Easy credit proves costly at Conn’s

A nightmare scenario unfolded at Conn’s this week when the company disclosed a huge third quarter loss, the departure of its CFO and withdrew guidance for the coming year amid disturbing delinquency trends in its credit card receivables portfolio.



The troubling revelations were made in conjunction with the release of results for the third quarter ended October 31 that saw sales at company’s 91 stores increase 18.5% to $305 million due. The gain was driven entirely by the addition of selling space as there were 17 more stores in operation at the end of the recent third quarter compared to the prior year third quarter. Same store sales declined 1 percent as the company lapped a 35.1 percent comp increase the prior year that was driven by aggressive marketing and lax credit underwriting standards.



Those lax standards proved a boon to sales as Conn’s apparently extended credit to anyone with a pulse, but the strategy blew up on Tuesday when the company recorded a $72 million provision for bad debt that caused a loss of $3 million, or eight cents a share, compared to a prior year profit of $24.4 million, or 66 cents a share.



As a result, share price plummeted more than 40 percent at one point and the company announced the departure of CFO Brian Taylor. It also commenced a search to fill newly created positions of president and chief risk officer and established a new credit risk and compliance committee of the board of directors. Filling the CFO role on an interim basis is Mark Haley who joined the company in October as Vice President and Chief Accounting Officer. He previously held the same position at Coldwater Creek, a retailer which recently liquidated.



Conn’s chairman and CEO Theodore Wright tried to find something good to say about the company’s performance, noting that sales increased and gross margins expanded, but the credit situation and future uncertainties ruled the day.



“Customer credit scores continue to deteriorate,” Wright said. “Despite underwriting changes reducing the percentage of originations to customers with scores below 550, the proportion of customers in late stage delinquency with a score below 550 increased this year, though it has remained relatively constant since the end of the second quarter. As a result, delinquency rates have increased and losses are being realized at a faster pace than originally anticipated.”



The good news, according to the company, is that delinquency trends appear to have stabilized with the more than sixty day delinquency rate holding steady at 10%. There was a slight improvement in the percentage of balances 31 to 60 days past due which declined to 3.3 percent from 3.6 percent.



“We are disappointed in this quarter’s reported results, and we are committed to improving performance in the credit segment through better execution and oversight,” Wright said.



Meanwhile, the company is also committed to an ongoing exploration of a full range of strategic alternatives that was announced in October. The company and its independent financial advisor are said to be, “actively engaged in preliminary discussions with multiple parties about a range of potential strategic alternatives.”



With everything the company has going on it remains committed to opening between 15 and 18 new stores in the coming year even as it withdrew earnings guidance for the remainder of the current and coming fiscal years. However, because credit matters have had such an impact on the company’s performance, beginning in December plans call for the release of monthly updates on the 60 day delinquency metric until the company experience more normalized trends.