Why Conn’s Bottom-Line Beat Was Not Enough for Investors

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Conn’s Inc. (NASDAQ: CONN) reported its fiscal first-quarter financial results before the markets opened on Tuesday. Although the company offered results that were more or less in line with expectations, this was not enough for investors, as one other stat stood out from the rest. And it doesn’t look like it’s getting better any time soon.

The company posted a net loss of $0.05 per share and $355.8 million in revenue, compared with consensus estimates from Thomson Reuters that called for a net loss of $0.22 per share and $358.71 million in revenue. In the same period of last year, the retailer posted a net loss of $0.31 per share and $389.11 million in revenue.

Total retail revenues were $279.4 million for this first quarter of fiscal 2018, compared to $319.0 million in the first quarter of last year, a decrease of 12.4%.  This drop was primarily related to a decline in same-store sales, partially offset by new store openings.

What killed this report was that same-store sales in the retail segment were down a whopping 15.2% in this quarter.

Credit revenues were $76.5 million for the quarter, up 9.1% from $70.1 million last year. The increase in credit revenue was primarily the result of originating higher-yield direct loan product, which resulted in an increase in the portfolio yield rate to 18.2% from 15.8%, partially offset by a 3.1% decline in the average balance of the customer receivables portfolio.

In terms of the outlook for the fiscal second quarter, the company expects to see same-store sales down between 12% and 15%, and finance charges and other revenues between $78 million and $82 million. The consensus estimates are $0.01 in earnings per share and $358.71 million in revenue for the coming quarter.

Norm Miller, Conn’s board chair, chief executive and president, commented:

We are encouraged by our fiscal 2018 first quarter financial performance, operating results and strong retail profitability – which is all underscored by ongoing progress with our credit business. Conn’s credit segment performance is improving as a result of higher finance charges, strengthening portfolio trends, controlled expenses, and lower borrowing costs. Interest income and fee yield of 18.2% was the highest since the fiscal 2015 fourth quarter as a result of the strategies we have implemented to increase yield. Approximately 84% of our current originations have a weighted average interest rate of 28.6%, compared to almost 22% in September. As higher rate originations become a larger percentage of Conn’s credit portfolio, we now expect interest income and fee yield will ultimately increase to 23 – 25%.

Shares of Conn’s closed Monday at $18.88, with a consensus analyst price target of $21.75 and a 52-week range of $6.54 to $19.10. Following the release of the earnings report, the stock traded down 10% at $16.95 in the premarket.