Q2 2023 Conn's Inc Earnings Call
Good morning, and thank you for holding welcome to concert Inc. Conference call to discuss earnings for the fiscal quarter ended July 31, 2022, My name is Doug and I'll be your operator today during the presentation all participants will be in it.
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 August 30th Twenty-twenty too was distributed before market opened this morning and can be accessed via the company's investor Relations website at IR Dotcom dotcom.
During today's call management will discuss among other financial performance measures adjusted net income adjusted net income per diluted share and net debt.
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 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 can cause actual results to differ materially from those indicated today.
Your speakers today are <unk>, the company's CEO and George Bush are the company's CFO I would now like to turn the conference over to MS. Holt. Please go ahead.
Good morning, and welcome to concert second quarter fiscal year 2023 earnings Conference call I'll start today's call with a review of the quarter and an update on our strategic priorities before turning the call over to George who will review our financial results in more detail.
Talented macroeconomic conditions continued to pressure consumer spending during our second quarter, which disproportionately affected our financial access customer segment and are more discretionary product categories.
While we entered the second quarter with a more cautious outlook for the remainder of the year the retail environment deteriorated further during the quarter.
As a result, we have accelerated our efforts to reduce operating costs and lower capital expenditures as well as continued to maintain conservative credit underwriting.
I remain confident in karnes value proposition and our ability to leverage our best in class payment options and industry, leading next day white glove delivery and our in house repair service capability.
We are focused on executing against the areas of the business that we can control and we continue to believe cons can become a best in class unified commerce retailer in the future.
I want to use my time today to focus on the near term dynamics that are pressuring the business and the actions we are implementing to successfully navigate this period and emerge a stronger company.
Our second quarter financial results were impacted by two main factors.
First we lapped a strong second quarter results from last year.
As last year benefited from stimulus programs and higher lease to own sales.
Second we are seeing weaker consumer demand for discretionary categories.
We believe this was driven by inflationary pressures and recessionary fears that have caused consumers, especially lower income consumers to focus on household necessities and shift spending away from discretionary products.
Yeah.
If these trends continue to disproportionately impact our financial access customers, which include customers, who finance with our in house credit product or third party lease to own product.
Second quarter sales to this lower income consumer segment declined 24% year over year compared to a 12% year over year decline two or higher income fast and reliable customer segment, which include customers, who paid with cash or our private label credit card.
While the challenging macroeconomic environment has impacted our retail result, our credit segment remains stable.
I am pleased to report another quarter of positive credit segment income before taxes.
Certain indicators of portfolio health remained better than pre pandemic levels. For example, re aged accounts as a percent of the portfolio are at the best levels in six years, despite a declining portfolio balance reducing the denominator.
In addition, the weighted average credit score of outstanding balances is that the highest level in over 10 years.
August same store sales are down approximately 27%, we expect third quarter same store sales to remain challenging as we overlap a positive 26% comp for the third quarter last fiscal year.
Overall, the dollar amount of retail sales have remained generally stable over the past several months.
We expect to see same store sales improve in the fourth quarter as we benefit from our growth initiatives and overlap a six 2% sales comparison in the fourth quarter last fiscal year.
We ended the second quarter with over $211 million of cash and available liquidity, which we believe supports the current needs of our business, while allowing us to simultaneously invest in our growth strategies and business transformation.
We also continued to demonstrate our ability to access the capital markets, even during even during turbulent market conditions.
During the second quarter, we successfully completed our 11th ABS transaction since re entering the ABS market in 2015.
Our stable credit performance and meaningful liquidity levels support our efforts to navigate this difficult period.
As a result, we can pursue multiple actions to drive sales, which includes investing in our E Commerce channel pursuing partnership opportunities and it and expanding our best in class payment options.
We are also focused on reducing operating costs adjusting our merchandising plans lowering capital expenditures and continuing to maintain conservative conservative credit underwriting.
Looking at our near term priorities in more detail starting with our merchandising plan.
We are adjusting our merchandising activities by tailoring, our category strategies and optimizing our assortment.
This includes expanding our sunglass collection in store and even further online to offer the latest trends and broaden our appeal within our appliance category.
And T V's, we're adding more value oriented model to complement our premium assortment and response to shifting consumer demand.
We are also building on the success of dream spot, our private brand and the mattress category by launching Zillow Hill, our new furniture private brand.
Bella Hill will offer our customers high quality on trend products at a great value.
We are also focused on pursuing actions to manage and optimize inventory levels and programs are underway to align inventory with our lower sales forecast.
We're also conducting an extensive review and prioritization of our cost structure. We expect current initiatives combined with prior actions to generate cost savings of approximately $12 million to $16 million in the back half of this fiscal year, which help offset the investments were made.
And our long term growth initiatives.
As part of our cost initiatives, we are reducing our marketing spend while reallocating the remaining marketing dollars to channel that most effectively drive near term growth.
We continue to assess our cost structure, and we will make necessary adjustments to support our forecasted sales.
Our next near term priority is to delay or eliminate certain capital expenditures and prudently manage our business. During this uncertain economic period.
This includes pursuing actions to adjust the planned new store openings and distribution center expansions.
As a result, we expect to reduce investments and capital expenditures this fiscal year by approximately $20 million compared to our prior expectation.
Another key priority is to ensure our credit portfolio remains healthy, while we expect normalizing credit trends and the shrinking portfolio balance to put pressure on our credit spread we entered this period with a strong credit infrastructure and strategy.
We are maintaining our conservative approach to underwriting by continuing to target higher credit quality customers and remaining disciplined in our approach to credit collections.
We also continue to pursue opportunities to leverage our best in class payment options.
We continue to make progress integrating the lease to own technology platform, we acquired in the first quarter.
We expect to originate our first in house lease to own sales by the end of the fourth quarter.
Or at least your own 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.
Our recently launched Layaway program provides our customers with another payment option and provides us with an incremental opportunity to serve additional customers.
I'm pleased to report that after a successful pilot of our Layaway program. In Q1, we have rolled this program out across all consultations and believe we are well positioned to support layaway cells and the holiday season.
With this update on our near term initiatives I want to review, our long term growth strategies in more detail starting with the success of our ecommerce growth plan.
During the second quarter, we can put it the first phase of our E Commerce platform migration and we successfully enhanced the front end of our website, including the homepage search capabilities and product listing pages.
It's important to note that over the course of my career I've led multiple digital transformations and I've learned to short term disruptions can occur even during successful implementations.
I'm proud to report that our team did a wonderful job with our phase one implementation.
As we increase online conversion and grew e-commerce sales by 11, 5% year over year to a second quarter record of $19 $3 million.
Phase two of our E Commerce platform migration started earlier this month and is focused on improving the cart and checkout experience.
The third and final phase of our platform migration is focused on functions that make it easier for our customers to apply for credit and make payments.
We expect to complete the re platforming of our web site this year.
Once complete our customers will see an enhanced website with improved functionality across their online journey.
As I've stated in the past our business is supported by industry, leading next day white glove delivery and in house repair service capabilities.
I continue to believe our established infrastructure can be the foundation for a much larger business.
As part of our growth strategy, we are pursuing multiple partnership opportunities to leverage our powerful logistics capabilities.
We recently completed a major milestone in our partnership strategy with the launch of our Belk store within a store pilot.
As of today's call. We have opened a total of eight belk partner locations and expect to launch an e-commerce experience on both dot com before the holiday season.
This partnership provides us with an efficient way to serve more fast reliable customers.
I look forward to updating investors on this pilot as well as other opportunities we are pursuing in the coming quarters.
To conclude my prepared remarks, we are taking the necessary actions to navigate a difficult environment and it's disproportionately affecting our financial access customer and are more discretionary product categories.
These trends are expected to continue throughout fiscal year 2023.
Well, we remain confident in the long term direction of our business, we are extending the timeline to achieve our previously stated financial targets beyond fiscal year 2025.
Over the near term, we are making prudent adjustments to reassess our cost structure, while simultaneously investing in our growth initiatives and maintaining stable credit trends.
We believe this will allow us to successfully emerge from this difficult period stronger and better positioned to achieve profitable growth.
I am proud of the hard work and dedication of our team members I want to thank our entire team for their commitment to our company our customers and our local communities.
Thanks Kendra on a consolidated basis total revenues were $346 6 million for the second quarter of fiscal year 2023, representing a 17, 1% decrease from the same period last fiscal year.
For the second quarter GAAP net income was nine cents per diluted share compared to net income of one dollar and 22 cents per diluted share for the same period last fiscal year.
On a non-GAAP basis adjusting for certain charges and credits we reported net income of four cents per diluted share for the second quarter compared to $1.22 per diluted share for the same period last fiscal year.
Reconciliations of GAAP to non-GAAP financial measures are available in our second quarter earnings press release that was issued this morning.
Looking at our retail segment in more detail total retail revenues for the second quarter with $279.8 million.
The 19, 4% year over year decline in retail revenue was primarily due to the trends <unk> discussed in your prepared remarks, including overlapping the benefits stimulus hard on second quarter sales last fiscal year.
Tighter year over year underwriting from our lease to own partner and a reduction in demand for discretionary products.
We opened six stores during the second quarter, including four store within a store pilots and Belk locations and ended the quarter with a total of 167 stores across 15 states.
For fiscal year 2023, we are now planning to open 10 to 12 Standalone locations in 15 to 20 store within a store locations all within existing markets, which will leverage fixed costs.
Retail gross margin for the second quarter was 34, 6% compared to 37, 7% for the same period last fiscal year, a decline of 310 basis points.
Approximately one third of this decline was due to higher freight cost.
In our furniture category, which we expect to improve in the coming quarters as we realize the benefit of lower freight costs.
Ultimately one third of the decline was due to deleveraging of fixed costs as a result of lower sales and the remaining one third was due to higher fuel and other calls.
SG&A expenses in our retail segment decreased by 4%.
This decrease was driven by lower variable costs on lower sales and reductions in advertising and labor costs as a result of cost savings initiatives.
As a percent of retail sales SG&A expenses were 35% for the second quarter compared to 29, 4% for the same period last fiscal year.
Yeah.
Retail segment operating income was $107000 and included a $1.5 million benefit from a lease modification that occurred during the quarter compared to retail segment operating income of $28 7 million for the same period last fiscal year.
Turning to our credit segment finance charges and other revenues were $66 $8 million for the second quarter, a six 4% decline from the same period last fiscal year.
The decline in credit segment revenue was due to a 4.9% reduction in the average balance of the customer receivable portfolio over the prior fiscal year.
The performance of our receivables portfolio remains stable.
Trends reflect a smaller portfolio balance and normalizing credit trends as we overlap last year's stimulus programs.
We believe our strong credit performance heading into this period combined with maintaining our conservative credit underwriting approach will help us navigate the evolving economic environment.
As a percent of the portfolio. The 60 plus day past due balance was 11% at July 31, 2022 and.
It is in line with our expectations.
This compares to seven 2% for the same period last fiscal year, which benefited from stimulus programs.
The dollar to re aged accounts as a percent of the portfolio balance was 16, 1% compared to 24% for the same period last fiscal year.
For the second quarter annualized net charge offs as a percent of the average portfolio balance was 13, 7% compared to 11, 3% for the same period last fiscal year.
During the second quarter of fiscal year 2023, the credit provision for bad debts was $26 $8 million compared to $10 $1 million for the same period last fiscal year.
The $16 $7 million increase in credit provision for bad debt was primarily driven by a smaller year over year decline in the allowance for bad debts and a year over year increase in net charge offs.
Credit segment income before taxes was $1 $1 million compared to $19 $5 million for the same period last fiscal year.
The reduction in credit segment income before taxes was primarily due to lower credit segment revenue a higher provision for bad debts and an increase in interest expense, partially offset by lower SG&A expenses.
Turning now to our balance sheet.
Our liquidity and capital position remains strong I'm pleased with the successful ABS transaction, we completed during the quarter, demonstrating our ability to access capital markets, even during turbulent market conditions.
We issued and sold approximately $407 $7 million in aggregate principal amount of class a and class B notes.
Due to market conditions, and forecasted liquidity needs. We retained the $63 1 million dollar cost you note, but could sell this bond in the future.
At July 31, 2022, we had $531 $2 million in net debt compared to $399.9 million for the same period last year.
In addition, net debt as a percent of the portfolio balance was approximately 59% at the end of the second quarter compared to approximately 36, 2% at the end of the second quarter of last year and 59%.
January 31, 2020 before the COVID-19 pandemic began.
We continue to believe our liquidity and access to capital provides us with flexibility to support our current needs of our business, while investing in our long term growth initiatives.
Before we open the call up to questions I want to review our expectations for the remainder of fiscal year 2023.
We now expect a low to mid teen decline in total revenue compared to our prior expectations of a high single digit decline for fiscal year 2023.
Our current expectations include a mid teen decline in annual retail revenue and a high single digit decline in credit segment and credit revenue as our portfolio contracts due to lower retail sales finance through our in house credit offering.
We now expect operating margin for the fiscal year to be between one and 2%, which reflects deleveraging on lower sales, partially offset by further cost reduction as compared to our previous guidance.
We expect annual interest expense of $32 million to $37 million, which reflects the pricing from our most recent ABS transaction.
Given the pressures we've discussed we also expect our full year tax rate to be lower as a result of our reduced profitability outlook.
The changes to our guidance, reflecting even more cautious outlook and a continuation of softer consumer demand, particularly for discretionary product categories and from lower income consumers.
We remain focused on managing the items, we can control and we are reducing expenses to reflect our lower revenue outlook.
Beyond our near term expectations, 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 through our partnership strategy.
We believe these initiatives will improve long term sales trends and help us achieve our long term financial goals.
However, as <unk> mentioned, we are extending the timeline to achieve our previously stated financial targets beyond fiscal year 2025.
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 and I are happy to take your questions. Operator, Please open the call up to questions.
Thank you, ladies and gentlemen at this time well be conducting a question and answer session. If you'd like to ask a question you May 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 would like to remove your question from the Q4 participants using speaker equipment it may be necessary.
We did pick up your handset before pressing the star key.
Our first question comes from the line of Brian Nagel with Oppenheimer. Please proceed with your question.
Good morning, Thank you for taking my morning.
Okay wonderful because I think first on the on just on the retail business.
Maybe a few questions all kind of lumped together, but.
I Wonder if you actually look at the trends from Q1 to Q2 and then you commented on Q3 as well do you are you are you beginning to see or do you think youre seeing signs of stabilization and it tells me recognizing there's a lot of moving parts here, including the difficult comparisons and then the second question you know we talked we've talked a lot.
For the last several quarters now about how the business, particularly through the pandemic really flexed to cater to a larger consumer base.
And some consumers that we're not necessarily at least historic with shoppers of cards. How you see that we're now pulling away from the pandemic how is that dynamic playing out although well those consumers still come in good cause or has it been more of a reversion there as well.
Yeah. Thanks for the questions Brian in term in terms of your first question regarding the stabilization of the business. We have seen from a dollar run rate standpoint, the business be fairly stable over Q2 and be seen as a slight worsening in Q3 as we're owed.
We're lapping slightly tougher comps in Q3 than we were in Q2, but my general dollar run rate standpoint, we have seen stabilization in the business.
When you look at your second question around where are the customers going you know when we look at our customers, we see a bit of a tale of two cities here, we've got our fast and reliable customers, which in Q2 declined roughly 12% versus our financial access customer who is lower income.
That declined at twice the rate of 24%. So when you look at what's happening with consumers in the lower income consumers are where.
Seeing it we're seeing worse results from that customer segment as they are facing more challenges from the effects of that macro economy, such as inflation, where they're having to shift out of discretionary categories. You know to pay for their their household essentials.
And to add to that Brian . If you were to look at that on a multiyear basis going back pre pandemic. So if you compare Q2 of FY 'twenty three to Q2, FY 'twenty that fast and reliable customer segment is up almost 50% compared to where it was pre pandemic and that's just being offset by some of the headwinds.
That change you mentioned around the lower income consumer, which is which is more than offsetting that that growth.
No that's great. That's very helpful and then maybe as.
Just a follow up question Oh, we have a.
Third question, I guess would be with regard to credit so.
So it was kind of.
Perspective of kind of where we go from here. It makes you understand this correctly is it the plan to you given the backdrop to tightened credit which could right.
The case would that represented incremental but potentially an incremental sales headwinds we think over the next few quarters or so.
Yeah.
In terms of our credit strategy, we've been maintaining a fairly conservative credit underwriting strategy.
So going forward I don't anticipate any extreme tightening that will significantly reduce sales going forward to date, we've been managing them in a way that it's fairly conservative and we don't anticipate a big shift going forward.
Got it appreciate it thank you.
Thanks, Brian .
Our next question comes from the line of Kyle Joseph with Jefferies. Please proceed with your question.
Hey, good morning.
For taking my questions I know, it's early on with the with the Belk launch, but can you give us a sense for how much you anticipate those locations contributing over time versus kind of an average store.
Sure.
We're excited about the opportunity that partnerships in general brain to our business. We're working on several partnerships right now and as I mentioned in my comments, we had a major milestone with our opening of our initial belk store within a store concept that we're early so we just opened those stores a few weeks ago. So.
Right now we don't have any projections to report, but were looking forward to them sharing more details in the coming quarters.
Okay and then.
Given the evolution of the book and it sounds like you know less reagent kind of a more conservative underwriting, but also weighing macro can you just give us a sense for your outlook for.
Either charge offs or do you use and how that would compare to kind of the pre COVID-19 vintages, we saw from con.
Overall, we feel that our portfolio is in great shape. When you look at some of the portfolio health indicators there.
They're better than pre pandemic levels, George if you want to hit on a couple of points in terms of Oh Gee.
Yeah, what I would say Kyle is that we do expect to see and I think John mentioned this in her prepared remarks, we expect to see some pressure on credit spread which is which is what I would encourage you to think about right as you're as you're looking at the credit business, we expect to see some pressure on the credit spread heading into the back half of this year and there's two things happening there.
It's just you've got a shrinking portfolio balance because we're originating less Collins credit loans. So that's the denominator effect that that is a that is causing will cause some some relatively higher charge offs and then the other is that we continue to see normalization in credit trends right.
Our portfolio today, if you if you look at the average FICO. It it's in the in the book is 611 compared to where it was pre pandemic, which was 594. So that's a big move in credit quality in the portfolio. So we feel like where.
The portfolio is in a good place in terms of credit quality, but we continue to see a normalization of credit trends as I know you you I'm sure. She is another a company as well.
Yeah, absolutely and then last one from me.
You pointed to.
Your financial access customers really kind of bearing the brunt of the macro pressure, but can you just talk about how you know weakness you're seeing in between store and online. Obviously you have decent online grow still even despite the rollout of the new platform, but just talk about how youre seeing trends online versus in store base.
On the customer mix.
Yeah, our customer makes online or in store or similar the difference with with online is because of the platform migration that we're doing we're able to increase conversion at a greater rate than the demand is there.
Mining within the categories.
You know the bigger thing to know in terms of what's growing and what's declining is if you combine kind of income levels with product categories, you'll see a large discrepancy. So if you look at our lease discretionary category of appliances.
And when you look at consumers, who paid cash which is generally our highest income consumer those sales were flat year over year, whereas if you look at consumer electronics, which is the most discretionary and lease to own which tends to be the lowest income we were down 60% in Q2. So you see a great disparity when you combine them.
The discretionary categories with them they the income level of consumers.
Got it very helpful. Thanks for answering my questions.
Thanks Carl.
Our next question comes from the line of Vincent <unk> with Stephens Inc. Please proceed with your question.
Hey, good morning, Thanks for taking my questions.
First one.
Kind of the broad strategic question. So understand the you know the updated guidance in a difficult macro environment.
But then some of the discussion today also sounds like you're still remain very optimistic about the opportunities in your markets and so I'm wondering kind of the the cost of the Capex.
Shifting to strategies that maybe is that a long term shift or maybe something that's just kind of timing for this for this year and then when you talk about your costs.
And your your Capex, how quickly can you pivot and flex that in the sense of if there's opportunities that show up later this year or into next year, how quickly could you move thank you.
Yeah. Thanks for your question Vincent So we remain very confident in our long term strategy.
Right now, though where were focused on the near term and making sure that were operating effectively in the in the challenging macro environment. Some of the capital expenditures that we've pulled back on our new stores distribution centers.
Things of that nature in terms of flexibility, while it does take time to.
To commit to leases and things of that nature. We can you know go back and invest additional capital if the macro environment and the overall operating environment becomes easier next year.
I would just add Vincent the year.
It has materialized very differently from the way we expected it to materialize at the beginning of the year, So what youre seeing around our actions around cost and capital are directly responsive to the current environment that we're in relative to where we expect it to be at the beginning of the year and and so it certainly will.
Cost to reflect the lower revenue.
Picture.
Okay understood and it sounds like the the long term strategy is still intact. It's just kind of a reaction to the yeah. Yes. Yeah. In fact, we continue to invest in some of our bigger initiatives. So the E. Commerce platform migration is still well underway and we expect to.
Finalize that by the end of the year, we acquired a lease to own platform and where we continue to work on that and expect to underwrite our first lease to own in house placed on transaction by the end of this year and working on a number of other smaller initiatives that we continue to push for it to make sure that we're driving the business in the most effective way possible.
And even in spite of that we're still opening 10 to 12 stores. This year, we expect to continue to grow the footprint again next year you know many of the leases that we are the stores that we would open next year, we've already signed leases for so we're still growing the business.
Okay perfect. That's very helpful. Thank you and I realize the second question on the.
On the lease to own.
Press release, the comments about some of the sales being impacted from <unk>.
Tightening lease to own on from your partner.
Wondering if you could talk about if you had already stood up your own in house the stone business.
Would we be in sales because I'm, just trying to kind of think about a run rate being better than maybe where it was this quarter. Thank you.
Yeah. That's a great question, when we stand up our own leased on business or our plan is to have higher approval rates and then or.
<unk>, a third party partner, which is part of the upside that well get from taking the lease to own in house, yeah. The other benefit to taking lease to own in house is the long term profitability that will have on our business over a multiyear period.
Okay perfect. Thanks very much.
There are no further questions I'd like to hand, the call back to management for closing remarks.
Thank you I wanted to take a moment to thank our employees for their hard work and dedication and thank our investors for their time and following cons in an interesting comment and I look forward to updating everyone next quarter.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.