Why Conn's Could Recover After Its Stock Price Slump

The company's valuation and growth outlook suggest that it offers good value for money

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Oct 23, 2019
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Following its 9% stock price decline in the last year, Conn’s Inc (

CONN, Financial) could offer turnaround potential.

The home appliance and consumer electronics retailer is expanding its number of stores, investing in its website and seeking to become more efficient in order to boost its financial performance.

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Store investment

The company opened ten new showrooms in the second quarter. It plans to open an additional four new locations in the third quarter, which represents its fastest pace of new store openings in over four years. The company operates in only 14 states, which suggests there is significant scope to expand its presence across the US in order to increase its number of potential customers.

Conn’s agreed to lease a 400,000 square foot distribution center in Florida in the second quarter. It will open in the next year and could support up to 40 Conn’s stores in the state, according to the company’s second quarter update. This would increase its number of stores by around 30% and provide it with access to 21 million consumers across Florida.

Online growth

The retailer relaunched its website in the second quarter. It included improved features, such as allowing its customers to access any of its financing options online without being required to visit its physical stores. This should increase convenience for the company’s customers, and may lead to improving sales growth for the business.

The company plans to increase its investment in online marketing over the medium term. In addition, its ongoing investment in warehousing and in its delivery capabilities provide increasingly flexible delivery options that may boost loyalty among its customers and differentiate it from sector rivals.

Efficiency

Conn’s opened its new distribution center in Houston in the second quarter. It should increase the retailer’s capacity and efficiency, which could improve its margins and allow it to expand into new retail locations.

In addition, the company implemented a new system in the second quarter to improve its budgeting and inventory planning. It provides more extensive data that can be used reduce the company’s costs and improve its delivery times. This may lead to an improvement in the customer experience that helps to improve its sales performance versus sector peers.

Potential threats

Conn’s reported falling sales in its consumer electronics and home office categories in the second quarter. Its near-term sales prospects could become increasingly uncertain as a result of weak consumer confidence. The Conference Board reported last month that consumer sentiment declined by the largest amount since the start of 2019. Consumers remain concerned about the potential impact of tariffs on Chinese imports. Conn’s anticipates that incremental tariffs could force it to raise the prices of its products. This could cause a reduction in customer demand for its products, according to the retailer’s second quarter update.

In response, the company is working with its suppliers to share the costs of tariffs placed on Chinese imports. This could limit its need for higher retail prices, which may support stronger sales growth for the business. Conn’s is also diversifying the geographical location of its production so that it has less exposure to China. This could provide it with a more resilient source of supply, although it may take time to be completed.

In addition, the retailer is increasing its number of styles in categories such as furniture. This could offset the weaker demand it experienced in other segments in the second quarter through offering greater choice for consumers versus its industry rivals.

Outlook

Analysts forecast that Conn’s will record a rise in its earnings per share of 15% in fiscal 2021. Its forward price-earnings ratio of 9.5 suggests that it offers a margin of safety and long-term investment appeal.

Disclosure: the author has no positions in any stocks mentioned.

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