Conn's, Inc. (NASDAQ:CONN) Q2 2020 Results Conference Call September 3, 2019 11:00 AM ET
Norm Miller - Chief Executive Officer
Lee Wright - Chief Operating Officer
George Bchara - Chief Financial Officer
Conference Call Participants
John Baugh - Stifel
Brad Thomas - KeyBanc Capital Market
Rick Nelson - Stephens
Kyle Joseph - Jefferies
Bill Ryan - Compass Point
Good morning and thank you for holding. Welcome to the Conn's Inc. Conference Call to discuss earnings for the fiscal quarter ended July 31, 2019. My name is Dana and I will be your operator today. During the presentation, all participants will be in a listen-only mode. After the speaker's remarks, you will be invited to participate in the question-and-answer session. As a reminder, this conference call is being recorded.
The company's earnings release, dated September 3, 2019 was distributed before market opened this morning and can be accessed via the company's Investor Relations website at ir.conns.com.
During today's call, management will discuss, among other financial performance measures, adjusted EBITDA, adjusted net income and adjusted earnings per diluted share. Please refer to the company's earnings release that was issued today for a reconciliation of these non-GAAP measures to the most comparable GAAP measures.
I must remind you that some of the statements made in this call are forward-looking statements within the meaning of federal securities laws. 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 Norm Miller, the company's CEO; Lee Wright, the company's COO; and George Bchara, the company's CFO.
I would now like to turn the conference call over to Mr. Miller. Please go ahead, sir.
Good morning and welcome to Conn's second quarter of fiscal year 2020 earnings conference call. I'll begin the call with a strategic overview. Then Lee will provide additional details on the quarter before turning the call over to George, who will complete our prepared remarks with additional comments on the financial results.
Our record second quarter earnings demonstrate our continued success executing on our strategic priorities, our strong operating performance across both our retail and credit segments and the demand for our unique value proposition. We are pursuing a compelling retail strategy that takes advantage of a large and stable addressable market, and we have invested in people, operations and systems to support our planned growth.
As you may recall, last quarter we launched our new e-commerce platform, including the implementation of our upgraded website, which was a significant milestone for our company. Conn's has created an end-to-end online solution, allowing our customer to transact with us entirely online, using any of our financing option.
I am also pleased to announce our planned expansion into the Florida market, another significant milestone in the 129 year history of our company. Florida is a logical next step for our geographic expansion as it is contiguous to our existing footprint. It’s home to over 21 million people and supports an attractive rate environment for our in-house credit offering.
To support our future Florida locations, we recently executed a lease agreement for an over 400,000 square foot distribution center in Central Florida that we’ll open in the next 12 month. We expect the first Florida store to open in the second half of next fiscal year.
Ultimately, we believe the State of Florida could support over 40 Conn's locations, which would represent a significant expansion to our current store base.
Our credit performance remains strong and is in line with the strategy we outlined over three years ago. With confidence in our underwriting and collections performance, our stable credit segment provides us with additional opportunity to grow retail sales and differentiate our business from other retailers.
Reflecting our optimism for the future and our desire to create value for shareholders, I am pleased to announce that we have repurchased $57.9 million of common stock through August 29, which represents approximately 9.6% of our outstanding shares. As you can see, positive momentum is accelerating across our business and we believe fiscal year 2020 is shaping up to be a year of strong earnings and operational growth.
So with this overview, let me turn the call over to Lee, who will provide more details on our second quarter operating results.
Thanks, Norm. The second quarter of fiscal year 2020 is the second best quarter of total retail sales growth in 13 quarters, despite the continued headwind of lapping the benefit of Hurricane Harvey rebuilding efforts had on our results last fiscal year. Although total same-store sales decreased 2.3%, reflecting the continued impact of Hurricane Harvey, I am pleased to announce that total retail sales increased 3.3% for the second quarter of fiscal year 2020 and same-store sales were positive in non-Hurricane Harvey impacted markets, highlighting the power of our growth opportunity.
Year-to-date, we have opened 10 new showrooms in existing states, including two opened in August. We plan to open four additional locations in the third quarter. This will bring the total number of showrooms opened in fiscal year 2020 to 14, all within existing states, which reflects the highest number of new stores that we will have opened in four years. New stores continue to operate in line with our credit and retail expectations. As a result, we plan to open a greater number of showrooms next fiscal year, which includes several in Florida. With only 133 stores in 14 states, we are excited by the significant and long-term opportunity we have to expand our footprint.
Since coming to Conn's in July, Rodney Lastinger, our new President of Retail has quickly contributed to our success, helping to drive better retail execution both in our new stores and within our existing store base. Rodney's experience at Target Corporation, managing over $21 billion in sales, 85,000 team members and 565 stores provides Conn's with a proven leader who understands how to properly manage, scale and develop a large retail operation.
Same-store sales in non-Hurricane Harvey impacted markets increased 0.4%, primarily due to higher sales within our home appliance and furniture and mattress categories. In fact, total same-store sales of our home appliance category were up 3.4% during the second quarter and outpaced industry growth as we have continued to enhance our better best assortment and go-to-market strategy.
Our furniture and mattress category grew in non-Hurricane Harvey markets as customers continued to embrace the increasing number of new styles and looks now present in our showrooms. Partially offsetting these second quarter strengths were lower sales within our consumer electronics and home office categories, which were impacted by challenging market dynamics for TVs, computers and gaming consoles. Overall, we continue to strategically manage our merchandising assortment and we believe we are well-positioned to continue growing same-store sales as a result of our better best product focused, attractive financing programs and compelling retail shopping experience.
Second quarter same-store sales within our Hurricane Harvey markets, which includes our largest market of Houston, continued to demonstrate the significant contribution rebuilding efforts had on our retail sales last fiscal year. For the quarter, same-store sales in hurricane impacted markets were down 9.3%, which is the smallest decline over the last four quarters and is a 550 basis point improvement compared to the first quarter.
As a reminder, Hurricane Harvey affected several of our Texas markets, including our home market of Houston in August 2017. It has taken two full years for us to lap Hurricane Harvey's impact, and we believe this current quarter will be the last period meaningfully affected by Hurricane Harvey.
Turning to e-commerce sales, which are included in same-store sales, the second quarter reflects the transformational increase in web visits, online applications and e-commerce sales. For the second quarter of fiscal year 2020, e-commerce sales were $3.2 million, which is approximately 20% higher than total e-commerce sales for all of last fiscal year. Application volume increased sequentially as result of improvements in our online platform after the first quarter of fiscal year 2020 transition to our new website.
In addition, we are starting to see improving trends in application volume from Hurricane Harvey markets. In fact, total application volume for the second quarter of fiscal year 2020 was the highest second quarter amount in three years, even with the continued pressure our Harvey impacted markets that had on applications and sales volume.
We are well positioned to expand e-commerce sales in the coming quarters as our digital marketing efforts grow. Our existing logistics infrastructure, warehouse locations and last mile delivery capabilities are fully scalable as we already offer next day delivery across our 14 state store network. We are excited by the positive trends we are seeing in online traffic, applications and sales and we believe that our ability to transact with our customers through our e-commerce platform is an important capability that supports our continued growth.
With over 90% of our retail sales completed using one of Conn's three credit offerings, we work closely with both Progressive Leasing and Synchrony Financial to optimize our third-party financing programs. Our unique and diverse credit offerings provide significant value for our customers and partners, while differentiating Conn's from other retailers.
During the second quarter of fiscal year 2020, we understand that our lease to own financing partner, Progressive Leasing, modestly tightened underwriting standards for lease transactions across many of their product category verticals, which included all of our eligible product verticals. Progressive and Conn's remain committed partners and we continue to believe 10% of retail sales through Progressive's offering is achievable.
In addition, we continue to work with Synchrony, our third-party partner for prime credit customers to enhance our relationship and expand our programs to prime customers. As a result of these efforts, sales financed through Synchrony increased to 17.7% of total retail sales for the second quarter of fiscal year 2020, compared to 16.4% for the same period last fiscal year and up 200 basis points compared to Synchrony sales for fiscal year 2017.
Quickly looking at the profitability of our retail segment, retail gross margin remained strong and we continue to benefit from our better best merchandising strategy. Retail gross margin was 40.5% for the second quarter, representing the 5th consecutive quarter at or above our target rate of 40%. The 90 basis point year-over-year decline in retail gross margin was due primarily to the one-time benefit of increases in appliance retail pricing related to tariff adjustments and the associated forward buys of inventory during the second quarter of fiscal year 2019, coupled with increased logistics costs to help support future growth specifically related to our new Houston distribution center.
I am pleased with the continued strength of retail profitability and the second quarter of fiscal year 2020 is in line with our strategy to produce annual retail gross margin above 40%.
Positive momentum is underway in our retail business, and we expect the second half of fiscal year 2020 to benefit from improving retail execution in the longer tenure of our merchandising, marketing and operations teams. We also expect the second half of the fiscal year to be positively impacted by new stores, sales from our e-commerce platform and lapping the sales impact from Hurricane Harvey.
With this overview of our retail segment, let's look at the continued positive trends underway in our credit segment. Credit results remain strong and are in line with expected seasonal trends. Our credit spread for the second quarter was 890 basis points, representing the highest second quarter credit spread in six years as a result of a net yield of 21.9% and a net charge-off rate of 13%.
On a trailing 12-month basis, our credit spread was 920 basis points at July 31, 2019 compared to 660 basis points at July 31, 2018. As a reminder, seasonality impacts credit performance as our core customer receives the benefits of personal income tax refunds during the first quarter.
Overall portfolio performance has benefited from stable underwriting, the enhancements we have made in our collection of recovery efforts and a healthy economic environment for our core customer. As a result, the 60 plus day delinquency rate remained stable at 8.7%, while our charge-off rate net of recoveries was 13% compared to 13.8% for the same period last fiscal year. In addition, we continue to control new store credit performance and first payment default rate at our new stores remain better than the company average.
Improving our recovery process remains a strategic focus as higher cash recoveries result in lower net charge-offs and reduced loss rates on our allowance for bad debt. For the second quarter of fiscal year 2020, we collected $6.1 million of recoveries, a 26% increase from the same period last fiscal year. Year-to-date, we have collected $12.5 million and we remain on track to collect over $20 million in recoveries this fiscal year.
As our trailing 12 month credit spread demonstrates the majority of our portfolio, including recent originations, is in line with our 1,000 basis point annual credit spread target. As a result, our sophisticated underwriting team continues to analyze and segment our portfolio to identify and test incremental sales opportunities.
We remain focused on maintaining a stable credit business and I am confident in our ability to manage risk going forward, even as growth accelerates. Positive same-store sales and non-Hurricane Harvey impacted markets, higher total application volume and growth in e-commerce sales demonstrates the positive momentum under way in our business. As a result, we believe we are well-positioned to achieve total annual retail sales growth of 8% to 10% in the coming quarters. At this level of growth, we can manage the credit segment with our 1,000 basis point spread target while achieving annual retail gross margin of at least 40% in leveraging SG&A expenses. This is the foundation of a very powerful and sustainable business model and I am extremely excited by the opportunities we have in fiscal year 2020 and beyond.
With this, let me turn the call over to George.
Thanks, Lee. I'm pleased to report results in line with or better than our guidance across every financial measure. On a consolidated basis, revenues increased 4.3% to $401.1 million for the second quarter of this fiscal year from $384.6 million for the same period last fiscal year. This helped drive an increase in GAAP net income of 17.4% to $20 million or $0.62 per diluted share for the second quarter of fiscal year 2020 from $17 million or 53% per diluted share for the prior fiscal year quarter.
On a non-GAAP basis, adjusting for certain charges and credit and loss from extinguishment of debt, earnings per diluted share were $0.62 for the second quarter of fiscal year 2020 compared to $0.57 for the same period last fiscal year. Adjusted EBITDA was $54 million or 13.5% of total revenue for the second quarter of fiscal year 2020 compared to $50.4 million or 13.1% of total revenue for the same period last fiscal year. Reconciliations of GAAP to non-GAAP financial measures are available on our second quarter earnings press release that was issued this morning.
Looking at our retail segment in more detail, total revenues for the second quarter increased 3.3% to $306.3 million for the same quarter last fiscal year. Regarding the ongoing trade negotiations and tariff, our merchandising team in partnership with our top vendors, has made substantial progress since last year in diversifying our production outside China and other affected countries. For goods covered by tariffs, the higher costs have generally been split between the parties, thereby limiting the retail increases needed to offset the tariff. Additional tariffs impacting consumer goods, including electronics, computers and accessories were announced in early August. While postponed, we believe this latest round of tariffs could have an impact on prices and demand for these products if they were to go into effect. Retail SG&A expense was $88.1 million, an increase of approximately $5.1 million from the same quarter in the prior fiscal year, while retail SG&A expense as a percentage of revenue deleveraged 80 basis points to 28.8%, primarily due to increased costs for new stores.
I am pleased to announce that our new state-of-the-art Houston distribution center opened in August. This LEED-certified facility will increase the capacity and efficiency of our retail operations within our largest market. Costs will be higher temporarily as we wind down operations from our legacy Houston distribution center, which we expect to be completed by the fourth quarter. In addition, for fiscal year 2020, we plan to open 14 stores compared to seven stores last fiscal year and only three stores two years ago. We typically start incurring costs associated with new stores approximately six months ahead of opening and there will be additional expenses incurred throughout the fiscal year as we prepare to open these locations.
I also want to mention, during the second quarter, we successfully implemented our new ERP system and we are progressing toward a successful conversion of our new loan management system, which we expect to be completed during the third quarter. As you can see, we are making a number of near-term investments to support our meaningful and long-term growth plan. This includes higher expenses associated with new distribution centers as well as investments in SG&A to support accelerating new store growth and our planned Florida expansion. While these higher costs will temporarily impact our overall level of profitability, they are necessary investments as we continue to expand our retail footprint and grow sales.
Turning to the credit segment, finance charges and other revenues were a second quarter record of $94.8 million, up 7.5% from the same period last fiscal year. The increase versus the second quarter of fiscal year 2019 was primarily due to a 60 basis point increase in the portfolio yield to 21.9% as well as higher retrospective insurance income compared to the prior fiscal year period.
Second quarter net annualized charge-offs as a percent of the average outstanding balance were 13%, an 80 basis point improvement over the prior fiscal year period. Provision for bad debts in the credit segment was $49.8 million for the second quarter of fiscal year 2020, a decrease of approximately $0.8 million from the same period last fiscal year, primarily due to strong portfolio performance. The allowance for bad debts and uncollected interest as a percent of the total portfolio was 13.3% at July 31, 2019, which was down approximately 20 basis points from the prior fiscal year period. SG&A expense in the credit segment for the second quarter increased 4.4% versus the same quarter last fiscal year and on an annualized basis as a percentage of the average customer portfolio balance was 10.2% compared to 10.1%. The increase in credit SG&A primarily reflects continued investments we are making in our recovery effort and an increase in operational expenses to support our growth. Interest expense for the second quarter was $14.4 million, which declined 7.5% from the same period last fiscal year, as a result of reductions in our weighted average cost of funds.
For the second quarter, annualized interest expense as a percentage of the average portfolio balance was 3.7% compared to 4.2% for the same period last fiscal year. Average net debt as a percentage of the average portfolio balance was approximately 62% -- 61% for the second quarter of fiscal year 2020 compared to 62% for the prior fiscal year period. ABS notes currently outstanding include all classes of our 2019 A and 2018 A notes and the B and C classes of our 2017 B note. We currently expect to complete one additional ABS transaction during the current fiscal year.
I am very pleased with the improvements we continue to make in our capital position. We expect to fund our anticipated growth through internally generated funds and from our existing capital sources. As Norm mentioned, through August 29, we have repurchased a total of 3.1 million shares at an average price of $18.79 per share, which is approximately 6% below our book value as of April 30th, 2019.
The total amount repurchased through August 29 under our $75 million share repurchase plan was $57.9 million or 9.6% of our outstanding shares. During the second quarter, we repurchased $34.3 million of our common stock and funded the growth of our customer receivables portfolio while our net debt to adjusted EBITDA ratio declined. Before opening the call up for questions, I want to note that we continue to expect our annual effective tax rate to be between 25% and 27% for the current fiscal year.
With this overview, Norm, Lee and I are happy to take your questions. Operator, please open the call up to question.
Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of John Baugh with Stifel. Please proceed with your question.
What if we could start with Florida and maybe talk a little bit about how you expect the expenses to ramp there and importantly, the interest rate cap or regulatory environment within that state?
Sure, John. I'll start off with the reason we went to Florida and then I'll hand it to Lee and George to talk about the SG&A side. Florida obviously is contiguous to our existing market. So, makes a lot of sense for us. Very attractive from a rate standpoint. We were able to charge -- it is -- it will be a state licensed product and we'll be able to charge the 29.99% APR and so -- and from a demographic standpoint, as you heard in our comments, there's 21 million people in Florida, a lot of similarities to the state of Texas from a demographic standpoint. And we're very bullish about what it bodes from a future sales standpoint.
Yes, and from an operational standpoint, John, expenses -- as we mentioned, we've signed a lease with the distribution center in Central Florida. It gives us that core location for our logistics build out. We'll start incurring expenses in the fourth quarter as we go. We'll start opening showrooms in the second half of next year and ramp that up. Again, obviously, as you know, when we go into new market, we will have some marketing expenses as we enter there and make sure we get our brand name out, but as we talked about and Norm said in the call, very excited about Florida's long-term potential. So from that standpoint, it's certainly worth the investment, a long-term play for us, the 40 plus stores we are going to open in the state.
Great. And then, maybe we could talk again about same-store sales, and I'm particularly interested in non-Harvey and you've got, I assume, some building benefit from new stores you opened over a year ago, offset by some cannibalization because all the stores have been in existing markets. Could you talk about the plus and the minus there and maybe how that's influencing numbers now and how that might change going forward with the Florida plan?
Yes, John. So currently, because we didn't open that many stores, last year seven, there's not many in the comp base. It'll be the fourth quarter and into the first quarter of next year when we will start to see that benefit. As you well know, historically when the company opened new stores, we would open them at $8 million to $10 million in revenue in the first year. We're now averaging between $6 million and $7 million in revenue because of the tightened underwriting. And those stores, by the way, are still profitable and pay back in the first year even at those reduced initial revenue levels, but they will give us tailwinds in future years. We believe ultimately the stores will still mature to that $10 million on average from a revenue standpoint and we should see tailwinds from a three to five-year timeframe from a comp standpoint that should bode very well for us in the next year, certainly the back half of next year as we're lapping the significant number of stores we've added this year.
And John, just a follow up. As you mentioned, ultimately there will be cannibalization in some of our existing markets as we open the showrooms in existing states. But obviously, we strongly believe we've seen it. We grow our overall total sales by market significantly so it would make sense. As they become a bigger piece, the cannibalization, we'll look at break that for you as we used to do in the past.
Okay. But is there a little bit of a drag in, say, the Q2 numbers and the Q3 expectations from cannibalization currently?
Very little, John.
Okay. Alright, and my last question -- well, I have many more, but I'll get back in queue, huge increase in applications processed in Q2, significant turn there. Could you talk about what's online, what's maybe a byproduct of -- I am comparing more to the first quarter where I know you had some challenges with the new online process. Kind of walk through the pieces of that applications and are you seeing an increase in applications offline, if you will, in existing non-Harvey markets? Any way you can slice that? Thank you.
Thanks, John. Yes, we always really communicated in the past is our online applications are greater and are growing at a faster pace than our retail applications. As you know, that's why we changed our platform. We went through a bit of a bumpy road in the first quarter as we transition to the new e-commerce platform. But as we shared at the end of the first quarter, we're seeing the impact of that new platform, the effectiveness of the platform and we believe that's reflected not only in e-commerce sales that Lee touched for the quarter where we were 20% higher in e-commerce sales for the quarter for what we did the entire prior year, we believe we're still in the very early innings of what we can deliver from an omni-channel standpoint as a retailer. So, very bullish about what the future bodes from both an application which ultimately translates to sales standpoint.
Our next question comes from the line of Brad Thomas with KeyBanc Capital Markets. Please proceed with your question.
Yes. Thank you. Good morning, Norm, Lee and George, and nice results here. I guess, guys, I wanted to zoom in first, maybe on the retail gross margin and I was hoping you could talk a little bit about some of the puts and takes as we think about modeling it over the next couple of quarters, particularly as you think about tariffs starting to roll in?
Yes, Brad. It's Lee, good morning. So from a retail gross margin, I think what we tried to stress on the calls, what I continue to reiterate is that, look, we want to make sure that we're in that 40 plus retail gross margin range and feel very comfortable that we can keep it there. Obviously, our it's our 5th consecutive quarter at or above that rate that we we're excited about, obviously down year-over-year, but we did talk about from the standpoint that we did have some of those forward buys from the tariffs that came in, we've bought pre those tariff implementations. So we got a one-time benefit from that. So, I would just point you back that we feel very comfortable with that 40% retail gross margin piece and that's sort of what we guided toward the next quarter from that standpoint. So from that, yes, we look at it, that's where we really would continue to point you toward.
And we have some downward pressure because of the logistic side of the house with the new Houston DC, the opening of the floor to DC. Both of those will -- we will incur some cost here as we get those -- the old legacy Houston DC closed and the new floor to DC open, but even with those give and takes, we still expect to be at or above that 40% margin level.
Okay. That's great. And as we think about the new DC and the store openings, you'll be ramping in for next year, I guess, as we calibrate our models, you guys are real helpful, kind of one quarter out, giving us some line items, but as we start to think about the fourth quarter and some of these costs coming in, any more quantification or color you could share with us on how to think about SG&A and some of the ramp in expenses?
Yes. Hey, Brad. This is George. I would tell you that as we continue to open up increasing new stores year-over-year. So this year we're planning to open 14 stores compared to seven last year and we talked about opening even more stores next year. We will continue to see some deleveraging from an SG&A standpoint.
But as we get to that consistent run rate basis, you'll then start to see the leveraging from an SG&A.
And if I could squeeze one more in here, just on the comments around the lease-to-own, that had been growing pretty nicely the last few quarters and took kind of a step back sequentially. I mean if you had been in line in 2Q with where it was as a percentage of sales in 1Q, looks like comp sort would have been about 2 points better. I guess, could you help us think about maybe how much of a headwind that was for you here in 2Q, is -- would 2% be a reasonable estimate?
I think that's reasonable, Brad, and -- but what I would say is and as we shared in the prepared comments, it was really driven predominantly by our partner and some things they did, not specific to Conn's, but overall from an underwriting standpoint. Having said that, it hasn't shaken what our belief is long-term on the lease-to-own opportunities that we have. Remember, in the past 12 months, we had 1.2 million applications submitted from a Conn’s standpoint, both in-house and online and approximately 700,000 were approved, which means about 500,000 are declined. So that speaks to the magnitude of the opportunities that exist for us to capture and get to that, why we remain very bullish on our ability ultimately to get to that 10% balance of sale, not at the expense of other elements of financing, but by growing the overall size of the pie.
Our next question comes from the line of Rick Nelson with Stephens. Please proceed with your question.
Looking at spread between Harvey and non-Harvey markets, same-store, the difference, 10% to 11%, you are guiding to a 6% spread at the midpoint for 3Q. Do you think that spread goes away in the fourth quarter? Or what is the timing you think there?
Yes, we think it will be negligible in the fourth quarter, Rick. We don't anticipate breaking out Harvey and non-Harvey in the fourth quarter.
And the accelerating new store growth that you referenced, is that number of units or is that percentage growth rate …?
The number of units.
Number of units.
And in e-com, can you discuss the economics there, the loss rate, it's interesting you referred to the store's showroom? Do you see over the long haul, online sales accounting for a substantial proportion of your volume?
Well, Rick, so first of all, thanks for the call out on showrooms. We're excited about the look and feel of our new showrooms and existing showrooms, and I know you'll be down here to see what our new showroom. So -- but with regard to the e-commerce, obviously very pleased to see that we were -- actually our e-commerce revenues 20% all of last year’s. Certainly believe it should be a material percentage of sales, but we really do believe that's going to be incremental sales on top of there'll be some cannibalization that mostly new customers able to come on. And as you referenced, we certainly are very careful from an underwriting perspective is why we took so long to actually offer a true omni-channel online e-commerce experience. Look, with John Davis and team, we certainly have the sophistication to do the proper underwriting and not take any excessive losses. So we are excited about that going forward.
And just as you've seen, Rick, on our new stores, our FPDs continue to run. They're lower than the portfolio average. From an underwriting standpoint online, we're well aware of the risk associated with the online consumer versus the retail in-person consumer. So we're taking appropriate steps from an underwriting standpoint to ensure that, as we've stated, any business that we underwrite, always with the risk mindset of maintaining that 1,000 basis points of credit spreads.
And I thought the Florida expansion also interesting. Any thoughts on how many stores you could open across the country?
I know that in the past there's been numbers thrown out there, prefer at this point not to. It is materially by several factors bigger than what our store base is now. Out of the 50 states, when you look at attractiveness from a high APR being in the high 20s APR, there's 35 plus states that give us that opportunity right off the bat. So when you're only in 14 of them and Florida is obviously one, California is one and a number of other high population states give us that opportunity in addition to where we're at now. So, we believe we can grow at that 8% to 10% top line revenue growth for many, many years from a growth standpoint, because our customer -- our core customer demographic is in every city, every town, every state of the United States. They represent about 20% of the U.S. population. So, the potential future growth is enormous for the company.
Slide 16 in your deck suggests that, that proportion of the population actually would grow in a downturn.
That has been historically -- a number of the members of the senior leadership team, including myself and Lee and JD have operated in subprime for a number of years. We've been in various economic cycles and downturns. And although there is some impact, when there is a recession, there is also a significant opportunity that presents itself as well as more customers enter into our core focus or demographic. So, we don't -- from a recessionary standpoint or a cycle standpoint, we are aware of that, but it gives us as much opportunities as it does the challenges that would be presented in a down cycle.
Our next question comes from the line of Kyle Joseph with Jefferies. Please proceed with your question.
Hey, good morning, guys. Most of my questions have been asked. Just to follow up on credit and I can wait for the queue for this, but just to get a sense of the charge of decline year-over-year. Is that primarily from the better recoveries or are you also -- I am basically looking for some color on frequency versus severity in terms of losses?
Yes, certainly recoveries had an impact. We've been excited about the ramp up and continued pace of our recovery effort. And so that's the material piece of it, Kyle.
And then from a frequency perspective, I know you guys talked about first payment default management at new stores, but can you give us any sort of sense of what trends you're seeing there?
We continue to be very pleased with 60 day plus delinquencies and for FPDs, which as you know, Kyle, are the two leading indicators of what the quality and the strength of the portfolio is. So this year and going forward, we're not going to see the significant increases we saw in past years because we're close to that 1,000 basis point spread. And as we hit that and we achieve that, we'll take associated incremental risk to maintain the 1,000 basis points, but also give us retail opportunity. So, the target here going forward, you shouldn't see significant fluctuations there because we're within that range. So, we're targeting spread wise.
Our next question comes from the line of Bill Ryan with Compass Point. Please proceed with your question.
A couple of questions. First, there's obviously been a reduction in market interest rates and you talked about doing one more securitization this year and you're obviously going to be rolling some of the prior deals. Do you see an opportunity with a reduction in market rates that the funding costs might actually come down a little bit further as we progress over the next few quarters? And secondly, going back to the disparity between the implementation of the tariffs and the pricing changes that you implemented, because obviously you had an outsized retail gross margin in Q4 last year, I want to kind of get some anticipate -- what you anticipate of what Q4, the retail gross margin might look like? Thanks.
Hey, Bill, this is George. With respect to your first question around interest rates, our ABL is tied to LIBOR rates. So certainly as market rates come down, it is possible that we would see reductions in our interest rate as a result. And then, with respect to the second question on tariffs, I mean, we continue to guide and feel comfortable with our 40% retail gross margin throughout the back half of the year.
Now, you are right, Bill, that the fourth quarter was elevated. So, it's typically our highest quarter from a margin standpoint, one of our higher quarters. But we don't expect to probably be at that level. We haven't guided for quarter four yet, but it won't be at that elevated level because of some of the tariff and some other things -- one-time things that occurred in that fourth quarter, but still above that 40% for certain.
Okay. One last thing. In terms of lease-to-own, obviously, some competitors introduced a lease-to-own product earlier this year. Just want to kind of get an idea, are you seeing any incremental competition on the lease-to-own product as well in your stores?
On a very limited basis, Bill. I mean, our expectation is ultimately probably every retailer will have some lease-to-own product, as every bricks and mortar retailer. Remember, our customer and the ones we're attracting now, very different than what the prime customer is targeting and attracting which is why out of the 1.2 million applications we get 500,000 we decline as I mentioned earlier. So the pool we have from an opportunity to grow our lease-to-own and to capture that 10% is within our walls right now, even if we lose some small piece of that. And remember, our financing is 2.5 times to 3 times better or less expensive for a customer if they can qualify for our Conn's financing versus having to move to a lease-to-own option.
Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Norm Miller for closing remarks.
Thanks. I just want to thank, first of all, our almost 5,000 associates across our stores and our distribution centers and our call centers for their hard work each and every day and for their contributions to our success. And I also want to thank the folks that have -- that are interested in the company and we look forward to sharing our third quarter results with you later this year. Have a great day.
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.