Conn’s Inc. (CONN) has surprised on the Zacks Consensus two quarters in a row but sales have recently taken a dive. Is retail telling us the recovery is fading?
Conn’s operates 76 stores in Texas, Louisiana and Oklahoma selling home appliances, consumer electronics, lawn and garden products and furniture and mattresses.
Most of its stores are in Texas, with 6 in Louisiana and 3 in Oklahoma so the store is a barometer of what is going on in the Texas economy.
The company also operates its own finance arm, and finances about 61% of its retail sales.
Conn’s Surprised By 25% in the First Quarter
On May 27, Conn’s reported its fiscal first quarter 2011 results which beat the Zacks Consensus by 5 cents per share. Earnings per share were 25 cents compared to the consensus of 20 cents. EPS was 50 cents a year ago.
While gross margins increased to 27.9% from 25% in the year ago quarter, sales fell 17.7% to $197.5 million. Same store sales also fell 19.7% from last year.
The company blamed “challenging economic conditions” in the company’s markets during the quarter. But wasn’t it “challenging” in 2009? I last reviewed Conn’s on Mar 4, 2009 after it had reported fourth quarter sales had jumped 22.3%. Back then, it was electronics, especially flat panel televisions, which were hot.
But there was no mention of flat panel’s or any jump in electronic sales in the company’s press release this May.
We can therefore conclude that the Texas economy, which had been stronger than many other parts of the nation because the housing bust didn’t hit it very hard, has weakened significantly. It’s not a good sign for retailers in other parts of the country, where the damage from the recession had already been more severe.
Zacks Consensus Estimates Move Higher Anyway
Despite the weakened sales, analysts still see earnings growth in fiscal 2011. They are projecting a gain of 31.4%.
The 2011 Zacks Consensus Estimate has climbed by 6 cents to 72 cents in the last 30 days. The company made just 55 cents last year.
The fiscal second quarter consensus has also risen by 1 cent to 19 cents in the last month.
Conn’s isn’t scheduled to report results again until Aug 26.
2-Year Chart
Retail stocks have been on a roller coaster the last 18 months and Conn’s is no exception.
The stock has shown considerable weakeness since early May, even before the recent earnings report, as investors have gotten jittery about the strength of the consumer.
But the recent downturn has also made it more attractive for value investors.
Value Fundamentals
Conn’s is pretty cheap for a retailer. It is trading with a forward P/E of 8.5 whereas the industry is at 14.5. Its price-to-book is just 0.4, again well under the industry average of 1.9.
The company also boosts a PEG ratio of just 0.5, making it a deep value stock with growth.
Conn’s is a Zacks #1 Rank (strong buy) stock.
Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor in charge of the market-beating Zacks Value Trader service.
