Here’s Why Conns Inc. Stock Should Rocket Higher

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Conns Inc. (NASDAQ:CONN) operates as a specialty retailer of durable consumer goods and related services in Texas, Arizona, Louisiana, Oklahoma, and New Mexico. In this article, I will outline the company’s performance and why I expect the stock to surge higher this week. Before delving into the numbers, it is prudent to have an idea of what Conns is involved in. The company’s stores provide home appliances, including refrigerators, freezers, washers, dryers, dishwashers, and ranges.

It also offers furniture and mattresses comprising furniture and related accessories for the living room, dining room, and bedroom, as well as traditional and specialty mattresses. Further, it offers a wide selection of home office products consisting of computers, tablets, printers, and accessories. Its stores also offer consumer electronics such as LCD, LED, 3-D, ultra HD and plasma televisions, Blu-ray players, home theater and video game products, digital cameras, and portable audio equipment. Finally, it has lawn and garden products, repair service agreements, installment credit programs, and various credit insurance products. Its most recent quarter was very strong.

First-quarter fiscal 2015 saw consolidated revenues increase 33.6 percent compared to the year-ago quarter to $335.4 million. Same-store sales grew 15.6 percent on top of a 16.5 percent increase in same-store sales reported a year ago. Furniture and mattress sales increased 64.7 percent and accounted for approximately one-third of total product revenue in first-quarter fiscal 2015. Retail gross margin improved 110 basis points to 41.4 percent.

Adjusted retail segment operating income rose 44.8 percent to $39.5 million, while the credit segment operating income declined $0.4 million to $11.3 million. Adjusted diluted earnings grew 31.1 percent to 80 cents per share from 61 cents per share. Conns reported net income of 77 cents per diluted share, which includes a pretax charge of $1.8 million associated with facility closures and lease terminations, compared to the prior-year quarter, when the company reported net income of 61 cents per diluted share.

Looking more in depth at the retail segment, we see that total retail revenues increased $68.3 million, or 32.6 percent, to $278.1 million for the quarter. The revenue growth reflects the impact of the net addition of nine stores over the past 12 months as well as a 15.6 percent increase in same store sales. The company’s decision to discontinue sales of lower-margin lawn equipment in January reduced the reported year-over-year sales increase. Sales of lawn equipment were $4.8 million in the first quarter of fiscal 2014.

After excluding lawn equipment, same store sales were up approximately 19 percent. Furniture unit sales expanded 52 percent, and the average selling price was up 15 percent while mattress unit volume grew 19 percent and the average selling price increased 14 percent. What is most striking is that home appliance unit volume increased 21 percent. Laundry sales were up 35 percent, refrigeration sales rose 32 percent, and cooking sales grew 23 percent. As a result of these outstanding numbers, retail gross margin increased 110 basis points to 41.4 percent for the quarter.

The year-over-year increase in retail gross margin is attributable to the significant growth in higher-margin furniture and mattress sales. Furniture and mattress sales contributed 31.8 percent of the total product sales and 42.4 percent of the total product gross profit in the current period. For the first quarter of fiscal 2015, home appliances accounted for 27.3 percent of total product gross profit, consumer electronics generated 21.6 percent of total product gross profit, and home office contributed 5.6 percent of total product gross profit.

The balance sheet is also improving. As of April 30, the company had $516.8 million in borrowings outstanding under its asset-based loan facility. The company had $183.8 million of immediately available borrowing capacity, with an additional $178 million that could become available upon increases in eligible inventory and customer receivable balances under the borrowing base.

Theodore M. Wright, Conns chairman and chief executive officer, said: “First quarter results met our expectations with solid performance in both the retail and credit operations. Same store sales rose 16 percent over the prior year with same store sales growth of 3 percent in the electronics category. This growth continued into May with same store sales increasing 13 percent. With the expansion of our product offerings and new store openings, furniture and mattress was our leading product category in the quarter. This favorable shift in product mix contributed to retail gross margin of 41.4 percent for the period.”

With this quarter, the stock should rocket higher. But what about for the rest of the year? Well, Conns reaffirmed its fiscal-year 2015 earnings guidance of $3.40 to $3.70 per diluted share on an adjusted basis. The company expects to generate diluted earnings per share of between $3.37 and $3.67 for the 12 months ending January 31, 2015, which includes charges of approximately 3 cents per diluted share associated with facility closures and lease terminations during the first quarter of fiscal 2015.

The company expects to see same stores sales up 5 percent to 10 percent and to open 17 to 20 new stores. Conn has plans to discontinue sales of lawn equipment to help improve retail gross margin, which it expects to be around 40 percent. The company also expects general expenses to be lower as a percentage of sales. Given the incredible progress the company is making, I rate the stock a buy and assign a $58 price target.

Disclosure: Christopher F. Davis hold no position in Conns and has no plans to initiate a position in the next 72 hours.

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