Conn's, Inc., a specialty retailer of home appliances, consumer electronics, computers, lawn and garden products, furniture and mattresses, announced earnings results for the quarter and nine months ended October 31, 2007.
Net income for the third fiscal quarter was $4.0 million, compared with $7.2 million for the third quarter of last year, a decline of 43.8%, due to a non-cash decrease in the fair value of the Company's interests in securitized assets. Diluted earnings per share declined 43.3% to $0.17, compared with $0.30 for the third quarter of last year.
Net income for the quarter ended October 31, 2007, includes a non-cash charge, net of tax, of $2.6 million, or $0.11 per diluted share, to reduce the fair value of the Company's “Interests in securitized assets." The reduction in fair value was driven by external financial market conditions, which resulted in an increase in the risk premium included in the discount rate assumption used in the Company's determination of the fair value of its “Interests in securitized assets," and was not related to the performance of the Company's credit portfolio.
Total revenues for the quarter ended October 31, 2007, increased 9.0% to $189.4 million compared with $173.7 million for the quarter ended October 31, 2006. This increase in revenues included increases in net sales of $17.7 million, or 11.6%, and a decrease in “Finance charges and other" of $2.0 million, or 9.3%. “Finance charges and other" declined due to the non-cash fair value charge discussed above, which totaled $4.0 million before taxes. Same store sales (revenues earned in stores operated for the entirety of both periods) increased 6.8% for the third quarter of fiscal 2008.
The credit portfolio experienced rising delinquencies during the third quarter, though at a slightly slower pace than in the prior year quarter. Additionally, the annualized net charge-off rate rose to 2.7% for the nine months ended October 31, 2007. More information on the credit portfolio and its performance may be found in the table included with this press release and in the Company's filing with the Securities and Exchange Commission on Form 10-Q which will be filed later today.
During the first quarter of fiscal 2008 the Company adopted several new accounting pronouncements related to the accounting for its “Interests in securitized assets." This change in accounting was adopted effective February 1, 2007, and prior periods were not adjusted. These pronouncements resulted in the Company electing to account for its interests in securitized assets at fair value, with all changes in the fair value included in “Finance charges and other.“ù Under the fair value accounting pronouncements, the Company is required to value the interests in securitized assets using assumptions it believes a market participant would use to value the asset. During the third quarter of fiscal 2008, “Finance charges and other“ was reduced $4.0 million by the non-cash fair value adjustment, which was driven primarily by a higher discount rate assumption. The risk premium included in the discount rate assumption was increased principally due to external market conditions, and was not a result of changes in the underlying economics or expected cash flows of the securitization program.
Due to the turmoil in the financial markets during the third quarter of fiscal 2008, the Company evaluated the risk premium included in the discount rate used in its discounted cash flow analysis. After discussions with its bankers and review of available market information, the Company estimated that, due to increases in the risk premiums expected for many securities, especially asset-backed securities, under the volatile market conditions experienced during the third quarter, a market participant would require a higher return on their investment if they were to purchase the Company's interests in securitized assets. The increase in the discount rate had the effect of reducing the current fair value of the asset and deferring earnings under the securitization program to future periods, but did not permanently reduce securitization income or the earnings of the Company. The deferred earnings will be recognized in future periods as interest income on the interests in securitized assets as the actual cash flows from the receivables are realized.
Net income for the nine months ended October 31, 2007, declined 3.7% to $26.6 million compared with $27.6 million for the prior year. Diluted earnings per share for the nine months ended October 31, 2007, were $1.11 compared with $1.14 in the prior year period. Net income for the nine months ended October 31, 2007, includes a non-cash charge, net of tax, of $2.8 million, or $0.12 per diluted share, to reduce the fair value of the Company's “Interests in securitized assets.“ù Total revenues for the nine months ended October 31, 2007, increased 9.1% to $598.2 million compared with $548.1 million for the nine months ended October 31, 2006. This increase in revenues included net sales increases of $42.7 million, or 8.8%, and increases in “Finance charges and other“ù of $7.4 million, or 12.3%. The increase in “Finance charges and other“ù was partially offset by the non-cash fair value charge discussed above, which totaled $4.3 million before taxes, for the nine months ended October 31, 2007. Same store sales (revenues earned in stores operated for the entirety of both periods) increased 3.5% for the first nine months of fiscal 2008.
During the nine months ended October 31, 2007, the Company completed a legal entity reorganization that resulted in a one-time reduction in the provision for income taxes of $0.9 million.
“While we enjoyed solid growth at the top line, we were not satisfied with our bottom-line performance this quarter, even after excluding the impact of the fair value adjustment," said Thomas J. Frank, Sr., the Company's Chairman and CEO. “Since we anticipate the retail environment continuing to be very competitive, we must improve our execution to achieve the gross profit and operating margins we expect.“
As part of the previously announced stock repurchase plan, the Company repurchased 542,100 shares of common stock for $12.0 million during the three months ended October 31, 2007. The Company has repurchased 1,041,185 shares since the inception of the plan for $24.5 million and intends to continue repurchasing shares up to the authorized limit of $50 million, dependent upon market conditions and share price.
The Company currently has 65 stores in operation. Additionally, the Company has under development and expects to open 11 stores by July 31, 2008, including two replacement stores and one new store in Oklahoma City, Oklahoma. The Company plans to continue its expansion by opening an additional two to five stores in the last half of next year.
About Conn's, Inc.: The Company is a specialty retailer currently operating 65 retail locations in Texas and Louisiana: 21 stores in the Houston area, 15 in the Dallas/Fort Worth Metroplex, 10 in San Antonio, five in Austin, four in Southeast Texas, one in Corpus Christi, three in South Texas and six stores in Louisiana. It sells major home appliances, including refrigerators, freezers, washers, dryers, dishwashers and ranges, and a variety of consumer electronics, including micro-display projection, plasma and LCD flat-panel televisions, camcorders, digital cameras, computers and computer accessories, DVD players (both standard and high definition), video game equipment, portable audio and home theater products. The Company also sells lawn and garden products, furniture and mattresses, and continues to introduce additional product categories for the home to help respond to its customers' product needs and to increase same store sales.
Unlike many of its competitors, the Company provides flexible in-house credit options for its customers. In the last three years, the Company has financed, on average, approximately 58% of retail sales. Customer receivables are financed substantially through an asset-backed securitization facility, from which the Company derives servicing fee income and interest income. The Company transfers receivables, consisting of retail installment contracts and revolving accounts extended to its customers, to a qualifying special purpose entity (QSPE) in exchange for cash and subordinated securities. The QSPE funds its purchases of the receivables through the issuance of medium-term and variable funding notes secured by the receivables and issued to third parties, and subordinated securities to the Company.
Furniture World Magazine-Business solutions for furniture retailers