Q1 2023 Conn's Inc Earnings Call

Speaker 1: We also expect an in-housealthly Stone program to have strong cash on cash returns that are higher than our trend traditional in-house credit offering.

Speaker 1: Our lease-ownone transition is an important initiative, as we create a platform that supports the volume of retail sales we expect to achieve through this payment option.

Speaker 1: Continued tightening by ourly Stone partners has been a significant headwind to our retail performance over the past quarter.

Speaker 1: To improve our lease-own performance, we have chosen to consolidate our lease-to-owned business under one partner that is committed to supporting a certain level leased on sales.

Speaker 1: We expect our expanded strategic partnership with American first financial to benefit least to own sales once it goes into effect in the coming weeks.

Speaker 1: Having diverse payment options has been the cornerstone of our differentiation.

Speaker 1: Our new vision is to have a payment option for everyone.

Speaker 1: For example, each year there are over 13 thousand applicants that apply for leas to own net cons, and our turned down.

Speaker 1: There are also customers that don't want to use credit for a variety of reasons.

Speaker 1: With this in mind, we decided to launch a laway program that provides these customers with a payment option and provides us with an incremental opportunity to serve additional customers.

Speaker 1: i'am pleased to report that, after a successful pilot of leoway program in Q1, we are planning to roll this program out to more stores this fiscal year.

Speaker 1: While recent economic uncertainty has impacted our near-term retail performance, I am confident in the strategic direction our business is headed and our ability to achieve our fiscal year 2025 financial goals.

Speaker 1: With a challenging macro backdrop and tighter underwriting from our third-party lease stron partners, we saw retail sales decline throughout the first quarter, as well as into may.

Speaker 1: As a result, we now expect total annual revenues to be down high single digits in fiscal year 2020. -three.

Speaker 1: To help navigate a more challenging macro environment. We are implementing near-term cost savings initiatives, including reductions in certain marketing and labor-related expenses that are expected to offset some of the impacts lower sales will have on profitability.

Speaker 1: To conclude my prepared remarks. Our transformation is progressing and I am encouraged by the strategies underway to create sustainable value for our shareholders.

Speaker 1: We are making prudent adjustments to our cost structure while simultaneously investing in our long-term growth initiatives and maintaining stable credit trends.

Speaker 1: We believe this will allow us to successfully navigate near-term economic challenges and emerge from this difficult period stronger and better positioned for profitable and accelerated growth.

Speaker 1: I am excited by the strategic direction we are headed and proud of the hard work and dedication of our team members.

Speaker 1: I want to thank our entire team for their commitment to our company, our customers and our local communities.

Speaker 1: Now let me turn the call over to George to review our financial performance.

Speaker 2: Bs genda. On a consolidated basis, total revenues were $339.8 million for the first quarter of fiscal year 2023, representing a 7% decrease from the same period last fiscal year.

Speaker 2: For the first quarter of fiscal year 2023, net income was 25 cents per liutited share compared to net income of $1, and 52 cents per utited share for the same period last fiscal year.

Speaker 2: As a reminder, earnings in the first quarter last fiscal year benefited from lower cost as a result of the COVID-19 pandemic and a $17.1 million benefit in our provision for bad debt associated with the release of a portion of our economic reserve.

Speaker 2: Reconciliations of GAAP to non-GAAP financial measures are available in our first quarter earnings press release that was issued this morning.

Speaker 2: Looking at our retail segment in more detail, total retail revenues for the first quarter were $272.5 million.

Speaker 2: The 6% year-over-year decline in retail revenue was primarily due to a more challenging retail environment, lapping the benefits stimulus had on first quarter sales last fiscal year and tighter underwriting from our leastto own partners.

Speaker 2: We opened three stores during the first quarter, including two stores within the state of Florida, and ended this quarter with a total of 161 stores across 15 states.

Speaker 2: For fiscal year 2023, we are now planning to open 10 to 14 stand-alone locations and 10 to 20 store within the store locations, all within existing markets, which will leverage fixed costs.

Speaker 2: We expect the store withinthe store locations will require approximately $1 thousand of capital investment, plus display inventories, making them a highly capital-efficient way to expand our footprint.

Speaker 2: Retail gross margin for the first quarter was 34%, a decrease of 200 basis points from the same period last fiscal year.

Speaker 2: The decline in retail gross margin was primarily driven by deleveraging of fixed costs. The impact of increased freight and fuel costs, which was partially offset by higher RSA commissions.

Speaker 2: Sgna expenses in our retail segment increased by five cent, pointy-seven percent, primarily due to labor and occupancy costs associated with new store growth.

Speaker 2: Tier stock compensation expense and investments in our e-commerce growth.

Speaker 2: As a percent of retail sales. Sgna expenses were 35% for the first quarter, compared to 31% for the same period of our fiscal year.

Speaker 2: As we discussed throughout today's call, lower retail sales and higher costs contributed to a reil segment operating loss of $2.1 million, compared to retail segment operating income of $15.7 million for the same period last fiscal year.

Speaker 2: Seasonality also impacted retail segment profitability in the first quarter, as the first quarter typically has the lowest quarterly retail sales during the fiscal year.

Speaker 2: Turning to our credit segment, finance charges and other revenues were $67.3 million for the first quarter, a 7% decline from the same period last fiscal year.

Speaker 2: The decline in credit segment revenue was due to a 6% reduction in the average balance of the customer's usual portfolio over the prior fiscal year period, as our underwriting strategies remained disciplined and we focused on maintaining a thousand basis points of credit spread.

Speaker 2: The positive performance of our receivables portfolio is encouraging, which we believe will help us navigate the evolving economic environment.

Speaker 2: As a percent of the portfolio. The 60 -plus Day pass due balance was 10% at eightril thirtye of 2022 and is in line with our expectations.

Speaker 2: This compares to 9% for the same period last fiscal year, which benefited from stimulus programs.

Speaker 2: The balance of reaged account as a percent of the portfolio was 16%, compared to 24% for the same period last fiscal year.

Speaker 2: For the first quarter, net charge offs as a percent of the average portfolio balance, or 12% compared to 15% for the same period last fiscal year.

Speaker 2: During the first quarter of fiscal year 2023, the credit provision for bad debts was $14.6 million, compared to a seventeenteen $2 thousand benefit to our provision for bad debts last year.

Speaker 2: For the first quarter last year, the provision for bad debt benefited primarily from a $2 million release of a portion of our economic reserve.

Speaker 2: With a smaller average portfolio balance. We deleveraged fixed credit segment, SGNA expenses and credit segment income before taxes with $10.5 million compared to $43.8 million for the same period last fiscal year.

Speaker 2: The reduction in credit segment income before taxes was primarily due to lower credit segment revenue, higher SGNA expenses and a higher provision for bad debt, partially offset by an improvement in interest expense.

Speaker 2: Turning now to our balance sheet and capital position.

Speaker 2: Our balance sheet and capital position remains strong and we continue to benefit from significant year-over-year growth in cash and private label credit card sales and robust cash collections on our customers seles portfolio.

Speaker 2: This continues to produce meaningful operating cash flow.

Speaker 2: We ended the first quarter with $529.9 million in net debt, compared to $434.7 million at the end of the first quarter of last year.

Speaker 2: In addition, net debt as a percent of the ending portfolio balance was approximately 50% at the end of the first quarter, compared to approximately 39% at the end of the first quarter of last year.

Speaker 2: We continue to believe our liquidity and access to capital provides us with flexibility to navigate the challenging economic environment while investing in our long-term growth initiatives.

Speaker 2: Before we open the call up to questions, I want to review our expectations for the remainder of fiscal year 2020. -three.

Speaker 2: As gender mentioned, we expect total revenue to be down high, single digits for fiscal year 2020. -three.

Speaker 2: Our expectations include a high single-digit decline in annual retail revenue and a high single-digit decline in credit revenue as our portfolio contracts, due to lower retail sales financed through our in-house credit offering.

Speaker 2: We now expect operating margin for the fiscal year to be between 3% and 4%, which reflect deleveraging on lower sales and the negative near-term impact from our lease-to-owned platform acquisition, partially offset by cost reductions as compared to our previous guidance.

Speaker 2: The change to our guidance reflects more challenging macroeconomic outlook, consistent with recent trends, and lower consumer spending, particularly for our financial access customer.

Speaker 2: Reductions to expenses are underway, including to marketing and labor, as we look to offset the impact of lower sales in a more challenging environment.

Speaker 2: Lastly, while our guidance reflects a soft third economic environment, we are excited by the initiatives underway, including strategies to drive e-commerce growth, enhance our credit offering and expand our value proposition to more customers, including our store within new store strategy with bek.

Speaker 2: We believe these initiatives will improve sales trends in the back half of the year and help us achieve our long-term financial goals.

Speaker 2: Finally I also want to share my thanks to all our team members for their continued hard work, service and dedication.

Speaker 2: So with this overview, tender and I are happy to take your questions.

Speaker 2: Operator please open the call up to questions.

Speaker 3: Thank you, Ladies and gentlemen, at this time, we will be conducting a question-and-answer session.

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Speaker 3: Our first question comes from the line of Brian naggel with Oppenheimer. Please prosee with your question.

Speaker 4: Hi good morning. Good morning morning Brian .

Speaker 5: So I've got up a couple of questions. I mean first with regard to GU retail and just the comments that you made about the current environment, and then which led you to lower your guidance for the balance of the year. I guess the question I have is: it may be a little group. You could elaborate further?

Speaker 5: On what? What you're seeing right now. So I look at. I know the comparison was extraordinarily challenging with last year's lash's very strong result.

Speaker 5: But if on a two year basis your comp sales actually rebounded rather significantly here in Q1, I guess question I'm King towards is I: how do you you're looking at your business? How much of it do youthink is just imply that the really difficult comparison last year versus an a true underlying weakening in the consumer.

Speaker 1: So Q1 we are overlapping the stimulus and so that was definitely one of the drivers of our decline in Q1 and some of the stimulus money will continue to impact future orders. But we are seeing a deterioration in the macro environment as I'm sure you've heard from other retailers. We've seen softness in consumer spending as consumers have shifted spending away from discretionary categories due to inflation in an overall decline in consumer confidence one of the things that we have seen in continue to see is.

Speaker 6: Consumer payment activity remained strong at coms, resulting in strong credit portfolio performance. Specifically, net charge-offs for us last quarter were 11% versus this year, versus 15% last year, and our rage balance can continue to decline.

Speaker 7: Ok OK, and then I guess the shifting the se question is on the new the Bell relationship you're announcing you- and I think you mentioned chh. You mention in your your comments that you know the bellshores are located in existing cons marketts. So the question have is: are you, are you, are you with this relationship? Are you basically cater into a new customers, the potential you actually could cannibalize your con stores businessing? Yes, of we. If we take us step back and look at what we're doing with with the B relationship, one of the things that true me to cons was our best in class supply chain for non compveyable goodstoday. That best in class supply chain is mainly serving a narrow, pretty narrow, market segment of the market. So my ambition is to be able to utilize our supply chain and service capabilities for a much, much broader market. So to do that, we either have the option of changing our bifurcating, our own real estate and marketing strategies, or we partner with retailers who are already over index.

Speaker 6: In an incremental customer segment, which that's where we see be having a customer segment that we don't necessarily serve today. Even though we're in the same geographic locations, the customer is is very different at beltk than at a traditional con store. So I believe this partnership model will prove to be a profitable growth segment for us and allow us to add density both to the markets that we RE in today and eventually expand geographicallywave. You know we're excited to have beltk is our first retail partner, as they over index in our fast, reliable customers and their stores have a high geographic overlap with our supply chain, So it makes it an easy partnership out of the gates in terms of you know wewhere Rewe're going with belt and in terms of the number of store.s, we're starting with a pilot in Q3 of 10 to 20 stores and you know we're excited for that pilot to learn, you know, to see how many Y stores are likely for the long termappreciatethank you.

Speaker 7: artct's question come from the long of Kyle Joseph, what jeffardreies, Please assume with your questionhe good morning. Thanks for taking my questions. I guess just to to stay on fealth for the time being. So I heard you right. Is that primarily targeting a fast and reliable customer and you know, like I guess, how? How much of beltk sales would you expect to be finance either in house or ltwe? We expect about to be you know the a high percent of just sales being the fast and reliable customer. So we will have the capability to offer financing to belt customers. But out of the gates we expect the majority of sales to, you know, come from from cash and credit card. And if you think about if to do out about college, if you think about our real estate.

Speaker 8: In cetra, but you know longer term. Can you update us on on how you envision your sales mix shift in terms of cash, private label, in-house and LT?

Speaker 6: So in terms of our core cons business, we don't see any type of major shift in terms of balance of salebut if we the partnership model, if we do end up using that to drive a significant amount of growth, that is where we will see.

Speaker 6: Over indexing in cash and personal credit cards understood. Thanks very much for answer my questions. Thanks B thanks.

Speaker 3: earnx's question comes from the line of Vincent kic with stevens. Please recei your question.

Speaker 9: Good morning. Thanks for taking my question. one more on belt, just to clarify. So I guess belt in terms of revenues that won't come in yet in fiscal 2023, but I guess expanses to ramp that up would be so and so first that right, and that is that one of the things that are maybe driving the lower.

Speaker 9: Sorry the lower margin expectations for fiscal choy Y. threeso we're starting our our belt partnership in Q3 of this year. So we'll open 10 to 20 stores by by the end of Q3. So we will see some revenue from the partnership this year. But it is we don't anticipate be being a driver of negative profitability. And if you think about Ben in drivers of the margin change compared to our previous guidance, I would think about it in a couple ways that the first is that obviously, with a lower sales outlook, we're deleveraging on the fixed costs. Now we expect to partially offset that is as we've mentioned with with some cost savings initiatives on the margin side, the retail gross margin side. We also expect some deleveraging there as well. But what else has changed since we last spoke a couple of months a is the dynamics around fuel.

Speaker 2: Which are significantly higher than they were. Our expectation for the year is that the impact of higher fuel costs will be greater than it was at the beginning of the year. And then the last point is provision expense, which we now expect to be lower on a smaller portfolio balance, but deleveraging as a percentage of sales.

Speaker 9: Ok that's really helpful, Thank you. And then second question on: So the credit segment performance is actually really strong this quarter and I'm impressed that net charge offs are actually down to 11% versus 15% last year and your, your spread was much higher than tenent, the 1000 base points that you VE guide to and I'm wondering kind of interplay between kind of the credit segment versus the retail segment is? Are the the maybe credit tightening or improvement in credit? Is that driving maybe some of the sales, retail sales, weakness or maybe you could talk about you're thinking about the interplayate between the two Thank you yes, overall the weakness and sales are really being driven from macro factors. Obviously we want to be any know in a time or a challenging macro environment, we want to be appropriately conservative with credit and so we're always making adjustments both to drive sales and to limit risk to our underwriting, based up the real time trends that we're seeing.

Speaker 6: But overall, if you you look get the sales declines in our business. They're being driven from macro factors, with customers with it, with inflation higher, customers shifting away from home related categories and specifically discretionary home related categoriesokaygot very helpouble. There are no further questions in the care. I'd like to hand the call back to management for closing remarks.

Speaker 1: Yes I think. Thanks everyone for your time and interest in cons. I want to thank our associates for their hard work and dedication and I look forward to updating investors in the coming quarters on our strategic priorities and business performance.

Speaker 10: Ladies and gentlemen, this does include today's teleconference. Thank you for your participation. You may disconnect your lines now and have a wonderful day.