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The Pros Of Conn's

Posted: Dec 01, 2008 14:07 PM by Ryan C. Fuhrmann

Tickers in this Article: CFR, BAC, BBBY, TGT, WMT, BBY, CONN

Conn's (Nasdaq:CONN) is a regional-based purveyor of home appliances, consumer electronics and furniture. Think of it as a mini Best Buy (NYSE:BBY) that runs its consumer credit business in-house, which means it is operating in the eye of the credit crisis storm given its retail and financial focus. To add insult to injury, it had more than figurative storms to deal with during its recently completed third quarter, with a couple of hurricanes dealing a significant blow to its corporate headquarters and a high percentage of its store base.

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Quarterly Turbulence
Despite the near-term turbulence, Conn's appears to be holding up quite well. Third-quarter retail sales advanced a respectable 2.3% to $173.9 million while revenue associated with extending credit to its customer base improved 9.7% to $25.6 million. A new store in Oklahoma helped offset a 5.8% drop in total comparable sales, which consisted of "slightly positive" comp growth in August and October and a major, 20.4%, comp drop in September due partially to Hurricanes Gustav and Ike. The storms also hit credit portfolio performance and resulted in two mandatory evacuations from Conn's corporate offices in the coastal town of Beaumont, Texas. (Learn to evaluate comps and other metrics in Analyzing Retail Stocks.)

Management reported that third-quarter earnings per share would have been 11 cents had it not been for hurricane-related charges. However, this still represents a 61% decline from the 28 cents per share reported in last year's quarter. When you include these charges and a fair value adjustment related to the manner in which it securitizes receivables, which consists of raising capital to fund the loans it extends to customers, the reported earnings loss was 35 cents per share.

Smoother Sailing Long Term
Given the economic uncertainty, management refrained from its custom of providing earnings projections. This clearly lowers earnings visibility, but consensus analyst projections currently stand at $1.19 per share for the year ending January 2010, which puts the P/E ratio at about 5. In my mind, that leaves quite a bit of cushion for further operational struggles or difficulties in securing credit to run its in-house credit operations. (For more on company guidance, read Earnings Forecasts: A Primer.)

Looking out longer term, Conn's has a number of characteristics working in its favor. For starters, hurricanes are nothing new for its operations and in a perverse sense the destruction leads to rebuilding activities, driving demand for Whirlpool (NYSE:WHR) and appliances, generators and furniture. Conn's also focuses on rural clients of a more blue-collar variety, which keeps it somewhat out of the clutches of Best Buy and other giant retailers such as Wal-Mart (NYSE:WMT), Target (NYSE:TGT) and Bed Bath & Beyond (Nasdaq:BBBY).

These customers are also less apt to be approved for traditional credit from large banks like Bank of America (NYSE:BAC) or regional players such as Cullen Frost (NYSE:CFR). This makes them more dependent on Conn's credit, which can be quite lucrative as credit loss ratios tend to average 3% annually. Additionally, management likes to boast that it understands payment trends given its close proximity to the customer and fact it also runs collections internally.

Bottom Line
True, one can't ignore the near-term risks - consumer demand remains challenging and management estimates it can fund operations for at least 18 months if credit conditions remain grim - but overall, this is a retailer with substantial potential to add to its small store base and therefore one to keep your eye on.

By Ryan C. Fuhrmann

Ryan C. Fuhrmann, CFA, has a background in portfolio management, overseeing assets for high-net-worth individuals and covering a broad array of industries from a generalist perspective. An active student of investing, he focuses on communicating his ideas as an investment writer and learning from the financial community. Ryan is also actively involved with the CFA Institute. Feel free to visit his website at www.rationalanalyst.com.

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