What's the Success Mantra for This Retailer?
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Tired of driving their business with price-sensitive, low-margin electronics and appliances, Texas-based retailer Conn's (NASDAQ: CONN) last year decided to focus on two product categories they believed would improve the bottom line and this is how it got serious about furniture and bedding.
And how's it working out so far? Furniture and bedding sales soared 50% in the quarter ended July 31 - 57.5% on a same-store basis - and were the key ingredient that grew the company's retail gross margin by some 530 basis points to 34.1%.
Conn posted a quarterly profit of $11.6 million, or $0.35 per share, versus a year-ago loss of $3.1 million, or $0.10 per share. It reported total revenue of $207.4 million, comprising net sales increase of 13% to $171.7 million in retail, and a 2.3% growth in finance. Same store sales increased 21.5%. It reported adjusted diluted earnings per share of $0.36 for the quarter ended 31st July 2012, compared to $0.18 reported for the same period in the previous year. Granted, the retailer's decision to move away from promotional price points in all product categories also helped, but it's clear that furniture and bedding are now the key drivers.
Conn’s posted better-than-expected quarterly results and raised its full-year profit forecast for the third time, as it gains from higher selling prices and strong demand for furniture and mattresses. The shares are soaring after the company reported its second-quarter financial results. Shares of this durable consumer goods retailer have more than doubled year-to-date.
Higher sales combined with efficient cost containment efforts aided the earnings in the quarter. Net sales growth for the quarter was driven by an improved and expanded product selection in the furniture and mattress category, higher average selling prices in the major product categories, and retention of a portion of the unit volume from closed stores. The broad margin improvement across all categories was driven by the exit of low price-point, low margin products and continued focus on sourcing.
In the aforesaid category, the company witnessed significant sales and margin growth which was higher than the growth in the other categories. Margins also benefited from the removal of low price-point and low margin products.
In addition, the opening of a Conn’s HomePlus store in Waco, Texas in mid-June and the revamp of four stores also contributed to the growth. Conn's has been altering its sales mix to feature high-priced products, especially furniture and mattresses, to boost margins. Its core customer base tends to be more working class and appears to be benefiting from an improving domestic economy, as well as less stringent credit requirements.
What about the Future?
Conn's said the improvements in operating performance have continued into the third quarter, and lifted its full-year 2013 profit outlook to $1.40 to $1.50 per share, versus its earlier forecast of $1.30 to $1.40 per share, representing it’s strong fundamentals.
Growth in same stores sales are expected at 10–15%. The company plans to increase the share of furniture and mattresses to 30% of its total sales, up from 21% at present, Chief Executive Theodore Wright said. Conn’s currently has 65 stores in Texas, Louisiana and Oklahoma. The company also plans to open as many as five new stores for the full-year and 10 to 12 stores in fiscal 2014.
How about the rivals?
Conn's, known for offering flexible credit options to shoppers, faces intense competition from bigger industry players like Best Buy Co. Inc. (NYSE: BBY), RadioShack Corp. (NYSE: RSH) and HHgregg (NYSE: HGG).
In August, U.S. consumer electronics retailer Best Buy’s same-store sales sank 3.2% after shoppers bought fewer televisions and notebook computers. Its business eroded by almost every measure, from revenue to gross profit margins to same-store sales, as gains in smartphones and tablets failed to make up for computer and television decline. Best Buy has been particularly hard hit by the phenomenon known as "showrooming," where bargain-hunters browse products in stores, then buy them more cheaply online.
The electronic retailer, RadioShack’s, shares down 75% this year, launched a wireless service under its own brand, staking more of its future on the highly competitive mobile-phone business. It still plans to build its turnaround on the competitive market for wireless phones and tablets, which often deliver slim margins but benefit from strong demand. RadioShack laid off workers at its corporate headquarters as the company continues to reduce costs following a second-quarter loss.
HHgregg is a specialty retailer of consumer electronics, home appliances and related services. The company estimates earnings of 11 cents per share this quarter. For the first quarter, it reported loss of $5.7 million with profits in the previous three quarters. For the fiscal year 2012, its first initiative is continue to grow their appliance market share, ensuring that they are the "must shop" appliance retailer and second is to stabilize profitability of the video category, for which they have to refine their go-to-market strategy.
Whether Yes or No?
Conn’s also kicked off its third quarter on a positive note. The good news about the second quarter sent Conn's stock skyward once again last week to more than $26 per share. That's a gain of roughly 120% since the beginning of 2012, and a 340% gain in the past 12 months.
The investors need to remain optimistic as the company shows a set of bullish features which include strong same-store sales momentum, share gain in the challenging appliance market, ability to charge higher price points compared to its peers, strong margin improvement, unit remodeling and an increase in its credit portfolio balance. Conn’s long-term prospect to garner 30% of product sales from its high-margin furniture and mattresses category will also bode well for its overall margins.
So it’s a Yes for an investment opportunity but with a “moderate buy” tag on it.
Riddhi2406 has no positions in the stocks mentioned above. The Motley Fool owns shares of Best Buy and RadioShack. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.