Conn’s (NASDAQ:CONN), a specialty retailer of appliances, furniture, home office products and electronics that also provides in house financing, spiked over 20% on Feb 5th. The bullish sentiment continued this week with analyst upgrades after the company released surprising January data. Given the company’s fragile performance, investors may be jumping the gun on a Conn becoming a potential turnaround.
The Rewards & Risks of Subprime Lending
Conn’s roller coaster like trajectory is a cautionary tale to other furniture firms. The company had experienced tech-startup like growth from 2011 to 2013 resulting in share price appreciating close to 1500% due to high same store sales growth and alluring margins. However, the main engine for this growth was an in-house financing program targeting low credit individuals who could not finance purchases elsewhere. As Conn’s lowered lending standards, more customers were buying but not actually paying. An increasing number of customers were unable to repay debt causing the company’s loan loss allowance as a percentage of their loan portfolio to increase to uncomfortably high numbers (below)
Reckless lending practices finally caught up with Conn’s in 2014 as the company had to take a big charge related to their credit lending business, completely erasing operating profits for the year. This resulted in the company losing 75% of their value.
Back on Track?
A press release announcing Conn’s January and Q4 Fiscal 2015 sales and delinquency data
revealed retail sales rose nearly 17% in January from the prior year. Conn’s same store sales increased 4.9% YoY for the month of January. This increase can be attributed to higher sales numbers for their furniture and appliances division. Although these numbers are pale in comparison to the 28.2% growth rate recorded in January of 2014, slower growth will become a norm as lending is tightened. The fact that the company grew same store sales while having tougher lending policies is a bullish sign for growth moving forward.
“Tighter underwriting, along with additional store openings, mostly impacted our Arizonaand New Mexicostores. Excluding Arizonaand New Mexicolocations, same store sales increased 6.9% for the month.” – Theodore M. Wright, CEO
The 60-plus day delinquency rate represents loans that are more than 60 days pas due on their monthly payments. These loans remained flat at 9.7% which should come as relief for investors. Below 60 day delinquencies declined in January 2015 compared to the previous month and are well below the same period last year. Another positive sign relating to their credit portfolio was reported by their CEO:
“Collections were strong for the month of January as our payment rate increased above the prior year January, and was flat for the quarter compared to a year ago.”
Conn’s is seeing the effects of the credit tightening. Delinquencies rates, across the board, are declining. Loans, on average, are under 6 months indicating the reduced credit risk of being short term. With over 33% short interest, CONN may have seen a short squeeze after January figures were released. The stock is up over 40% in 3 trading days.
Conclusion
Conn’s current valuation is being priced at 14x forward earnings estimates, on par with the industry average of 14.5x. Although press release numbers are encouraging, more data needs to be presented to validate that the company has, in fact, turned a corner. Investors willing to take the chance on Conn’s after the initial spike could be rewarded, but these same investors must be weary of the company’s prior performance.
