Q3 2020 Earnings Call
Good morning, Thank you for holding.
Welcome to Consummating <unk> conference call to discuss earnings for the fiscal quarter ended October 31st 2019.
My name is Rob your operator for today.
Presentation, all participants will be unless the only mode.
After the speaker's remarks, you'll be invited to participate in the question answer session.
As a reminder, this conference call is being recorded.
The company's earnings release dated December 10th 2019, well distributed before market opened this morning, I can be accessed via the company's Investor Relations website.
Dot com dot com.
During today's call management will discuss among other financial performance measures adjusted EBITDA adjusted net income 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 their 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.
Many 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 for those indicated today.
Your speakers today are norm Miller, the company's CEO , we write the Companys CLL.
George for sure the company CFO .
I would now let's turn the conference call over to Mr. Miller.
Please go ahead Sir.
Good morning, and welcome to concert quarter, a fiscal year 2020 earnings conference call.
I'll begin the call with a strategic overview, then we 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.
Strong credit results combined with our highly profitable retail business resulted in a 13% increase in third quarter earnings per diluted share.
To date earnings have increased 26% to $1.74 cents per diluted share and our year to date adjusted EBITDA has increased nearly 8% $256 million producing an adjusted EBITDA margin of approximately 14%.
Our strong year to date earnings demonstrate the power of our business model despite challenging retail sales.
Almost four years ago, we communicated our long term credit strategy aimed at producing a credit spread of approximately a thousand bases points I am pleased that our credit spread was above this level during the third quarter, which produce positive credit segment income for the first time in five and a half years.
Our credit model is the foundation of our business and enables our unmatched value proposition for our core customer.
That's our credit strategy matures, we'll remain disciplined in our approach to protect the overall health of the business, while pursuing initiatives aimed at optimizing retail sales.
We are disappointed that our third quarter same store sales declined 8.4%, which reflects the impact of prudent underwriting adjustments and unprecedented market dynamics within our consumer electronics category.
During the third quarter, we began to see deteriorating performance a certain segments of the portfolio.
We made the necessary adjustments to maintain our long term credit spread of approximately 1000 basis points, which negatively impacted same store sales by approximately 4% to 5%.
Compounding the impact to third quarter retail sales with a combination of significant price deflation for premium large screen televisions and an increase in production of large screen Tvs by second and third year manufacturers.
These market dynamics disproportionally reduce large screen TV prices and also enabled customers to use cash or existing financing options to purchase large screen Tvs elsewhere, which further impacted same store sales by approximately 3% to 4% during the quarter.
Producing positive same store sales, while remaining disciplined in our credit strategy is a top priority of the leadership team.
Lee will review in his remarks, we have implemented several strategies to offset current market conditions, and we are pursuing multiple retail growth initiatives.
Unit expansion is an important component of our growth plan and the performance of our new showrooms remains in line with our expectations as they contributed over 7% to re Joe growth during the third quarter.
This year, we have successfully opened 14, new showrooms and plan to open 16 to 18, new showrooms next fiscal year, including our first locations in the state of Florida.
We are excited about our expansion plans as our showrooms are extremely profitable have a quick payback and have historically produce compelling returns.
The leadership team and our board of directors are significant share holders of the company and we share investors disappointment with our sales performance during the third quarter and the pace of our retail transformation.
Our focus on better best products with a home and affordable financing options are the cornerstone of our unique value proposition for a large population of consumers across the country.
In addition, our disciplined credit strategy combined with our strong capital position and highly profitable business model provides us with the significant flexibility to successfully navigate current market conditions, while supporting our long term growth plan.
While the remainder of this fiscal year will be challenging we believe we will emerge well position to achieve an 8% to 10% we joke growth rate doing next fiscal year and we're confident we can sustain this level of growth for many years to calm.
So with this overview, let me turn the call overly who'll provide more details on our third quarter operating results. Thanks norm I'll begin my prepared remarks outlined our credit segment performance and the drivers affecting retail sales before reviewing the near and long term initiatives, we have developed to turn around our retail performance.
Third quarter credit segment results were very strong our credit spread was over 1000 basis points. During the third quarter as a result of a record net yield up 22.1% in favorable charge offs of 11.4 per se.
As a result, we achieved our first credit segment income in five and a half years. The continued improvements in our credit performance validates our credit strategy supports our unique in hybrid business model. It has significantly reduced our cost of funds.
In addition, as our credit model matures, we are well positioned to pursue opportunities the reinvest our excess credit spread into strategies aimed at growing retail sales.
It is paramount that we remain disciplined in our credit strategy as we pursue a growth oriented retail plan and expand our online presence new customers an online applications had become the fastest growing segments of our customer funnel, which isn't encouraging trend and will help us expand our base of high quality recurring customers. However, as we've stated historically new.
Customers and online applications have higher initial losses compared to existing customers and it is important to control the proportion of new customers in our portfolio.
During the third quarter, we began to see the performance deteriorate in new customer accounts and account from online applications that were originated earlier this fiscal year.
First payment defaults and 60, plus day delinquencies began to increase and we made prudent underwriting adjustments to mitigate the impact of these higher risk vintages and tightened standards, primarily on new customers on online applicants. We estimate these actions reduced third quarter same store sales by approximately 4% to 5%.
We expect fourth quarter same store sales will also be impacted by these underwriting changes which is included in our same store sales guidance.
As you can see from the credit spread this quarter the business can support additional credit risk in our ability to achieve 1000 basis points of credit spread was the result of the credit decisions. We have made over the last three years, we understand it may be counterintuitive to tighten credit when we achieved the highest credit spread in six years, but as our financial performance demonstrates we are.
Focused on pursuing a conservative credit strategy, especially as our retail expansion accelerates.
We continue to refine the balance between our retail in credit segments, and we will proactively adjust our underwriting standards as we did in the third quarter when portfolio trends outperform or underperform our expectations.
Our disciplined credit approach will maintain the health of our overall business. We believe the proactive credit decisions. We made in the third quarter combined with the significant improvements we continue to make it our underwriting and collection capabilities will help us quickly offset the higher amount of third quarter 60, plus day delinquencies. However, our near term provision and allowance will be.
Higher as we count for charge offs associated with accounts originated prior to the third quarter.
Enhance collection recovery capabilities will also help us offset the impact of higher new customer originations and we continue to make improvements in our pre and post charge off collection efforts.
Year to date recoveries have increased 31.3% to $18.8 million, which includes recoveries of $6.2 million in the third quarter.
I'm also pleased by the pricing of our recent November ABS transaction, which further validates our credit strategy, we will remain disciplined credit strategy as the overall health of our portfolio continues to benefit from higher yields better underwriting and improved collections.
Moving onto our retail business.
In addition to the impact on sales of underwriting changes, we also experienced challenging market conditions throughout the third quarter, primarily within our consumer electronics category lingering impact from lapping the rebuilding efforts associated with Hurricane Harvey and the impact on same store sales of cannibalization from new stores.
Same store sales within our consumer electronics category declined 25.6% during the third quarter, reflecting two compounding factors.
First significant price deflation for premium large screen Tvs reduced average selling prices during the quarter. According to NPD data the average selling price of Tvs. During the three months ended October 30, Onest 2019 was $376 compared to cons average selling price for televisions of 1176.
X dollars, which is over three times higher than the industry average and demonstrates our better best premium product focus more importantly average selling prices for the entire TV category declined over 8%. During this period, while average selling prices for TV screen sizes of 65 inches and above which is the segment of the TV market we.
Primarily focused on were down nearly 22%.
Second we also saw units declined as a lower price points of large screen Tvs made cash purchases more accessible to our core customer decreasing the need for financing we estimate that the market dynamics in the consumer electronics category impacted same store sales by approximately 3% to 4% during the quarter demonstrating the impact. This one category had on third.
Quarter sales performance.
A challenging market environment also exists within our gaming category as manufacturers, including Sony and Microsoft announced the next generation consoles will be released next year, which we believe is affecting demand for current models. This year. In addition, a large component of our game. This strategy is focused on attaching a gaming console with the sale of a new television.
As TV sales declined during the quarter. They have also impacted our sales of gaming consoles with the launch of new console. We believe sales within this category will improve later next year as consumers upgrade or purchase new models.
We expect sale the PV isn't gaming console will continue to negatively affect our consumer electronics category with an even greater impact in the fourth quarter because of the higher mix of sales from this category during the holiday season.
Appliance sales helped offset the challenges we faced and other categories as same store sales increased 5.5% during the quarter in total sales increased 13.6% or by nearly $11 million, we remain well positioned within the appliance market because of our large selection of brand name products next day delivery.
And in Health service offering and we are optimistic about our near and longer term opportunities to expand our market share.
In addition appliances are currently the largest contributor to our growth in E. Commerce sales speaking of ecommerce ecommerce sales increased 350% to $3 million from the prior year period, helping to offset the overall decline in same store sales.
While still a smaller portion of our overall sales we're excited by the opportunities we have to interact with our customers online.
We have developed a unique and differentiated ecommerce offering because of our next day delivery logistic and fulfillment capabilities as well as our full spectrum of financing options.
Looking at trends within our Hurricane Harvey markets last year's rebuilding efforts continue to affect retail sales, which speaks to the severity and magnitude of the storm and the disruption to the replacement cycle within our important southeast Texas markets.
The gap between a Harvey non RV markets continues to decline was 6.1% in the third quarter compared to 9.7% in the second quarter.
For the fourth quarter, we expect our hurricane Harvey markets will continue to be impacted by pulled forward demand, but the gap should decline further.
Therefore, we will no longer break out the impact of Hurricane Harvey in our quarterly same store sales guidance.
We're also starting to experience some cannibalization from opening new showrooms in existing markets.
We estimate that the impact of cannibalization on third quarter same store sales was approximately 1% to 2% and we expect to continue to see cannibalization impact same store sales in the coming quarters.
As a result of tropical storm Imelda, we closed 23 stores our distribution service centers in the corporate office in southeast, Texas during the third quarter fiscal year 2020.
Well dangerous levels of rainfall and flooding impacted certain markets. The store move through quickly and did not have a material impact on retail sales during the third quarter fiscal year 2020. However, we did provide credit relieved to customers impacted by the storm, which contributed $7.3 million to the increase in reagents for the quarter.
As you can see third quarter retail sales were impacted by several different factors, we have several initiatives underway to mitigate the near term weaknesses, we are experiencing retail sales.
Overall, we are focused on positioning calling for long term success inconsistent retail performance by increasing our product and service offerings, promoting our leading financing options and expanding our retail footprint.
During the third quarter, we successfully piloted fluorine products across our three Belmont showrooms and as a result, we're expanding the pilot across our Houston market, which combined represents approximately 20% of our store base the $15 billion residential foreign market in the U.S. supports an inventory light business model and have strong gross margin.
Flooring is expected to rollout across many of our markets in the coming quarters. Once fully implemented we believe this segment could contribute approximately $15 million of annual retail sales. We believe it will be accretive to our retail gross margin.
Flooring is the first step in a broader strategy to expand our reach into other large ticket or professionally installed home product categories. A process is underway to identify and evaluate additional categories that complement our merchandising strategy of selling aspiration, all home goods that typically require financing.
Over 92% of our retail sales continued to be financed by one of our three financing options demonstrating the unique value of our business model and we continue to make progress expanding our relationships with our third party financing partners.
The balance of sales through our partnership with Synchrony financial increased nearly 300 basis points from the same period, a year ago to 18.5% of total retail sales in the third quarter. However, we are disappointed with the penetration of lease to own sales because we believe sales through this financing options should be at least 10% of total retail sales given our credit waterfall comp.
Their door actual result of 7% in the third quarter internal initiatives are underway to improve our execution and we're also working with our least don't partner to achieve this goal.
Looking at our geographic expansion strategy, New showrooms are performing in line with our expectations. We successfully opened 14, new showrooms and existing states. During the current fiscal year compared to seven last fiscal year, we expect new showrooms, we will contribute to same store sales growth in future quarters, as they mature and benefit from recurring customer sale.
Yes.
Next year, we plan to open 16 to 18, new stores, including approximately eight new locations and Central Florida.
We believe once fully penetrated Florida will become our second largest state with approximately 40 showrooms.
As you can see we are actively pursuing a methodical expansion strategy focused on becoming a national retailer and investments in our physical and digital platforms are required to support this growth.
Our third quarter retail gross margin of 39.2% remains strong but was below our expected rate of at least 40% primarily due to the decline in same store sales and higher than expected onetime expenses associated with the Houston distribution Center relocation.
The year over year decline in retail gross margin was due primarily to the benefit of increases and appliance retail pricing related to tariff adjustments and the associated forward buys of inventory during the third quarter fiscal year 2019, coupled with increased logistics costs to help support future growth.
Our new state of the Art Houston distribution Center opened during the third quarter and we will start incurring additional expenses in the coming quarters associated with the development of our new Florida distribution Center.
To conclude my prepared remarks, despite the near term market impacts to our business. We are focused on pursuing our long term growth opportunities while remaining disciplined in our credit strategy underlying business trends and new store performance continued to support our model aimed at achieving total annual retail sales growth of 8% to 10% in annually.
Credit spread of approximately 1000 basis points in annual retail gross margin of at least 40%. We believe we will achieve these results during next fiscal year, and we're focused on producing consistent sustainable and highly profitable financial results for many years to come with this overview, let me turn the call over to George to review our financial results in more.
Detail.
Thanks, Lee on a consolidated basis revenues increased 1% to $377.7 million for the third quarter of this fiscal year from $373.8 million for the same period last fiscal year. Despite the 8.4% decline and same store sales as the contribution to revenue from.
New stores and increases in finance charges and other revenue more than offset the same store sales decline.
Total revenue growth helped drive an increasing GAAP net income of 3.5% to $15.1 million from $14.6 million for the same period last fiscal year.
GAAP net income per diluted share increased 13.3% to 51 cents for the third quarter fiscal year 2020.
On a non-GAAP basis adjusting for certain charges and credits net income for the third quarter fiscal year 2020 was 61 cents per diluted share compared to 59 cents per diluted share for the same period last fiscal year.
Adjusted EBITDA was $51.8 million or 13.7% of total revenue for the third quarter compared to $51.8 million or 13.9% of total revenue for the same period last fiscal year.
Reconciliations of GAAP to non-GAAP financial measures are available on our third quarter earnings press release that was issued this morning.
Looking at our retail segment in more detail total retail revenues for the third quarter decreased 1.3% to $280.3 million from the same period last fiscal year.
As it relates to ongoing trade negotiations and tariffs we continue to believe existing and currently planned tariffs will not have immaterial impact on our retail performance.
Retail US you know expense was $87.1 million, an increase of $6.2 million from the same quarter in the prior fiscal year, while retail asked you know expense as a percentage of retail revenue Deleveraged 260 basis points to 31.1% primarily due to increased cost for new stores.
As well as other investments, we're making to support our growth.
As we continue to accelerate the pace of new store openings, we will de leveraged from an EPS DNA standpoint.
I also want to mentioned that we have successfully implemented our nuvo management system, which follows the successful upgrade of our core finance and HR platforms.
The investments, we're making to our back office systems are part of a broader technology focused transformation to support not only our footprint expansion, but also ecommerce growth.
It's important to note that investments associated with new distribution centers accelerated new store growth, Florida expansion and technology investments will continue to weigh on profitability throughout next year. While these investments will temporarily impact our overall level of profitability. This in next fiscal year they are necessary as we.
Thank you the next phase of our business strategy focused on retail growth.
Turning to the credit segment finance charges and other revenues were a quarterly record of $97.4 million up 8.5% from the same period last fiscal year.
The increased versus the third quarter fiscal year 2019 was primarily due to a 40 basis point increase in the portfolio yield to 22.1% as well as higher retrospective insurance income compared to the prior fiscal year period.
Third quarter net annualized charge offs as a percent of the average outstanding balance were 11.4% and 90 basis point improvement over the prior fiscal year period, and the lowest level of quarterly charge offs in five years.
Provision for bad debts in the credit segment was $42.1 million for the third quarter fiscal year 2020, a decrease of approximately $5.2 million from the same period last fiscal year, primarily due to strong portfolio performance.
Allowance for bad debts, and uncollectible interest as a percent of the total portfolio was 13.3% at October 30, Onest 2019, which was down approximately 30 basis points from the prior fiscal year period.
As you know expense in the credit segment for the third quarter on an annualized basis as a percentage of the average customer portfolio about was 9.8% compared to 9.9% in the same quarter last fiscal year.
Interest expense for the third quarter was $15.1 million, which was down slightly from the same period last fiscal year.
The third quarter annualized interest expense as a percentage of the average portfolio balance was 3.8% compared to 4% for the same period last fiscal year.
Average net debt as a percentage of the average portfolio balance was approximately 61% compared to approximately 60% for the same period last fiscal year.
Looking at RMBS program, we closed our 2019 the transaction in November the second transaction of the year and I am extremely pleased with the pricing and structure, we were able to achieve as a result of portfolio performance and strong transaction execution.
EPS transaction was $486 million with an all in cost of funds of approximately 4.46% representing an 80 basis point reduction from the from our 2019, a transaction completed earlier this year and the lowest all in cost of funds. We've achieved since the company re entered the ABS market in September of 2000.
In 15.
We also change the agent bank on our $650 million revolver from Bank of America to JP, Morgan and backfill bank of America's commitment in November .
The agent bank on our revolver is an important business partner and we made this voluntary change to ensure we have strategic partners ships with our banks that are committed to our industry over the long term.
We're pleased to see the level of commitments for both existing and new banks during this process.
Through Friday December six we have repurchased approximately 3.5 million shares of our common stock at an average price of $19 per share for a total of $66.2 million, which has reduced the amount of our shares outstanding by nearly 11%.
With a strong balance sheet in place and diverse sources of capital we are well positioned to continue to organically grow and navigate near term challenges.
Finally, I want to provide an update on the upcoming current expected credit loss accounting standard, which is commonly referred to as diesel that we are required to adopt on February one 2020.
The new accounting standard changes the method of accounting for our allowance for bad debts from an incurred loss to an expected loss model, which will generally require that we increased the reserve on our customers evils.
From one year of incurred losses to lifetime expected losses.
We currently estimate that adopting c.. So we'll increase our total allowance for bad debts by 40% to 60% based on the portfolio composition and economic outlook as of October 30, Onest 2019.
The ultimate amount that we will that will be recorded on February one 2020 will be dependent on our portfolio composition and economic outlook at that time.
As a final note diesel is simply an accounting change and does not affect the cash flow or fundamental economics of our business.
With this overview normally and I are happy to take your questions. Operator, Please open the call up to questions.
Thank you at this time will be conducting a question and answer session. If you like to ask a question. Please press star one on your telephone keypad and the confirmation tone.
Well indicate your line is in the question can you give me press star to he'd like to move your question from the Q.
Participants are using speaker equipment, maybe necessary to pick up your handset before pressing the star here.
Thank you and our first question is coming from the line of Rick Nelson with Stephens. Please proceed with your question.
Thanks, Ken good morning.
No.
Right.
You are planned for 8% to 10%.
Long term revenue growth.
After inclusive of.
Fiscal 20.
And.
I'd like to know what your same store sales functions, our federal into that for fiscal 2000.
The fiscal 21.
Fiscal 21 excuse.
Fiscal 2000 is here we're in now as you know railcar fiscal year starts on February Onest, you're talking about next year, yes, okay, yes. So.
Still believes strongly that that 8% to 10% total retail sales growth is.
Achievable in fact from a new store growth standpoint, we're at the 7% range as we sit here today.
Inclusive then there would be low single digit same store sales would be.
Continues to be my expectation of 1% to 2% same store sales with that new store growth gets us to that 8% to 10% range.
Yes.
What are the big.
Swing factors it sounds like you've tightened up.
On the underwriting excuse me.
Challenge.
Would impair that they pay with linker, and then maybe or what.
What are the offsets I guess.
Okay. So first from an electronic standpoint, as we shared and are prepared comments.
Pete.
Electronics impact was 3% to 4% in the third quarter.
That the difference between the same store sales, where we finished in the third quarter and what our guidance the midpoint in our guidance in the fourth quarter is almost predominantly all driven by the increase in consumer electronics mix in the fourth quarter.
The other drove the other.
Drivers from an underwriting and leased own standpoint, and a cannibalization standpoint stay similar from third to fourth quarter. So as we look forward to next year.
We will we will continue to have some headwinds from an electronic standpoint into the first and second quarter.
But as a mix it becomes a much smaller so the impact to it will be significantly less than up to 6% to 7% hit here in the fourth quarter that its.
That is causing from an underwriting standpoint.
Now.
It's combination of two things going on there.
With that 4% to 5% in.
Impact that we talked about in the prepared comments first we tightened about 100 to 200 basis points, the middle part of the quarter.
But.
We because we saw F., Pts and 60 day plus.
Get higher than where we were comfortable with.
But at the same time as the quarter evolve, we saw that new and existing customer mix.
Shift even greater at least in the third quarter that got they cause that underwriting impact to be up to 4% to 5% for the full quarter, because as we underwrite for new customers, both online and in store.
They are they are always at a tightened underwriting as compared to our existing customer base.
We don't anticipate that underwriting impact.
To continue throughout next year.
We've already seen existing customer mix.
Come back.
Stronger so.
We will have some underwriting did.
Our impact in the.
First quarter.
But we expect especially with the new.
New underwriting model that we've put in place and as our spread is above that 1000 basis points. It gives us opportunities and and we still have more opportunity from a spread standpoint from where we're at today, we expect to be able to mitigate those.
Underwriting changes that we.
We took in the third quarter to CAD.
To get back to flat from that perspective, we also have.
The e-commerce , the new products, we expect them to.
To contribute 1% to 3%.
In themselves those those two items from the same store sales standpoint, this coming fiscal year.
Yes.
We expect Tidewater.
Okay, sorry, Jim and continue to grow and.
Thats the case.
When should we assume you'd have to do more type thing.
First program.
It's a good question Randy you have to separate online online applicants versus our online business ecommerce I mean, they're both coming online, but we are already very tight from an.
From a full underwriting standpoint in full business standpoint.
So the growth you're seeing is already it's we're already got a very very tight underwriting standard with the E. Commerce that you seem to this point.
The issue is because if you look when I came to the company four and a half years ago.
70% of our applications or conductive were completed in store, 30% online as we sit here today that has slipped 180 degree 70% of our applications online 30% of them our in store approximately so.
That's where the impact is from an underwriting standpoint, where you use where we saw the impact in the third quarter, we can still grow the ecommerce business with tight underwriting we think significantly from where we're at today Hey, Rick in Italy, One thing on E. Commerce, it's important to note is that.
We are seeing from left PD and and delinquency, it's actually better from the ecommerce perspective than the overall company, which again is such an important channel for us. So we will continue to push forward as we as we go into the future here and the reason it's better is were tighter underwriting number one we're tighter from an underwriting standpoint and a significant.
Over the customers that are doing business with us completely online our appliance customers are those categories that are better credit categories for us as well.
Are you still planning sticks fixed 7 million.
First year sales volume for the new stores group.
I'm thinking Wow speaker because of that type.
As we sit here today, it's still in that range. It it varies I would say, it's somewhere between five and 8 million depending on if it's in an existing state are brand new state, but that we haven't done anything dramatically obviously as we as we tightened with new.
Be it online or in store there are ramifications there.
That may get it towards the lower end, but again everything we're opening work as you know we're at core profitable at three and half to 4 million in revenue with our stores and even if we are tighter.
A little bit tighter coming out of the gate with the new stores.
As we now we only have a couple of them here that.
Out of the pipeline, but as we they mature we expect that revenue and we get some recurring customers in that store base.
We expect that growth ultimately to mature to the.
$8 million to $10 million in revenue on a per store basis, just may take us a little longer to get there, but that that's been the case as we've been tightened underwriting even before the third quarter. That's been the case for the past year.
Okay fair enough, thanks, and good luck.
Thanks, Rick.
Our next question comes from the line of John Baugh Stifel. Please proceed with your question.
Thank you and good morning.
So maybe you could clarify.
One.
Buckets or was it across the whole customer profile, where where are you changed underwriting.
How much you changed the sound like there was an initial change during the quarter. It and you increased it during the quarter should just a little more color around around the fleets.
Sure John it's all around new customers.
Almost and new retail as well as predominantly new web.
When I say web I don't mean necessarily e-commerce , I mean web applicants.
We.
We segmented customer base into a variety of different segments, but.
Four primary segments are.
Retail new retail existing web new web existing and that is one of the major layers that we look at across the entire portfolio and in the third quarter.
The underwriting change we did predominantly web knew was.
Within the range of 100 to 200 basis points, but as we saw that mix change.
The impact of that 100 to 200 basis points became greater not because we took a second.
We took a second bite at the Apple, it's just because of the mix shift from.
From both retail to new continued to increase or was higher than we modeled are forecasted.
Okay.
And projected so that's what resulted ultimately in that 4% to 5%.
Impact from an underwriting standpoint for the quarter, Okay and is there a way to look at or assessed.
For I don't know your existing customers I guess or non do.
What.
First payment defaults or 60 day delinquencies did that.
Yeah, I'm trying to get a sense of how extracting knew how how the book or portfolio performed.
Yeah, I mean, we absolutely we don't share that John the FTD and the 60, but we we absolutely thats how we that's how we take actions.
And part of on Li's prepared comments I made it on the surface. It sounds contrary that we've had the best credit performance in six years, yet we've done some underwriting tightening.
It sounds.
[noise] contrary on the surface, but it's because the spread and the credit performance that we're seeing today is.
It's a lagging indicator the leading indicator as you know is SPD ease and 60 day delinquencies and we see that typically in 60 to 120 days from an underwriting standpoint, we start to see those vintages come in we take action and.
We do a regularly but.
We saw a more of a softening on the new side of the house, New web, especially we're getting an abundance of customers there.
Frankly, if you solve the number and the reporting that we issued out so that we will issue a number of applicants are up significantly.
Which is a good thing for the business there is demand for it for our products. It's just they're predominantly in our Theres, a there's a significant number of them and that web new.
Arena that.
We have to be very prudent and.
And and we're being look I am being very conservative from from an underwriting and credit standpoint, I'd, rather have short term pain and certainly we feel that here today to ensure that.
The stability of the portfolio.
Very very comfortable going forward or where that is that.
Sue So I don't know expected numbered nor what are you seeing that.
Oh, the existing portfolio is or is not changed in terms of perform.
No. It's it's not changed its the performance is very.
Not a macro issue from existing customers standpoint at all.
And then quickly on the.
The consumer electronics.
Understand the gaming comment.
But I don't cover the category and the significant deflation at big screen TV.
I would presume that eight continues and b, we're going to.
Theres, just no new product cycle like Big screen drive see in the next year too. So I assume that that will get worse, albeit just almost smaller base and therefore less activity that is that the way you guys are looking at it.
Yeah, I mean, it will linger I won't be at this level as we lap these numbers I mean.
The dynamics of what we saw this quarter because we saw some softening on the C. In the.
The ended the first quarter in the second quarter from a price standpoint, but it was really post labor day, the labor day event in post Labor day, when we saw.
The ASP is as Lee talked about in his prepared comments on 65 mentioned above is down.
Over 20%, 22% three times the rate of Sps in general from an NPD standpoint.
TV wide now no ASP is on TV has it been coming down for multiple years. It was the magnitude that they came down and specifically in the category that.
No we primarily focus on from a better best standpoint, Hey, John its Levy. If you look forward one of the things that's coming through and you're seeing is the 8-K, that's a new technology development for consumers certainly has some great screen technology.
So there are differentiating factors that will allow us to keep playing in that bigger screen size better technology aspiration of products that we talk about but obviously in this third quarter fourth quarter were we obviously taken ahead with the influx of second and third tier products at that 65 inch screen size et cetera that you saw donate we don't anticipate.
To be a growth category for us here for what the current technology, but we don't expect to see as we especially as we lap into next year and I will see some softness as we saw in the first and second quarter, but not nearly to the magnitude we believe that we're seeing today.
Thanks, Good luck.
Thanks.
Our next question is from the line of Brian Nagel with Oppenheimer. Please proceed with your question.
Hi, good morning, Thanks for taking my questions.
So we don't you may have just touched on this but I want to ask again, if we look at the.
I guess the credit issues in the quarter and commentary that you and your team made regarding tightening.
Did that reflect do you think.
What you saw there which reacted to reflected more bay cons issue or is there something that's starting to crack that you're seeing in credit overall from a macro standpoint.
Yes, I really think it's our issue.
Brian I don't think its.
We're not seeing it on a macro we're not seeing it from a collection standpoint, that's that's typically where we're very our antenna is is is up because as we start to.
If we would start to see something from a macro standpoint, and a recession standpoint, that's typically where you would see it on the.
On the delinquency side, there and is predominantly on the new side of the house you would see it on the existing side.
As well and we're not seeing that on the existing customer base that it's been fairly stable. There. It's it's purely the mix of.
Of new to a new web and new retail versus existing and frankly part of it is our learning curves as weve.
Over the past four years invested significantly within the credit business and the underwriting team.
And we accelerate retail growth. So we are inherently getting more new customers into our mix.
From the start and then that consumer behavior mix of moving from retail.
Web standpoint.
Now were.
For us, we're still learning through that process.
Of being able to underwrite as effectively to maximize the sales potential there and not jeopardize the credit portfolio and as I said before being being fairly conservative as we go through this to make sure that.
And how we get that right mix, because we have more than enough customers.
Both coming online and in the stores submitting applications that.
We just have to underwrite them effectively and it's why.
We highlighted the lease to own at 7%. That's just that's strategically just a huge huge opportunity.
Communicated.
Many times that 10% is the number and to me that's not the ceiling. That's the floor of where we should be at we should be a minimum of 10% leased down based on the credit quality customers that we see.
That's the that's there from an opportunity standpoint, Hey, Brian as Lee just the come back to your original question on the consumer or the health of consumers I said in my prepared remarks, they are feeling relatively flush and that's what we're seeing from the consumer electronics, where.
You've got the price points. These large screen TV is coming down to a level, where they they truly can buy them with cash you don't have to finance them. So as to your question that really in as norm answered, it's more of our phenomenon than a consumer.
Health issue.
Okay. That's very helpful. Then so the second question ahead on onto consumer electronics is particularly this dynamic now we're seeing.
Televisions.
I think enormous you mentioned its price deflation and Tvs is by no means a new phenomenon, but seems like it accelerated here.
Is there anything.
Given the Cogs business model the customer you serve that project, but we have new stores is there anything you can do for merchandising standpoint to contend with this lower price alternative at other venues where is it just a matter of have to wait through this with on the TV category.
I mean is very difficult, Brian because I mean, we've been more aggressive we have some opening price points to use them to get customers.
You know ended the show room. The the issue is it staff. The deflation is so great. If it was on the margin.
We can mitigate and frankly, we saw that and in the.
Earlier in this past fiscal year at the magnitude that we're seeing at.
At 2020, 5% down it and frankly, it's not just the price deflation.
It is a number of second and third tier manufacturers that that that we're doing no business a year ago in the 70, and 75 inch and above even 65 inch very limited.
You know.
As they've entered into the market because the price points are there for them to be able to compete is seeing a lot of those our customers are now we know we've gotten.
Survey and information from our customers, saying.
I don't have to finance for 65 inch I mean, there were 65, and 55 and 65 inch TV for 300 under $300 under $400.
Through Black Friday, and our customers.
No at that price point don't need to finance and have the cash to be able to buy that outright.
Hey, Brian This is George I would just add that obviously, we're continuing to focus on additional products that we could add to our floor.
You mentioned in his prepared remarks flooring and what we think that can be from an opportunity standpoint, as well as some of the complimentary categories.
In that space. So we certainly recognize the challenges in the in the CE space and specifically the television market and are focused on introducing new categories and new products to to offset those sales, but but as you know Brian you've been cover in retail for a long time.
I mean, it is not a new phenomenon.
From a TV cycle standpoint.
These you know even on our and our lower quarters, Theres still 23% to 25% of the mix of our products theyre not going away.
It's.
Then you go through these cycles and it's happened before where until some new technology comes in you see a leveling off but we don't expect that category to go away. We just we don't see it as being a growth category 8-K may mitigate to some degree but.
But it's still an important.
Driver from a traffic standpoint, and an important element.
Element from an overall category I'd like to minimize or mitigate the the size. It is with some of the home services and other products that we're going into.
To make it less painful when there are these downturns, but it is a part of.
Yes, evolutionary process with TV.
Through the years.
Hi, just one more question I appreciate that color one more question or why do we have had this discussion the basket.
Clearly have done it does an absolute phenomenal job in repairing the credit business and we saw in the quarter profitability.
Yeah and had been tracking above that thousand point spread.
When you use a team.
You are talking I mean does it did the topic of maybe be too tight on credit come up.
That you would be pushing it is too far discredit really need to be I know it this quarter quarter fluctuations, but just credit need to be a profitable business or could we structured credit in order to drive better retail results.
No. That's a good question, Brian we do have very robust conversations around that.
And now part of it as I mentioned.
I will acknowledge having lived through.
The struggles we had when the credit business throughout the company to the precipice.
4.55 years ago very conscious of that.
And then ill and pushing JD and the credit team all the time to to find ways to where we can say, yes, we lead talked about the yield.
Record yield we still have more opportunity there we think theres. Another hundred do 150 basis points that will season from a yield standpoint.
And how would you heard on the recoveries there's opportunity from a charge offs standpoint, so not only do we have opportunity with the spread were at but we still see that spread.
You know that.
Opportunities to rise to increase on both ends of that spread.
Having said that.
No in the short term were being fairly conservative.
And till until I'm certain that the things we're doing it.
Doesn't do us any good to be in a position today to.
A year from now.
That we're in a better position retail wise, but we pay for that.
Nine months 12 months.
15 months down the road. So it is that balancing act and I will tell you. The team is very conscious it's not an easy thing to do it's not the easiest business model, but I'm completely confident we have the right people and the REIT strategies to do it and.
Look we we went through some bumps.
For four and a half years ago is we will get integrated business.
You know into a stable place as we work through the strategy there and we're going through some bumps here on the retail side, but I'm as confident in is bullish today as I ever have been that we can grow this business.
Low single digit same store sales, 8% to 10% topline and maintain that credit business and.
Stable place.
Yes, I appreciate you appreciate the color. Thanks, Thanks, Brian .
Our next question is from the line of Kyle Joseph with Jefferies. Please proceed with your question.
Hey, good morning, Thanks for taking my questions most of them.
Have been covered I just wanted to talk about the financing mix of the portfolio and the trends you're seeing there obviously you've seen good growth in the synchrony channel or is it sounds like the least down channels kind of come down or under underperforming. Your expectations can you just discuss what's what's going on there how much.
You guys control, how much of that as the macro factor and how much of that is specific underwriting by those respective partners.
Yes, so I'll start with the synchrony piece, you're right I mean, we've seen our synchrony business in the past year go up.
By almost 300 basis points.
And.
Now it speaks to the demand across the entire credit spectrum of our products. We now have about two including cash customers about 25% or one in four of our customers are our prime or our cash customers.
We've worked very closely with synchrony.
To to integrate them on our website and and.
It's the benefits of adding an in house credit team because we can we can talk directly with their credit team a lot of the retailers that both progressive on the lease stone and synchrony on the.
On the prime side of the house there they are not typically.
Interacting with retailers that have a credit in an underwriting team and can work with them to be able to to drive the performance. So pleased with where we're at would synchrony still think theres some upside there but.
I'm very solid performance, it's been disappointing on the lease downside.
I would tell you I don't think it's a macro issue at all Kyle.
I think it's in an execution issue and.
Half half the issue is on our side and execution in the show room of of converting those customers we decline.
And then some of it rests with our partner as well that we talk with them on literally almost a daily basis.
Of where we need to go there's a number of initiatives that they have in the hopper that they're working on to move that needle and there's a number of things we're working on as well, but I will tell you at the end of the day. It's it is truly an execution issue on the on the lease down there is nothing macro we see going on there.
Got it. Thank you that's it from me.
Thanks Kyle.
Our next question is from the line of Bill Ryan with Compass point. Please proceed with your question.
Thanks, and good morning.
Oh, it's obviously very good that you caught the credit inflection point relatively early.
But I was wondering if you could give us a little bit more granular color on the specific underwriting changes that you made.
Did you tighten up on down payment terms debt to income ratios whatever it may be in the second part of that question.
Why are the new customers of today performing somewhat worse, then, let's just call to new new customers of yesterday that prompted the tightening because obviously there's been some change in behavior. Thanks.
Sure Bill So first on the.
On the actions that we took it was kinda, yes, and yes on a number of the things that you talked about I mean, when we when we Titan we tightened by increasing down payments, we tighten front from a leverage standpoint, we tightened by just declining outright.
And lowering credit and lowering credit limits all three of those our actions that we take to to impacts.
Credit availability that we provide and ultimately that will reduce from a sales standpoint, and new customers and Bill you you understand the subprime.
Customer fairly well.
New customers have historically and we've communicated that many times and this is an economist phenomenon. This is a subprime phenomenon.
They defaulted twice the rate of existing customers.
Part of the challenge that that.
That my predecessor had in the business had four or five years ago was you know they grew the new customer mix between comps and new stores at a rate that.
We saw new customer mix get up into the 60 plus percent of the total mix versus its in the last 12 months. It's in the 49% range for US right now, but it was down in the Thirtys when before we started growing.
Be so before we started accelerating new store openings in the key is keeping it at that that mix.
From both.
The new customers coming in as well as to what's changed Bill is the consumer behavior customers that used to come into our store.
To fill out an application more of them are going online and frankly, we've made it easy for them because they can fill out an application not hit their credit score.
Thank you, we can do a soft pool and they can see exactly what they.
What they qualify for.
So there's a there's a bit of self selection that occurs there because if a customer before that was coming into the show room in order to get that information because it's only been about a year and a little over a year that we've been doing that.
Where we could do with soft pull and they can see what they qualified for now they can go online in the past they would come in the store, we could convert them to at least stone.
And and.
Have a better chance when we could see that customer face to face as that mix is moved online.
It creates more challenges for us from an execution standpoint of if that customers declined or they're approved with a down payment how do we how do we get them into the store to be able to try to convert them to progressive or are even to cons with a down payment and bill it's.
Lee look it truly is a balanced and we're trying to navigate that balance very carefully as you bring in new customers. It got to bring in new customers, you're never truly going to know even with the best underwriting models until you get them onboard you're going to suffer some losses that is kind of a customer acquisition cost in a sense that you suffer through but you can't let in so many in some of those losses that these stabilize the port.
Well, if so thats the balance we're constantly trying to way here as we go forward.
Okay. Thank you.
Our next question comes from the line of Brad Thomas with Keybanc. Please proceed with your question.
Hi, good morning, Thanks for taking my question.
One of first ask about the outlook for.
Retail gross margin I was hoping you could talk little bit about how you're thinking about that in the fourth quarter and what.
Drivers or had ones that were seeing here now how much that may continue into 2020, as we refine our models.
Okay.
Yes, so I'm sure Brad so for the fourth quarter.
We guided to 39 five I think is the centerpoint of the guidance, which is a little under what our long term.
Expectation is that the 40% there's really two things predominantly driving that one is.
From an OLED logistics standpoint.
As we open and we talked about in the in the prepared comments, the Houston DC and transition there will also opening a.
Louisiana, DC and it won't be the fourth quarter will be more the first the first half of next year, the Florida DC those will always short term on the.
On the margin a bit I think it was about 60 basis points.
This past quarter is what the impact was from a logistics standpoint, and then the other element that striving to frankly is is the lower sales.
On the same store sales standpoint de levered that some and that those those two are the primary drivers. There is nothing systemic that's that's occurred from a product standpoint, our pricing standpoint that.
That would reflect that.
Decline in margin.
Got you that's helpful arm.
A question that we've been getting with respect to the rent on business is has the growth of progressive and other retailers affected you and I was curious if you had a chance tried to do the analysis on a state by state basis as the best Buy's rolled out as lows and started to roll out are you seeing any impact from that.
Now offering progressive on your business.
To sit here and say there is no impact that I don't think we can say that.
I do think as more retailers not only best buy but others out there and frankly I believe ultimately almost every retailer will have a lease to own.
Partnership or virtual lease to own process. So I think theres been some that certainly is made it more challenging but having said that if you go to the investor deck on page seven.
And you look.
At the number of applications, we get we get one point and fiscal 19, we got 1.2 million applications is actually a little more than that from a run rate standpoint.
That our applications are up were declining somewhere in the neighborhood of 600 to 650000 people on an annual basis. So there is more than enough.
Fish and opportunity for us to be able to get to that 10% leased or even with some of the macro things happening with other retailers from our perspective.
Gotcha, and an enormous I understand you correctly. It feels like we can kind of compartmentalize a couple of issues here that seems to be the more.
Transitory nature with adjusting.
Your approvals on under online customers on that headwinds in the consumer electronics industry.
But as we've talked about in the kuna here. It does feel like there was some of those will continue here at your 2020 I guess my question would be as you guys plan for calendar 2020 for next year.
Are there any adjustments that youre looking at making at this point and.
You know how how you go to market the timing of store openings et cetera, and anything you're looking at changing because of how the back half is playing out here.
That's a good question Brad that's why we communicated we were still opening more stores, we haven't changed that at all at that 16 to 18 is what we're targeting for next year above the 14, we opened this year.
Moving forward with Florida.
When you look at the macro categories I mean lease stone, there's clearly several hundred basis points of opportunity there minimum from our standpoint, the underwriting we will see that in the fourth quarter.
And there will be some probably end up in the first in the early part of the year frankly, I don't expect that underwriting impact to last throughout next year with the spread that we continue to see increasing.
And the opportunities we have there I think will we will be able to mitigate that as.
The second quarter and.
And the rest of the year unfolds, the electronics category, we did see some of that this past year in the first in the second quarter, I think they'll still be a little bit there.
That will have some headwinds, but not nearly to the degree you've seen in the third in the fourth quarter and then you add on to that.
In addition to the lease to own opportunity the opportunities we have with the new products the opportunities from an e-commerce standpoint.
Now I feel very comfortable that you know next year, we will still during the year, we will be at that low single digit same store sales.
And I'll add that towards the back half of the year as the year unfolds and at that 8% to 10% total retail growth.
Gotcha. That's helpful. Thank you so much and good luck the rest the holiday season.
Thank you we have reached end of the question answer session I'll turn the call over to norm Miller for closing remarks.
Thank you I want to say first of all thank you to our 5000 associates around the company that worked very hard to.
To deliver performance for our customers and and meet expectations everyday. We appreciate the work they do and we also appreciate your interest in the company and look forward to talking with you at the end of the fourth quarter.
This concludes the call.
Thank you you may now disconnect your lines at this time, thank you for your participation.