Q4 2023 Conn's Inc Earnings Call
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Speaker 2: My name is Doug and I will be your operator today. During the presentation, all participants will be in a listen-only mode. After the speaker's remarks, you will be invited to participate in a question and answer session.
Speaker 2: As a reminder, this conference call is being recorded. The company's earnings release dated March 29, 2023, was distributed before market opened this morning and can be accessed via the company's investor relations website at ir.com.
Speaker 2: During today's call, management will discuss, among other financial performance measures, adjusted retail segment operating income, adjusted retail segment operating loss, and loss.
Speaker 2: adjusted net loss per share and net debt.
Speaker 2: Please refer to the company's earnings release that was issued today for the reconciliation of these non-GAAP measures to their most comparable GAAP measures.
Speaker 2: I must remind you that some of these statements made in this call are forward-looking statements within the meaning of the federal securities laws.
Speaker 2: These forward-looking statements represent the company's present expectations or beliefs concerning future events.
Speaker 2: 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.
Speaker 2: Your speakers today are Norm Miller, the company's interim CEO , and George Bishara, the company's CFO .
Speaker 2: I would now like to turn the conference over to Mr. Miller. Please go ahead. Good morning, and welcome to CON's fourth quarter fiscal year 2023 earnings conference call. I'll start today's call with an update on our strategic priorities before turning the call over to George, who will review our financial results in more detail. Please return to your seats.
Speaker 2: When I first spoke to investors and analysts after rejoining the company as interim CEO in late 2022, I discussed the need to refocus our efforts to better serve our core credit constrained consumers.
Speaker 2: To accomplish this goal, we are pursuing transformative initiatives that include refocusing on our core consumers, launching an in-house lease-to-own strategy, and accelerating ecommerce growth.
Speaker 2: While we believe the economic landscape will remain challenging throughout this coming year, we believe that the strategies underway will enable us to emerge from this period stronger, more focused, and better positioned to create lasting value for our customers, employees, and shareholders.
Speaker 2: So with this introduction, I want to focus my prepared remarks on the actions we are pursuing to turn around our recent performance and drive long-term growth.
Speaker 2: I am extremely confident in the direction we are headed, driven from the strong foundation of our credit segment, our compelling retail credit business model, and our large market opportunity.
Speaker 2: CON's leading credit organization is the result of the investments we made over multiple years to create sophisticated underwriting, collection, and marketing capabilities.
Speaker 2: This solid foundation enables us to navigate normalizing credit trends and a difficult economic environment while simultaneously pursuing our growth strategies, including our emerging in-house LTO opportunities.
Speaker 2: The strength of our credit business combined with our differentiated business model also enables CONs to offer unmatched payment options that are aligned with growing consumer needs and favorable demographics.
Speaker 2: Within the 15 states in which we operate today, nearly half of consumers have credit scores that fit our CONS credit and LTO payment options.
Speaker 2: In addition, the national average credit score in the United States in calendar 2022 was unchanged following multiple years of unprecedented credit score growth.
Speaker 2: With high inflation and growing economic uncertainty, we expect consumers' credit scores will decline in 2023 for the first time in over a decade.
Speaker 2: As a result, we believe our multiple payment offerings are needed now more than ever and we are focused on helping provide flexible and affordable payment options to our customers.
Speaker 2: Our large addressable market also creates a compelling customer funnel that today represents approximately 28 million total visits to either one of our stores or to our website over the last 12 months.
Speaker 2: We believe this provides significant growth opportunities across all aspects of our customer funnel that include growing the number of visitors who apply for credit.
Speaker 2: increasing approval rates and amounts, and expanding our customers use of their available credit.
Speaker 2: Since becoming a public company almost 20 years ago in late 2003, I believe CONS has undergone two major strategic transformations.
Speaker 2: The first was in 2012 when the company went through a retail transformation that resulted in a move away from small, less profitable cash and carry merchandise towards large ticket essential products for the home, including expanding our furniture assortment. These changes contributed to significantly higher retail sales.
Speaker 2: risk of our customers.
Speaker 2: These changes contributed to a significant improvement in the profitability of our credit segment and created a solid foundation to support credit driven growth initiatives.
Speaker 2: I believe that our in-house lease-to-own strategy will be the third strategic transformation we will undergo since becoming a public company and is critical to unlock the full potential of our customer funnel.
Speaker 2: I am pleased to report that we recently launched our in-house lease to own product as Improvement Financial, a brand name that is different from our core retail business. Like the other transformations the company has been through over the last 20 years, bringing the lease to own business in-house, and the
Speaker 2: has the potential to contribute to significant growth in both revenue and earnings in the coming years.
Speaker 2: Over the near term, it will allow us to provide another profitable option to better serve the approximately 600,000 applicants that did not qualify for cons and house financing over the last 12 months.
Speaker 2: Since our differentiated retail credit business model enables us to capture both retail gross margin and lease income, we believe cons can approve more LTO applicants and provide greater purchasing power than other providers.
Speaker 2: We also believe we have a compelling opportunity to drive repeat customer relationships by gaining access to the payment history of LTO customers.
Speaker 2: We will use this information to convert in-house LTO customers to future CONSCredit customers.
Speaker 2: This will allow us to develop longer customer relationships by graduating customers to more attractive, lower-priced financing options while also helping customers improve their credit.
Speaker 2: After several quarters of development, Improvement Financial went live in February 2023 in three Houston area stores, and we have recently expanded to 10 locations.
Speaker 2: By the end of this fiscal year, we expect improvement financial will be offered across the majority of our stores and at cons.com. While it's too early to provide information on the performance of our new in-house LTO offering, we are excited by the potential to add incremental sales and earnings to cons.
Speaker 2: This past year, LTO sales were approximately $81 million and represented just over 7% of retail sales. LTO sales were approximately $1.5 million and represented just over $2.5 million and
Speaker 2: As our in-house LTO program matures, we believe annual LTO sales can more than double and grow to over 15% of our retail sales.
Speaker 2: As we convert third party LTO sales to in-house LTO transactions, we expect our operating income this fiscal year to be negatively impacted by approximately $15 million.
Speaker 2: However, as the program matures, we believe our in-house LTO offering will add over $20 million to annual operating income.
Speaker 2: As you can see, Improvement Financial is a transformational opportunity that we believe will unlock significant value.
Speaker 2: I look forward to updating our shareholders on the progress of this program over the coming quarters.
Speaker 2: Next, I want to provide an update on the successful transition of our ecommerce business.
Speaker 2: Over the past 18 months, we completely replatformed our website and created a modern online shopping experience that is supported by a broader assortment. Even as we undertook the difficult task of converting our ecommerce platform and enhancing our digital capabilities, we were able to grow ecommerce sales by 10.8%
Speaker 2: to an annual record of $79 million this past fiscal year.
Speaker 2: Going forward, we continue to believe we have a large opportunity to grow online sales and we are committed to driving traffic and increasing conversion.
Speaker 2: E-commerce sales are up 21.5% through the first seven weeks of the quarter, and we believe e-commerce sales this fiscal year can increase to over $100 million.
Speaker 2: Longer term, we continue to believe ecommerce sales can grow to over $300 million annually.
Speaker 2: Our ecommerce platform has also benefited from the recent implementation of an innovative digital application that changes two major aspects of the process.
Speaker 2: First, we no longer require a hard credit inquiry to provide a credit decision before shopping
Speaker 2: Hard credit inquiries can affect a customer's credit score.
Speaker 2: Customers, particularly non-prime customers, are often wary of completing an application knowing that their credit may be affected.
Speaker 2: In this new process, a credit decision is provided through a soft credit inquiry prior to shopping with little to no impact on the customer's credit score, which removes a significant friction point from the application and shopping process.
Speaker 2: Second, customers no longer go through a series of credit decisions individually applying for each credit program.
Speaker 2: Instead, once a customer completes a common application, they see a dashboard of qualifying offers which allows them to see and select the payment option that best fits their individual needs. This new digital application removes another significant friction point and removes another significant friction point.
Speaker 2: from the application process and provides our customers with additional information to make informed purchase decisions.
Speaker 2: Since launching our innovative digital application process, we are seeing application traffic increase, which we believe ultimately supports sales opportunities across our customer funnel.
Speaker 2: Our refocus on our core consumer through more targeted marketing combined with a refreshed ecommerce platform are beginning to drive application growth.
Speaker 2: The year-over-year change in applications has been narrowing over the past six months and March will be the first month applications are up year-over-year in almost 18 months. Applications are a critical leading indicator of sales and I am encouraged by these improving trends.
Speaker 2: Turning to new store growth, we ended fiscal year 2023 with 168 locations, which included 11 new stores and 1 closed location. And we continue to test our store within a store strategy with Belk.
Speaker 2: This fiscal year we expect to open 11 stores and 2 distribution centers, all of which were previously committed.
Speaker 2: After these stores and distribution centers open, we plan to pause new store openings over the next couple of years to focus on better serving our core credit constrained consumers, capitalizing on our in-house lease to own strategy, and accelerating e-commerce growth. With major investments across our credit and retail segments behind us, we will continue to work to ensure that our customers are well-in-house and well-in-house.
Speaker 2: We believe we have a multi-year opportunity to drive retail growth within our existing stores and online without the need to open new stores or distribution centers. We believe this strategy will maximize profitability by increasing revenue per store.
Speaker 2: and leveraging our fixed operating costs. Finally, given the uncertain economic environment and in lieu of official guidance, I want to provide some details on recent sales trends and considerations for the year.
Speaker 2: Since the third quarter, sales trends have improved or remained stable as we have refocused the business on our poor, credit constrained consumer.
Speaker 2: These trends continued into the first quarter with total retail sales down 18.6% quarter to date.
Speaker 2: Looking forward to the remainder of the fiscal year, we expect retail sales to improve on a sequential basis as we benefit from the growth strategies we have discussed today.
Speaker 2: Looking at other areas of our income statement, we expect retail gross margin to stabilize and benefit from lower trade expenses this fiscal year.
Speaker 2: After reducing SG&A by approximately $18 million last fiscal year, primarily through cost savings initiatives, we expect annual SG&A expenses to increase year-over-year by $25 to $35 million.
Speaker 2: This expense growth is primarily associated with the 22 new stores that will have opened between last fiscal year and this fiscal year. It's also important to note that we currently expect our annual interest expense to increase year over year by approximately $40 to $45 million as a result of wider credit spreads and we expect inflation to drop down recommend the above. It m
Speaker 2: and higher benchmark rates.
Speaker 2: Before I turn the call over to George to share more details on our financials, I want to reiterate my confidence in our business.
Speaker 2: CONZ continues to have a strong value proposition, a solid foundation, and compelling future.
Speaker 2: I believe we have the right strategies in place to drive top line sales and improve our financial results, especially as retail trends normalize.
Speaker 2: We can and should win in any environment and the leadership team and I will hold the company accountable to this belief.
Speaker 2: As we refocus on execution in the business, I am confident we can turn around our financial and operating results.
Speaker 2: I have a deep conviction that our business resonates with our customers and a strong belief in our leadership team's ability to deliver on our strategic priorities.
Speaker 2: With this overview, I'll turn the call over to George. Thanks, Norm. While this past fiscal year was challenging, and we expect this current year to be impacted by continued economic uncertainty, we recommend you go to our website at Helloatson.org and click the link right here. Google Home AI, great.
Speaker 2: changes in consumer behavior, and our in-house lease-to-own transition. We are excited by the strategies underway to drive profitable growth.
Speaker 2: On a consolidated basis, total revenues were $334.9 million for the fourth quarter, representing a 16.8% year-over-year decline.
Speaker 2: For the fourth quarter, the company reported a gap net loss of $1.79 per looted share compared to net income of $0.26 per looted share for the same period in fiscal year 2022.
Speaker 2: For fiscal year 2023, total revenues were $1.3 billion, representing a 15.6% year-over-year decline.
Speaker 2: The company reported a gap net loss of $2.46 per diluted share for fiscal year 2023, compared to net income of $3.61 per diluted share for fiscal year 2022.
Speaker 2: On an on-gap basis, adjusting for certain charges and credits, we reported a net loss of $1.53 per alluded share for the fourth quarter compared to net income of $0.33 per alluded share for the same period in fiscal year 2022.
Speaker 2: For fiscal year 2023, we reported a net loss of $2 per diluted share compared to net income of $3.71 per diluted share for fiscal year 2022. Reconciliations of GAAP to non-GAAP financial measures are available in our fourth quarter earnings press release that was issued this morning.
Speaker 2: Looking at our fourth quarter retail segment performance in more detail.
Speaker 2: Total retail revenues were $270.8 million in the fourth quarter, representing an 18.7% year-over-year decline. Lower retail revenue was driven by a decrease in same-store sales, which was primarily driven by lower discretionary spending for home-related products and comparatively higher same-store sales.
Speaker 2: the prior year due to the impact of stimulus benefits.
Speaker 2: These decreases were partially offset by new store growth. Retail gross margin for the fourth quarter declined 210 basis points to 33.7% compared to 35.8% for the same period in fiscal year 2022.
Speaker 2: The decrease in gross margin was primarily driven by higher freight costs and deleveraging a fixed distribution cost from lower sales.
Speaker 2: We expect retail gross margin to improve over time as retail sales recover and we realize the benefit of lower international shipping costs.
Speaker 2: We estimate that the higher freight costs have impacted retail gross margin by approximately 150 to 200 basis points and will reverse over time as we continue to receive new inventory at lower freight costs. SG&A expenses in our retail segment for the 4th quarter decreased 2.2% to $103.1 million compared to $105.4 million and is estimated to be a 2.9% increase in the retail segment.
Speaker 2: percent of retail sales for the fourth quarter, compared to 31.6 percent for the same period of fiscal year 2022.
Speaker 2: For the fourth quarter, retail segment operating loss was $19.5 million compared to retail segment operating income of $10.9 million for the same period of fiscal year 2022.
Speaker 2: On a non-GAAP basis, adjusted retail segment operating loss for the fourth quarter was $11.7 million, excluding charges and credits for asset disposal and store closure costs.
Speaker 2: This compared to non-GAAP adjusted retail segment operating income of $13.6 million for the same period in fiscal year 2022, which excludes charges and credits for non-recurring excess import freight costs related to congestion in US ports.
Speaker 2: Turning to our fourth quarter credit segment performance, finance charges and other revenues were $64.1 million, a 7.8% year-over-year decline, primarily due to a decline in the average balance of the customer receivable portfolio.
Speaker 2: It is important to note that recent credit performance is up against large-scale stimulus programs, which supported better payment, delinquency, and charge-off performance over the past two years.
Speaker 2: Underlying portfolio health remains stable, however, normalizing trends, current economic conditions, and a more restrictive re-age policy have impacted overall performance.
Speaker 2: As a percent of the portfolio, the 60 plus day past due balance was 12.7% at January 31, 2023, compared to 10.4% in fiscal year 2022, which benefited from stimulus programs.
Speaker 2: The balance of reaged accounts as a percent of the portfolio was 16.5% compared to 16.8% for the same period in fiscal year 2022.
Speaker 2: In addition, carrying value of reaged accounts continues to improve and remains at one of the lowest levels in almost a decade.
Speaker 2: For fiscal year 2023, net charge-offs as a percent of the average portfolio balance were 14% compared to 11.1% for the year ended January 31, 2022.
Speaker 2: Our credit spread for fiscal year 2023 was 9.1% compared to 11.7% in fiscal year 2022.
Speaker 2: During the fourth quarter, the credit provision for bad debts was $44.1 million compared to $28.2 million for the same period in fiscal year 2022.
Speaker 2: The $15.9 million increase in credit provision for bad debts was primarily driven by higher net charge-offs.
Speaker 2: The company reported a credit segment loss before taxes of $27 million in the fourth quarter compared to a credit segment loss of $1.1 million for the same period in fiscal year 2022. The greater credit segment loss before taxes was primarily due to a smaller portfolio and a higher provision for bad debts.
Speaker 2: Our 4th quarter and full year effective tax rate were 8% and 10.7% respectively.
Speaker 2: These effective tax rates were lower than the statutory tax rate, primarily because of a non-cash valuation allowance that we recorded in the fourth quarter against our deferred tax asset.
Speaker 2: Turning now to our balance sheet. At January 31, 2023, we had $576.6 million in net debt compared to $483.4 million for fiscal year 2022.
Speaker 2: Net debt as a percent of the ending portfolio balance was approximately 56.2% at the end of the 4th quarter, which remains below Pre pandemic levels.
Speaker 2: In addition, we have no near-term debt maturities, and last summer we successfully completed our 11th ABS transaction since re-entering the ABS market in 2015.
Speaker 2: We expect to complete another ABS transaction later this fiscal year. On February 21, 2023, we entered into a $100 million three-year term loan that was used to pay down the balance of our ABL facility and provided us with additional liquidity as we execute our turnaround strategies. As of March 24, 2021, we received a $100 million loan from the U.S. Department of Defense. The loan was not approved by the U.S. Department of Defense. The loan was not approved by the U.S. Department of Defense.
Speaker 2: The company had $209.2 million of cash plus availability under our $650 million revolving credit facility.
Speaker 2: We continue to believe our liquidity and access to capital provides us with flexibility to support the current needs of our business while investing in our long-term growth initiatives. Before we turn the call over to questions, I want to review the accounting treatment of our in-house LTO transition.
Speaker 2: As we have stated before, in our consolidated financial statements, revenue from sales made through our in-house LTO offering will be reported as lease income recognized over the life of the lease, rather than as a retail sale recognized at the time of the transaction. Therefore, as this year progresses, the financial statements will be reported as lease income
Speaker 2: You will see lower LTO retail sales flow through our income statement and a growing base of lease revenue. This will temporarily impact profitability as Norm stated in his prepared remarks. As lease revenue scales and our transition matures, we will benefit from highly profitable LTO economics. Alphabetuter Dirty, who works in agriculture and agriculture, and a orcs and d Ab Gina, high reliability, will benefit her time. Next oranges in the e Nate, Jew ads, contacts in Rotary across
Speaker 2: Finally, I want to share my thanks to our team members for their continued hard work, service and dedication. Once again, I wish you all the best of luck and thank you to our partners eight in need next year.
Speaker 2: So with this overview, Norm and I are happy to take your questions. 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.
Speaker 3: If you'd like to ask a question, you may press star 1 on your telephone keypad. The confirmation tone will indicate your line is in question 2.
Speaker 3: You may press star 2 if you would 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.
Speaker 3: Our first question comes from the line of Kyle Joseph with Jefferies. Please proceed with your questions.
Speaker 4: Hey, good morning. Thanks for taking my questions. I appreciate kind of the color you gave on quarter to date, but just wanted to hear what you guys are seeing in terms of tax refunds quarter to date and how that's impacting both demand and credit performance.
Speaker 5: Yeah, hey, Kyle. Good morning. What I would say is.
Speaker 5: that our tax season so far we've seen the reports nationally that the average refund is down 10-11 percent but what I would say is what we're seeing from a tax season standpoint certainly from a portfolio standpoint is within our range of expectations of where we
Speaker 5: at least more than it is the portfolio. Overall, pretty pleased with where it is from a collection standpoint today.
Speaker 4: Got it, thanks. And then on the in-house LTO option, historically you provided the three channels, in-house financing, third party financing, and third party LTO. Are we gonna get a fourth channel disclosure there or will it be part of the in-house financing breakdown? Yes, thank you very much for that.
Speaker 5: No, we will break it out separately. The in-house LTO versus the cons financing, they won't be rolled together. We will reflect them separately. I think to Norm's point, Kyle, we're going to try to......
Speaker 2: provide detail about the P&L impact as this materializes over the next 18 months. And we'll obviously share that in our upcoming.
Speaker 2: this materializes over the next 18 months and we'll obviously share that in our upcoming disclosures.
Speaker 5: And frankly, and frankly, Kyle, although we didn't say it in the prepared comments, you know, we expect to transition here over this year, the majority of the business, but we still expect to have some portion of.
Speaker 5: our lease-owned business with our third-party partner. And even past this fiscal year, it will depend on how the performance goes, but from my perspective, there's a value in having a champion challenger so we can benchmark ourselves on our LTO performance versus...
Speaker 6: what we're seeing from our third-party partner. Got it. Thanks very much for taking my questions.
Speaker 3: Thanks, Kyle. Our next question comes from the line of Brian Nagle with Oppenheimer. Please proceed with your question.
Speaker 2: Hey guys, good morning. Good morning Brian morning. So I want to. This on the LTO opportunity, I know we've been talking to us for a while, but as you look at me, thanks for all the color, but I guess what I'm looking at, how should we think about. D,
Speaker 2: risk profile, the risk of this for cons, versus either using the partners you've been doing or a normal sale using your credit operation.
Speaker 5: Well from a risk standpoint, if you're on the investor deck that we sent out this morning you'll see that we in the past 12 months it's been it's
Speaker 5: It's been at a lower level or lower run rate, but we still had 1.1 million total applications this in the past 12 months. Now the number should be higher than that and historically it has been as we refocus on the icon customer here. We expect that number to increase.
Speaker 5: here this fiscal year and beyond. But out of that 1.1 million customers that submitted applications, whether in our store or online, we approved 460,000, meaning we declined 640,000 applications. So –
Speaker 5: that is really what the opportunity is. And our, from a risk standpoint, we would not want to take risk with confinancing with those customers because of, because of their credit performance. But, and we, as you know, are
Speaker 5: yield in our spread is about a thousand basis points and our net yield is about 23%. With the lease product, the implied yield, we don't quote a yield because it's a lease product, not a loan product, but if you calculated the APR, it would be in the 130-140% range.
Speaker 5: So you have much greater spread to be able to take more risk with that customer. In addition, remember our third party partner on the lease to own, which is very profitable to them, all they get is the lease revenue of the product. We get the retail product margin. As we do it in-house, we'll get both the retail product margins.
Speaker 5: in that 33 to 37 percent range, plus we'll get the least revenue over time as well, which gives us the opportunity to go deeper potentially, say yes to more customers, and to put that in perspective, every one percent that we can increase approvals, and now that's another six.
Speaker 5: 6400 applications on the lease to own that we could approve potentially that our 3rd party partner couldn't. And if you look at, I'll take a very conservative balance average ticket. A 1200 bucks that's.
Speaker 5: $7 million annually in revenue with 1% increase from an approval standpoint. So the opportunity both from a profitability standpoint as well as a sales standpoint, that's why I said I truly believe that we will look back two years from now, three years from now and see this as one of the
Speaker 5: strategic transformations of the company over the last 20 years.
Speaker 2: Now that's very, very helpful. I appreciate that. And then the shifting gears a bit, I guess, George, you mentioned in your comments about this break costs. And we're hearing this now, something similar to cost retail where more companies like yourselves have line of sight to declining shipping costs.
Speaker 2: So I guess the question I have is how do you think about, you know, how big is that opportunity? You know, here was me is 2023 progressives and when should it kick in? And then from cons perspective, what will you do with that safe? Will that be a margin driver or to a certain extent? What can you reinvest back in the price?
Speaker 2: Yeah, as I said in my prepared remarks, we estimate that the impact on gross margin is between 150 and 200 basis points on total retail gross margin. Now from a category standpoint, all of that is coming from furniture.
Speaker 2: But we're still in, we're seeing improvements in gross margin and furniture, but still receiving inventory at now lower freight costs. So it's gonna take 12 months or so before we see the full benefit of freight costs going back to where they were pre-pandemic. So that's just about it. Em developers begin-
Speaker 5: from a profitability standpoint or where those dollars go, we would expect that to drive higher retail gross margin on the business going forward. And we are seeing current freight costs get approached very close to where they were pre-pandemic.
Speaker 5: The, the items being shipped today from Asia, certainly, but remember we have to work through the inventory that that we have that has that higher average weighted cost. Uh, that George is talking about that will take a number of months to work through. Got it. If I could, could I slip in 1?
Speaker 5: shift over the last few or several months? Yeah, what I would say is we are seeing increased demand with the lower you move in the credit spectrum with cons financing and LTO although that customer is I think is more stressed.
Speaker 5: Currently, their need for credit and their demand for credit, we have seen over the past, since I've returned in the past 90 to 120 days, demand their increase. Now, part of that is being driven. We've shifted focus from a marketing standpoint. I mean, that's where our bread is buttered. That's what differentiates us.
Speaker 5: ultimately in the marketplace is our ability to offer financing on essential products for the home that customers don't have as many alternatives and frankly they have less alternatives today than they had six months ago or twelve months ago because of tightening higher up the credit spectrum.
Speaker 5: We are absolutely seeing increased demand with the cons financing and LTO side of the house. You guys will appreciate the color. Thank you.
with the cons financing and LTO side of the house. I appreciate all the colors. Thank you. Bye.
Our next question comes from Vincent with Stevens. Please proceed with your question. Thank you, Marty. Thanks very much for taking my questions. First question on the current side of the business. I'm wondering how you are thinking about
how credit will perform as we go into the fiscal 2024 period and kind of specifically as as the leased owned business ramps up how does the accounting work for that because I understand the the lease revenues comes over time but just want to understand how maybe credit shows up. Thank you.
Let me take the second question, Vincent, on the accounting. The way today when we record a third party LTO transaction, we record revenue from that sale and we get the margin and the period in which the sale is incurred, just like we would for any of the other payment types.
appreciation on the leased merchandise. So you'd have lease revenue in revenue, and then you'd have another line item that's leased appreciation and write-off that would flow through our financial statements. Does that answer your question? or One
Yeah, yeah, that's helpful and any broad kind of broader business thoughts on credit for the year. Yeah, I would say, you know, I'm cautiously optimistic as we sit here today. I'm pretty pleased. Vincent with where the portfolio's performing, although our charge offs were a little elevated here in the.
that is atypical that we would see once you get past the stimulus side of the house. And if you look at the way we're underwriting, you know, 70% of the customers that we're approving currently in the portfolio are at the higher end of the house.
Of our cons spectrum of customers, higher credit quality within that con spectrum, if you will, which is those are much higher levels than we have done historically pre pandemic. So, or I feel very confident.
Optimistic now the concern is the macro side of the house, how that unfolds. Clearly, we don't know and what will happen with unemployment and how long does inflation and higher rates persist. But as we sit here today and we look at delinquencies, we look at all forward leading indicators.
of the existing portfolio. Pretty pleased with where the portfolio sits as we sit here today. As I mentioned to Kyle, the tax season has been a pretty solid one for us here two-thirds of the way through it.
Okay, that's very helpful. Thank you. And my last question. Just on the financing, the funding and the liquidity side of the business, over the past month there's been some concerns.
just broadly with financial institutions and some of these banks having issues. So just wondering if that's affecting cons at all and if you know how we should think about funding and liquidity needs through this year. Thank you.
Yeah, Vincent, this is George. Not really. We don't really keep large deposit balances in any of our banks, so that's not a concern. We've got a strong base of a banking group in our ABL facility.
The only real impact that we've seen over the last few weeks is that spreads in the ABS market have widened a bit, but it has not changed the fact that the market is still open and we could do a transaction if we needed to. Our plan is that we will do
at least one transaction sometime later this year from an ABS standpoint and that those somewhat wider spreads are reflected in our interest expense outlook that Norm shared in his prepared remarks.
least one transaction sometime later this year from an ABS standpoint and those somewhat wider spreads are reflected in our interest expense outlook that Norm shared in his prepared remarks. Okay great that's very helpful. Thanks very much.
That's all the time we have for questions. I'd like to turn the call back to Mr. Miller for closing remarks.
Thank you. First of all, we appreciate all of our associates across the enterprise and their hard work and dedication each and every day. And also appreciate your interest from a shareholder standpoint. We look forward to sharing our first quarter results here in the next couple months.
Have a great day. 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.