changes. Overtime though, we expect these changes will improve our yield by approximately 150 basis points. Credit is a fundamental part of our business model, we know we must improve our performance in this segment and maintain an appropriate balance between retail growth and credit risk. While we focus on executing the initiatives I have discussed, we will reduce our store opening plan this year to 10 to 15 new stores with long-term expectation to grow revenues 10% to 15% per year. Finally, the Company continues to add many talented individuals to the organization. We've grown our employee base by 66% over the past three-years. We will continue to add dedicated associates as well as motivated leaders to execute our plan. Conn’s Associates are one of our most valuable assets. I would like to thank all of them for their hard work and dedication day-in and day-out. Let me concludes my prepared remarks by saying we are focused on moving forward to capitalize on our long-term potential. We have created a path forward that positions us to execute our growth strategies while reducing risk and enhancing shareholder value. I will now turn the call over to Mike.

[Michael J. Poppe:]

Thank you, Norm. Starting with our retail performance, same-store sales excluding the exited product categories were up 3.6% for the quarter, driven by furniture and mattresses, strength in furniture and mattresses is partially offset by softness in home appliance and consumer electronics sales. As we show on slide three of the earnings deck, total sales growth for the quarter was driven by furniture and mattresses up 28% and home appliances up 5%. These are our two highest margin and best credit quality product categories. In addition, sales of repair service agreements were up 24% due to increased product sales mix driven higher average selling price of these agreements and increased retrospective commissions. On the other hand, we experienced sales declines from categories where we made the strategic decision to exit certain products including tablets, which are part of Home Office and video game products and digital cameras, which are part of Consumer Electronics. Same-store sales for fiscal 2016 were up 0.5% in line with our full-year guidance. Retail gross margin increased over the prior year due primarily to the increased proportion of sales from repair service agreements. Slide four in the presentation recaps product gross margins, which were down 60 basis points as a percentage of product revenue. This was driven by margin rate declines in furniture and mattress and Home Appliances. These declines were due primarily to investments in price to drive volume and exit low performing lower priced furniture product and some one-time inventory handling costs, partially offset by the favorable product sales mixed shift toward higher margin furniture mattress category. Consumer Electronics margin rates improved during the quarter benefiting from a sales mix shift to higher-end TVs, which deliver better margins and the elimination of low margin gaming equipments and digital cameras. From a marketing perspective, we continue to invest in digital marketing including testing new e-mail campaigns. Additionally, given the volume of direct mail we have sent over the past couple of years, we are completing additional analysis and testing to improve the effectiveness and efficiency of our progress to ensure we are allocating our marketing spend properly. Inventory increased year-over-year, as we expanded our assortment and in-stock levels for furniture and open new stores. We significantly reduced inventory levels during the fourth quarter compared to end of the third quarter and are comfortable that our sales and purchasing plans will bring inventory in-line in our early fiscal 2017 without impacting margins. During the past quarter, we opened two new two stores in our Tulsa and Albuquerque markets. We have opened three new stores so far in the first quarter to kick off our plan to open 10 to 15 new stores this year. On slide five, the average FICO score of the portfolio for the last four-years. The portfolio has been in a narrow range of credit scores and remain there last quarter. The FICO score of all originations in Q4 fiscal of 2016 was 614 compared to 611 in Q4 of the prior year. As Norm noted, during the fourth quarter, we began implementing our new early pay default model and changes to thin file customer underwriting. We are in a process of completing our updated originations scoring model and strategy, we expect to test the new model and strategy during April before completing the implementation. In late March and early April, we are making adjustments to our origination policy. We have identified opportunities to reduce risks primarily related to new customers. Changes will result in modifying our credit limits, down payments and cash option eligibility to reduce risks for some customers while declining other unprofitable customers. Additionally, we have identified some profitable segments of existing customers with FICO scores over 500 that we will start approving. The combined impact of these and the fourth quarter changes is expected to reduce sales around 4%. The goal of our ongoing underwriting analysis is to provide enhanced segmentation of the application population to allow us to more precisely isolate low performing segments of the population and identify additional pockets of profitable customers to approve. We will continue to monitor portfolio performance and make prudent underwriting adjustments when appropriate. Portfolio delinquency continues to show stabilization. Slower portfolio growth is benefiting the underlying performance of the portfolio, but has a negative effect on the reported delinquency and charge-off rates. First quarter of fiscal 2017 delinquency is expected to decrease seasonally. February greater than 60 day delinquency was down from January to 9.3%. The portfolio had grown at the same pace as it did in the prior year, the 60 plus delinquency rate would have been at least 20 basis points lower than reported for February. While still higher than a year ago, slide six shows that the existing customer mix trend and origination has flattened out. It is important to note that we typically see an increase and repeat customer transactions during the fourth quarter. Looking at net charge-off performance, the rate for the quarter was higher than the prior year due largely to the slower portfolio growth, which impacted the charge-off rate by about 80 basis points. We remained focused on delivering outstanding value and a great experience to our customers by continuing to improve execution in our retail and credit operations. Now, I’ll turn the call over to Tom Moran. Tom.

[Thomas R. Moran:]

Thanks Mike. Adjusted diluted earnings for the three months ended on January 31, 2016 were $0.11 per share. This excluded net charges of $3.9 million or $0.08 per diluted share on an after tax basis from a sales tax order reserve, legal and professional fees related to the exploration of our strategic alternatives and securities related litigation. For the retail segment of the business, total revenues for the fourth quarter of fiscal 2016 were $376.9 million, which was an increase of $25.3 million or 7.2% versus the same quarter a year ago. This growth reflects the impact of a net addition of 13 stores over a year ago with negative same-store sales of 1.7% including the impact of the exited product categories. We want to call your attention to a change we made during the fourth quarter of fiscal year 2016 in our accounting presentation for delivery, transportation and handling costs. Under the new method, these costs are included in costs of goods sold, whereas previously they were presented separately, as an operating expense. We believe that including these expenses in costs of goods sold better reflects the cost of generating the related revenue and results in more meaningful presentation of retail gross margin. This change also enhances the comparability of our financial statements with many of our industry peers. We have also revised our retail gross margins calculation to include service revenues as well as costs of service parts sold. We've applied both of these changes respectively. Retail gross margins improved by 40 basis points versus the prior year to 36.1%. This improvement was driven by the impact of repair service agreements, which benefited from higher retro or back-end payments as well as higher average selling price on the front end due to mix. Our long-term retail gross margin goal on the revised basis of presentation is 39%. We have continued delivering year-over-year improvements and this goal is achievable considering the following. Our increasing sales of furniture and mattresses, which have a higher margin, our decreasing share of revenues from lower margins small electronics and home office and improving warehouse utilization. Slide seven of the earnings presentation shows retail cost and expenses. Starting with the top row, we show that cost of goods including warehousing and occupancy costs leveraged by 20 basis points as a percent of total retail revenue declining to 63.8%. This improvement resulted from the drivers as we just discussed for retail gross margins. Retail SG&A was 23.2% for the quarter compared to 22.9% for the same period a year ago. The 30 basis points increase was driven by the impact of new store openings, which drove the 40 basis point increase in occupancy and contributed to the 40 basis points increase in advertising. Those increases were partially offset by a 30 basis points decline in compensation and benefits on store payroll leverage. Taking a look at the credit segment, finance charges and other revenues were $79.9 million for Q4 of fiscal 2016, up $4.8 million or 6.4% versus Q4 of last year. This was driven by a 17.6% increase in the average balance of the portfolio, partly offset by a decline in the interest income and fee yield. Drivers of that decline included, first, the introduction of 18-month and 24-month equal payment, no-interest finance programs beginning in October of 2014 to certain higher credit quality borrowers. Second, a higher provision for uncollectible interest and, third, our discontinuation of charging customers certain payment fees. SG&A expense in the Credit segment for the quarter grew 22.5% versus the same period last year, driven by the addition of collections personnel to service 17.6% year-over-year increase in the average customer portfolio balance together with the anticipated near-term portfolio growth. Credit SG&A as a percentage of average total customer portfolio balance, deleveraged by 30 basis points versus last year. Provision for bad debt for the three months ended January 31, 2016 was $64.5 million, an increase of $6.4 million from the same prior year period. Key factors in determining the provision for bad debts included the following. First, the 17.6% increase in the average receivable portfolio balance, 5.4% increase in the balance is originated during the quarter compared to the prior year quarter an increase of 20 basis point in the percentage of customer accounts receivable balances greater than 60 days deliquesce to 9.9% at January 31, 2016 as compared to the prior year period. And the balance of customer receivable accounted for as troubled debt restructuring increased to $117.7 million or 7.4% of the total portfolio balance. As a result of these factors, the provision of bad debt as a percent of the average portfolio balance was 16.6% compared to 17.6% in the fourth quarter of last year. For the fiscal 2016 fourth quarter, interest expense increased by $14.5 million year-over-year driven largely by our reentry into the ABS market, which increased the average debt balance outstanding and contributed to an increase in the effective interest rate. For the quarter, interest expense as a percent of the average portfolio balance was 6.2% with average debt as a percent of the average portfolio balance of approximately 77%. We view the higher borrowing costs associated with our ABS transaction as a temporary cost of reenter into this market, this will give us a more diversified capital structure to support the growth of our business. As we become a repeat ABS issuer within an established performance record, we expect that our borrowing cost in these transactions will improve in the future as they have for other companies that have accessed this market. Turning now to balance sheet and liquidity, inventory was up 27% last year, an increase year-over-year as we expanded our assortment and in-stock levels for furniture and the product mix shift over the funded share which has slower tends as well as the impact of these store openings. As Norm touched on earlier in the call, last week we closed another securitization transaction, announced on March 14, 2016, we issued two classes of rated asset-backed fix rate notes with the Class A notes rated as investment grade by Fitch. The face amount of the notes issued was approximately $494 million on an aggregate outstanding customer receivables portfolio balance of $705 million. We received upfront proceeds of approximately $478 million net of transaction cost and reserves. The notes have an all-in costs of funds of approximately 7.8% after considering all underwriting discounts and expenses. The Class C notes and Class R notes are currently being retained by a subsidiary of Conn’s and may be issued in the future. Looking to Slide eight of the presentation, our liquidity and capital flexibility has improved substantially following ABS transaction, which we closed earlier this month. On a pro forma basis, reflecting the completion of this deal, as of January 31, 2016, we would have had a $160 million in cash, $125 million in ABL net availability and an additional $684 million in ABL committed growth capacity. During Q4, we repurchase 4 million shares of common stock for $100 million, this brings total share repurchases for fiscal 2016 to 5.9 million shares for a total of $151.6 million. At this point, I would like to turn things back over to Norm for some final comments.

[Norman Miller:]

Thanks Tom, I would like to take just a few minutes before we open it up to questions, just to review highlights of our performance, which serve as the foundation for a long-term growth plans. And it's shown on Slide nine in the earnings call slide. During the past fiscal year, we've delivered positive same-store sales excluding exited categories. Our trends in delinquency have stabilized due to changes we've made in underrating and collection. We continue to build a diversified capital structure to a successfully completed rated ABS transaction and are leveraging Synchrony for a portion of our no-interest financing, which will reduce capital requirements while improving returns. We are modestly lowering growth plans for the business to focus on improving our retail and credit execution and improve our infrastructure to support our longer term growth opportunity. Finally, the business continue to reflect strength in key areas including solid store economics and stable adjusted EBITDA result, delivering nearly $150 million annually for the past two-years. All of these actions give us a stable foundation we need to support future profitable growth. I would like to close by recognizing Theodore Wright, our Non-Executive Chairman, who intends to retire from our Board of Directors at the end of its current term. Theo's departure is part of a long plan leadership success developed by the board, which included my appointment of CEO and President this past September and was based on his desire to devote more time and intention to other personal and business interests. We are deeply appreciative of Theo's many years of service to Conn’s as a Board member and as Chairman and CEO. We are now happy to opening it up to questions.

[Operator:]

[Operator Instructions] Our first question comes from the line of John Baugh from Stifel. Your question please.

[John Baugh:]

Thank you. Good morning and thanks for taking my questions. Just a couple things, quickly. I noticed the approval rate was down I think year-over-year from roughly 45% to 40%, and that was the end of January, or the January quarter. Some of these changes I think you mentioned that would drive a 4% drop in sales were made I think more - later than that. So can you correct me if I'm wrong on that? It looks like when you take that drop in approval rate times the increase in applicants you actually had a net approval decline of about 4% in the January quarter of accounts. So I wonder if I got all that math right and what the implications are for approval rates going forward?

[Thomas R. Moran:]

So to your points John, there were two factors, you pointed out one and it was only in for part a quarter and that was underwriting changes we made around thin file and beginning to assess in our early pay default model. And then second was, we talked about last quarter, the marketing changed we made to drive increased application volume and saw a lot of application volume increase through the web, which have a higher decline rate, lower approval rates than our in-store applications. So part of it just had to do with the source of the application growth.

[Michael J. Poppe:]

And I will say we are seeing some general weakening from across the credit performance from a customer standpoint. A softening as I depicted as across all segments of customers, but the significant portion is the increase from a web standpoint versus the in-store application.

[John Baugh:]

Yes. Norm, that seems to match - I guess here again, do I have the math right? And I know you're making a change prospectively, moving Synchrony-type business back out. But it looked like your average FICO score was relatively unchanged year-over-year; and if I'm not mistaken you were bringing on Conn's books higher FICO score customers during the period. Does that speak to some of that general weakening of the existing customer in the portfolio since you originated?

[Norman Miller:]

If you look at the history from a FICO score standpoint, we did see a benefit this year by a couple of points from the movement of bringing those high FICO scores customers on our brooks. But if you historically, I mean, it affects it by three or four, five total points at the end of the day but that's not been material driver that’s driving that weakness.

[John Baugh:]

Okay. Then just two other quick ones if I could. Can you update us on the payment rate covenant and sort of where we sit on that? I know seasonally it gets better here in the April quarter, but just a broad view on that. Then I noticed the re-aged balance was up almost 50% year-over-year and the portfolio growth was obviously less than that. Were there any changes in the re-age policy? Thanks again.

[Thomas R. Moran:]

Yes so from a payment rates standpoint we were in compliance in fourth quarter and tax season we would expect to see the normal seasonal lifts. So payment rates in the fourth quarter was just a little over 4.5%. And then from a re-aging standpoint, no changes in our re-aging policies or practices to speak of and from a seasonal standpoint it kind of follows the normal seasonal pattern and just has to do more with the fact that delinquencies have been elevated for a period of time here.

[John Baugh:]

Thanks. I'll defer to others.

[Thomas R. Moran:]

Thanks John.

[Norman Miller:]

Thank you John.

[Operator:]

Thank you. Our next question comes from the line of Brad Thomas from KeyBanc Capital Markets. Your question please?

[Brad Thomas:]

Yes, hi. Good morning and thank you for taking my question. My first question is on new store productivity. You made some comments about it in your prepared remarks; but I was hoping you could just give us an update on how you are thinking about new store productivity from a revenue perspective, given the current underwriting policies and the markets that you will be entering. And then secondly, from a bigger-picture perspective, should we be thinking of the new stores as being something that could be additive to earnings in their first year or is that something that is dilutive and if so, could you quantify? Thank you so much.

[Norman Miller:]

Sure, Brad, first if you look at our new store sales with some of the underwriting changes that we've made as well as we've slightly altered our grand opening schedule or plan. We spread it our more months in fiscal year 2016 versus 2015. We see our first year monthly sales on new stores averaging about 780,000 in fiscal year 2016 versus about 830,000 for stores opened in fiscal year 2015. As we implement some additional underwriting changes for new customers, we would expect to see that come down to some degree. However, have said that where most of the new stores that we are opening the 10 new stores will be within existing markets if you will, so a number of those customers will be existing customers that will come into those stores within the marketplaces as well. And our expectation is that from our four-wall EBITDA profitability standpoint, we don't expect a material difference from a profitability and return standpoint economically. It may move it a month or two, but still very, very strong store economics.

[Thomas R. Moran:]

Yes, we haven't seen the EBITDA payback period moved meaningfully, it stayed within that three to six months range we've seen historically. And then I would just add, long-term we still expect the store revenue potential to be similar that what we think today, it’s just the time to get there may be slightly longer.

[Norman Miller:]

We are being a little more cautious with new customers to ensure that we are balancing from a credit risk standpoint appropriately.

[Thomas R. Moran:]

The other thing were doing from an economic standpoint with new stores is the openings this year are focusing on existing markets, so that we leverage the existing distribution and then its more efficient from an advertising perspective as well.

[Brad Thomas:]

Great. That's helpful. and then you obviously referenced some investments that you will be making in IT and some other areas. I guess, could you give us some examples of where these IT investments could start to give you some benefits to the customer and to the extent you want to quantify what investments you are making, if it's important for the P&L. Any color would be appreciated. Thank you.

[Norman Miller:]

Absolutely Brad. We are anticipating to invest about $5 million to $7 million over the next 12 to 18 months. As I have mentioned in three primary areas, credit where we will be investing in additional staffing to assist with building more sophisticated modeling, forecasting, monitoring capabilities. From an IT standpoint, investing in both people and systems to enhance our business capabilities and really improve from a customer experience standpoint and build out the infrastructure and make ongoing enhancements as well from a compliance standpoint from an IT perspective. And lastly, the third element was HR looking to build the team up we need to enhance our recruiting, our retention and leadership development capabilities to ensure that as we look forward into fiscal 2018 and beyond, we have that foundation and that infrastructure in all three critical areas that will enable us to accelerate or increase our growth plans.

[Brad Thomas:]

Great. Thank you.

[Operator:]

Our next question comes from the line of Peter Keith from Piper Jaffray. Your question, please.

[Jonathan Berg:]

Good morning, guys. Actually this is Jon on for Peter. Thanks for taking our questions. First off, I guess in looking at your interest expense for fiscal year 2017, it looks like the last couple of quarters you've been running around about an 8% rate. Are there any parameters you can provide for this full-year? Is that roughly in line with what we should be expecting, or any detail you could give there?

[Norman Miller:]

The way you can frame up our interest expense really going forward is, just think about the debt that we will be carrying as a percent of our average customer portfolio balance, so just the leverage figure which we cited in Q4, which was fully reflective of moving into the ABS inclusion in our structure. So we had that ratio about 77%. So if you look at that and then look at the rates that we have on the different buckets of our financial structure, the ABLs are high yield notes and then the ABS as were disclosing the cost of funds as we go into it. You can sort of build a portfolio of what our debt looks like and that's probably a good way if you need to estimate our interest expense. You will need to have an assessment of where you think the portfolio is going to go, but that gives you the pieces to build it up.

[Jonathan Berg:]

Okay. Then I guess my second question is, as far as with these pricing investments, I guess you guys made in furniture and mattresses and then also appliances in the fourth quarter, I know that impacted the product margin some. Do you feel at this point now you are competitively priced? Was that a one-time thing do you think in the fourth quarter, or do you expect a pressure on margin to continue as we go forward the next several quarters?

[Norman Miller:]

We don’t anticipate that similar pressure on margin continues here, at least over the next several quarters. We feel we are very competitive from a pricing standpoint and some of the things we did to eliminate some SKUs and change some SKU assortment and exiting that from a current standpoint to get those exited SKUs out is really what drove as much of that margin decline as anything. But that's a one-time thing, we don’t see that going forward.

[Jonathan Berg:]

Okay, great and then just one last quick one. On the residual from your first transaction, do you have any update there on a potential sale or on all or part of that residual?

[Thomas R. Moran:]

Yes. Given the volatility there have been in the capital markets here in the first part of the year and in the ABS market and the way that spreads have widened, it now would not be conducive to trying to effectively market a residual. And in fact we and several others issuers have even retained subordinated tranches of bond offerings just because of the widening of spreads and pricing in the markets recently.

[Norman Miller:]

Now having said that the performance of our first ABS transaction has continued to perform exactly - very close to what we had laid out. And as the residual holder through February we've received $26 million of cash flow and as a servicer and additional $28 million for a total of $54 million. So you know the fact that that residual has performed as we had laid out was very hopeful as we went into the market for the rated transaction to build confidence and increased our investor base going forward, because of our performance with that first transaction.

[Jonathan Berg:]

Great. Thank you; good luck in the rest of the year.

[Thomas R. Moran:]

Thanks.

[Norman Miller:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Brian Nagel from Oppenheimer. Your question please.

[Brian Nagel:]

Hi, good morning; thank you for taking my questions. So first question, I know you gave a lot of detail in your prepared comments. But as we look at the fourth quarter results here, and particularly the credit metrics on your P&L such as the loan-loss provision, is there anything in there that we should view as more or less one-time in nature as we think about the trajectory for a loan-loss provision going into the next year?

[Michael J. Poppe:]

In the fourth quarter, no nothing particularly one-time in nature. I think what we are seeing is as we've made the underwriting changes this past year any additional changes we are making it takes time for that to season into the portfolio along with the slower growth we saw in the later part of this year and the lower projected growth pace this year will change the customer mix. And one of the biggest drivers of loss is, just the customer mix and the number of new customers being originated and then the portfolio given that they have a loss rate of nearly two times that of repeat - longer term repeat customer.

[Brian Nagel:]

Got it; thanks, Mike and then the second question, with respect to the securitization, Conn's just recently completed a securitization. You talked a little bit about that. So my question is maybe a couple parts. What is the likely timing? I understand a lot of it's market dependent and such, but what is the likely timing of the next securitization and then as we're looking - as investors, we're looking at the securitization, what should we look for or expect to see in terms of indications that the strategy is working, the securitizations are becoming easier and less expensive for Conn's?

[Norman Miller:]

Well, I'll initially start at least to say, we expect to execute one to two additional securitization before the fiscal year is over. Some of that will be dependant in some parts of what is happening from an overall capital markets standpoint. And to the second part of your question, concerning what can you look at to determine whether or not the strategy is working longer term on our entry into the ABS market, would be at the end of the day what our costs are and the cost of borrowing and leverage amounts are going forward with future transactions. Clearly, as we entered into the market with the second transaction, we had a very different capital market than we did last August and September with the first securitization, but even with that more volatile capital markets, we were able to improve from a performance standpoint all-in cost at the end of the day. Longer term, it would be our expectation to drive our all-in cost not down to the ABL’s cost if you will, but in that 4.5% to 5% range would be where we would expect longer term.

[Thomas R. Moran:]

And some other bigger accomplishments in this transaction is, because one, it was rated, we did this investment grade rating. That opened up the investor base through a lot of different investors that wouldn’t participate in an unrated transaction and we attracted a very different longer term money manager investor base versus the predominantly hedge fund investor base and the unrated transaction. And then when you look at the spreads on our deal versus similarly rated transactions for others in the recent last couple of months, our pricing compares very favorably to these other transaction everybody thought significant spread widening and some more than - it had a bigger impact than even we saw.

[Brian Nagel:]

Got it. Just maybe one more quick question if I could, different topic and I don't recall if you addressed it in your comments or not. But any difference or any further shift in performance of the markets that are more oil-dependent for Conn's?

[Thomas R. Moran:]

We've continued to see a relative stability in that performance. We keep watching it closely, but no real trend changes in that that we've seen.

[Brian Nagel:]

Okay. Thank you.

[Michael J. Poppe:]

Thank you.

[Norman Miller:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Rick Nelson from Stephens. Your question, please.

[Richard Nelson:]

Thanks. Good morning. Just to follow-up on that question about the energy markets, your comments about relative stability

[Michael J. Poppe:]

Yes that is true from both perspective, we haven’t seen any signs at this point in delinquency that the energy impacted markets are performing any differently than our other markets. And Tom was speaking specifically to sales.

[Norman Miller:]

Having said that Rick, it's harder on the delinquency standpoint, we really believe that unemployment is a better trend that would indicate where we would have real concern from a delinquency standpoint in those markets. So we monitor unemployment pretty closely and we haven't seen significant de-gradation there, but that's where we are on the watch out to determine if we're going to see softening in that areas.

[Richard Nelson:]

Thanks for that color. Also like to ask you about buybacks. After the first securitization, those really stepped up. If you could talk about where you are now with the authorization and the liquidity or financial wherewithal, given some of your bank requirements, what you could potentially do.

[Norman Miller:]

Yes, currently at least in the short-term we're not anticipating any future buybacks, certainly over the next couple of quarters. And really just from a conservative nature of from a capital standpoint and a liquidity standpoint with the volatility of the markets as we went out with this second ABS transaction. We're being very cautious in ensuring that we have ample cushion from a liquidity standpoint and a capital standpoint to be able to grow the business.

[Richard Nelson:]

Okay, thanks for that. Also, finally, if I could ask you

[Norman Miller:]

For the month of March, it's actually we're tracking a bit softer than what we have provided from an overall guidance standpoint. We expect March same-store sales to be down low to mid single digits driven by couple of things. First, the underwriting changes that we had discussed, both the ones implemented in the fourth quarter and some impact on the additional underwriting changes that we are implementing here in the month of March. Secondly, Easter, the Easter holiday where our stores were closed actually fell in March this year versus April last year and that's about a $4 million impact. And lastly, the month started off from a macro standpoint just softer, but having said that in the past two weeks, we've seen a significant improvement from a sale standpoint even with the underwriting things that we're putting in place where they have been flat to up low single digits the last couple of weeks. All-in, we still expect for the month be in low to mid single digits same-store sales down for the month of March.

[Richard Nelson:]

Thanks for that color Norm and good luck, guys. Thanks.

[Michael J. Poppe:]

Thank you.

[Norman Miller:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of David Magee from SunTrust. Your question please.

[David Magee:]

Hey, good morning, everybody. First question has to do with just the EBIT margin visibility this year. You mentioned the additional investments of $5 million to $7 million, I think. Given the gross margin improvement that you are expecting, do you still think that - or do you think the EBIT margins might be flat or higher year-over-year this year?

[Michael J. Poppe:]

Can you repeat the question, because its breaking up a little bit.

[Norman Miller:]

Its breaking up, can you repeat it.

[David Magee:]

Yes, sorry. Again, with regard to the EBIT margin visibility this year, given the additional investments, do you think that the gross margin improvement will be offsetting in that regard, and so EBIT margins will be flat or any color there would be helpful.

[Norman Miller:]

Overall, we would expect them to be close to flat year-over-year.

[David Magee:]

And what are you seeing with regard to incremental wage pressures this year?

[Norman Miller:]

The significant portion of our sales forces from a retail standpoint is commission sales, so we don't see significant impact there. On collection side of the house or the credit side of the house, we haven't seen any materially at least in the market that we operate in to make any note of.

[David Magee:]

Great thanks. Last question. What is your sense for when the lines might cross this year with regard to delinquencies? Do you still think mid-year is an appropriate target for that?

[Michael J. Poppe:]

It's a little hard to predict David, especially with the slowing the growth of the business, moving the high FICO score business to Synchrony and then what we've seen in the macro environment with the way that subprime credit is performing broadly and the macro environment has been weaker off late. It's hard to predict where the crossover point will be, but we are making those additional underwriting changes we think are prudent to make sure that we are delivering profitable business and profitable mix to customers.

[David Magee:]

Okay; fair enough. Thanks, guys.

[Michael J. Poppe:]

Thank you.

[Operator:]

Thank you. And this does conclude the question-and-answer session of today's program. I would like to hand the program back to management for any further remarks.

[Norman Miller:]

Thank you. We appreciate everybody's participation and we look forward to talking with you next quarter and sharing our results. Thank you.

[Operator:]

Thank you. Ladies and gentlemen for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.