The curious case of Conn’s potential sale
Conn’s has begun exploring a range of strategic alternatives, including a potential sale, while maintaining the company’s long term strategy is viable.
Conn’s said its board had authorized management to explore a full range of strategic alternatives to enhance value for stockholders and retained BofA Merrill Lynch as financial advisor and Vinson & Elkins as legal counsel to aid in the process. Some of the options include a potential sale, slowing store openings to return capital to shareholders and separating its retail and credit businesses. Conn’s operates 89 stores selling appliances, consumer electronics, furniture and mattresses in Arizona, Colorado, Louisiana, Mississippi, Nevada, New Mexico, Oklahoma, South Carolina, Tennessee and Texas.
“Our strategic initiatives remain on track with new store openings and the penetration of new geographic markets, and we remain committed to our current strategic plan,” said Theodore M. Wright, Conn’s chairman and CEO. “We are extremely proud of what our Conn’s team has accomplished. While we remain confident in the company’s future prospects and have ample capital and liquidity to execute our business plan, we have decided to conduct a strategic review and explore options to accelerate the realization of value for our stockholders.”
Conn’s announcement is atypical in the retail industry. Retailers tend to announce they are exploring strategic alternatives after an extended period of deteriorating results causes uncertainty regarding future growth prospects. That doesn’t appear to be the case at Conn’s even though the company’s stock price is near a 52 week low and it is experiencing unfavorable trends in its credit business.
Total revenues increased 30.4% to $353 million during the second quarter ended July 31 thanks to the addition of 14 new stores and an 11.7% same store sales increase which came on top of a prior year increase of 18.4%. The 11.7% gain was the company’s 12th consecutive quarter of same store sales growth.
The top line growth has been driven by easy credit offered via Conn’s differentiated approach to serving the market which includes a range of financing options. More customers are paying their bills more slowly and the deterioration in credit quality became evident in the second quarter. The percentage of the customer portfolio balance delinquent for 60 or more days increased to 8.7% which caused Conn’s to increase its provision for bad debts.
“Our credit operations ran into unexpected headwinds, resulting in portfolio performance deterioration,” Wright said of the company’s second quarter results. “Despite tighter underwriting, lower early-stage delinquency and improved collections staffing and execution, delinquency unexpectedly deteriorated across all credit quality levels, customer groups, product categories, geographic regions and years of origination. Tighter underwriting and better collections execution did not offset deterioration in our customer’s ability to resolve delinquency.”
The delinquency situation is expected to worsen in the third and fourth quarters, according to the company, with the company planning for the percentage of accounts 60 days past due to exceed all time highs.