No-money-down credit is undoubtedly a great thing for consumers, allowing them to purchase goods they would otherwise not have the means to buy. It can also be a good thing for companies, providing a significant boost to the top line. However, it doesn't always work out that way, as not everybody can pay back those loans. Conn's (NASDAQ:CONN), a large retailer which in-house offers credit on its merchandise which include electronics and furniture, saw its bottom line take a big hit as a result of increased delinquency in its credit division, sending the stock plunging.
Conn's has had a spectacular run in share price over the last few years, going from a low of around $3.40 towards the end of 2010 to a peak of $77.62 at the start of this year, following a period of strong earnings growth. It's now trading well off those highs at $31, as business seems to be drying up somewhat.
Conn's second-quarter report showed a decline in profit, and investors hurried for the exit, the stock is down a whopping 30% following the release. Earnings of $17.7 million were down 8% from $19.2 million in the same period last year. EPS excluding items of $0.50 missed the analyst consensus of $0.75 by a mile.
The company's revenue performance was quite a bit better, rising 30% to $353 million driven mainly by a strong performance in furniture and mattresses, but again missed the mark. Meanwhile, same-store sales were up by a surprisingly healthy 11.7%. Normally, such a high figure would be encouraging, but it was clearly not enough to drive away the dark clouds building on Conn's horizon. In fact, the earnings miss wasn't even the half of it.
Versus a previous full-year earnings outlook of $3.40-$3.70 per share, the company now expects to earn between $2.80 and $3 per share, a very significant drop which according to the company was related mostly to a spike in 60-day-plus delinquency rates on the company's in-house credit. Analysts polled were expecting $3.54 per share.
According to Canaccord analysts, the company delivered its second loss in the credit segment in three quarters, partly related to execution issues. The provision for bad debt was nearly 14% in the second quarter, up from 10.6% a year ago and 8.2% in the last quarter. The firm has now lowered its full-year bad debt provision guidance to 11%-12% versus a previous estimate of 8%-10%.
The company's CEO Theodore Wright stated that while the company's retail performance was excellent, the credit division ran into "unexpected headwinds" during the quarter, as the ability to pay back debt deteriorated across all credit quality levels, customer groups, product categories and regions. The process began in June and delinquency spiked through July and August especially, so there may be more trouble coming.
This is not a particularly encouraging sign for the US consumer, which for a large part relies on credit to fund its purchases. Especially the fact that the process accelerated last months is worrying, as it means it may be set to continue for some time. So far though, this seems to have mainly affected Conn's, which suggests it may be an execution issue. As a result, the company has announced it will be tightening its underwriting, reducing its no-interest programs and raising some of its interest rates.
Conn's run of spectacular growth seems to have hit a bit of a roadblock. While the retail division is still performing admirably, trouble is brewing in the credit division, where an increased number of people that are unable to pay off their debts is weighing on income. This, together with an earnings miss and a lowered outlook sent the shares plummeting some 30% following the release. Until the company tightens up its credit operations, especially considering last month's performance, it may be best to wait and see what happens before getting back in.
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