Q3 2022 Conn's Inc Earnings Call

December 7, 2021

[music].

Good morning, and thank you for holding welcome to the Conn's Inc Conference call to discuss earnings for the fiscal quarter ended October 31st 2021. My name is Melissa and I'll be the operator for today.

During the presentation, all participants will be in a listen-only mode. After the speakers' remarks, you'll be invited to participate in a question and answer session. As a reminder, this conference call is being recorded. The company's earnings release dated December 7, 2021, was distributed before market opened this morning and may be accessed via the company's Investor Relations website at IR.Conn.com.

As a reminder, this conference call is being recorded the company's earnings release dated December seven 2021 was distributed before market opened this morning and may be accessed via the company's Investor Relations website at IR Dot Com dotcom.

During today's call, management will discuss among other financial performance measures 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 their most comparable GAAP measures. I must remind you that some of their statements made in this call are forward-looking statements within the meaning of the 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 Chandra Holt, the company CEO and George Bchara the company's CFO. At this time I'd like to turn the call over to Ms. Holt. Please go ahead.

Our forward looking statements within the meaning of the 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 Chandra Holt, the company CEO and George Bchara the company's CFO.

At this time I'd like to turn the call over to Ms. Holt. Please go ahead.

Good morning, and welcome to Conn's third-quarter fiscal year 2022 earnings conference call. I'll start today's call with a review of the quarter and outlook for the remainder of our fiscal year before turning the call over to George who will review our financial results. Since joining the company as CEO in August my confidence and our differentiated business model has only increased. We had a great third quarter, which reinforces my excitement in the direction Congress headed and my belief in the enormous potential of our expanding retail digital and payment offerings.

Since joining the company as CEO in August my confidence and our differentiated business model has only increased we had a great third quarter, which reinforces my excitement in the direction Congress headed and my belief in the enormous potential of our expanding retail digital and payment offerings.

Overall, I'm proud of our impressive third-quarter performance, especially in this very fluid business environment. During the third quarter, earnings per share increased 140% over the prior year to 60 cents per diluted share driven by accelerating retail sales momentum, triple-digit year over year e-commerce growth and favorable credit performance. On a year to date basis total retail sales have increased 26.3% to $972.7 million and earnings have increased to $3.34 per diluted share.

During the third quarter earnings per share increased 140% over the prior year to 60 cents per diluted share driven by accelerating retail sales momentum triple digit year over year ecommerce growth and favorable credit performance.

On a year to date basis total retail sales have increased 26, 3% to $972 $7 million and earnings have increased to $3.34 per diluted share.

Our strong financial results are a testament to the hard work and commitment of our team members and the actions we are pursuing to create sustainable value for our shareholders. The third-quarter same-store sales exceeded our expectations, increasing 26% over the prior fiscal year and total sales were up 28.8%.

The third quarter same store sales exceeded our expectations, increasing 26% over the prior fiscal year and total sales were up 28, 8%.

On a two-year basis, same-store sales continued to accelerate in the third quarter, increasing 9.7% compared to 3.2% in the second quarter and 1.8% in the first quarter. We have growth underway demonstrates the rapid expansion of our e-commerce business, increasing demand across our major product categories and our success, attracting a wider range of customers.

We have growth underway demonstrates the rapid expansion of our ecommerce business, increasing demand across our major product categories and our success, attracting a wider range of customers.

In fact, retail sales grew across all payment option, even as we lapped the significant growth we experienced last fiscal year and noncash finance sales. We are also benefiting from the assortment and supply chain decisions we made earlier this year to maintain a high level of in stocks to support next day delivery. At October 31st 2021, over 80% of the items we carry were available for next day delivery, even as sales increased at a faster pace than inventory.

We are also benefiting from the assortment and supply chain decisions. We made earlier this year to maintain a high level of in stocks to support next day delivery.

At October 31st 2021 over 80% of the items. We carry we're available for next day delivery, even as sales increased at a faster pace than inventory.

We believe our in-stock position and next-day availability was a competitive differentiator in the third quarter and enabled us to attract new customers. While global supply chain challenges are expected to continue into the new year. This year's results demonstrate that our teams are successfully managing through these issues.

While global supply chain challenges are expected to continue into the new year. This year's results demonstrate that our teams are successfully managing through these issues.

We believe our proactive inventory strategies will continue benefiting our business and competitive position going forward. As expected, third-quarter retail gross margins were pressured by higher international freight car that elevated cost of goods sold. Our team continues to do a great job managing this fluid environment and optimizing our domestic distribution assets.

As expected third quarter retail gross margins were pressured by higher international freight car that elevated cost of goods sold.

Our team continues to do a great job managing this fluid environment and optimizing our domestic distribution asset.

Our nimble supply chain approach has also allowed us to reduce dependency on quad-port. We're also taking actions to support our margins by diversifying our sourcing base, flexing our assortment, reducing promotions and selectively increasing prices. While we remain focused on providing customers with compelling value, we will continue to closely monitor market conditions and margins across our categories and expect to continue to prudently pass along price increases to mitigate higher costs.

We're also taking actions to support our margins by diversifying our sourcing base flexing, our assortment, reducing promotions and selectively increasing price it.

Well, we remain focused on providing customers with compelling value. We will continue to closely monitor market conditions and margins across our categories and expect to continue to prudently pass along price increases to mitigate higher costs.

Looking at our third-quarter retail sales and performance in more detail. We saw double-digit sales growth across our top product categories. Within our appliance category sales remained strong as same-store sales increased 21.9% over the prior year. This growth was driven by our assortment expansion, favorable in-stock position and rapid e-commerce growth. Furniture and mattress same-store sales increased 18.8% over the prior year. More than any other category, we have pivoted the furniture assortment through creative sourcing actions to maintain a consistent flow of product and ensure a broad range of next day delivery options for our customers.

Within our appliance category sales remained strong as same store sales increased 21, 9% over the prior year.

This growth was driven by our assortment expansion favorable in stock position and rapid ecommerce growth.

Furniture, and mattress same store sales increased 18, 8% over the prior year.

More than any other category, we have pivoted the furniture assortment through creative sourcing actions to maintain a consistent flow of product and ensure a broad range of next day delivery options for our customers.

In our mattress category, we continue to see strong growth from our reinvented assortment launched earlier this year composed of leading national brands and our first private label brand [dream spot.] Dream spot continues to exceed our expectations and is our number one selling mattress brand in both units and dollars. In addition, our expanded mattress in a box assortment is driving our online growth in the category. The same-store sales within our consumer electronics category increased 28.2% over the prior year. This success was driven primarily by higher TV unit sales as we leaned into the growth segments of premium picture quality and ultra-large screen sizes.

Dream spot continues to exceed our expectations and as our number one selling mattress brand in both units and dollars.

In addition, our expanded mattress in a box assortment is driving our online growth in the category.

The same store sales within our consumer electronics category increased 28, 2% over the prior year.

This success was driven primarily by higher TV unit sales as we leaned into the growth segments of premium picture quality and ultra large screen sizes.

In addition, as a heavily penetrated category online, Tvs are benefiting from our rapid e-commerce growth. Lastly, Black Friday TV pricing started in October and contributed to a strong end to the third quarter. From a channel perspective, we ended the quarter with a record $19.2 million in E-Commerce sales.

Lastly, Black Friday, TV pricing started in October and contributed to a strong end to the third quarter.

From a channel perspective, we ended the quarter with a record $19 $2 million in E Commerce sales.

But the 294.8% year over year increase in e-commerce sales is a result of the investments we've been making to improve the functionality of our website and create a frictionless customer experience online while also leveraging our best in class next day white glove delivery capabilities.

We believe our long term e-commerce growth opportunity is significant and we continue to invest heavily in our digital experience to increase customer conversion. With year to date e-commerce sales of $47.2 million, we believe we are on track to grow e-commerce sales to approximately $70 million this fiscal year.

With year to date e-commerce sales of $47 $2 million. We believe we are on track to grow ecommerce sales to approximately $70 million this fiscal year.

We are in the early inning of our digital transformation and I believe we can significantly increase our e-commerce penetration in the coming years to be in line with other comparable omnichannel retailers. The performance of new stores is also contributing to our growth recently opened new stores added 8.2% to total retail sales growth for the quarter.

The performance of new stores is also contributing to our growth recently opened new stores added eight 2% to total retail sales growth for the quarter.

We ended the third quarter with 157 stores and we have opened 11 locations year to date, primarily within the state of Florida. The performance of recently opened stores is encouraging and we anticipate accelerating our pace of store openings next fiscal year.

The performance of recently opened stores is encouraging and we anticipate accelerating our pace of store openings next fiscal year.

Yeah.

Turning to our credit segment. We entered the third quarter favorable underlying credit trends, reflecting the successful actions. We took beginning in March of '20 to carefully manage risk throughout the COVID-19 pandemic. As a result of these prudent actions, we achieved a third-quarter credit spread of 14.6% representing the highest spread in over 10 years.

Entering the third quarter favorable underlying credit trends, reflecting the successful actions. We took beginning in March of 'twenty 'twenty to carefully manage risk throughout the COVID-19 pandemic.

As a result of these prudent actions, we achieved a third quarter credit spread of 14, 6% representing the highest spread in over 10 years.

As shown on slide 12 of our Investor presentation, since optimizing our credit strategy, higher credit quality customers represent a greater percentage of Conn's in house finance sales. This has occurred even as these in house finance sales have increased. In addition, these new higher credit quality vintages are outperforming older vintages.

This has occurred even as these in house finance sales have increased.

In addition, these new higher credit quality vintages are outperforming older vintages.

The weighted average origination credit score of sales finance has averaged 616 over the past four quarters compared to 608 for the fiscal year ended January 31st 2020. Our disciplined approach to risk has helped proactively manage our 60 plus day delinquency and re-aged balances. Both indicators of portfolio health remain well below pre-COVID-19 levels.

Our disciplined approach to risk has helped proactively manage our 60 plus day delinquency and re aged balances.

Both indicators of portfolio health remain well below pre COVID-19 levels.

As a percent of the portfolio. The 60 plus day past due balance was 8.8% compared to 11.5% for the same period last fiscal year. The balance of re-aged accounts as a percent of the portfolio was 18.3% compared to 28.2% for the same period last fiscal year. While we expect delinquency and charge off trends to normalize in the coming quarters. We believe they will remain below pre COVID-19 level based on our enhanced credit strategy and current economic outlook. As a result, I believe we are well-positioned to target a credit spread of approximately 1000 basis points going forward.

The balance of re aged accounts as a percent of the portfolio was 18, 3% compared to 28, 2% for the same period last fiscal year.

But we expect delinquency and charge off trends to normalize in the coming quarters. We believe they will remain below pre COVID-19 level based on our enhanced credit strategy and current economic outlook.

As a result, I believe we are well positioned to target a credit spread of approximately 1000 basis points going forward.

As you can see Congress emerge from the COVID-19 pandemic stronger and better positioned for sustainable growth. Our confidence in our credit segment reflects the transformation we made during the pandemic to refine our credit strategy and add new lease to own partners.

Our confidence in our credit segment reflects the transformation, we made during the pandemic to refine our credit strategy and add new lease to own partners.

In addition, our expanded focus across a larger total addressable market of prime, near prime and subprime customers is driving continued retail growth throughout all payment options. This is especially encouraging as we have lapsed significant growth in cash, credit card and third party finance sales over the prior fiscal year. In fact, cash credit card and third party finance sales have increased 23.9% during the third quarter after increasing 32.7% in the third quarter last fiscal year.

This is especially encouraging as we have lapsed significant growth in cash credit card and third party finance sales over the prior fiscal year.

In fact cash credit card and third party finance sales have increased 23, 9% during the third quarter after increasing 32, 7% in the third quarter last fiscal year.

Overall, I believe Conn's is uniquely positioned to navigate the current macro environment and deliver strong retail and credit results next fiscal year. We are entering the fourth quarter with the best credit performance in our recent history reflected by the highest credit spread in over 10 years as well as favorable 60 plus day delinquency and re-aged trend.

We are entering the fourth quarter with the best credit performance in our recent history reflected by the highest credit spread in over 10 years as well as favorable 60, plus day delinquency and re aged trend.

In addition, our enhanced credit strategy, which relies more heavily on our third-party partners allows us to capture incremental customers, regardless of where they fall in the credit spectrum. To conclude my prepared remarks, we are well-positioned heading into the fourth quarter because of our stable credit segment and growing retail business.

To conclude my prepared remarks, we are well positioned heading into the fourth quarter because of our stable credit segment and growing retail business.

Overall, retail trends remained strong reflecting favorable consumer demand and the growth strategies we have put in place. In addition, providing flexible and affordable payment options is an important component of our value proposition. We believe this creates a unique competitive advantage that helps our customers better navigate the current inflationary period.

In addition, providing flexible and affordable payment options is an important component of our value proposition.

We believe this creates a unique competitive advantage that helps our customers with better navigate the current inflationary period.

I believe our recent results demonstrate the powerful value proposition, we have created and the strong position we are in to navigate the dynamic retail and credit environment. Our impressive third quarter and year to date performance, robust in-stock inventory levels and growing e-commerce capabilities are encouraging and we are on track to deliver significant revenue growth and record earnings this fiscal year.

Our impressive third quarter and year to date performance robust in stock inventory levels and growing ecommerce capabilities are encouraging and we are on track to deliver significant revenue growth and record earnings this fiscal year.

As we remain focused on the future, I am confident we are headed in the right direction. I look forward to updating investors on our enhanced strategic growth plan and long term financial outlook at an in-person Investor day in Houston early next year. More details will be announced in the coming weeks and I look forward to sharing our exciting strategies aimed at creating significant value for our shareholders.

I look forward to updating investors on our enhanced strategic growth plan and long term financial outlook at an in person Investor day in Houston early next year.

More details will be announced in the coming weeks and I look forward to sharing our exciting strategies aimed at creating significant value for our shareholders.

Finally, I want to use this opportunity to thank our team members for your steadfast commitment to Conn. Thank you for your continued support and service. Now, let me turn the call over to George to review our financial performance.

Now, let me turn the call over to George to review our financial performance.

Thanks Chandra. I'm encouraged by the positive momentum underway in our business and our strong position headed into the fourth quarter. On a consolidated basis, total revenues were $405.5 million for the third quarter, representing a 21.4% increase from the same period last fiscal year.

On a consolidated basis total revenues were $405.5 million for the third quarter, representing a 21, 4% increase from the same period last fiscal year.

We reported strong third-quarter net income of 60 cents per diluted share compared to net income of 25 cents per diluted share for the same period last fiscal year. Looking at our retail segment in more detail, total retail revenues for the third quarter were $334.8 million or 28.8% increase from the same period last fiscal year. Retail revenue was driven by an increase in same-store sales of 26% unused store growth.

Looking at our retail segment in more detail total retail revenues for the third quarter were $334.8 million or 28, 8% increase from the same period last fiscal year.

Retail revenue was driven by an increase in same store sales of 26% unused dogwood.

During the third quarter, Conn's credit sales increased 31%, which we achieved by capturing a greater share of wallet and a larger amount of higher credit quality customers within our core demographic rather than by approving applicants further down the credit spectrum. Cash, credit card and third party finance sales grew 23.9% during the third quarter of fiscal year 2022.

Cash credit card and third party finance sales grew 23, 9% during the third quarter of fiscal year 2022.

This increase was driven by a 64% increase in lease to own sales as we successfully leverage our platform of integrated partners. We continue to believe we have opportunities to increase sales across all our financing options. Gross margin for the third quarter was 36.8% a decrease of 150 basis points from the same period last year.

We continue to believe we have opportunities to increase sales across all our financing options.

Gross margin for the third quarter was 36, 8% a decrease of 150 basis points from the same period last year.

The year over year decrease in retail gross margin was primarily driven by the impact of increased product cost as a result of higher freight, partially offset by an increase in sales of higher-margin products. Higher retail sales helped leverage retail SG&A expense during the quarter. As a percent of retail sales, SG&A expenses were 30.2% for the third quarter compared to 32.4% for the same period last fiscal year.

Okay.

Higher retail sales helped leverage retail SG&A expense during the quarter.

As a percent of retail sales SG&A expenses were 32% for the third quarter compared to 32, 4% for the same period last fiscal year.

Retail segment operating income was $22.5 million compared to $15.2 million for the same period last fiscal year. Due to higher retail sales and improved operating leverage partially offset by lower retail gross margin.

Due to higher retail sales and improved operating leverage partially offset by lower retail gross margin.

Turning to our credit segment. Finance charges and other revenues were $76 million for the third quarter. The 4.9% decline from the same period last fiscal year was primarily a result of a 15.2% reduction in the average balance of your customer receivable portfolio. The credit quality of our portfolio has improved significantly due in part to the prudent derisking actions we began implementing in March 2020. Our strong credit results continue to show that all receivables portfolio is performing well.

The four 9% decline from the same period last fiscal year was primarily a result of a 15.2% reduction in the average balance of your customer receivable portfolio.

The credit quality of our portfolio has improved significantly due in part to the prudent Derisking actions, we began implementing in March 2020.

Our strong credit results continue to show that all receivables portfolio is performing well.

Annualized net charge offs as a percent of the average portfolio balance was 8% at the end of the third quarter compared to 14.7% for the same period last year. During the third quarter, the credit provision for bad debts was $26.5 million compared to $27.4 million last fiscal year. Year over year decline was due to an improvement in credit quality, which resulted in lower charge offs during the quarter, partially offset by a greater increase in the allowance.

During the third quarter, the credit provision for bad debts was $26 $5 million compared to $27 $4 million last fiscal year.

Year over year decline was due to an improvement in credit quality, which resulted in lower charge offs during the quarter, partially offset by a greater increase in the allowance.

Credit segment income before taxes was $1.8 million compared to a $2.7 million loss for the same period last fiscal year, primarily due to lower interest expense, a lower provision for bad debts and improvements in our credit performance.

I'm pleased to report that this is the fourth consecutive quarter of profitable credit segment income before taxes. As our portfolio begins to grow, we will continue to focus on controlling risk-limiting portfolio volatility and achieving approximately 1000 basis points of annual credit spread while supporting our long term growth opportunity.

Yeah.

As our portfolio begins to grow we will continue to focus on controlling risk limiting portfolio volatility and achieving approximately 1000 basis points of annual credit spread while supporting our long term growth opportunity.

Consolidated SG&A expenses for the third quarter were $138.1 million. The $15.9 million increase from the prior-year period was due to a higher variable operating expenses associated with sales growth additional new stores and an increase in advertising costs as we lapped prior year reductions due to the COVID-19 pandemic.

The $15 $9 million increase from the prior year period was due to a higher variable operating expenses associated with sales growth additional new stores.

An increase in advertising costs as we lapped prior year reductions due to the COVID-19 pandemic.

Turning now to our balance sheet and capital position. We ended the third quarter with a strong balance sheet and capital position as we continue to benefit from significant year over year growth in cash from third party finance sales and robust cash collections on our customer receivables portfolio. This is produced meaningful operating cash flow over the past seven quarters, which we have used to further reduce debt and strengthen our balance sheet.

We ended the third quarter with a strong balance sheet and capital position as we continue to benefit from significant year over year growth in cash from third party finance sales and robust cash collections on our customer receivables portfolio.

This is produced meaningful operating cash flow over the past seven quarters, which we have used to further reduce debt and strengthen our balance sheet.

Okay.

We ended the third quarter with $424.1 million in net debt compared to $615.2 million at the end of the third quarter of last year. In addition, net debt as a percent of your ending portfolio balance declined to approximately 37.7% at the end of the third quarter compared to approximately 48.2% at the end of the third quarter of last year. In November, we closed our 10th ABS transaction since reentering the ABS market in 2015.

Dishing, that's debt as a percent of your ending portfolio Das declined to approximately 37, 7% at the end of the third quarter compared to approximately 48, 2% at the end of the third quarter of last year.

In November we closed our 10th ABS transaction since reentering, the ABS market in 2015.

The terms of the 2021 A transaction before the highest advance rate of $85.75 per cent and lowest all-in cost of funds of approximately 3.9% since we reentered the ABS market. We believe completing this transaction, which resulted in net proceeds of $377.8 million further strengthens our liquidity position well into next fiscal year.

We believe completing this transaction, which resulted in net proceeds of $377.8 million further strengthens our liquidity position well into next fiscal year.

In addition, our proven ABS platform continues to demonstrate our ability to access the capital markets. I am pleased with our success of striking the balance sheet, de-risking the business and executing our growth initiatives. These efforts have built underlying strengths in our business and driven strong sales momentum we've experienced so far this year.

I am pleased with our success of striking the balance sheet derisking, the business and executing our growth initiatives.

These efforts have built underlying strengths in our business and driven strong sales momentum we've experienced so far this year.

Before we open the call up to questions, I want to review our expectations for the full year and fourth quarter and provide some initial thoughts on our business as we head into the into next fiscal year. Starting with retail sales. Early Black Friday pricing combined with concerns related to product availability caused an earlier start to the holiday season, which we believe pull forward some retail sales into the third quarter.

Starting with retail sales.

Are we back Friday pricing combined with concerns related to product availability caused an earlier start to the holiday season, which we believe pull forward some retail sales into the third quarter.

We believe our marketing and promotions were well-positioned to capitalize on these trends and we continue to expect mid-teens same-store sale growth for the full year. For the current fiscal year, we expect finance charges and other revenues to be down year over year, primarily due to a lower balance of customer receivables.

For the current fiscal year, we expect finance charges and other revenues to be down year over year, primarily due to a lower balance of customer receivables.

Given the ongoing issues related to the global supply chain. We now expect full-year retail gross margin to be down approximately 30 to 50 basis points, resulting in retail gross margin being down approximately 100 to 150 basis points in the fourth quarter.

We continue to believe SG&A expenses will be up on a two-year basis, primarily driven by new stores as we anticipate continued investments in our growth strategies to be largely offset by tighter cost controls. The fourth-quarter provision is expected to be up versus the prior-year period, driven primarily by portfolio growth.

The fourth quarter provision is expected to be up versus the prior year period, driven primarily by portfolio growth.

In addition, the provision in the fourth quarter of last fiscal year benefited from an approximately $20 million reduction in our allowance primarily driven by improved economic conditions as well as a reduction in the balance of accounts that received the COVID-19 deferral. As we look into next year, we expect to produce positive same-store sales despite a fluid economic environment. We also anticipate accelerating our pace of new store openings in fiscal year 2023 above the 12 stores we will open this fiscal year.

As we look into next year, we expect to produce positive same store sales. Despite a fluid economic environment. We also anticipate accelerating our pace of new store openings in fiscal year 2023 above the 12 stores, we will open this fiscal year.

Retail gross margins are expected to remain under pressure next year, driven primarily by the ongoing impacts of the global supply chain. We anticipate our provision next year to increase primarily due to portfolio growth from higher sales of cons in house financing and a smaller reduction in the economic reserve within our allowance. We plan to provide more insight into next year's expectations as well as our long term financial and operating targets at our Investor Day early next year.

We anticipate our provision next year to increase primarily due to portfolio growth from higher sales of cons in house financing and a smaller reduction in the economic reserve within our allowance.

We plan to provide more insight into next year's expectations as well as our long term financial and operating targets at our Investor Day early next year.

Overall, we expect fiscal 2023 to be another strong year for Conn and I'm excited about the direction we are headed. Finally, I want to share my thanks to all our team members for their continued hard work service and dedication. So with this overview, Chandra and I are happy to take your questions. Operator, could you open the call up to questions?

Finally, I want to share my thanks to all our team members for their continued hard work service and dedication.

So with this overview gendron I'm happy to take your questions operator could you open the call up to questions.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Kyle Joseph with Jefferies. Please proceed with your question.

Sarkies.

Our first question comes from the line of Kyle Joseph with Jefferies. Please proceed with your question.

Hey, good morning, guys. Thanks for having me on and taking my questions. I just have two around e-com genre. I think he talked about the growth opportunity there, but you know longer term can you give us any sort of sensor goalpost of how you think about the e-com as a percentage of sales for the consolidated business? And then as a follow up to that on e-com sales could you give us any sense of the financing mix? Does it mirror kind of the consolidated portfolio or do you see more call it prime or leased out online?

And then as a follow up to that on E. Com sales could you give us any sense of the financing mix does it mirror kind of the consolidated portfolio or do you see more call it prime or leased out online.

Yeah. Good morning. Thanks for that question. I'm you know, we're very excited about our performance in e-commerce, delivering almost 300% growth this quarter. And we've invested in and you can see that that growth happening. And we do believe there's opportunity to continue to invest to further drive that business and we do believe that we can be in line from a penetration standpoint with other similar retailers within our categories. So we do think there's significant upside in the e-commerce business. From a payment standpoint and a financing standpoint, what we see online is that a mix that's fairly similar to what we see in stores.

We can be in line from a penetration standpoint with other similar retailers you know within our categories. So we do think there's significant upside in the e-commerce business from a payment standpoint on a financing standpoint, what we see online is that a mix that's fairly similar to what we see in stores.

We see a little bit higher from a cash standpoint, and a little bit higher from a comp standpoint, with synchrony being a little bit smaller but overall fairly similar to what we see in stores.

Got it, very helpful. And then one follow up for me just in terms of the margin pressure and go with the supply chain issues. I know there's a lot of uncertainty and it's hard to predict but any sort of visibility as to is the one you would expect, I know you talked about them continuing into 2020 two but is there any sort of outlook as to when you would expect those pressures to ease?

Is there any sort of outlook as to when you would expect those pressures to east.

Yeah, we do you know as we said in the prepared remarks, we do expect international freight rates to be a headwind for next year and continue into next year. We are starting to see it normalize so where you're seeing an increase for quite a while and it's starting to normalize and entering a little bit of reduction, but we do anticipate it continuing to be a headwind for the foreseeable future. And don't have a clear line of sight as to when that will come back down.

Headwind for the foreseeable future and and don't have a clear line of sight as to when that will come back down.

Great. Thank you very much for answering my questions. Thank you. Our next question comes from the line of first Nelson with Stephens Inc. Please proceed with your question.

Thanks, Paul.

Thank you. Our next question comes from the line of first Nelson with Stephens Inc. Please proceed with your question.

Okay. Thanks a lot. To follow up on the provision guidance. In 2Q call about nine weeks ago, I believe you were guiding to a lower provision in the second half. Now you're guiding to a higher provision for the fourth quarter. I'm curious kind of what the drivers are there.

Right.

To follow up on the provision.

God guidance admit to Q call about nine weeks ago, I believe you were guiding to a lower <unk>.

Provision in the second half.

Now you're guiding to a higher provision.

For the fourth quarter I'm, just curious kind of what the drivers are there.

Good morning, Rick. This is George so the provision was down year over year in the third quarter consistent with our expectation. But as we think about the fourth quarter, we're now expecting a greater increase in the portfolio, which is driving an increase in the allowance this year versus last year. I would also remind you that if you look at, as I mentioned in my prepared remarks, if you look at the fourth quarter of last year, we benefited from a fairly significant reduction in the allowance in the fourth quarter of last year that we don't expect to see this year.

But as we think about the fourth quarter, we're now expecting a greater increase in the portfolio, which is driving a greater increase in the allowance this year versus last year I would also remind you that if you look at the as I mentioned in my my prepared remarks, if you look at the fourth quarter of last year, we benefited from a fairly significant reduction.

in the allowance in the fourth quarter of last year that we don't expect to see this year.

Thank you for that. I'd also like to get some perspective on your credit customer. We've seen this customer is seeing a lot of it inflation with higher crude gas prices rising. Do you have any concerns that would [inaudible] standpoint, or a credit standpoint?

Right.

Kept some pretty spot on.

Hello.

Your credit customer.

We've seen this customer is seeing a lot of it in place.

Higher crude price.

The city is rising.

Have any concerns that would permit.

Oh standpoint, or a credit standpoint.

Yeah. Good question. So right now credit is performing well and we continue to adapt our underwriting in anticipation of a normalized credit environment. And if you look on page five of the Investor presentation, you can see that we're clearly underwriting to a higher quality credit customer, which reduces the volatility. We're still underwriting to a 1000 basis points of spread but it reduces the volatility because we're underwriting to a higher quality level.

Quality credit customer, which reduces the volatility we're still underwriting to a 1000 basis points of spread but it reduces the volatility because we're underwriting to a higher.

Quality level and.

So we feel good about our strategy in credit. I think the other thing as it relates to sales, I'm you know I'm excited about the Investor day that we're gonna have them at the beginning of next year, but I think the one thing you'll see us focus on is running a very stable credit business and utilizing a more modern value proposition to drive the sales versus increasing our risk within credit to drive the sales. The only thing I would add to that, Rick, is that if you look at the portfolio health today.

Proposition to drive the sales forces, increasing our risk within credit to drive the sales.

The only thing I would add to that Rick is that if you look at the portfolio health today.

We're in as good a position as we've been in a long time with re-age percent down significantly your year over year TDR percentage down and 60 day delinquencies, so heading into or heading out of the pandemic, we're positioned from a balance sheet standpoint in a really good position.

60 day delinquencies, so heading into or heading out of the pandemic, we're positioned from a balance sheet standpoint, and a really good position.

Okay. Thanks for that. I also want to follow up on the fourth-quarter sales. Try to imagine some pulling forward. Can you talk about the same stores sales are tracking here in the holiday quarter? Yeah, demand remained strong into the fourth quarter. So our value proposition continues to work and our strong in stops in-stock position has set us up for success in Q4. And our abilities to deliver our sales guidance for the full year I'm, saying it seems very much achievable, although we feel confident that we'll deliver in Q4.

I also want to follow up on the fourth quarter.

Sales.

Yeah.

I'm pulling forward.

Can you talked about.

The same stores sales are tracking here in the holiday.

Nice quarter.

Yeah demand remained strong into the fourth quarter. So our value proposition continues to work and are strong in stops in stock position has set us up for success.

Success in Q4, and our abilities to deliver our sales guidance for the full year I'm, saying it seems very much achievable, although we feel confident that we'll deliver in Q4.

Okay, all right very good. Thanks a lot. Good luck. Thanks, Rick. Thank you. Our next question comes from the line of Brad Thomas with Keybanc Capital markets. Please proceed with your question.

Thanks, a lot.

Good luck.

Thanks, Rick.

Thank you. Our next question comes from the line of Brad Thomas with Keybanc Capital markets. Please proceed with your question.

Hi, Chandra and George and good morning. Wanted to follow up on an earlier question that touched on E-Commerce. And Chandra just as you get more time under your belt, you know, with Conn's. I was wondering if you could talk a little bit more about the investments that you think might be necessary to help accelerate e-commerce growth or if you feel like the business has that in place. And what that timeline might look like to help accelerate growth. Dovetailing off the strong momentum you have here in 3Q.

Wanted to follow up on an earlier question that touched on E Commerce and Kindred just as you get more time under your belt, you know, Wisconsin I was wondering if you could talk a little bit more about.

The investments that you think might be necessary to help accelerate e-commerce growth or if you feel like the business has that in place and and what that timeline might look like to help accelerate growth.

Dovetailing off the strong momentum you have here on <unk>.

Yeah, great question. So when I look at the e-commerce business I kind of tear it apart into two different segments. So you've got the front end the customer-facing website and then you've got the backend with the supply chain and the delivery. And when I look at our e-commerce business, we're already very strong from a backend standpoint. We have next day White Glove delivery, which is very unique to us and our strong in-stock position that we have at the end of Q3 over 80% of the items that we have available to sell. We could get customers next day and when you compare that competitively, it was a big advantage for us in Q3. So I feel really good about the supply chain component and our ability to continue to utilize and replicate our supply chain going forward. From a front end standpoint is where we have work to do. And we've invested in improving the functionality of our website, which is what's driving a lot of the growth right now. And when you look at the website, there's really three components. There's traffic, conversion and average order value.

Tear it apart partner two different segments. So you've got the front end the customer facing website and then you've got the backend with the supply chain and the delivery and when I look at our E. Commerce business. We're already very strong from a backend standpoint, we have next day white glove delivery, which is very unique to us and our strong in stock position.

That we have at the end of Q3 over 80% of the items that we have available to sell we could get customers next day and when you compare that competitively. It was a big advantage for us in Q3, so I feel really good about the supply chain component and our ability to continue.

Continue to utilize and replicate our supply chain going forward from a front end standpoint is where we have watched you and we've invested in improving the functionality of our website, which is what's driving a lot of the growth right now and when you look at the website. There's there's two there's really three components its trough.

And you know the big opportunity that we're focusing on is conversion and that, there are things that you do to invest in conversion are around site functionality. It's around you know shipping speed we already have shipping pricing our retail pricing. So we know all the things that we need to do to continue to drive the business and we'll continue to invest there. We are in the early stages of our transformation. So we had over 5% penetration. So we have a ways to go but a lot of upside for the future.

There we are in the early stages.

Of our of our transformation. So we we had over 5% penetration. So we have a ways to go but a lot of upside for the future.

Really helpful, Chandra. Thank you. And George, if I could just follow up on Rick's question, just about the fourth quarter. You know if we take your comp guidance mathematically at face value to be at a mid-teens comp for the year, what would imply that the fourth quarter decelerates pretty significantly and you know it might be 9% could get you to a 16% growth for the full year. Is there anything you're seeing that would suggest you'd get that level of a slowdown in the fourth quarter? And any more color that you'd be able to share about how things are tracking or how you're expecting them to play out.

Mathematically at face value to be at a mid teens comp for the year you know what.

Would imply that the fourth quarter decelerated pretty significantly and you know it might be 9% could get you to a 16% growth for the full year is there anything you're seeing that would suggest you'd get that level of a slowdown in the fourth quarter and any more color that you'd be able to share about how things are tracking or how you're expecting them to play out.

I mean I think, as I mentioned in my prepared remarks, we positioned ourselves this year for an earlier holiday season, and we certainly saw the benefits of that winning in October. And that was reflected in the third car quarter results. Then November was strong. It was just slower than the trends for the third quarter and we're anticipating that that along with December will result in a strong fourth quarter. But somewhat less strong than the third quarter from a sales standpoint. Yeah. Got it. That's helpful. And then George, the last one for me just as we think about SG&A for 2020, any broad strokes you can help us work with as we think about how growth may play out for next year.

As I mentioned in my prepared remarks, we positioned ourselves this year foreign earlier holiday season, and we certainly saw the benefits of that winning in October and that was reflected in the third car quarter result November was strong it was just slower than than the the trends for the for the third quarter and we're <unk>.

Anticipating that that along with December will result in a a strong fourth quarter, but somewhat less strong than the than the third quarter from it from a sales standpoint.

Yeah.

Gotcha.

It's helpful.

And then Georgia last one for me just as we think about SG&A for 2020 any broad strokes you can help us work with as we think about how growth may play out for next year.

Yeah, we didn't put out full guidance for next year, Brad. I mean, I think we're continuing to focus on investing in new stores, investing in people in the right place. But we think that with the growth of the business next year, we should be able to leverage SG&A. And we've said that before. Very helpful. Thank you all so much and good luck this holiday. Thanks, Brad. Thank you. Our next question comes from the line of Brian Nagel with Oppenheimer and Company. Please proceed with your question. Hi, good morning. Thanks for taking my questions. So the first question just to follow up on Brad's question, there isn't comment just with regard to the pull forward into holiday demand here. So as you look across your store your merchandise mix. You're recognizing there are certain categories are probably lend more of the holiday purchases than others. Are you see it, as you try to size the impact of this is pull forward, are you seeing different trends within different categories, depending on their nature relative to the holiday demand?

I mean, I think we're continuing to focus on investing in new stores investing in people in the right place, but we think that with with the growth of the business next year, we should be able to leverage SG&A and we've said that before.

Before.

Very helpful. Thank you all so much and good luck this holiday.

Thanks, Brad.

Thank you. Our next question comes from the line of Brian Nagel with Oppenheimer and company. Please proceed with your question.

Hi, good morning, Thanks for taking my questions.

So the first question just to follow up on Brad's question, there isn't a comment just with regard to the.

The pull forward into holiday demand here. So as you look across your store your merchandise mix.

Recognizing there are certain categories, you'll probably when more of the holiday purchases and others are you see it and as you try to size. The impact of this is pull forward are you seeing different trends within different categories, depending on the nature of it relative to the holiday demand.

Yeah. So I mean overall, if you look at what happened in Q3. So we saw an acceleration through the quarter. So August we posted a 17.5% comp, September 18.6 in October with a 26.7. So you saw a big lift in October. And when you look at the categories that drove that, you're right. That the categories that are more holiday sensitive did drive, did having a larger acceleration than some other categories, specifically within consumer electronics, TV Black Friday pricing went out in October. Which it did last year a little bit later, but when earlier this year and the breadth of items that were on sale were far greater than what we saw last year. So overall, we saw an acceleration in October across categories, but there were some more holiday sensitive categories that we saw a greater increase in October than others.

That's the categories that are more holiday sensitive did drive did having a larger acceleration than than some other categories, specifically within consumer electronics T. V. T V. Black Friday pricing went out in October which it did last year, a little bit later, but when earlier this year and the breadth of items.

We're on sale where were far greater than what we saw last year. So overall, we saw an acceleration in October across categories, but there were some more holiday sensitive categories that we saw a greater increase in October than others.

Thanks, Chandra. That's helpful. Then the second question I have with regard to the freight costs. So a headwind and everyone's talking about this is obviously not unique to cost. But a headwind to gross margins through Q3, and George, you talked about being a continued heading into the fourth quarter. The question is I guess, how do you see this progressing and probably more importantly, are there levers that Conn's could pull in the nearer term to help offset or manage some of these freight costs?

A headwind and everyone's talking about this was obviously not you'd need to cause but a headwind to gross margins.

Q3, the George you talked about being a continued heading into the fourth quarter, but of course I have is I guess, how do you see this progressive and probably more importantly are there levers that <unk> could pull in.

The nearer term to help offset or manage manage somebody's freight costs.

Yeah. So I mean, as we said we believe that the freight, the international freight cost will continue to be a headwind to margin. But the team is working very hard to mitigate as much as we can. So both the utilization within our supply chain as well as sourcing activities as well as you know prudently passing on price increases, as we feel that we can, given the market conditions. We're balancing all of that along with continuing to try to drive the growth so we can leverage SG&A and ultimately deliver operating margin leverage. So there's a lot of puts and takes that's a fluid environment, but I do believe that the team is keeping the customer at the center of their decisions as well as a shareholder in making good decisions for that business in the long run.

Within our supply chain as well as sourcing activities as well as you know prudently passing on price increases as we feel that we can given the market conditions. We're balancing all of that along with continuing to try to drive the growth. So we can leverage SG&A and ultimately deliver operating margin leverage.

So there's a lot there's a lot of lot of puts and takes that's a fluid environment, but I do believe that the team is keeping the customer at the center of their decisions as well as a shareholder in and making good decisions for that business in the long run.

Thank you. I appreciate it. Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Ms. Holt for any final comments. I just wanted to thank everyone for your time today and interest in Conn's. I look forward to speaking with everyone at our Investor Day in Houston early next year. And lastly, I wanted to wish everyone a happy holiday season and a happy new year. Thank you. Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Thank you I appreciate it.

Yeah.

Okay.

Thank you, ladies and gentlemen that concludes our question and answer session I'll turn the floor back to Ms. Holt for any final comments.

I just wanted to thank everyone for your time today and interest in cons I look forward to speaking with everyone at our Investor Day in Houston early next year, and lastly, I wanted to wish everyone, a happy holiday season, and a happy new year.

Thank you.

Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.

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