Conn's Doing Significantly Better Than Rivals

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Conn’s Inc. (NASDAQ: CONN), a specialty retailer of durable consumer products, yesterday reported its third-quarter financial results. The company swung to a profit in the third quarter, driven by robust sales growth and a decline in costs. The Beaumont, Texas-based company also raised its outlook for the full year.

Q3 Results

Conn’s, which also provides consumer credit, had struggled following the financial crisis of 2009 as its customers struggled to make payments. However, the company has seen significant improvement in its financial performance as credit quality improved.

For the third quarter ended Oct. 31, Conn’s reported a profit of $11.8 million, or $0.35 per share, compared to a loss of $12.7 million, or $0.40 per share reported for the same period in the previous year. Excluding one-time items, the company reported a profit of $0.38 per share, compared to a profit $0.02 per share reported for the same period in the previous year. Analysts had forecast third-quarter adjusted earnings of $0.28 per share.

Conn’s reported third-quarter revenue of $206.4 million, which represents an increase of 11% over the same period in the previous year. Analysts were expecting the company to report revenue of $199 million.

During the third quarter, Conn’s same-store sales rose an impressive 12.6% over the prior quarter.

Theodore M. Wright, chairman and CEO of Conn’s, noted that the company’s HomePlus store in Albuquerque has performed well since opening in November and this week the company will open three additional stores. Wright further said that the company continues to see sales growth in its existing store base and November same-store sales rose 6% on top of same-store growth of 10% last year.

Outlook Raised Yet Again

Following the better-than-expected, fourth-quarter results, Conn’s raised its full-year outlook for the fourth time this year. The retailer now expects full-year earnings to come in between $1.55 per share and $1.60 per share, compared to previous guidance range of $1.40 per share to $1.50 per share. Same-store sales growth for the full year is expected to be between 13% and 16%, compared to previous guidance of growth of 10% to 15%.

For fiscal year ending in Jan. 31, 2014, the company expects earnings to be between $2.05 per share and $2.15 per share, well above the consensus forecast of $1.91 per share.

While Conn’s Continues to Improve, Rivals Continue to Struggle

While Conn’s has a significant improvement in its operating and financial performance, the company’s rivals Best Buy (NYSE: BBY) and RadioShack (NYSE: RSH) have seen better days.

Best Buy, which reported its third-quarter results on Nov. 20, posted a GAAP net loss from continuing operations of $13 million, or $0.04 per share for the quarter ended Nov. 3. Excluding one-time items, Best Buy’s net earnings from continuing operations for the quarter were $10 million, or $0.03 per share, compared to $173 million, or $0.47 per share reported for the same period in the previous year. The company’s comparable store sales for the quarter fell 4.3%.

RadioShack reported its third-quarter financial results on Oct. 23. For the quarter ended Sept. 30, the Fort Worth, Texas-based company reported total net sale of $1 billion, down from $1.03 billion reported for the same period in the previous year. RadioShack’s comparable store sales for the quarter fell 1.6%. The company reported a net loss of $47 million, or $0.47 per share, compared to net income of $0.3 million reported for the same period in the previous year. Net loss, excluding one-time items, was $33 million, or $0.33 per share for the quarter.

Conn’s results for the third quarter are in complete contrast to those of Best Buy and RadioShack. While Conn’s swung to a profit in the third quarter and has a bullish outlook, Best Buy and RadioShack swung to a loss.

So what is Conn’s doing right?

Conn’s has been shifting its focus from lower margin consumer electronics products and increasing its focus on higher-margin furniture and mattress segment. This shift in focus has helped Conn’s to improve results even as its rivals Best Buy and RadioShack have been struggling.

In the third quarter, Conn’s furniture and mattress sales rose 31.7% over the previous year.  The company’s retail gross margin improved from 25.3% to 35.5% in the third quarter. The improvement in retail gross margin was driven by the company’s focus on high-margin products.

Shares Rally

As Conn’s continues to see improvement in its business, the company’s shares have rallied this year. YTD, Conn’s shares have gained more than 154%. In the same period, Best Buy shares have fallen more than 44%, while RadioShack shares have fallen more than 79%.

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Source: stockcharts.com

Valuation

Conn’s currently trades at a forward P/E of 14.62, which is significantly higher than the industry average. However, given the company’s strong fundamentals and outlook, the valuation is justified. As we just noted, Conn's is doing extremely well compared to some of its rivals in the consumer durables market.


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