Conns Management Discusses Q3 2014 Results - Earnings Call Transcript

Dec. 5.13 | About: Conn's, Inc. (CONN)

Conns (NASDAQ:CONN)

Q3 2014 Earnings Call

December 05, 2013 11:00 am ET

Executives

Theodore M. Wright - Chairman, Chief Executive Officer and President

Michael J. Poppe - Chief Operating Officer and Executive Vice President

Brian E. Taylor - Chief Financial Officer, Principal Financial & Accounting Officer and Vice President

Analysts

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

Peter J. Keith - Piper Jaffray Companies, Research Division

N. Richard Nelson - Stephens Inc., Research Division

David G. Magee - SunTrust Robinson Humphrey, Inc., Research Division

Laura A. Champine - Canaccord Genuity, Research Division

R. Scott Tilghman - B. Riley Caris, Research Division

Operator

Good morning, and thank you for holding. Welcome to Conn's, Inc. conference call to discuss earnings for the third quarter ended October 31, 2013. My name is Jonathan, and I will be your operator today. [Operator Instructions] As a reminder, this conference call is being recorded.

The company's earnings release dated December 5, 2013 distributed before as the market opened this morning and slides that will be referenced during today's conference call can be accessed via the company's Investor Relations website at ir.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.

Your speakers today are Theo Wright, the company's CEO; Mike Poppe, the company's COO; Brian Taylor, the company's CFO; and David Trahan, the company's President of Retail.

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

Theodore M. Wright

Good morning, and welcome to Conn's third quarter fiscal 2014 earnings conference call. I'll begin the call with an overview of our retail segment and some comments on the credit segment, then Mike will discuss our credit segment further and Brian will finish our prepared comments.

Conn's earned $0.71 per share in the third quarter on an adjusted basis. This compares to an adjusted $0.38 in the same quarter a year ago, an increase of 87%. We're raising our guidance for the full fiscal year 2014 to $2.75 to $2.80. A year ago, we initiated guidance for fiscal 2014 at $2.05 to $2.15 and has since raised our guidance twice for an increase in our guidance of 30% at the top end.

Consistent with our past practice, we are initiating guidance for fiscal 2015 at $3.80 to $4. Guidance at the top end for fiscal 2015 is a 43% increase over the top end for fiscal 2014.

Sales over the Thanksgiving weekend were strong in all categories and remained on trend. This year, we opened our Thanksgiving Day for the first time. Without the sales on Thanksgiving Day, we wouldn't have performed nearly as well for the weekend. Americans have decided they want to shop on Thanksgiving. Because of this, regretfully we have asked our associates to work on Thanksgiving Day. We appreciate our associates' support serving customers on this day.

Same-store sales for the third quarter by category are on Slide 2. Same-store sales increased by double digits in all major categories.

On Slide 3, we show gross -- product gross margins by product category for the third quarter. Product gross margin percentages were up over the prior year across-the-board. Total retail gross margin percentage for the quarter was 40.1%, an increase of 460 basis points over the prior year.

The company set a longer-term goal of 40% retail segment gross margins. We met this goal in the third quarter. With the increase in furniture and mattress sales, this goal can be achieved for a full fiscal year.

Preliminary November same-store sales increased about 32%. Same-store sales were up by double digits in every category. Total sales for November increased 51%. Gross margins for November appear in line with the expectations.

On Slide 5, you can see a 3-year trend in furniture and mattress sales. Same-store sales of furniture and mattresses increased 55% in the third quarter, on top of the 34% increase a year ago. For the third quarter of fiscal 2014, furniture and mattress sales represented 27% of product sales and 39% of product gross margin dollars.

The same-store sales growth trend in furniture and mattresses accelerated in the third quarter and these trend continued in November. November same-store sales of furniture and mattresses increased 63%. Expanded assortment, store remodels, store relocations and improved in-store merchandising are all contributing to accelerating same-store growth in furniture and mattresses.

Stores opened in fiscal 2013 and 2014 averaged 38% of sales from furniture and mattresses for the quarter. We will keep increasing the assortment and the quality of our furniture offering to consumers. Our vendors are working with us to provide color or cover options for our better selling SKUs. This allows us to increase our assortment on the same sales square footage and meet the needs of more consumers.

Mattress same-store sales continued to increase steadily with mattress sales up 40% for the quarter and 38% in November.

The company previously set a longer-term goal of 35% of sales from furniture and mattresses. We're steadily progressing to our goal. With more new stores, continued remodeling and relocations, along with enhancements to our offering, we can reach this goal.

As I've discussed on earlier conference calls, we changed our advertising approach and spent more on TV, direct mail and digital. We increased TV exposure, reduced radio and print spending, with radio now an infrequent component of our plan. And we included more and stronger messages to apply online in all media.

Starting in the second quarter, we also made it easier for our customers to apply for credit. We now advertise the phone number to call to apply for credit. Direct mail programs include the use of the mail-in form for application.

The consumer response to advertising changes was sustained in the third quarter and in November. As you can see on Slide 6, application traffic increased dramatically. Changes to our advertising approach are attracting more customers new to Conn's. Based on past experience, we would expect each of these new customers to make on average nearly 2 additional purchases in the next 5 years.

We're building a new customer base in both our existing markets and new markets that will benefit sales in future periods. Our new stores are illustrative. One new store entered the top base in the quarter and was a solid contributor to sales comps. Our other new stores are following the same pattern and would suggest these stores will be contributors to top sales performance in fiscal 2015.

In Q3, we made alterations to our direct mail program to reduce mailing to higher risk -- higher credit risk customers and increase mailing to lower credit risk customers, including adding prime quality credits to our mail program. This change was implemented over the course of the quarter and was more fully in effect in November. Although not a change to underwriting standards, this is improving the credit quality of applications received and credit granted without reducing sales growth.

On Slide 13, you can see our advertising spending was up slightly as a percentage of sales. Advertising spending in our materials markets was about 4% of sales for the quarter. Through market advertising, particularly in the major metropolitan market of Phoenix was less efficient.

On Slide 7 is information about stores opened in fiscal 2013 and 2014. The new stores are performing well and new store performance is still above the company average after the 35% same-store increase in the third quarter.

We plan to add 10 to 12 stores in the current fiscal year. Year-to-date, we have opened 10 stores with 2 stores opening today. An additional 3 stores will open in January for an expected total of 13 from the full fiscal year.

Work is well underway on our fiscal store opening. Our fiscal year 2015 store opening plan with 15 leases or purchase agreements already signed for locations expected to open in fiscal 2015.

We plan to open from 15 to 20 stores in the next fiscal year. 2 stores were closed in the third quarter and another store was closed in November. As mentioned in the earlier conference calls, evaluation of our store portfolio is ongoing and we have a few additional stores likely to close over the next 12 to 18 months.

We expect these store closures will have minimal effect on sales and will benefit profitability.

Turning to our credit segment. The company made good progress in addressing the issues we experienced in the second quarter about credit collection system. We're on track to meet our timetable 4 to 5 months from our last conference call to fully address the effects of these issues on our portfolio. Delinquency should improve markedly over the next quarter.

The follow-up on some recurring questions from investors after our last conference call. As of November 30, greater than 60 days delinquency on originations in our new stores was 10 basis points higher than in legacy stores.

The increase in proportion of sales to new customers, including existing and new stores will likely cause, if sustained, 60-day plus delinquency to increase an estimated 30 basis points with potentially a similar effect on overall static losses.

As seen on Slide 21, a 100 basis point change in provision for bad debt would affect EPS by an estimated $0.20 per share. A 100 basis point change in gross margin percentage would change EPS by an estimated $0.22 per share. Although important, the provision for bad debt is one of many items impacting our earnings. Our objective is to manage the business to provide returns to our shareholders and service to our customers and associates. Minimizing bad debt expense will not accomplish our objectives.

Our team is looking forward to a strong finish to the holiday season after a great start. We appreciate the efforts of our associates to manage all the opportunities provided by the company's growth. Now I'll turn the call over to Mike. Mike?

Michael J. Poppe

Thanks, Theo. Credit segment profits increased sequentially on portfolio growth and declined year-over-year due to a higher provision for bad debts and lower interest yields, given the increased balance of interest fee receivables.

Last year's interest yield, current year operating profits would have exceeded the prior year and SG&A as a percent of revenues would have been the same.

Recent delinquency, charge-off and re-aged trends are shown on Slides 8 and 9. As of November 30, 60-day -- 60-plus-day delinquency was down 20 basis points from August month end when it spiked due to system implementation issues during the second quarter. The 20-basis point improvement since August compares to an average seasonal increase of 60 basis points over the past 5 years. And the delinquency rate at the end of November is consistent with the average for November over the previous 5-year period. And as charge-off rate increased during the quarter as we discussed on the last earnings call and is expected to be elevated during the fourth quarter as we addressed the increased delinquencies created by the second quarter system implementation issues.

To date, we have not identified any new issues related to the system implementation and are focusing on enhancements to the system to improve collector efficiency and effectiveness.

Early-stage delinquency has stabilized. And as you can see on Slide 10, late-stage delinquency, 91 to 209 days past due has improved since August.

Slide 11 shows static pool loss information for the portfolio over the past 9 years. Static pool loss rate shown is the accumulative charge-off rate based on the fiscal year of origination. Other than fiscal 2009, which was significantly impacted by the recession, static pool loss rates have been fairly stable over time at around 6% while charge-off and provision for bad debt rates are highly volatile.

Many years of experience underwriting a single type of credit for our core customer, limited variation and underwriting practices over time and experienced collecting this specific type of credit allow us to deliver consistent performance.

During fiscal 2012, changes were made that shortened contract terms and the time period before charge-off, including limiting reaging. Credit accounts are now paying down more quickly and charge-offs are occurring sooner in the contract life. Since the receivables pay off quickly, only small balances remain from recent fiscal year originations. 1% of fiscal 2011, 11% of fiscal 2012 and only 35% of the balances originated last fiscal year. The more conservative reaging and charge-off practices result in the balances remaining in the portfolio being higher quality than in the past.

We expect the final static pool loss rates for the recent fiscal years to be in line with historical experience, though there may be modest upward pressure as a result of the recent execution issues and for the current fiscal year due to the increased volume of new credit customers. However, due to the rapid pay down of the receivables we now experience, we do not expect the final static pool loss rates under reasonably foreseeable scenarios to exceed 7%.

Turning to underwriting trends for the quarter. As shown on Slide 12, roughly 93% of our sales in the quarter were paid for using 1 of the 3 monthly payment options offered. The increase in the percent of sales under our finance program was driven largely by changes in our advertising programs, as well as merchandise mix exchanges which drove higher ASPs and reduced the volume of cash tickets.

The approval rate under our in-house credit program decreased by 3.2% from the prior quarter level, and the average score underwritten during the quarter was 599 compared to 601 in the second quarter. Results so far indicate that performance of current year originations is within expectations.

We expect this quarter's improvement in the profit contribution to credit segment to continue over the coming quarters.

Now I'll turn the call over to Brian Taylor. Brian?

Brian E. Taylor

Thank you, Mike, and good morning. We generated record revenues and net income this quarter. Net income was $26 million or $0.71 per diluted share in the current quarter after excluding charges. This compares to net income of $13 million or $0.38 per share on an adjusted basis last year.

Reported net income was $0.66 per share versus $0.35 per share a year ago. Reported results for the current quarter include pretax charges of $2.8 million from store closures.

During the quarter, we closed -- we lost a closed store sublease tenant due to bankruptcy and revised prior estimates for few others. Additionally, as Theo discussed, we'll close 2 stores and relocated several other facilities. The lost tenants accounted for almost half of the total charge.

As of October 31, our 11 new Conn's HomePlus stores had opened and 29 additional stores have been remodeled or relocated using our new format. By the end of January, we expect 2/3 of our store base will be in the Conn's HomePlus format.

Third quarter retail revenues revenues were $257 million, rising 54% from the prior-year period. Compared to last year, sales have increased significantly in each major product category, ranging from home appliances, which rose 35%, the furniture and mattress, which rose 95%.

Turning now to Slide 13. Retail SG&A expense was 27% of sales this quarter, flat sequentially and improving 130 basis points from last year. Our investment in future store openings and supporting infrastructure tempered the leverage impact of the revenue expansion.

We estimate that such expenses, including rent, personnel and advertising, totaled $2.5 million or $0.04 per diluted share this quarter. Adjusted operating income for the retail segment increased to 163%, to $34 million this quarter, driven by sales growth, gross margin expansion and SG&A leverage.

Retail operating margins on an adjusted basis expanded 550 basis points year-over-year to 13.2% of revenues.

Credit segment revenues were $53 million this quarter, up 38% from the prior-year period. Annualized interest and fee yield was 18% this quarter, relatively flat sequentially and down 150 basis points from a year ago. Short-term no-interest receivables represent 33% of the portfolio balance at October 31 as compared to 24% 12 months ago. We do not expect the relative mix of promotional receivables to increase substantially in future periods.

General and administrative expenses for the credit segment were 47% above the prior-year period, as we added collection personnel to support the sales-driven growth in originations in the overall portfolio.

Servicing costs were 38% of revenues this period, comparable with the fiscal 2014 first half level and impacted by decline in portfolio yield.

Provision for bad debt equaled $22.5 million this quarter, reflecting portfolio growth and the year-over-year increase in delinquency rates.

Based on current trends, we expect bad debt provision rate to range between 9.4% and 9.7% of the average portfolio balance for fiscal 2014. The guidance for provision rate increased due to the faster sales growth and related portfolio growth realized in the third quarter and projected for the fourth quarter.

Credit segment operating income was $10 million this quarter, approximately 25% of the consolidated total.

Interest expense decreased $800,000 year-over-year due to a reduction in our overall effective interest rate. The lower rate reflects the repayment of our asset-backed notes in April of 2013, as well as the reduction in the rate under our revolving credit facility.

Focusing now on the balance sheet and liquidity. In the third quarter, our inventory turn rate was 5.5%. We expect this to improve as we sell through purchases to support fourth quarter activity.

At quarter end, 80% of our $132 million in inventory was financed with outstanding accounts payable.

As shown on Slide 14, our customer receivable portfolio equaled $945 million at October 31, increasing $102 million during the quarter. Borrowings rose $88 million during the quarter, totaling $423 million at the end of October. Outstanding debt stands at 45% of the customer receivable balance.

Moving now to Slide 15. In November, we amended our asset-based revolving credit facility, raising commitments by $265 million to $850 million. Lowering borrowing costs by 25 basis points and extending the term to November 2017. After giving effect to the amendment, we would have had immediately available borrowing capacity of $231 million under the facility with an additional $196 million available with the growth in receivables and inventory. If our current growth pace is sustained, we will evaluate further expansion of our credit facility, as well as other capital alternatives to support our longer-term liquidity requirements.

For the third quarter of 2014, our annualized return on stockholders' equity grew to 19.2% on an adjusted basis.

Moving now to Slide 16. We raised the top end of our earnings guidance for fiscal 2014 by $0.15. Our revised guidance, excluding charges is $2.75 to $2.80 per diluted share based on full year expectations, which include same-store sales growth of 22% to 25%; retail gross margin of 39.3% to 39.8% and credit segment's bad debt provision of between 9.4% and 9.7% of the average portfolio balance, based on stated same-store sales expectations.

Turning to Slide 17. We initiated earnings guidance of diluted earnings per share of $3.80 to $4 for our fiscal year ended January 31, 2015. Full year expectations considered in developing the guidance include: Same-store sales growth of between 7% and 12%; new store openings of 15 to 20; retail gross margin range of between 39% and 40%; credit portfolio and the interest fee yield of around 18%; and our credit segment's provision for bad debt of between 8% and 9%, again dependent on our same-store sales expectations and no significant changes in the number of diluted shares outstanding.

Based on the midpoint of our fiscal 2015 guidance, we expect return on equity to approximate 21% next year.

A more detailed presentation of our third quarter results will be included in our Form 10-Q we will file with the SEC.

This concludes our prepared remarks. Jonathan, would you please start the question-and-answer portion of the call?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Brad Thomas from KeyBanc Capital Markets.

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

I wanted to well, first, just applaud everything you got to do on the retail side but follow up first with maybe a couple of questions on the credit side. First, with respect to the quarter you just reported here, could you help us just parse out and a little bit more color what's going on in terms of the underlying trends of your existing customers versus how much your new customers that you haven't had experience with may have weighed on that provision rate, as well as how much the increase in the short-term no interest debt may have increased that provision rate?

Michael J. Poppe

Let's start with the short-term no-interest financing. That has no impact on the provision rate. The weight of new versus existing customers, you will see in the Investor Deck about 45% of originations this year to new customers versus about 30% same time last year. So Theo already spoke to the impact on delinquency being about 30 basis points and that some measure of that would flow through the static losses over time.

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

Okay. And then as we look forward, I just want to make sure everyone is connecting the dots right here, as we think about your guidance for 2014 and the provision for bad debts being 8% to 9% below what you guys are guiding for this current year, what are your assumptions for new customers going into the portfolio in use of any other factors, just to make sure everybody is clear on why that rate can come down next year rather than needing to continue to go up?

Theodore M. Wright

We expect that the mix of new customers as a percentage of the total remain essentially the same. The reason for the decline from the current year is largely we don't anticipate the same problems that we had in the second quarter of the current fiscal year. So that's the principal reason for the decline.

Operator

Our next question comes from the line of Peter Keith from Piper Jaffray.

Peter J. Keith - Piper Jaffray Companies, Research Division

I want to look at the retail side of the house first. So the gross margin expansion just remains well above what I was expecting. Clearly, I think we would anticipate some ongoing expansion with furniture and mattresses, but you're really getting nice expansion across all categories. Could you help us understand what's driving that in appliances and consumer electronics and how sustain will that might be?

Theodore M. Wright

Great. I'll take appliances first. I think in the appliance area, some of that is being driven by better terms from vendors. As we've increased our volume and we're focused on selling more volume, we are getting benefit of volume, volume rebate programs and other programs that are improving the overall margin in appliances. We're also doing a better job in refrigeration, particularly on focusing on French door refrigeration, stepping the customer up to that product where we have a little better gross margins. On the electronics side, 65-, 75-inch televisions are becoming a bigger piece of the business. We also benefited from 4K or Ultra HD becoming a meaningful part of our business, beginning this quarter. And I think on electronics, we've also done just a better job of merchandising and executing on the sales floor with add-on products for electronics, display furniture, audio, and other accessories, where we dramatically improved our performance. And that's having a big benefit to our overall electronics gross margins.

Peter J. Keith - Piper Jaffray Companies, Research Division

Okay, that's helpful summary. And I did want to pivot to the credit side of the house. When we look at the 60-day delinquency rate for Q3, so that was up roughly about 150 basis points year-on-year versus the year-on-year increase from Q2 of 70 basis points. Could you kind of divide that out between the late stage and an early stage? I guess what we're trying to understand is are you seeing the late stage is kind of just taking the python that's moving through from the Q2 collections issue? And then are the early stage delinquencies are relatively stable and then ultimately that will begin to flow through as well?

Michael J. Poppe

Yes. So Slide 10 shows the late stage and so that's actually the gap widens somewhat in November from where it was in August, when it spiked. So we talked about on the last call, in August it spiked up from July. So we're actually 60-plus down since August, since we talked on the last call. But you nailed it that it's got to flow through those back end stages too, before we get if we cleaned up. And early stage is -- has stabilized.

Peter J. Keith - Piper Jaffray Companies, Research Division

Okay. So it sounds like with the reporting -- with July quarter end and October quarter end that the delinquency rate element was up. But then you referenced when we shifted the month of August and November, you're actually now running down from those 2 time periods. So if we look at Q4 as a whole and a kind of projecting delinquencies, how do you think that the Q4 rate should look when we get to year end?

Michael J. Poppe

It will definitely be improved from where it is today.

Peter J. Keith - Piper Jaffray Companies, Research Division

So that would be down sequentially from the 8.5%?

Michael J. Poppe

Yes.

Operator

Our next question comes from the line of Rick Nelson from Stephens Inc.

N. Richard Nelson - Stephens Inc., Research Division

I am curious if you're doing anything different from a credit standpoint today that you're providing the static pool analysis. It looks like the percentage of applications approved went down and the average down payments went up in the quarter.

Theodore M. Wright

Yes. Generally, we did not change our underwriting standards and risk modeling for the quarter. However, we did evaluate some of our processes and controls around the approval of credit and made some minor modifications to those processes and controls to eliminate some of the very highest risk -- the highest risk customers. We also saw a change in the mix of applications that influenced the approval rate of -- the change in approval rate is not strictly the result of alterations in our approval process. But we did make some modifications during the quarter.

N. Richard Nelson - Stephens Inc., Research Division

Also I want to ask you about slide on Page 19. The annualized -- say for example has an annualized provision rate of 14%. And I am curious how that works into your provision guidance as we look forward.

Theodore M. Wright

That slide demonstrates the impact on our provision of originations. And it's intended to illustrate how an increasing pace of sales growth in originations puts upward pressure on our provision rate. And the way this is incorporated in our modeling is we include the same-store sales and new store growth forecast in the modeling. And that -- as we said, as that sales increase -- impacts the overall model, it also impacts the provision and causes the provision rate to increase. So our provision rate forecast for next year includes an assumption of significant sales growth that's putting upward pressure on our provision rate forecast as well.

Operator

Our next question comes from the line of David Magee from SunTrust.

David G. Magee - SunTrust Robinson Humphrey, Inc., Research Division

A couple of questions. One is, I know you moved to new stage. You expect to see better flexibility in terms of what you can charge on a credit side. Is that something that you have meaningfully baked into the assumptions for next year at this point in time? Or is that the longer-term trend?

Theodore M. Wright

That will benefit our interest yield over the longer term as we build balances. But we haven't included that in any meaningful way in our forecast for next year.

David G. Magee - SunTrust Robinson Humphrey, Inc., Research Division

Has it been a factor with this year in meaningfully way in 2013?

Theodore M. Wright

No, not really. The balances associated are small enough but it's not a significant impact.

David G. Magee - SunTrust Robinson Humphrey, Inc., Research Division

Okay then, also with regard to next year, are you -- do you anticipate further upside with the ASPs across the categories?

Theodore M. Wright

We're not anticipating that in our forecasting. And we think that the upside opportunity there is much more limited than its been in the past. I think as Ultra HD or 4K really takes hold, that might give us an opportunity to get some benefit in television. And I think that's the single biggest opportunity for us furniture and appliance ASPs. We don't see a dramatic opportunity to improve those over the coming year.

David G. Magee - SunTrust Robinson Humphrey, Inc., Research Division

Then up with regard to CU, was the Ultra HD, is that the driving factor for the success there that was a trend change it looked like in the third quarter. It just seems like that product would be sort of out of reach for your sort of core customer right now. I'm surprised that you called it out.

Theodore M. Wright

It's one factor among many. I think the fact that 65- and 75-inch LED was the price points that reach our customer was more meaningful. I think the other items I called out on attachments were also significant. So it was one factor among many but it wasn't insignificant. And one reason to call it out is looking forward, we see it being a bigger opportunity for us as it behaves like electronics always have before, those price points come down to where they are more achievable for our customer.

Operator

Our next question comes from the line of Laura Champine from Canaccord.

Laura A. Champine - Canaccord Genuity, Research Division

The revenue is obviously growing very quickly but inventory is growing even faster. Can you talk to us a little bit about where that growth is weighted and what decisions you're making from an inventory management prospective?

Theodore M. Wright

Sure. We can talk about that. Some of it relates to seasonality. There are some categories, particularly television, where we were a little more front loaded this year versus prior year's in television. And then we also saw increases in furniture. As we expanded our assortment and put on the floor this color options and color alternatives that I've talked about, that also led to an increase in inventory during the quarter. But we expect that to flow through the system here rapidly and we don't anticipate any sustained increase. We don't anticipate any sustained increase in inventories in relation to our sales rate.

Operator

Our next question comes from the line of Brian Nagel from Oppenheimer.

Unknown Analyst

[indiscernible] for Brian Nagel. Our first question has to do with credit. So you guys reported that the 60-day delinquency rate increased to 8.5 from 8.2 in Q2. And Theo indicated that you guys will see the market improving in Q4. Is that improvement mainly driven by the timing and charge-offs of the delinquent accounts related to the systems issue or is there something else also going on?

Michael J. Poppe

It's related to flowing through the delinquency that were impacted during that time frame as late state delinquency continues to improve as we reported on the slide in the earnings day.

Unknown Analyst

Okay. And then just moving on to the retail business. You guys laid out the -- your SG&A margin guidance for next year of I think it was 28% to 29% versus this year's 28.5% to 29%. How can we think about SG&A leverage as you guys start to again ramp up growth of 15 to 20 units next year? What other comps would you need to leverage SG&A?

Brian E. Taylor

We're levering SG&A today in our legacy stores. If you look at our retail business, that segment independently, and you back out the performance or the cost associated with the new store openings, we're significantly levering SG&A. So if you look at Slide 13, you can see the leverage there and SG&A in the retail segment. And if you look through that to our legacy stores, there would be -- I am sorry. I am getting the number. There will be another 180 basis points of SG&A leverage in our legacy stores. So it's really the increased pace of growth of new stores that's offsetting a portion of the leverage in our retail segment.

Unknown Analyst

Okay. And then in terms of the openings next year, are there any initial color in terms of the weight? Should we expect them to be more back half weighted or?

Brian E. Taylor

You should expect them to be more consistent over the course of the year, this year, as opposed to -- in the current year, it's more back half weighted with substantial number of stores opening in the fourth quarter. It should be more steady over the course of the year, next year.

Operator

Our next question comes from the line of Scott Tilghman from B. Riley.

R. Scott Tilghman - B. Riley Caris, Research Division

I wanted to follow up on the G&A question, really 2 other components to that. First, on the credit side, we have seen that ticking up, obviously tied to some of the issues around second quarter, but sustained here in the third quarter. When do you anticipate that the G&A levels for that segment of the business will return to more normalized levels? And then as a second question, looking at the retail side and your Slide 4 the sales per associate, the growth there year-over-year is less than half the overall sales growth rate. I just want to get my hands around what you are thinking in terms of your staffing model today with the existing store base with the change in the merchandise, but also going forward as you enter some of the newer markets?

Michael J. Poppe

So, Scott, the credit SG&A leverage relative to revenues is really an impact of the yield and the higher interest-free receivable balance if you adjusted to last year's yield. Credit SG&A would have been the same as last year's SG&A as a percentage of revenues.

Theodore M. Wright

And in terms of SG&A related to our sales associates in particular, that should be relatively stable because without regard to headcount, our sales associates are based -- paid based on commissions that are based on the sales -- the sales rate. So we're building staff to support the increasing sales rate. And at the same time, we're raising individual sales associate productivity, but we're not reducing the amount of commission rate on those sales. So we think the sales compensation particularly should be relatively stable. It doesn't benefit our leverage particularly. And then there is no negative effect on SG&A, as we add those additional staff, particularly either. So it should be fairly stable. The pure selling component of SG&A should be pretty stable.

R. Scott Tilghman - B. Riley Caris, Research Division

So I just to clarify, it sounds like the reason, the pace of sales per associate is not matching the pace of overall sales growth is because of additions to the floor?

Theodore M. Wright

That's correct.

Operator

Our next question comes from the line of David Kim [ph] from Solaris Capital.

Unknown Analyst

I was wondering if we could touch on -- so there's been a dramatic increase in certain no-interest in-house promotional receivables as a percent of total. I am just wondering if you could break out the payment rate on those receivables versus the non-promotional receivables. I would assume its significantly higher but...

Michael J. Poppe

I don't have the specific payment rate for you but I'd tell you that roughly half of those customers meet the terms and the majority of our no-interest financing is a 12-month term.

Unknown Analyst

12-month term, okay. Is -- as I guess -- if I look at sort of the payment rate over the last few years and it seems pretty stable over that time. I would have expected I guess that to kind of go higher as sort of the mix has shifted towards your promotional receivables. I wonder if you could address that or if I am missing anything there?

Michael J. Poppe

You bet. Rapid portfolio growth put pressure on the payment rate because our finance contracts have a fixed monthly payment. The payment rate is at its lowest right after the sale is financed. So the high growth is what's putting pressure on the payment rate. The rapid growth -- so it's reflected in the decreasing average age of receivables in the portfolio, which was 8.6 months old this year, 9.7 months last year. And if you are looking at the portfolio stats, you go back to few years ago, the average age of receivable was 12 months or longer.

Unknown Analyst

Okay, got you. And then the cash recovery percentage covenant on your revolver, is that a calculation that's comparable to your payment rate? How is that I guess calculated?

Michael J. Poppe

Its the same calculation.

Unknown Analyst

Same calculation, okay. Okay, and then I was wondering in what fiscal year did you make changes to your re-aging and charge-offs criteria?

Michael J. Poppe

That would have been calendar '11 or fiscal '12.

Unknown Analyst

Okay. And I guess what is the criteria that you use currently to charge-off the receivable? How delinquent does it get before that happens?

Michael J. Poppe

If it is contractually more than 209 days past due, it's charged-off.

Unknown Analyst

Okay. So I guess when I look at the static loss ratio table, seeing a steeper slope I guess in more recent vintages and you addressed part of that earlier on the call with there being changes in the re-aging policy and sort of how you -- and being more conservative on how you define charge-offs. It sounds like you're keeping the turn on loss ratios pretty stable around 6%, which sort of implies a pretty I guess meaningful flattening of that slope over the next few years. I'm just wondering how you gain confidence in that evolution.

Michael J. Poppe

You bet. So we know, based on the change in contract terms in our re-aging and charge-off policies that the contact can't remain in the portfolio as long as it did historically. And if you go to Slide 20 in the earnings call deck, it will show how the fiscal '12 and fiscal '13 originations by quarter were playing out. And you can see the fiscal '12 period, where we are a couple of years in now, the cumulative rates are flattening out for the quarterly originations as we have incurred most of the losses we were in those originations. And when you look at the detail on the balances -- or the percentage of the balance left, it's running off very quickly. There is very little of the Q1 2012 balance actually left on the books.

Unknown Analyst

Got it, okay. And then final question I guess is how many remodels did you have this quarter and last quarter? And can you give us a sense of sort of the timing -- or the case of those remodels sort of intra-quarter for both quarters?

Theodore M. Wright

I am afraid I'm not going to be able to give you the exact number of remodels in the quarter. We can provide that to you later. The pace of remodels is decelerating and the pace of relocations is accelerating. And as we have seen the results of our remodels and new stores to date, I'd say we're developing more conviction around our new store model and more going to move more aggressively to get the stores remodeled, relocated or if they are not unsuitable for our current format, closing some of those stores.

Operator

Our next question is a follow-up from the line of Peter Keith from Piper Jaffray.

Peter J. Keith - Piper Jaffray Companies, Research Division

You had referenced in the past that with the collections issue in Q2 that actually caused you guys to reassess your collections practices. You maybe made some changes. Could you highlight what some of those changes were? And then are there any early observations that those have had a positive or negative impact?

Brian E. Taylor

Okay. I would say that the changes that we've made are numerous, that there are lots of little things as opposed to any sort of dramatic, strategic move in any way. But we've realigned our collection teams along similar lines to what we had 2 or 3 years back, when our collections performance was better. We've made some enhancements to pay for performance among collectors, similar to what we've done on the sales side, where we're paying better, but we're paying based on productivity. We've increased our hiring in our Beaumont site because we have seen strong performance there historically. And so we are using that Beaumont site more aggressively than we were a few months ago. I'd say there are a number of other specific examples without getting too deep into the detail. But early indications are that over time, we're going to benefit from these moves and that I think is having an impact on the trend. A few -- in your questioning, you were asking about August -- I'm sorry, July versus October. And then we talked about August versus November. And what we're seeing is a, an accelerating pace of performance. And I think that the changes that we've made are an influence there.

Peter J. Keith - Piper Jaffray Companies, Research Division

Okay, that's good to hear. One last little quick modeling question for me. Maybe you have only one store right now that's now in year 2. But what should we expect that year 2 comp on some of these new stores to be on a go-forward basis as more and more of them roll into the comp base?

Brian E. Taylor

Yes. I hesitate to make a prediction since we don't have any yet. But from the one that entered the comp base, we're running very strong double-digit comp levels right now. And the other stores that will enter in the comp base going forward, again a relatively small group, we are following that same pattern.

Operator

Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to management for any further remarks.

Theodore M. Wright

Thanks, everyone, for participating.

Operator

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

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