Conn's: Well-Run Regional Player

Conn's (CONN) is a regional home appliance (27% of sales) and consumer electronics (30%) retailer operating 73 stores in Texas, Louisiana, and recently into Oklahoma. Right off the bat, the first thing that comes to mind is "tough competition." Indeed, since the company is going nose to nose with retailing heavyweights Wal-Mart (WMT), Best Buy (BBY), and Home Depot (HD). Consumer retail is a business with low customer captivity (translation: no moat), and Conn's has no discernable scale advantages that would allow it to survive irrational price or advertising wars with one of these big players. For primarily this reason, it does not make the MagicDiligence Top Buys list.

However, this is still an interesting and well-run company. Long-time management (CEO Tom Frank has been with the company 48 years) has carved out a strategy that differentiates the business from direct competitors. Customer service is a big factor in successful retail ventures, and Conn's requires all of its sales personnel to take training to specialize their knowledge of home appliances or consumer electronics, even going so far as to send them on delivery and installation trips to put this knowledge to the test. For anyone who has encountered a clueless clerk at Circuit City (CC), the value of this is evident. In addition, Conn's has a next-day delivery policy, and nearly 95% of qualifying purchases were fulfilled. Again, this is in stark contrast to most of the big box retailers.

But the biggest differentiation is Conn's in-house financing unit. Buying big-ticket items like plasma televisions or a new washer/dryer is often done on credit cards, where providers earn big interest rates. Conn's decided it wanted to benefit from these by financing the sales of its own products, and today close to 60% of all sales are done through the in-house credit department. The company earns over 19% interest on its credit receivables while paying about 2.5% over LIBOR (currently under 4%) to obtain the capital for the loans, leading to an interest spread generally around 12-13%. Banks would kill for that spread. The financing business has been so successful that it now accounts for well over 10% of revenues.

Running the financing unit in-house puts default risk on the company's back as well. Fortunately, this has not been a major issue. Provisions for loan losses have typically been around 3%, and even last quarter (ending July 31) did not produce defaults out of the ordinary. The company recently renewed its financing securitization facilities with banking partners, and the company believes it has enough access to capital to continue its financing business through the next 12 months. This is extremely important news given the seizure in the credit markets today.

On top of all this, Conn's traditional metrics are good as well. The company has next to no debt, and runs operating and cash flow margins, roughly in line with its competitors. The financing business plays a bit of havoc with the Magic Formula screening system though - financing income is included in operating earnings, but retained interest in the receivables is not, leading to a higher MFI return on capital than is realistic. MagicDiligence calculates about a 22% figure - not enough to land it on the screen in normal circumstances. Still, this is a well-run regional player with some interesting competitive strategies and represents an attractive MFI pick.

Disclosure: Steve owns no position in any stocks discussed in this article.

Comments

[DoubleM:]

What this company "says" they do is a bit different than reality. Very little product training is actually provided, and few if any sales personnel are offered an opportunity to accompany delivery or installation personnel. The sales training is rudimentary and includes tactics such as a telemarketing blitz on previous customers on Sunday mornings. This and daily calling annoys many more customers than it generates. Any search on Internet for customer complaints will unearth hundreds.

2008 Oct 26 03:47 PM

[Conned:]

Yes I agree, their advertiesments look good, but dealing with their store staff and management is another thing. I went in the North Austin, TX store to purchase a DTV converter box. The clerk took my government coupon card and went off to check the price of the converter box. She came back to the counter and said they did not have the brand I wanted and gave me back my coupon card. At the next store I went to they said the $40 coupon card was charged already. I went back to Conns and the clerk admitted she charged the card and did not know how to get the $40 back on my coupon card nor was the manager even remotely interested in helping to resolve the situation. They acted helpless and gave me the company headquarters toll free number to call. I called their head office and the operator said that there was nothing they could do but take down the details and send it back to the store manager. So Conns has taken my $40 and offered me nothing in return. I have filed a complaint with the DTV2009 government people, but it looks like I've lost my $40 after their reply that my complaint was put on a "list".

Be careful when shopping at these smaller appliance stores. They will do anything to get you to purchase, but the after-sale and customer service is something less than desirable. You get what you pay for. Pay less, get less. I also found that their stores have high sales representative turnover, that should have told me something before I was so trusting in giving them my coupon card before they confirmed the price and avaibility of the product.

2008 Nov 23 03:03 PM

[Duked:]

Conn's thinks their marketing stratagies are good and bringing business in the doors. Their advertisements, phone systems and internet sites say "if they are out of the product advertised they will sell you the next better product line at the same discounted price as the advertised product". Most items advertised are in limited amounts and you will never get the next best product line. They'd rather lose the customer then stand by their claim in advertising. They continually telemarket their exsisting financed customer base, over and over again, till the customers no longer want to deal Conn's. They do not have customer consideration in any way. All they do is refer you to corporate or service departments, where you wait for ever for someone, and then they never help you or even call you back with a resolution. They're sales staff are not trained on products, just how to sales and close the deal. The technical support team for computers, televisions and electronics takes weeks to months to get repaired. Even through the customer buys the service maintenance agreements and are told certified technician work on the products and then that it takes forever, to find out a month later they sent it to the manufacture for repairs. Service department just keep telling me they would check and not get back to me, then to find my product was longer in Conn's possession. THEY have horrible sales, services, management. Best to buy somewhere else, you'll have better chances.

2008 Nov 24 03:53 AM

[galvez_chucke1:]

Conn's hates to honor their "if they are out of the product advertised they will sell you the next better product line at the same discounted price as the advertised product" guarantee. even when they have designated a replacement product, they will refuse to honor it. Do not expect the upper management to be sympathetic, either.

Jan 02 02:19 PM