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CONNS INC - 10-Q/A - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Unless the context otherwise indicates, references to "Conn's," the "Company," "we," "us," and "our" refer to the consolidated business operations of Conn's, Inc. and all of its direct and indirect subsidiaries. Forward-Looking Statements This report contains forward-looking statements that involve risks and uncertainties. Such forward-looking statements include information concerning our future financial performance, business strategy, plans, goals and objectives. Statements containing the words "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "project," "should," or the negative of such terms or other similar expressions are generally forward-looking in nature and not historical facts. Although we believe that the expectations, opinions, projections, and comments reflected in these forward-looking statements are reasonable, we can give no assurance that such statements will prove to be correct. A wide variety of potential risks, uncertainties, and other factors could materially affect our ability to achieve the results either expressed or implied by our forward-looking statements including, but not limited to: general economic conditions impacting our customers or potential customers; our ability to continue existing or to offer new customer financing programs; changes in the delinquency status of our credit portfolio; unfavorable developments in ongoing litigation; increased regulatory oversight; higher than anticipated net charge-offs in the credit portfolio; the success of our planned opening of new stores and the updating of existing stores; technological and market developments and sales trends for our major product offerings; our ability to protect against cyber-attacks or data security breaches and to protect the integrity and security of individually identifiable data of our customers and our employees; our ability to fund our operations, capital expenditures, debt repayment and expansion from cash flows from operations, borrowings from our revolving credit facility, and proceeds from accessing debt or equity markets; and the other risks detailed in our United States Securities and Exchange Commission ("SEC") reports, including but not limited to, our Annual Report on Form 10-K for our fiscal year ended January 31, 2014. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Except as required by law, we are not obligated to publicly release any revisions or update to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. General We are a leading specialty retailer that offers a broad selection of quality, branded durable consumer goods and related services in addition to a proprietary credit solution for our core credit constrained consumers. We operate an integrated and scalable business through our retail stores and website. Our complementary product offerings include home appliances, furniture and mattresses, consumer electronics and home office products from leading global brands across a wide range of price points. Our credit offering provides financing solutions to a large, underserved population of credit constrained consumers who typically are unbanked and have credit scores between 550 and 650. We provide customers the opportunity to comparison shop across brands with confidence in our competitive prices as well as affordable monthly payment options, next-day delivery and installation, and product repair services. We believe our large, attractively merchandised stores and credit solutions offer a distinctive shopping experience compared to other retailers that target our core customer demographic. As of July 31, 2014, we operated 86 retail locations in Arizona, Colorado, Louisiana, Mississippi, Nevada, New Mexico, Oklahoma, South Carolina, Tennessee and Texas. Our primary product categories include: • Furniture and mattress, including furniture and related accessories for the living room, dining room and bedroom, as well as both traditional and specialty mattresses; • Home appliance, including refrigerators, freezers, washers, dryers, dishwashers and ranges; • Consumer electronic, including LCD, LED, 3-D, Ultra HD and plasma televisions, Blu-ray players, home theater and video game products, digital cameras, and portable audio equipment; and • Home office, including computers, tablets, printers and accessories. Additionally, we offer a variety of products on a seasonal basis. Our stores typically range in size from 20,000 to 50,000 square feet and are predominately located in areas densely populated by our core customer and are typically anchor stores in strip malls. We utilize a merchandising strategy that offers approximately 2,300 quality, branded products from approximately 200 manufacturers and distributors at various price points. Our commissioned sales, consumer credit and service personnel are well-trained and knowledgeable to assist our customers with product selection and the credit application process. We also provide additional services including next-day delivery and installation capabilities, and product repair or replacement services for most items sold in our stores. 15 -------------------------------------------------------------------------------- Table of Contents We provide multiple financing options to address various customer needs including a proprietary in-house credit program, a third-party financing program and a third-party rent-to-own payment program. The majority of our credit customers use our in-house credit program and typically have a credit score of between 550 and 650, with the average score of new applicants financed by us during the three months ended July 31, 2014 of 607, up from 601 for the same period last year. For customers who do not qualify for our in-house program, we offer rent-to-own payment plans primarily through AcceptanceNow (formerly known as RAC Acceptance). For customers with high credit scores, we have partnered with Synchrony Financial (formerly known as GE Capital) to offer long-term, no-interest and revolving credit plans. AcceptanceNow and Synchrony Financial manage their respective underwriting decisions and collection of their credit programs. For the three months ended July 31, 2014, we financed approximately 77.0% of our retail sales, including down payments, under our in-house financing program. We believe our extensive brand and product selection, competitive pricing, financing alternatives and supporting services combined with our customer service focused store associates make us an attractive alternative to appliance and electronics superstores, department stores and other national, regional, local and internet retailers. Due to the holiday selling season, our business is moderately seasonal, with a greater share of our revenues, operating and net income historically realized during the quarter ending January 31. Operational Changes and Operating Environment We have implemented, continued to focus on, or modified operating initiatives that we believe should positively impact future results, including: • Opening expanded Conn's HomePlus stores in new markets. During the six months ended July 31, 2014, we opened ten new stores in Arizona (1), Colorado (2), Mississippi (1), Nevada (1), South Carolina (1), Tennessee (3) and Texas (1). We plan to open eight additional new stores by January 31, 2015. We plan to open between 15 and 18 stores in fiscal 2016. We opened 14 new stores in fiscal 2014 and five new stores in fiscal 2013. For the six months ended July 31, 2014, new stores opened since February 1, 2012 accounted for approximately 25.0% of total product sales. New stores opened since February 1, 2012 accounted for approximately 14.9% and 3.4% of total product sales in fiscal 2014 and 2013, respectively; • Reviewing our existing store locations to ensure the customer demographics and retail sales opportunity are sufficient to achieve our store performance expectations, and selectively closing or relocating stores to achieve those goals. In this regard, we have closed a total of 19 retail locations since the beginning of fiscal 2012 that did not perform at the level we expect for mature store locations. We plan to close seven additional retail locations by January 31, 2015; • Remodeling and relocating existing stores utilizing the Conn's HomePlus format to increase retail square footage and improve our customers' shopping experience; • Expanding and enhancing our product offering of higher-margin furniture and mattresses; • Focusing on quality, branded products to improve operating performance; • Increased use of short-term, no interest credit programs, with terms of 12 months or less, over recent years with the intent to accelerate cash collections, while modestly reducing portfolio interest and fee yield. In this regard, we discontinued offering six-month, no-interest programs in August 2014 and currently offer only a 12-month program. Beginning in September 2014, we raised eligibility requirements to qualify for the 12-month program; • Planning to modestly raise interest rates charged to customers, where possible, in response to the changing market environment; • Adjusted our underwriting standards during the third and fourth quarters of fiscal 2014 and in March and August of 2014 to improve the overall quality of our credit portfolio. To improve ultimate cash collections, beginning in May 2014, customers may re-age their account once every four months which compares to once every six months previously. The maximum number of months an account can be extended remains unchanged at 12 months; and • Focusing on continuing to improve the execution within our collection operations to reduce delinquency rates and future charge-offs. 16-------------------------------------------------------------------------------- Table of Contents Results of Operations The presentation of our results of operations may not be comparable to some other retailers since we include the cost of our in-home delivery and installation service as part of selling, general and administrative ("SG&A") expense. Similarly, we include the cost related to operating our purchasing function in SG&A expense. It is our understanding that other retailers may include such costs as part of their cost of goods sold. The following tables present certain operations information, on a consolidated and segment basis: |