Conn's (CONN) Shares Tumbling as Business Update Disappoints Investors

October 20, 2009 10:21 AM EDT

Conn's, Inc. (NASDAQ: CONN) today provided an update regarding current trends in its business.

Shares are down more than 25% on the news.

Economic conditions in the Company's markets have deteriorated significantly during the current year. This deterioration is evidenced by the significant increase in the unemployment rate in Texas, which, according to the Bureau of Labor Statistics, stood, preliminarily, at 8.0% for the month of August 2009, rising from 5.6% in December 2008 and 5.0% in August 2008. As a result, the Company's sales and credit portfolio performance have been adversely impacted. Preliminary total net sales through the first two months of the quarter ending October 31, 2009, declined 1.3%, compared to the year ago period. Through the first half of October, total net sales are down approximately 20% from the same period in October 2008. Additionally, product gross margins have been under continued pressure and through the first two months of the current quarter were down approximately 110 basis points as compared to the second quarter of fiscal 2010. In light of the slowdown in sales, the Company has focused its attention on improving the product gross margin and reducing expenses in an effort to minimize the effects on profitability.

In addition to the impact on sales, the current economic conditions have also put pressure on the Company's credit customers. The 60-day delinquency rate was 8.6% at September 30, 2009, as compared to 8.0% at September 30, 2008, which is consistent with the year-over-year 60 basis point increase the Company experienced at July 31, 2009. However, the average net loss rate for the two months of the current year quarter was approximately 4.0% and is expected to be higher in the month of October. The net loss rate is expected to remain between 4.0% and 5.0% during the fourth quarter of fiscal 2010, as compared to 3.4% in fourth quarter of fiscal 2009. The Company has taken measures to improve the credit quality of the portfolio by increasing the use of promotional credit programs for high credit-quality customers, raising the floor on the credit scores accepted in the portfolio and raising down payment levels.

The Company currently expects the total capital available for immediate needs and future growth to be relatively consistent with the amounts available as of July 31, 2009. The Company is continuing to closely monitor its capital availability and compliance with the various credit facility covenants and will adjust its plans, as appropriate, to maintain adequate liquidity and compliance with the covenants. The Company can reduce its use of its own credit programs, including raising down payments, and increase the use of third-party finance programs to manage capital availability, as well as taking advantage of other options.

The current economic conditions and the affects on the Company's operating results will also require the Company to review the adequacy of its allowance for bad debts related to the customer receivables held on balance sheet, the net loss assumption used in the determination of the fair value of its interest in securitized assets and determine whether the change in conditions will require it to perform an assessment for a potential non-cash impairment adjustment to goodwill during the third quarter of fiscal 2010. As a result, the Company is withdrawing its previously provided earnings guidance and has decided to temporarily discontinue its practice of providing earnings guidance. The Company believes it may report a net loss for the quarter ended October 31, 2009, before considering the impacts of any potential fair value or goodwill adjustments, though it expects to be solidly profitable during the fourth quarter of fiscal 2010, excluding potential fair value and goodwill adjustments. All of the above amounts are subject to change upon completion of the Company's quarter end financial statement closing process.

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