Conn's Inc. (CONN) filed Quarterly Report for the period ended 2009-10-31.
Conns Inc is a specialty retailer currently operating retail locations in Texas and Louisiana. It sells major home appliances, including refrigerators, freezers, washers, dryers and ranges, and a variety of consumer electronics, including projection, plasma and LCD televisions, camcorders, VCRs, DVD players and home theater products. They also sell home office equipment, lawn and garden products and bedding, and continue to introduce additional product categories for the home to help increase same store sales and to respond to their customers' product needs. Conn's Inc. has a market cap of $142.4 million; its shares were traded at around $6.34 with a P/E ratio of 4.3 and P/S ratio of 0.2. Conn's Inc. had an annual average earning growth of 6.4% over the past 5 years.
Highlight of Business Operations:
Our gross margin increased from 34.0% to 34.5% for the nine months ended October 31, 2009, when compared to the same period in the prior year. The increase was a result of trends similar to those discussed for the three months ended October 31, 2009.
Based on the Company s current loss rate experience and the additional risk premium that a market participant would require on that loss rate, the Company estimated that a market participant would require a loss rate input that was approximately 100 basis points higher than what was utilized at July 31, 2009. As a result, we increased the weighted-average loss rate from 4.0% at July 31, 2009 to 5.0% at October 31, 2009. This was partially offset by a reduction in the discount rate input used in the calculation. Based on a review of the changes in market risk premiums during the three months ended October 31, 2009, and discussions with our investment bankers and financial advisors, we estimated that the market risk premium required by a market participant decreased approximately 100 basis points during the quarter ended October 31, 2009. As a result, we decreased the weighted average discount rate assumption from 25.5% at July 31, 2009, to 24.3% at October 31, 2009, after reflecting a 11 basis point decrease in the risk-free interest rate included in the discount rate assumption. Similarly, we reviewed the changes in market risk premiums for the quarter ended July 31, 2009 and reduced the weighted average discount rate assumption to 25.5% from 30.0% at January 31, 2009 to reflect a decrease in the market risk premium of approximately 450 basis points and a 3 basis point decrease in the risk-free interest rate. If a market participant were to require a risk premium that is 10.0% higher than we estimated in the fair value calculation, the fair value of our Interests in securitized assets would decrease by $3.4 million as of October 31, 2009. If we had assumed a 10% reduction in net interest spread (which might be caused by rising interest rates or reductions in rates charged on the accounts transferred), the fair value of our Interests in securitized assets and Finance charges and other would have been reduced by $4.9 million as of October 31, 2009. If the assumption used for estimating credit losses was increased by 10%, the impact to Finance charges and other during the three months ended October 31, 2009 would have been a reduction in revenues and pretax income of $1.7 million.
Allowance for Doubtful Accounts. We record an allowance for doubtful accounts, including estimated uncollectible interest, for our Customer accounts receivable, based on our historical net loss experience and expectations for future losses. The net charge-off data used in computing the loss rate is reduced by the amount of post-charge-off recoveries received, including cash payments, amounts realized from the repossession of the products financed and, at times, payments received under credit insurance policies. Additionally, we separately evaluate the Primary and Secondary portfolios when estimating the allowance for doubtful accounts, but do not separately evaluate reaged accounts since these accounts have represented a relatively consistent proportion of the total portfolio over time. The balance in the allowance for doubtful accounts and uncollectible interest for customer receivables was $9.8 million and $3.9 million at October 31, 2009 and January 31, 2009, respectively. Additionally, as a result of our practice of reaging customer accounts, if the account is not ultimately collected, the timing and amount of the charge-off is impacted. If these accounts had been charged-off sooner the net loss rates over time might have been higher. Due to the recent growth in the balance of receivables on the balance sheet, as of October 31, 2009, reaged receivable balances represented 6.8% of the total portfolio balance. If the historical loss rate used to calculate the allowance for doubtful accounts were increased by 10% at October 31, 2009, we would have increased our Provision for bad debts by approximately $0.8 million.
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