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Executives

Michael Poppe - CFO

Timothy Frank - CEO and President

Analysts

Rick Nelson - Stephens

David Magee - SunTrust Robinson Humphrey

Jeff Blaeser - Morgan Joseph

Dan Binder - Jefferies

Conn's Inc. (CONN) Q3 2009 Earnings Call November 25, 2009 11:00 AM ET

Operator

Welcome to the Conn's, Inc. Conference Call to discuss earnings for the third quarter ended October 31, 2009. My name is Anthony. I will be your operator today. During the presentation all participants will be in a listen-only mode. After the speakers' remarks, you will be invited to participate in a question-and-answer session. As a reminder this conference is being recorded.

Your speakers today are Mr. Timothy L. Frank, the company's President and CEO, and Mr. Michael J. Poppe, the company's Chief Financial Officer.

I would like to turn the conference over to Mr. Poppe. Please go ahead, sir.

Michael Poppe

Thank you, Anthony. Good morning, everyone and thank you for joining us. I am speaking to you today from Conn's corporate offices in Beaumont, Texas.

You should have received a copy of our earnings release dated November 25, 2009, distributed before the market opened this morning, which describes our earnings and other financial information for the quarter ended October 31, 2009. If for some reason you did not receive a copy of the release, you can download it from our website at conns.com.

I must remind you that some of the statements made in this call are forward-looking statements within the meaning of the Securities and Exchange Act of 1934. These forward-looking statements represent the company's present expectations or beliefs concerning future events. The company cautions that such statements are necessarily based on certain assumptions, which are subject to risks and uncertainties, which could cause actual results to differ materially from those indicated today.

I would now like to turn the call over to today's host, Tim Frank, Conn's President and CEO. Tim?

Timothy Frank

Thank you, Mike. Good morning and thank you for joining us today. Mike and I are going to speak to our sales, financial performance, and the current status of our credit and financing operations. We continue to face very challenging conditions in our markets and we are focused on maintaining control of credit portfolio performance, removing cost from the model, and getting back on track with profitable operating results.

We reported a $20.7 million loss in the third quarter consisting of $17.4 million in non-cash or non-reoccurring items, including $4.1 million of the $4.9 million Texas Attorney General settlement, a $3.7 million fair value adjustment, and a $9.6 million goodwill write-down.

For the first nine months of our fiscal year, we remain profitable and I expect that we will be profitable during the fourth quarter.

During the third quarter, we increased market share in our key categories of electronics, appliances, and furniture and mattresses despite the current challenging economic environment as evidenced by our sales performance relative to published industry information.

According to the US Census Advance Retail Sales report, revenues for consumer electronic and appliance retailers during the three months ended October 31, 2009, were down 8.7%, while our revenues declined 6.5% in those categories.

In fact, our total TV unit sales increased 26.5% during the third quarter over the prior year with LCD unit sales up 20% and plasma units up 117% as we offered our customers a great selection of top brands and expanded our lineup this year.

Our furniture and mattress business has continued to exceed industry performance. According, again to the US Census, sales for furniture retailers during the three months ended October 31, 2009, were down 8.9%, while our business was up 10%.

Net sales for the quarter were down 7.2%. The same-store sales declined 9.3%. Revenue growth from furniture and mattresses was offset by revenue declines in consumer electronics, appliances, track, and lawn and garden.

Our appliance revenues were down 9.9% with refrigeration sales down 7.1%, laundry down 9.6%, and cooking sales down 3.6%. Despite the revenue decline, TracLine, an online syndicated market research service, reported that our market share grew during the third quarter compared to last year. We grew our furniture and mattress revenue 10% by improving our product mix and continuing to broaden our selection.

Consumer electronics revenue declined by 3.6%, despite a 26.5% increase in total television units sold due to a 23.4% decline in average selling prices. Again, according to TracLine, our market share in TVs grew in our markets during the third quarter compared to last year.

A bright spot in our track performance was that computer and peripheral sales dollars were up 3.8% led by laptops that were up 9.4% on a unit sales increase of 39.9%. Our repair service agreement sales continued to underperform in the third quarter, but we anticipate a return to normal penetration now that the Attorney General lawsuit has been settled.

The same-store sales performance was adversely impacted by economic activity in our markets evidenced by the unemployment rate in Texas increasing from 5.3% in October 2008 to 8.3% in October 2009.

We are cautiously optimistic about fourth-quarter sales though we do expect a decline versus last year's performance. This expectation is driven by the fact that last year we experienced a 12.5% comp sale increase during the fourth quarter. We are positioned well for Black Friday, have sufficient product on hand, and our stores are merchandized better than ever have been.

We recently opened two new stores one in Denton, Texas, North of Dallas and the other in Pasadena, Texas, Southeast of Houston. Both are performing in line with expectations. Each of these locations was previously occupied by Circuit City and are in our existing markets allowing us to leverage our infrastructure in advertising dollar and capitalize on opportunities to gain market share. We have elected to hold on future store openings at this time.

Gross margin increased from 29.5% to 32.4% in the third quarter, due to a 430 basis point positive impact from the fair value adjustment. We also added 50 basis points to our gross margin due to an increase in finance charges and other as a percentage of the revenue mix. These gains were partially offset by 220 basis point reduction in product margin, which was the result of competitive pricing pressures.

We have initiated a product margin improvement plan that includes tightening price controls on the sales floor while maintaining our price guarantee. We experienced an increase in re-occurring SG&A expense this quarter versus last year. Our sales compensation increased as a percentage of revenues due to lower sales productivity resulting in higher minimum wage payments for many of our sales associates.

Additionally, given the number of new stores opened last year, our occupancy costs, as percentage of revenues increased, due, again to lower sales. We partially offset those increases by reducing advertising by $445,000 in the quarter compared to last year. We did so without reducing coverage or penetration. While the, fair value adjustment was less than last year, it negatively impacted our gross profit, operating profit and pre-tax income by $3.7 million. The reason for the charge was 100 basis point increase in net loss assumption.

We have identified an additional $1.2 million in monthly cost savings and added these to our cost reduction plan. These new savings will not negatively impact our ability to serve our customers, but will center on improving sales person productivity and advertising efficiency. We expect these additional cost savings to gain significant traction during the fourth quarter.

Through our merchandising group's efforts the manage receipt of holiday merchandize to mirror the selling season more effectively than last year. We were able to lower our inventory levels at the end of the quarter as compared to last year, yet still have sufficient inventory to offer our customers tremendous values this holiday season.

They were also focused on protecting us from potential product shortages. We're well prepared for Black Friday as I mentioned earlier. We believe that we will experience strong consumer demand for flat-panel TVs, gaming hardware and software and computers. Our strength during this time of the year is that we have a much deeper supply of key SKUs than many of our competitors, particularly on Black Friday and the weekend.

Our performance during the third quarter in credit continued to be challenged, although we believe that our credit portfolio results reflect that we outperform other consumer credit operations especially in light of current economic conditions.

The net charge-off rate was 4.3% during the third quarter compared to 3.4% for the same period last year. Our net charge-off rate for the past 12 months is 3.5%. Additionally, 60-day delinquency was up seasonally to 9.3% versus 8.1% at the same time last year.

Despite economic conditions our credit portfolios are performing well with reage balances down $2 million since January 2009. The percent of the portfolio reage was flat compared to first quarter at 18.8% and it was down from 19.7% at the same time last year. We're focused on maintaining prudent underwriting standards in order to ensure the long-term success of our credit portfolio, a key advantage in our business model.

We are keenly focused on using our credit programs effectively to support our retail sales efforts and will not sacrifice future portfolio performance for short-term sales gains. Mike will discuss the balance sheet in further detail, but we remain acutely focused on monitoring and managing the company's capital position and liquidity in the context of current market conditions as efficient use of capital to support our retail operations is key to our future success.

A significant aspect of our plan to enhance our capital position is to be more aggressively utilizing third-party credit resources to lessen our dependence on our own credit programs without reducing financing opportunities for our customers.

As we move into the fourth quarter, I want to provide you with a clear understanding of our plan to improve results. Key features of this plan include lowering our dependence on our own credit programs by shifting some of the load to third-party credit resources, improving our product margin by tightening pricing controls on the sales floor and at the same time, offering our sales associates incentives on higher margin products, continuing to effectively manage our inventory, reducing non-performing SKUs, increasing turns, thereby improving efficiency and reducing costs by limiting low performance throughout our business.

As you may be aware, we settled with Texas Attorney General's office yesterday. While we continue to feel this suit was without merit and should never have been brought. We also felt, it was in our best interest of our employees and their families that we put this matter behind us. We are relieved to close out the settlement negotiations, so that we can return to our total focus and complete attention to serving our customers. This is consistent with our long history of providing outstanding customer service and being a leader in the communities that we have served for more than 120 years.

I'm now going to turn the program over to Mike Poppe, so that he can share additional financial information with you. Mike?

Michael Poppe

Thank you, Tim. This quarter with increasingly challenging economic conditions in our markets, we incurred a diluted loss per share of $0.68 including a $9.6 million non-cash goodwill impairment charge, a $3.7 million unfavorable non-cash fair value adjustment and a $4.1 million increase in our litigation reserve related to the settlement of the Texas Attorney General's lawsuit.

We saw unemployment rates in Texas rise an additional 40 basis points during the quarter, an increase roughly 300 basis points or 57% since October of last year. Total revenues decreased half of 1% to a $182.8 million on a net sales decrease of 7.2% and a 1.5% decrease in finance charges and other, partially offset by a change in the non-cash fair value adjustment that was approximately $12 million smaller than the amount recorded in the prior year period.

As Tim provided color to you already on the underlying changes in net sales, I will speak to the decline in finance charges and other for the quarter which was driven by higher net charge-offs on receivables held by the QSPE and reduced retrospective profits earned under our credit insurance program, partially offset by lower borrowing costs for QSPE as the QSPE's debt balance outstanding has been reduced since the third quarter of last year.

We began retaining receivables on our balance sheet during the third quarter of the prior fiscal year and are required to provide a provision for bad debts to reserve for future expected net credit losses on receivables held by us and not transferred to our QSPE.

During the three months ended October 31, 2009, we recorded a total provision for bad debts of $3.5 million as compared to $2.8 million in the prior year. The increase is driven by a $900,000 increase in total net charge-off and as a result of a $1.2 million increase in the bad debt reserve due to the recent credit portfolio performance and expectations about future net charge-off. We increased our reserves as a percent of the customer receivable balance to 3.8% at October 31 from 3.3% at July 31.

As a result of the sustained decline in our market capitalization below book value and the impact of the current economic environment on our operating results, we concluded that an interim test for impairment of goodwill was necessary. Based on our analysis, we determined that we were required to record a $9.6 million non-cash impairment charge reducing the goodwill balance to zero.

As a result of an increase in the balance of receivables retained on our balance sheet since the third quarter of the prior fiscal year and as a result an increase in the balance of debt outstanding, net interest expense was higher during the current fiscal year. As a reminder, the company has interest rate swaps in place to lock the interest rates on $40 million of its variable rate borrowings under the revolving credit facility.

Adjusted diluted loss per share, excluding the fair value impact in both periods and the goodwill impact in the current period was $0.29 in the current year quarter, as compared to adjusted diluted earnings per share of $0.11 in the prior year. Also, impacting the earnings comparison was the $4.1 million charge related to the settlement of the Texas Attorney General's lawsuit.

At this time, we are unsure what amount of the litigation reserve will be deductible for taxes and as such, have not recorded any tax benefit related to the reserve. As a result, the settlement impacted diluted earnings per share by $0.18 in the current year quarter.

Turning to our liquidity and cash flow; the company and its QSPE's current financing facilities provide $570 million of total financing commitments with $560 million of those commitments being long terms in nature. There is $463 million outstanding under these commitments at October 31, 2009 before considering $21.8 million of letters of credit.

As a result of the reduction in the total portfolio balance since January 31, 2009, our QSPE was able to reduce its total debt outstanding by $104.5 million, while we increased the total debt outstanding on our balance sheet by only $62.1 million.

Combining our free cash flow and the reduction in the customer receivables and related debt balances of the company and the QSPE, we increased our capital available for future needs by $27 million since July 31 for a total increase of $42.4 million since January 31.

Given the current facts and circumstances, we believe the QSPE and the company have sufficient combined capital to fund our operations for at least 12 months before considering renewals or expansions of existing facilities or other debt or equity capital raising opportunities and dependent upon continued compliance with debt covenants under the various credit facilities.

The sources of this capital as of October 31 include approximately $63.3 million of unused capacity under the company's ABL facility, of which $42.1 million was available to be drawn at October 31 and the remainder will become available based on growth in the receivables portfolio held on our balance sheet and growth in eligible inventory; $12 million available under the QSPE's revolving credit facility which will become available based on growth in the balance of receivables transferred to the QSPE; $10 million available under an unsecured line of credit and among other sources we have future cash flow from earnings, third-party consumer financing programs, flexible inventory payment terms, the ability to sell our finance-owned real estate, the ability to adjust capital investment programs and other operating and financing alternatives including changing the amount of credit granted to our customers under our credit programs.

While we and our QSPE were in compliance with all of the covenants under our revolving credit facilities as of October 31, 2009, due to the recent declines in the economic conditions in our markets and the related impact on our operating results, there is a reasonable likelihood that we could trigger a default provision in one of the credit facilities beginning January 31, 2010, unless we are able to sufficiently improve operating trends, reduce the balance of debt outstanding on our balance sheet or amend the covenants contained in our credit facilities prior to January 31, 2010.

We are taking actions to maintain compliance including entering discussions with the lenders in our ABL and ABS facilities regarding potential amendment of the covenants and are reviewing options to reduce the outstanding balance of debt on our balance sheet including the ability to sell and leaseback owned real estate, raise additional capital and reduce the use of our credit programs, while increasing the use of third-party programs to finance purchases by our customers. Much of this analysis and more is available in our Form 10-Q for the quarter ended October 31, 2009, to be filed with the Securities and Exchange Commission later today.

Tim, that concludes our prepared remarks. If you're ready we'll open up the line for questions.

Timothy Frank

Sounds good.

Question-and-Answer Session

Operator

(Operator Instructions) We'll take our first question from Rick Nelson with Stephens. Please, go ahead.

Rick Nelson - Stephens

Can you tell us how sales are tracking in the early going of the fourth quarter and how you target sales for the full quarter?

Timothy Frank

Certainly, but the first thing I'd like to say is that Black Friday weekend can represent as much as 40% of our volume for the month. So anything that we're tracking at this point does not necessarily indicate what the month will end at and it certainly does not indicate what the quarter will end at. Right now, our sales are down about 18% and that's against a month last year when our comps were up 12.5%.

So, if you reduce the increased comps out of that, we have made significant headway from October and certainly, I believe that we are extremely well positioned for Black Friday, Saturday, and Sunday, as we look at our ad versus the competitors' ads, which are posted online.

We feel that we're in a much better position to take advantage of that huge event as we did last year and as we did the year before that and as we did the year before that. I don't want to keep going on, but I do want to tell you that, every time we've had a holiday event this year, the consumer has come out and we've had significant increases. So, I'm very optimistic.

Rick Nelson - Stephens

Tim, that 18% decline you referred to, is that same store or is that total?

Timothy Frank

That's total.

Rick Nelson - Stephens

Can you give us a feel for what same-store sales are tracking?

Timothy Frank

It's not significantly different, Rick. It's, maybe 100 basis points or so different, most of the stores or almost all the stores are in the same-store base now.

Rick Nelson - Stephens

Can you remind us what the comparison is to date and h how the comparisons looked as the quarter unfolds? I think you had a big Black Friday a year ago.

Timothy Frank

So again, November comps were 12.5% and then for the quarter, I believe the comps were 12.5% as well. To your point, much of the 12.5% in the last quarter was picked up Black Friday weekend, but we don't have that number in front of us exactly what the...

Rick Nelson - Stephens

I'd like to ask you how you think about credit in the holiday quarter given your desire to strengthen the portfolio and also to reduce debt levels on a sequential basis, do you tighten further or do you maintain levels like they were in the third quarter? How do you think about that?

Timothy Frank

I think, while we are looking at doing and as I talked about in the presentation is taking some of the credit and using GE Money for some of it. We've been doing that. We may increase that. We had tightened the bottom. I don't think a great deal of additional more tightening is necessary or prudent although we will move slowly to do a little bit more tightening. What I would say is that, our month-to-date metrics on both delinquency and write-offs are very good, especially on the write-off piece of it.

So, I believe that we are moving in the right direction, even given the headwinds that we're experiencing right now in this economic environment. I think we've taken the appropriate response to safeguard that credit unit and if need be, we'll additional responses, but we look at it many times every day very closely.

Rick Nelson - Stephens

Mike, on the covenant front, I'm sure you've had discussions with the banks on renegotiating covenants. I'm wondering if you could provide some color there on what sort of cost or fees might be involved with amended covenants?

Michael Poppe

You bet. We are having active and constructive dialog with the creditors, but it is early in the conversations as you point out, there will be increase if when something gets done, if something gets done. It's early to say what may happen, but if an amendment gets done, borrowing costs would likely go up. What the total amount would be is too early to tell, Rick.

Rick Nelson - Stephens

I don't know, Tom, you are including that in operating results for the quarter?

Timothy Frank

Yes, sir. It's in SG&A.

Rick Nelson - Stephens

Yeah. If the actual loan settlement proves to be less than you're currently forecasting, you will bring that into operating income?

Timothy Frank

The amount has been reserved and accrued is what is agreed on with the state. So we would not expect it to be different.

Michael Poppe

Rick, the agreement, anything that's not used to help consumers goes back to the state.

Operator

We'll take our next question from David Magee at SunTrust Robinson Humphrey. Please go ahead.

David Magee - SunTrust Robinson Humphrey

First question, just to be clear, is it safe to assume that the two-year trend that you are speaking of for November to date is running like down six versus, I guess it not the down15, you had for the third quarter?

Timothy Frank

That's correct.

David Magee - SunTrust Robinson Humphrey

Then with regard to this weekend, it sounds like this will be obviously, a very important milestone here. Is most of the business done on Friday versus the balance of the weekend?

Timothy Frank

Now Saturday is about 2.5 times what a normal Saturday is. Sunday is about 1.5 times, what a normal Sunday is. Quite frankly, we know by 11 a.m. and essentially what's going to happen that day.

David Magee - SunTrust Robinson Humphrey

On Friday?

Timothy Frank

Yes.

David Magee - SunTrust Robinson Humphrey

So, in the past, when you've seen in the competition in advance of Black Friday, you see the weather reports and so you kind of know what you can, how accurate have you been in the past about your gut feels for the big weekend?

Timothy Frank

We've always been more conservative than what's actually occurred. What we're known for and really known in the communities that we serve is that when customers go to the nationals, they have very limited SKU counts for the SKUs that are the real hot price points. So, in many cases they leave disappointed.

When they come to our store, we make sure that we have that product in stock and that we're making a profit on that product. So, it's a very different type of an event for us. We allow an appropriate number of customers into the store at one time. Our manager stays outside and visits with the people in line and lets them know where their product that they are looking for is interested in; it's a very pleasant positive event.

David Magee - SunTrust Robinson Humphrey

So, why would you all have a deeper supply than your competition?

Timothy Frank

I believe it's because of two reasons. One, I believe it's because of merchandising strength, but also, because we're regional as opposed to a national, it's easier for us to get those quantities in appropriate counts for each store. If you've got 2,000 stores, it's much more difficult to get those real low price point items.

David Magee - SunTrust Robinson Humphrey

How is the LED selling for you right now?

Timothy Frank

LED has been a great bright spot for us. Right now, when we look at our sales and I just pulled it in front of me, we're looking at that it's about 24.5%, 25% of our total LCD sales and in October it was 30%. So, for the quarter, August, September, October, it was 24.5% and that's trending up. In August, it was 20% of LCD, September, it was 24%, and October, it was 30%.

David Magee - SunTrust Robinson Humphrey

So that must be having a meaningful impact on your ASP, then, overall for your TV category?

Timothy Frank

Yes.

David Magee - SunTrust Robinson Humphrey

Then with regard to using third-party for your in-store financing, how does that work mechanically or do you give up much when you go that route?

Timothy Frank

We're going to maintain very tight controls over. Essentially, we can pick and choose certain cash option programs that would be on the GE Money program. We can run it through GE Money for certain days if we want to and then run it through our own credit. The whole idea is the prudent use of that vehicle, so that we don't use up too much capital during the selling season.

Operator

We'll take our next question from Jeff Blaeser at Morgan Joseph. Please go ahead.

Jeff Blaeser - Morgan Joseph

A couple of questions on the net write-downs, obviously, Texas has been outperforming the country on unemployment. You've been doing the same with the write-downs. If it proves to be just a lagging indicator and the unemployment does match that of the country in the 10% range, what kind of feel do you have for the net write-down rate going forward, if that were to occur?

Timothy Frank

We track this very closely and for December, January, and February, those accounts that would be positioned to charge-off in those particular months, we see very good trends and reference to what those accounts look like at this point. One of the reasons is, we've been very conservative with our reage program and you can see that in the reduction in absolute dollars of the reage program. So those accounts in that position are healthier accounts in very late stage delinquency, I guess, would be the best way to say.

In addition, when you look at our origination scores for our credit applications in the month of November, the origination scores are tracking higher than they have in the past. So we're very encouraged by that and it's not a huge difference, but it is a positive trend.

Jeff Blaeser - Morgan Joseph

On the sales side, any feel for the lawsuit, has had an impact on the sales and that could potentially lighten up going forward. I know you mentioned earlier, you didn't think it did, but has that changed at all?

Timothy Frank

Well, that was probably me being optimistic. I would say that it has had an impact especially in the Huston market where the Attorney General made his announcement. He came out with the first press release. Our competitors took those newspaper articles and in some cases actually had them posted at the front of their stores.

Again, I do not think that the lawsuit had merit and I'm glad it settled and behind us. I would tell you right now, our customer satisfaction with our service department is an excess of 90% and we are one day our on service calls, so I mean that's best of class performance. We do take care of our customers and so this really, this settlement is geared not just to benefit our employees and get behind us, but it's a benefit to our investors.

Would have liked to have been able to get out of this for a lot less than the $4.8 million, but certainly understand that, what was necessary at the end of the day. So, it did have an impact. It's very difficult to quantify it, but certainly did and we believe that, moving forward, we're going to be in a much better position. Good to get it behind us.

Jeff Blaeser - Morgan Joseph

Finally, you mentioned today and in the past about the owned real estate value. Can you gives us an idea of what you think that value is today and what kind of cap rates you'd probably be likely to use if you were to do it at this point for a sale lease?

Timothy Frank

Sure. We've had some preliminary discussions, Jeff. It's a little early to tell right now what we can get. As you know and as you read, commercial real estate market is pretty choppy right now.

Operator

Take our next question from Dan Binder at Jefferies.

Dan Binder - Jefferies

I have several questions for you. I'll ask two of them and then follow-up with you, if there's time at the end of the call. First on inventory, correct me if I'm wrong, but looks like the inventory was down like 32.5 or so percent year-over-year. That's fairly substantial, if that's correct, I guess I'm just trying to understand why it has outpaced the sales decline so significantly and how that can actually leave you in a good position for Black Friday.

Timothy Frank

Certainly. What we did is we looked at our most underperforming SKUs, eliminated about 92 SKUs out of a roughly over 1,000 current SKUs and what that has done has allowed to go what we call narrow and deep. We definitely have the inventory that we need for Black Friday and the weekend.

As we sit today, it's not that much of a decrease. We've brought a lot in the decrease against last year is about 25% and we continue to receive in merchandise. So, I feel that we're really in good position and I feel that the merchandising team, working with our accounting department has done a tremendous job in making sure that we're very efficient with our inventory.

Dan Binder - Jefferies

I'm sorry. The call cut out. Did you say down 25% year-over-year on what exactly?

Timothy Frank

Inventory.

Michael Poppe

Where we are, where we -

Timothy Frank

Yeah. You're right, it was over 30%. That has been reduced to 25% down. We've received a lot of product in the last two weeks.

Dan Binder - Jefferies

Then to just eliminate any concerns, can you just comment on the vendor relationships given recent operating results and comments around covenant issues and so forth. The vendors are still supporting you in good terms or are there any issues with any of the major ones.

Timothy Frank

We have great relationships with our vendors. There are no issues at this time. Yesterday late afternoon, after the market closed, we certainly called and visited with our venders and all of them were very good calls. We pay our vendors in a very timely manner and certainly have sufficient liquidity to take care of any billings, any invoices and again another reason though for us to be as efficient as we can with our inventory at this time.

It's not the best time in the world to bring down inventory certainly, but again, I believe by the strategy of going narrow and deep that we have outstanding values for our customers and we have much better depth in those SKUs that are national counterparts, at least that's a way it's played out in the past.

Dan Binder - Jefferies

With regard to Black Friday last year, I think, you guys had some pretty good results and correct me if I am wrong, if I remember correctly like 160% comp or something like that and we were going to a period when Circus City was hemorrhaging and you guys were able to lap up a lot of that market share. I guess first is that number correct if I remember correctly?

Secondly, do you think you can keep it and improve on that or is that just a really super tough compare to go up against? In another words is the market share shift permanent?

Timothy Frank

Sure. First of all it was a little optimistic. I wish it was 160%. It went from essentially $12.5 million to $19.6 million on Black Friday. It was very, very good and very good weekend for us. That was about a third year in a row where we had significant increases on that day.

We do feel that the market has shifted and that the consumer really comes out when there's a very legitimate reason certainly in perception to come out and so that is holiday sales. So we do believe that it's going to be a good Black Friday. Did I answer our question?

Dan Binder - Jefferies

Then finally if you could on the product margin decline, you talked about and you've had multiple quarters with margins under pressure because competition has been tougher and I guess many of us would have thought with Circuit City gone, competition would have eased up a bit.

If you could just talk to the competitive environment, are you finding that? Is it specific players and has it continued thus far into the current quarter?

Timothy Frank

Yes, certainly. What we've seen with the margin decline is we've been very aggressive and it's reflected in our market share gains. We've been very aggressive in protecting our market share, probably too aggressive and so one of the points in the plan that I laid out was how we are going to get some of that gross margin back. One of the ways that we plan on doing that is by steering our salespeople to higher margin, better value product for consumers, through the use of SPIS primarily funded by vendors and that will help with costs as well and should help drive up the margin as we've seen in the past when we've used that type of an approach.

In addition, we're tightening down some of the controls that we have in the stores in reference to price concession activity. Now, the first half of November, we have been aggressive in pursuing the business and so that trend has not led up. It is primarily in consumer electronics and appliances. We do feel that starting in December 1, that we're really going to be able to see an uptick in the last two days we've been well about 19% in our product margin.

So it's starting to trend that way already. Obviously, Black Friday weekend though is a very aggressive pricing time. So it's not really going to be reflected in November's numbers, definitely be there in December and January.

Dan Binder - Jefferies

Do you think you're going to be able to trend back above 19% you said?

Timothy Frank

That's certainly our plan.

Dan Binder - Jefferies

Just the last question with regard to the lawsuit, what were the procedural or policy changes you needed to make and how does that impact your business going forward? I know you talked about penetration levels getting back up. I'm just curious how that's attainable if there were any limiting factors or issues that is a result of lawsuit.

Timothy Frank

Immediately we had everything in place really just as soon as this came out within weeks. I mean it's been in place for well over four months and I think more than anything there were no operational issues that have limited our ability to sell, bad press has been really the driving factor in that. Certainly, our competition has capitalized on that.

In the Rule 11 settlement agreement, making sure that we provide consumers a copy of the extended warranty agreement at the time of sale. Well, certainly we've been doing that. There was a very short period of time where we mailed it as opposed to handed it out about three months, quite frankly in the entire history of our company there is about three months where we mailed it, as oppose to just handed it at the point of sale.

We've been back to handing it at the point of sale. In addition, we added a Spanish version to that handout. So that was a slight additional cost. So that would be the main thing and is this posted on our website at this point.

Michael Poppe

No.

Timothy Frank

We are going to post this on our website for you, but every single item here has been enforced for the last four months, another example of one is defendants agreed that if a product fails within 72 hours of purchase or delivery to the consumers' home, the product will be replaced.

Defendants will move any charges for property insurance from a consumers account within five business days of defendants receipt, but the consumer's reasonable proof of property insurance. We are doing that and really feel that we've been in compliance with that.

Dan Binder - Jefferies

So it sounds like a lot of relatively low cost fixes on these sort of things?

Timothy Frank

Absolutely. Again, we certainly have been in compliance with this in last four months and I feel like in many ways, we've been in compliance with these the entire time.

Operator

With no further question in the queue, I'd like to turn the conference back over to your presenter's for any additional or closing comments.

Timothy Frank

Okay. Well, thank you, everyone. Again, I want to thank each of our 3,200 loyal employees and their families for their dedication to executing at the highest levels everyday and thank you to all of our wonderful customers. We know that many of you represent second and even third generations of families that's been loyal Conn's customers for decades.

Thank you for your interest in our company and thank you for your participation in the call today. Good-bye.

Operator

This does conclude today's presentation. We thank you everyone for their participation.

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Source: Conn's Inc. Q3 2009 Earnings Call Transcript
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