A burst in trading of Conn’s Inc. (CONN, Financial) catapulted the specialty retailer’s stock to surprising heights. Shares flew as high as 24% in Thursday trading.
The performance was attributed to heightened consumer spending and a healthy Texas economy, where Conn’s operates a lot of its business.
Before the company’s earnings call, the stock was already kissing $32 a share, inching closer to its 52-week high of $37.80 a share. The stock’s 52-week low of $16 a share reflected disappointing earnings last year.
But Conn’s executives told a different story on Thursday by delivering revenue and earnings beats.
Revenue, which includes credit and retail operations, was reported at $358 million, up from analysts’ forecasts of $355 million.
Conn’s reported earnings of 39 cents per share and made a profit of $12.7 million. That was great news after it reported a loss of $2.6 million, or 8 cents per share, in the prior year. Analysts estimated earnings of 27 cents per share. The figures reflect non-GAAP estimates and performance for the quarter ended April 30.
The Texas-based specialty retailer reported its first positive month of same-store sales in more than two years. It also posted a record-breaking gross margin of 39.6% and was able to reduce its interest expense by about $8 million, easing a significant debt load. The company reported a credit spread of 870 basis points, the best in over three years.
CEO Norm Miller described Conn’s performance in the earnings call as “an excellent start to the fiscal year.”
Analysts had predicted earnings of 27 cents per share on revenues of $355 million.
New sales strategies
Furniture and mattress sales rose by 35% while sales of home appliances increased 28% and home office sales increased 6.6%.
The company credited better sales to an increase in the number of in-store products. For example, the company saw a surge in sales of its home office merchandising after it redid its assortment of items, Miller said.
Miller also explained that the improvements were the result of an enhanced customer experience, due to a better trained sales staff.
In total, retail revenues were reported at $275 million, compared to $279 million in the prior-year quarter. The decrease was mostly related to a decline in same-store sales, which was partially offset by new store openings. The retailer opened two stores in Texas during the quarter, bringing its total store count to 118 in 14 states. It plans to open five stores in fiscal year 2019.
Guidance
Conn’s estimates a change in same-store sales of 0% to 3%. It also predicts a retail gross margin between 40.25% and 3% for the second quarter of fiscal 2019.
Conn’s estimates a provision for bad debts to range from $51 million to $55 million. It also expects finance charges and other revenues to reach $85 million to $89 million.
It estimates an interest expense of $16 million to $17 million.
Of a total of four analysts, two rate the stock a buy, one rates it outperform and one analyst rates it a hold, according to Reuters. The ratings are as of Thursday, June 7.
Underlying financials
Investors were able to witness the upward trend in the stock’s value just a day prior to the earnings call. Shares of Conn’s closed on Wednesday at $25.65 a share, up more than 4%.
By early Thursday afternoon, more than 1.5 million shares had exchanged hands, compared to the one-month average of no more than 564,000 shares a day.
The stock was trading 151.91 times earnings and 12.95 times forward earnings. It price-book ratio was 1.91 times, lower than 57% of its competitors. Its price-sales ratio was 0.66 times, higher than 51% of its competitors. It has struggled to increase net income in the last few years, as revenues have exceeded about $1 billion.
The company pays no dividends. Its three-year average buyback ratio is 4.7%, which is higher than 93% of its competitors in the Global Specialty Retail Sector.
It reported long-term debt of $1.09 billion. Over a year ago, in January 2017, the debt load was more than $1.1 billion. Debt has been rising since 2013, when the company sat on $263 million. Two years later, its debt exceeded $1.2 billion.
In free cash flow, the company reported $34 million in January, compared to $149 million a year ago. The year prior, it reported a cash flow loss of more than $230 million.
It has more than 4,200 employees.
Conn’s has a market cap of $978 million. GuruFocus ranks it 4 out of 10 in financial strength and 6 of 10 in profitability and growth.
Gurus who own the stock include Chuck Royce (Trades, Portfolio), Steven Cohen (Trades, Portfolio) and Lee Ainslie (Trades, Portfolio).
The Peter Lynch chart, which is incomplete, suggests the stock is somewhat overvalued.
