Conn’s Inc. (CONN) reached a break-even level during fourth quarter 2011, reporting in line with the Zacks Consensus Estimate as well as the prior-year quarter. In fiscal 2011, adjusted earnings were 18 cents down from 57 cents recorded in fiscal 2010.
On a GAAP basis, Conn’s reported a loss of 12 cents per share versus a gain of 7 cents in fourth quarter 2010. In full fiscal 2011, the company’s loss was 4 cents per share compared with earnings of 16 cents in the prior year.
The decline in earnings was mainly due to poor performance by the credit segment. Lower interest income as well as higher selling, general and administrative and interest expenses offset the benefits of the reduced provision for bad debts in the credit segment.
Inside the Headline Numbers
In the fourth quarter, the seller of home appliances and consumer electronics grew 2.9% year over year in revenues to $213.4 million. The quarter’s revenue comprised net sales increase of 5.1% to $179.2 million, and a decrease of 7.2% in finance and other charges to $34.2 million. However, total revenue declined 9.6% year over year to $790.5 million in full fiscal 2011.
Same store sales increased 5.2% during the fourth quarter compared with a 31.7% decrease in the comparable quarter prior year. The upside was driven by growth in consumer electronics as well as furniture and mattresses categories. Category-wise, same-store sales from furniture and mattresses were up 33%, consumer electronics were up 11%, appliances were down 9% and track sales were up 1%.
The company decided to exit certain product lines in its track category due to lower-than-expected sales and recorded an inventory charge of $1.7 million related to these slow-moving aged products. This led to a decline in retail gross margin to 22.8% from 23.5% in fourth quarter 2010.
Financial Aspects
Conn’s ended the year with cash and cash equivalents of $11.0 million, long-term debt of $373.6 million and stockholder equity of $358.0 million.
The company also completed a vital financing transaction in November 2010 that extended the maturity period of its debt capital and injected additional equity into the capital structure. With the help of this fund, the company terminated its securitization program, which led to the$1.4 million financing charge in the quarter.
Our Take
Although the company reported in line adjusted results, we remain optimistic on the series of strategic actions ithas taken recently. Conn’s has reviewed its store locations pertaining to demographic information and market share opportunities. Hence, it has decided to shut down five underperforming locations. Management estimates the closure of stores will benefit earnings per share between 4 cents and 6 cents per year. However, Conn’s faces intense competition bigger industry players like Best Buy Co. Inc. (BBY) and RadioShack Corp. (RSH).
Conn’s currently retains a Zacks #1 Rank, which translates into a short-term Strong Buy rating. We also maintain our long-term Neutral recommendation on the stock.
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