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Be Careful with the Impressive Growth of This Retailer
Posted by: Anh Hoang (IP Logged)
Date: September 5, 2012 01:51PM

Conn’s Inc. (CONN) just announced impressive results for second quarter 2012. Adjusted diluted earnings per share is $0.36 for the quarter, which is double compared to the last year figure of $0.18. Furniture and mattress sales are up 57.7% and same-store sales rose 21.5% year over year. The EPS beat analysts’ expectations by $0.01.

Theodore M. Wright, the company’s chairman and CEO, noted that the positive trend would continue in August: “Improvements in our retail operating performance continued into August, when we experienced growth in same store sales of 12% on top of a 6% increase last year. Same store sales of furniture and mattresses rose 33% in August after achieving same store growth of 59% a year ago.”

Should investors buy the stock following this positive earning news?

Actually CONN is made up of two businesses: the retail business and a finance business on its own products to customers. In the last two years, the “receivables” item in the balance sheet went up very rapidly. It was $94 million in 2008, $156 million in 2009, $377 million in 2010 and $360 million in 2011. Along with the increase in its receivables, there was the significant increase in items labeled “Long-term portion of customer accounts receivable,” grouping in “other long-term assets” category. Dangerously, those receivables have been financed by long-term debt. And it seems that the revenue of the retailer business has been strongly supported by the credit sales to the customers over the last two years, which is not very sustainable in my opinion.

USD millions 2008-01 2009-01 2010-01 2011-01 2012-01
Receivables 36 94 156 377 360
Other long-term assets 0 45 77 300 283
Long-term debt 0 63 106 374 321

In addition, two senior vice presidents have been selling out the shares since June this year; the total combined sale value was nearly $1.5 million.

Currently, the market values CONN at 222x earnings, 2 times its book value and 15.2 its operating cash flow. The enterprise value is more than $1 billion; the Enterprise value/EBITDA is more than 26 times. CONN might suit the taste of other speculative investors, but I am not interested in a half-retail, half-financing business with that high valuation.

Stocks Discussed: CONN,
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