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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C.  20549
 

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended October 31, 2014
 
Commission File Number: 1-34956
 
CONN'S, INC.
(Exact name of registrant as specified in its charter)

A Delaware Corporation
 
06-1672840
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

4055 Technology Forest Blvd, Suite 210
The Woodlands, Texas 77381
(936) 230-5899
(Address, including zip code, and telephone
number, including area code, of registrant's
principal executive offices)

None
(Former name, former address and former
fiscal year, if changed since last report)

Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ý   No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer x
Accelerated filer o 
Non-accelerated filer o 
Smaller reporting company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No ý

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of December 4, 2014:
 
Class
 
Outstanding
Common stock, $0.01 par value per share
 
36,297,211



CONN'S, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE FISCAL QUARTER ENDED OCTOBER 31, 2014

TABLE OF CONTENTS

 
 
 
 
Page No.
PART I.
 
FINANCIAL INFORMATION
 
 
Item 1.
 
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
Item 3.
 
 
Item 4.
 
 
PART II.
 
OTHER INFORMATION
 
 
Item 1.
 
 
Item 1A.
 
 
Item 2.
 
 
Item 3.
 
 
Item 4.
 
 
Item 5.
 
 
Item 6.
 
 
 
 
 
 
 
 




PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements
CONN'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share data)
 
October 31,
2014
 
January 31,
2014
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
5,760

 
$
5,727

Customer accounts receivable, net of allowance of $71,784 and $38,447, respectively
598,241

 
527,267

Other accounts receivable
75,245

 
51,480

Inventories
168,603

 
120,530

Deferred income taxes
40,562

 
20,284

Income taxes recoverable
12,846

 
2,187

Prepaid expenses and other current assets
9,389

 
8,120

Total current assets
910,646

 
735,595

Long-term portion of customer accounts receivable, net of allowance of $60,884 and $33,354, respectively
507,399

 
457,413

Property and equipment, net
116,585

 
86,842

Deferred income taxes
11,070

 
7,721

Other assets
10,306

 
10,415

Total assets
$
1,556,006

 
$
1,297,986

Liabilities and Stockholders’ Equity
 

 
 

Current Liabilities:
 

 
 

Current portion of long-term debt
$
391

 
$
420

Accounts payable
92,100

 
82,861

Accrued compensation and related expenses
6,409

 
11,390

Accrued expenses
39,300

 
27,944

Income taxes payable
2,685

 
2,924

Deferred revenues and credits
22,452

 
17,068

Total current liabilities
163,337

 
142,607

Long-term debt
696,310

 
535,631

Other long-term liabilities
59,681

 
30,458

Total liabilities
919,328

 
708,696

Commitments and contingencies
 

 
 

Stockholders’ equity:
 

 
 

Preferred stock ($0.01 par value, 1,000,000 shares authorized; none issued or outstanding)

 

Common stock ($0.01 par value, 100,000,000 and 50,000,000 shares authorized, respectively; 36,284,140 and 36,127,569 shares issued, respectively)
363

 
361

Additional paid-in capital
229,862

 
225,631

Accumulated other comprehensive loss

 
(100
)
Retained earnings
406,453

 
363,398

Total stockholders’ equity
636,678

 
589,290

Total liabilities and stockholders' equity
$
1,556,006

 
$
1,297,986


See notes to condensed consolidated financial statements.

1


CONN'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
 
Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
Product sales
$
278,139

 
$
234,159

 
$
796,525

 
$
628,482

Repair service agreement commissions
23,056

 
19,601

 
64,042

 
52,756

Service revenues
3,414

 
3,286

 
9,952

 
8,968

Total net sales
304,609

 
257,046

 
870,519

 
690,206

Finance charges and other revenues
65,449

 
53,830

 
187,951

 
142,422

Total revenues
370,058

 
310,876

 
1,058,470

 
832,628

Costs and expenses:
 

 
 

 
 
 
 
Cost of goods sold, including warehousing and occupancy costs
178,976

 
151,987

 
508,475

 
411,484

Cost of service parts sold, including warehousing and occupancy costs
1,525

 
1,286

 
4,815

 
4,010

Selling, general and administrative expenses
112,562

 
90,341

 
320,069

 
242,353

Provision for bad debts
72,019

 
22,730

 
133,862

 
58,049

Charges and credits
355

 
2,834

 
3,601

 
2,834

Total costs and expenses
365,437

 
269,178

 
970,822

 
718,730

Operating income
4,621

 
41,698

 
87,648

 
113,898

Interest expense
8,950

 
3,714

 
19,921

 
10,720

Other income, net

 

 

 
(38
)
Income (loss) before income taxes
(4,329
)
 
37,984

 
67,727

 
103,216

Provision (benefit) for income taxes
(1,265
)
 
13,608

 
24,672

 
37,502

Net income (loss)
$
(3,064
)
 
$
24,376

 
$
43,055

 
$
65,714

Earnings (loss) per share:
 

 
 

 
 
 
 
Basic
$
(0.08
)
 
$
0.68

 
$
1.19

 
$
1.84

Diluted
$
(0.08
)
 
$
0.66

 
$
1.17

 
$
1.79

Weighted average common shares outstanding:
 

 
 

 
 
 
 
Basic
36,265

 
35,955

 
36,203

 
35,686

Diluted
36,265

 
36,965

 
36,928

 
36,795


See notes to condensed consolidated financial statements.

2


CONN'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited)
(in thousands)
 
Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
 
2014
 
2013
 
2014
 
2013
Net income (loss)
$
(3,064
)
 
$
24,376

 
$
43,055

 
$
65,714

Change in fair value of hedges
39

 
103

 
155

 
193

Impact of provision for income taxes on comprehensive income
(14
)
 
(36
)
 
(55
)
 
(68
)
Comprehensive income (loss)
$
(3,039
)
 
$
24,443

 
$
43,155

 
$
65,839


See notes to condensed consolidated financial statements.

3


CONN'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited)
(in thousands)
 
 
 
 
 
Additional
 
Accumulated
Other
 
 
 
 
 
Common Stock
 
Paid-in
 
Comprehensive
 
Retained
 
 
 
Shares
 
Amount
 
Capital
 
Loss
 
Earnings
 
Total
Balance at January 31, 2014
36,127

 
$
361

 
$
225,631

 
$
(100
)
 
$
363,398

 
$
589,290

Exercise of stock options, net of tax
71

 
1

 
112

 

 

 
113

Issuance of common stock under Employee Stock Purchase Plan
28

 

 
862

 

 

 
862

Vesting of restricted stock units
58

 
1

 

 

 

 
1

Stock-based compensation

 

 
3,257

 

 

 
3,257

Net income

 

 

 

 
43,055

 
43,055

Change in fair value of hedges, net of tax of $55

 

 

 
100

 

 
100

Balance at October 31, 2014
36,284

 
$
363

 
$
229,862

 
$

 
$
406,453

 
$
636,678


 
 
 
 
 
Additional
 
Accumulated
Other
 
 
 
 
 
Common Stock
 
Paid-in
 
Comprehensive
 
Retained
 
 
 
Shares
 
Amount
 
Capital
 
Loss
 
Earnings
 
Total
Balance at January 31, 2013
35,191

 
$
352

 
$
204,372

 
$
(223
)
 
$
269,949

 
$
474,450

Exercise of stock options, net of tax
707

 
7

 
14,869

 

 

 
14,876

Issuance of common stock under Employee Stock Purchase Plan
21

 

 
680

 

 

 
680

Vesting of restricted stock units
56

 
1

 

 

 

 
1

Stock-based compensation

 

 
2,889

 

 

 
2,889

Net income

 

 

 

 
65,714

 
65,714

Change in fair value of hedges, net of tax of $68

 

 

 
125

 

 
125

Balance at October 31, 2013
35,975

 
$
360

 
$
222,810

 
$
(98
)
 
$
335,663

 
$
558,735


See notes to condensed consolidated financial statements.

4


CONN'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
Nine Months Ended 
 October 31,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
43,055

 
$
65,714

Adjustments to reconcile net income to net cash used in operating activities:
 

 
 

Depreciation
13,294

 
9,048

Amortization
2,287

 
3,140

Provision for bad debts and uncollectible interest
153,709

 
66,399

Stock-based compensation
3,258

 
2,889

Excess tax benefits from stock-based compensation
(961
)
 
(4,743
)
Charges, net of credits, for store and facility closures and relocations
3,105

 
2,834

Deferred income taxes
(23,681
)
 
(2,374
)
Gain on sale of property and equipment
(345
)
 
(37
)
Tenant improvement allowances received from landlords
14,621

 
5,422

Change in operating assets and liabilities:
 

 
 

Accounts receivable
(284,291
)
 
(248,644
)
Inventories
(48,073
)
 
(58,047
)
Other assets
(1,347
)
 
(501
)
Accounts payable
9,239

 
36,814

Accrued expenses
(2,242
)
 
9,756

Income taxes
(10,798
)
 
2,493

Deferred revenues and credits
2,376

 
138

Net cash used in operating activities
(126,794
)
 
(109,699
)
Cash flows from investing activities:
 

 
 

Purchase of property and equipment
(53,116
)
 
(37,122
)
Proceeds from sale of property and equipment
19,402

 
44

Net cash used in investing activities
(33,714
)
 
(37,078
)
Cash flows from financing activities:
 

 
 

Borrowings from revolving credit facility
357,456

 
306,664

Payments on revolving credit facility
(441,950
)
 
(147,737
)
Proceeds from issuance of senior notes, net of issuance costs
243,400

 

Payments on asset-backed notes

 
(32,513
)
Change in restricted cash

 
4,717

Proceeds from stock issued under employee benefit plans
975

 
15,556

Other
660

 
(58
)
Net cash provided by financing activities
160,541

 
146,629

Net change in cash and cash equivalents
33

 
(148
)
Cash and cash equivalents, beginning of period
5,727

 
3,849

Cash and cash equivalents, end of period
$
5,760

 
$
3,701

See notes to condensed consolidated financial statements.

5


CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.     Summary of Significant Accounting Policies
 
Basis of Presentation. The accompanying unaudited, condensed consolidated financial statements of Conn’s, Inc. and its wholly-owned subsidiaries (the “Company”) have been prepared by management in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The accompanying financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature, except as otherwise described herein. The Company’s business is moderately seasonal, with a higher portion of sales and operating profit realized during the quarter that ends January 31, due primarily to the holiday selling season. Operating results for the nine months ended October 31, 2014 are not necessarily indicative of the results that may be expected for the full fiscal year ending January 31, 2015. The Company’s balance sheet at January 31, 2014 has been derived from the audited financial statements at that date. The financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2014, filed with the United States Securities and Exchange Commission (the "SEC") on March 27, 2014.

Principles of Consolidation. The consolidated financial statements include the accounts of Conn’s, Inc. and its wholly-owned subsidiaries. Conn’s, Inc. is a holding company with no independent assets or operations other than its investments in its subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.
 
In April 2012, the Company transferred certain customer receivables to a bankruptcy-remote, variable-interest entity (“VIE”) in connection with a securitization. The VIE, which was consolidated within the accompanying financial statements, issued debt secured by the customer receivables that were transferred to it, which were included in customer accounts receivable and long-term portion of customer accounts receivable. On April 15, 2013, the VIE redeemed the then outstanding asset-backed notes and the remaining customer receivables were transferred back to the Company.
 
Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Earnings per Share. Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share include the dilutive effects of any stock options and restricted stock units granted, to the extent not anti-dilutive, which is calculated using the treasury-stock method. The following table sets forth the shares outstanding for the earnings per share calculations:
 
Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
(in thousands)
2014
 
2013
 
2014
 
2013
Weighted average common shares outstanding - Basic
36,265

 
35,955

 
36,203

 
35,686

Assumed exercise of stock options

 
790

 
587

 
892

Unvested restricted stock units

 
220

 
138

 
217

Weighted average common shares outstanding - Diluted
36,265

 
36,965

 
36,928

 
36,795


For the three months ended October 31, 2014, 744,000 stock options and restricted stock units were excluded from the calculation of diluted earnings per share due to their anti-dilutive effect on the loss for the period. For the nine months ended October 31, 2014, 92,000 shares of stock options and restricted stock units were outstanding but were not included in the calculation of diluted earnings per share due to their anti-dilutive effect. There were no anti-dilutive stock options or restricted stock units for the three and nine months ended October 31, 2013.


6


Fair Value of Financial Instruments. The Company determines the fair value of its assets and liabilities subject to fair value measurement by using the highest possible “Level” based on a hierarchy defined as follows:
 
Level 1 – Quoted prices available in active markets for identical assets or liabilities
Level 2 – Pricing inputs not quoted in active markets but either directly or indirectly observable
Level 3 – Significant inputs to pricing that have little or no transparency with inputs requiring significant management judgment or estimation.
The fair value of cash and cash equivalents and accounts payable approximate their carrying amounts because of the short maturity of these instruments. The fair value of customer accounts receivables, determined using a Level 3 discounted cash flow analysis, approximates their carrying amount. The fair value of the Company’s asset based, revolving credit facility, using Level 2 inputs, approximates carrying value. At October 31, 2014, the fair value of the Company's 7.25% senior notes which was determined using Level 1 inputs was $215.0 million as compared to the carrying value of $250.0 million, excluding the impact of the related discount.

Stockholders' Equity. On May 29, 2014, following approval by its stockholders on May 28, 2014, the Company amended its Certificate of Incorporation to increase the number of authorized shares of common stock, par value of $0.01 per share, from 50,000,000 shares of common stock to 100,000,000 shares of common stock.

Stockholders' Rights Plan. On October 6, 2014, the Company adopted a one-year stockholders' rights plan whereby the Board of Directors of the Company ("Board of Directors") declared a dividend of one right for each outstanding share of the Company's common stock to stockholders of record on October 16, 2014. Each right entitles the registered holder to purchase from the Company one one-thousandth of a share of the Company's Series A Junior Participating Preferred Stock at a price of $155.00 per right. The rights are not presently exercisable and remain attached to the shares of common stock until the occurrence of certain triggering events. Subject to certain exceptions, the rights will separate from the shares of common stock and a distribution date will be deemed to occur on the earlier of (i) the tenth business day after a public announcement or filing that a person or group has become a beneficial owner of 10% or more of the Company's outstanding common stock after the adoption of the stockholders’ rights plan, or (ii) the tenth business day (or such later date as the Board of Directors may determine) after the commencement of, or announcement of an intention to commence, a tender or exchange offer that, if consummated, would result in a person or group becoming a beneficial owner of 10% or more of the Company's outstanding common stock. The rights will expire on October 5, 2015, unless exercised, redeemed or exchanged prior to that time. The Board of Directors may terminate the rights plan before the expiration date or extend the expiration date. The rights have no voting or dividend privileges, and, unless and until they become exercisable, have no dilutive effect on the earnings of the Company.

Recent Accounting Pronouncements. In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2014-09, which provides a single comprehensive accounting standard for revenue recognition for contracts with customers and supersedes current guidance. Upon adoption of ASU 2014-09, entities are required to recognize revenue using the following comprehensive model: (1) identify contracts with customers, (2) identify the performance obligations in contracts, (3) determine transaction price, (4) allocate the transaction price to the performance obligations, and (5) recognize revenue as each performance obligation is satisfied. ASU 2014-09 is effective for the Company beginning in the first quarter of fiscal 2018 and will result in retrospective application, either in the form of recasting all prior periods presented or a cumulative adjustment to equity in the period of adoption. The Company is currently assessing the impact the new standard will have on its financial statements.
  
2.     Charges and Credits
 
During the three months ended October 31, 2014, the Company recorded a net pretax credit of $0.1 million ($0.1 million after-tax) due to the revision of estimated lease termination and other costs and credits related to store closures and relocations and a pretax charge of $0.5 million ($0.3 million after-tax) for legal and professional fees related to the Company's exploration of strategic alternatives and a class action lawsuit. During the three months ended October 31, 2013, the Company recorded a pretax charge of $2.8 million ($1.8 million after-tax) related to store closures and relocations as well as revised estimates of future obligations related to previously closed stores. These charges are reported within the retail segment.

During the nine months ended October 31, 2014, the Company recorded a net pretax charge of $3.1 million ($2.0 million after-tax) due to the revision of estimated lease termination and other costs related to store closures and relocations and a pretax charge of $0.5 million ($0.3 million after-tax) for legal and professional fees related to the Company's exploration of strategic alternatives and a class action lawsuit. During the nine months ended October 31, 2013, the Company recorded a pretax charge

7


of $2.8 million ($1.8 million after-tax) related to store closures and relocations as well as revised estimates of future obligations related to previously closed stores. These charges are reported within the retail segment.

3.     Supplemental Disclosure of Customer Receivables
 
Customer accounts receivable are originated at the time of sale and delivery of the various products and services. The Company records the amount of principal and accrued interest on customer receivables that is expected to be collected within the next twelve months, based on contractual terms, in current assets on its consolidated balance sheet. Those amounts expected to be collected after twelve months, based on contractual terms, are included in long-term assets. Customer receivables are considered delinquent if a payment has not been received on the scheduled due date. Accounts that are delinquent more than 209 days as of the end of a month are charged-off against the allowance for doubtful accounts and interest accrued subsequent to the last payment is reversed and charged against the allowance for uncollectible interest.
 
As part of its efforts in mitigating losses on its accounts receivable, the Company may make loan modifications to a borrower experiencing financial difficulty. The loan modifications are intended to maximize net cash flow after expenses and avoid the need to repossess collateral or exercise legal remedies available to the Company. The Company may extend the loan term, refinance or otherwise re-age an account. In accordance with accounting standards, accounts that have been re-aged in excess of three months or refinanced are considered Troubled Debt Restructurings (“TDR” or "Restructured Accounts").

The Company uses risk-rating criteria to differentiate underwriting requirements, potentially requiring differing down payments, credit limits and initial application and documentation criteria. The following tables present quantitative information about the receivables portfolio managed by the Company:
 
Total Outstanding Balance
 
Customer Accounts Receivable
 
60 Days Past Due(1)
 
Re-aged(1)
(in thousands)
October 31,
2014
 
January 31,
2014
 
October 31,
2014
 
January 31,
2014
 
October 31,
2014
 
January 31,
2014
Customer accounts receivable
$
1,180,095

 
$
1,022,914

 
$
105,248

 
$
82,486

 
$
90,788

 
$
75,414

Restructured accounts
73,428

 
45,356

 
20,430

 
11,917

 
73,428

 
45,356

Total receivables managed
1,253,523

 
1,068,270

 
$
125,678

 
$
94,403

 
$
164,216

 
$
120,770

Allowance for uncollectible accounts related to the credit portfolio
(132,668
)
 
(71,801
)
 
 
 
 
 
 
 
 
Allowance for no-interest option credit programs
(15,215
)
 
(11,789
)
 
 
 
 
 
 
 
 
Total customer accounts receivable, net
1,105,640

 
984,680

 
 
 
 
 
 
 
 
Short-term portion of customer accounts receivable, net
(598,241
)
 
(527,267
)
 
 
 
 
 
 
 
 
Long-term portion of customer accounts receivable, net
$
507,399

 
$
457,413

 
 
 
 
 
 
 
 

(1)
Amounts are based on end of period balances. As an account can become past due after having been re-aged, accounts may be presented in both the past due and re-aged columns shown above. The amounts included within both the past due and re-aged columns shown above as of October 31, 2014 and January 31, 2014 were $42.8 million and $27.4 million, respectively. The total amount of customer receivables past due one day or greater was $314.0 million and $249.3 million as of October 31, 2014 and January 31, 2014, respectively. These amounts include the 60 days past due totals shown above.

8


 
 
 
 
 
Net Credit
 
 
 
 
 
Net Credit
 
Average Balances
 
Charge-offs(1)
 
Average Balances
 
Charge-offs(1)
 
Three Months Ended 
 October 31,
 
Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
(in thousands)
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Customer accounts receivable
$
1,153,226

 
$
853,394

 
$
23,602

 
$
12,358

 
$
1,090,078

 
$
779,859

 
$
66,162

 
$
31,982

Restructured accounts
67,709

 
41,693

 
3,462

 
4,564

 
57,715

 
40,446

 
10,650

 
10,671

Total receivables managed
$
1,220,935

 
$
895,087

 
$
27,064

 
$
16,922

 
$
1,147,793

 
$
820,305

 
$
76,812

 
$
42,653


(1)
Net credit charge-offs include the principal amount of losses (excluding accrued and unpaid interest) net of recoveries which include principal collections during the period shown of previously charged-off balances.

The following presents the activity in the Company’s balance in the allowance for doubtful accounts and uncollectible interest for customer receivables:
 
Nine Months Ended October 31, 2014
 
Nine Months Ended October 31, 2013
(in thousands)
Customer
Accounts
Receivable
 
 
Restructured
Accounts
 
 
 
Total
 
Customer
Accounts
Receivable
 
 
Restructured
Accounts
 
 
 
Total
Allowance at beginning of period
$
54,448

 
$
17,353

 
$
71,801

 
$
27,702

 
$
16,209

 
$
43,911

Provision(1)
131,806

 
21,903

 
153,709

 
53,468

 
12,931

 
66,399

Principal charge-offs(2)
(77,058
)
 
(12,404
)
 
(89,462
)
 
(35,805
)
 
(11,947
)
 
(47,752
)
Interest charge-offs
(13,807
)
 
(2,223
)
 
(16,030
)
 
(6,045
)
 
(2,017
)
 
(8,062
)
Recoveries(2)
10,896

 
1,754

 
12,650

 
3,823

 
1,276

 
5,099

Allowance at end of period
$
106,285

 
$
26,383

 
$
132,668

 
$
43,143

 
$
16,452

 
$
59,595


(1)
Includes provision for uncollectible interest, which is included in finance charges and other revenues.
(2)
Charge-offs include the principal amount of losses (excluding accrued and unpaid interest), and recoveries include principal collections during the period shown of previously charged-off balances. Net charge-offs are calculated as the net of principal charge-offs and recoveries.
The Company records an allowance for doubtful accounts, including estimated uncollectible interest, for its customer accounts receivable, based on its historical cash collections and net loss experience using a projection of monthly delinquency performance, cash collections and losses. In addition to pre-charge-off cash collections and charge-off information, estimates of post-charge-off recoveries, including cash payments, amounts realized from the repossession of the products financed and, at times, payments received under credit insurance policies are considered.
 
The Company determines reserves for those accounts that are TDR based on the present value of cash flows expected to be collected over the life of those accounts. The excess of the carrying amount over the discounted cash flow amount is recorded as a reserve for loss on those accounts.
 
The Company typically only places accounts in non-accrual status when legally required. Payments received on non-accrual loans are applied to principal and reduce the amount of the loan. Interest accrual is resumed on those accounts once a legally-mandated settlement arrangement is reached or other payment arrangements are made with the customer. Customer receivables in non-accrual status were $13.1 million and $12.2 million at October 31, 2014 and January 31, 2014, respectively. Customer receivables that were past due 90 days or more and still accruing interest totaled $91.0 million and $63.3 million at October 31, 2014 and January 31, 2014, respectively.


9


4.        Supplemental Disclosure of Finance Charges and Other Revenues
 
The following is a summary of the classification of the amounts included as finance charges and other revenue:
 
Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
(in thousands)
2014
 
2013
 
2014
 
2013
Interest income and fees on customer receivables
$
52,142

 
$
40,260

 
$
150,858

 
$
109,667

Insurance commissions
12,777

 
13,132

 
35,753

 
31,688

Other revenues
530

 
438

 
1,340

 
1,067

Finance charges and other revenues
$
65,449

 
$
53,830

 
$
187,951

 
$
142,422


Interest income and fees on customer receivables is reduced by provisions for uncollectible interest of $7.8 million and $4.2 million for the three months ended October 31, 2014 and 2013, respectively, and $19.8 million and $9.4 million for the nine months ended October 31, 2014 and 2013, respectively. The amount included in interest income and fees on customer receivables related to TDR accounts was $1.8 million and $1.1 million for the three months ended October 31, 2014 and 2013, respectively, and $4.9 million and $3.2 million for the nine months ended October 31, 2014 and 2013, respectively. The Company recognizes interest income on TDR accounts using the interest income method, which requires reporting interest income equal to the increase in the net carrying amount of the loan attributable to the passage of time. Cash proceeds and other adjustments are applied to the net carrying amount of TDR accounts such that it always equals the present value of expected future cash flows.

5.     Accrual for Store Closures
 
The Company has closed or relocated retail locations that did not perform at a level the Company expects for mature store locations. Certain of the closed or relocated stores had noncancelable lease agreements, resulting in the accrual of the present value of the remaining lease payments and estimated related occupancy obligations, net of estimated sublease income. Adjustments to these projections for changes in estimated marketing times and sublease rates, as well as other revisions, are made to the obligation as further information related to the actual terms and costs become available. The following table presents detail of the activity in the accrual for store closures:
 
Nine Months Ended 
 October 31,
(in thousands)
2014
 
2013
Balance at beginning of period
$
4,316

 
$
5,071

Accrual for additional closures
2,595

 
137

Adjustments
(216
)
 
2,036

Cash payments, net of sublease income
(3,880
)
 
(1,509
)
Balance at end of period
$
2,815

 
$
5,735


The accrual for store closures is presented on the condensed consolidated balance sheet as follows:
(in thousands)
October 31,
2014
 
January 31,
2014
Balance sheet presentation:
 
 
 
Accrued expenses
$
954

 
$
1,957

Other long-term liabilities
1,861

 
2,359

 
$
2,815

 
$
4,316



10


6.     Debt and Letters of Credit
 
The Company’s long-term debt consisted of the following:
(in thousands)
October 31,
2014
 
January 31,
2014
Asset-based revolving credit facility
$
450,463

 
$
534,956

7.25% Senior notes, net of discount of $4,792
245,208

 

Other long-term debt
1,030

 
1,095

Total debt
696,701

 
536,051

Less current portion of debt
(391
)
 
(420
)
Long-term debt
$
696,310

 
$
535,631


Senior Notes. On July 1, 2014, the Company issued $250.0 million in senior unsecured notes due July 2022 (the “Senior Notes”), bearing interest at 7.25%, pursuant to an indenture dated July 1, 2014 (the "Indenture"), among Conn’s, Inc., its subsidiary guarantors (the "Guarantors") and U.S. Bank National Association, as trustee. The Senior Notes were sold at par, and resulted in net proceeds to the Company of $243.4 million, after deducting the initial purchasers’ discounts and commissions and other offering expenses. The net proceeds were used to repay outstanding borrowings under the Company’s asset-based revolving credit facility. The effective interest rate of the Senior Notes after giving effect to offering fees is 7.6%.

The Indenture restricts the Company's ability and the ability of certain of its subsidiaries to: (i) incur indebtedness; (ii) pay dividends or make other distributions in respect of, or repurchase or redeem, our capital stock; (iii) prepay, redeem or repurchase debt that is junior in right of payment to the notes; (iv) make loans and certain investments; (v) sell assets; (vi) incur liens; (vii) enter into transactions with affiliates; and (viii) consolidate, merge or sell all or substantially all of our assets. These covenants are subject to a number of important exceptions and qualifications. During any time when the Senior Notes are rated investment grade by either of Moody's Investors Service, Inc. or Standard & Poor's Ratings Services and no Default (as defined in the Indenture) has occurred and is continuing, many of such covenants will be suspended and the Company and its subsidiaries will cease to be subject to such covenants during such period.

Events of default under the Indenture include customary events, such as a cross-acceleration provision in the event that we default in the payment of other debt due at maturity or upon acceleration for default in an amount exceeding $25.0 million, as well as in the event a judgment is entered against us in excess of $25.0 million that is not discharged, bonded or insured.

The Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by the Guarantors. The only direct or indirect subsidiaries of Conn’s, Inc. that are not Guarantors are minor subsidiaries. There are no restrictions on the ability of any of the Guarantors to transfer funds to Conn’s, Inc. in the form of loans, advances or dividends, except as provided by applicable law.

In connection with the issuance and sale of the Senior Notes, the Company and the Guarantors entered into a registration rights agreement (the “Registration Rights Agreement”) with the initial purchasers, dated July 1, 2014. Pursuant to the Registration Rights Agreement, the Company and the Guarantors have agreed to file a registration statement with the SEC so that holders of the Senior Notes can exchange the Senior Notes for registered notes that have substantially identical terms as the Senior Notes. In addition, the Company and the Guarantors have agreed to exchange the guarantee related to the Senior Notes for a registered guarantee having substantially the same terms as the original guarantee. The Company and the Guarantors will use commercially reasonable efforts to cause the exchange to be completed within 365 days of the issuance of the Senior Notes. The Company and the Guarantors are required to pay additional interest if they fail to comply with their obligations to register the Senior Notes within the specified time periods.

Revolving Credit Facility. Conn's, Inc. and certain of its subsidiaries (the "Borrowers") amended its asset-based revolving credit facility in connection with the issuance of the Senior Notes, to provide for among other things, the issuance of the Senior Notes and Indenture as well as related guarantees, upstream distributions from subsidiaries to Conn’s, Inc. (a holding company) for the payment of interest and principal on the Senior Notes and under certain circumstances optional and mandatory prepayment of the Senior Notes and allow holders of the Senior Notes to receive payments even though they may be stockholders of the Company.

The Company’s asset-based revolving credit facility with a syndicate of banks had capacity of $880.0 million as of October 31, 2014. The revolving credit facility provides funding based on a borrowing base calculation that includes customer accounts

11


receivable and inventory. The amended and restated credit facility bears interest at LIBOR plus a spread ranging from 250 basis points to 325 basis points, based on a leverage ratio (defined as total liabilities to tangible net worth). In addition to the leverage ratio, the revolving credit facility includes a fixed charge coverage requirement, a minimum customer receivables cash recovery percentage requirement and a net capital expenditures limit. The obligations under the asset-based revolving credit facility are secured by all assets of the Borrowers. The asset-based revolving credit facility restricts the amount of dividends the Company can pay.

As of October 31, 2014, the Company had immediately available borrowing capacity of $335.3 million under its asset-based revolving credit facility, net of standby letters of credit issued, for general corporate purposes. The Company also had $93.1 million that may become available under its asset-based revolving credit facility if it grows the balance of eligible customer receivables and its total eligible inventory balances. The Company pays additional fees in the amount of 0.25% for the additional commitment amount.

The Company’s asset-based revolving credit facility provides it the ability to utilize letters of credit to secure its deductibles under the Company’s property and casualty insurance programs, among other acceptable uses. At October 31, 2014, the Company had outstanding letters of credit of $1.1 million under this facility, which is the maximum potential amount of future payments.

The Company was in compliance with its financial covenants at October 31, 2014.

7.     Contingencies
 
Securities Class Action Litigation. Between March 5, 2014 and May 5, 2014, the Company and three of its current and former executive officers were sued in three purported securities class action lawsuits, each filed in the United States District Court for the Southern District of Texas. Each of the complaints allege that the defendants made false and misleading statements and/or failed to disclose material adverse facts about the Company’s business, operations, and prospects. The complaints allege violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. The complaints do not specify the amount of damages sought.

On June 3, 2014, the court consolidated these three complaints into a single, putative class action, In re Conn’s, Inc. Securities Litigation, Master File No. 14:14-CV-00548, and appointed lead plaintiffs. On July 21, 2014, the lead plaintiffs’ filed an amended and consolidated complaint (the “Amended Complaint”). On September 4, 2014, the defendants filed a Motion to Dismiss the Amended Complaint.

On October 1, 2014, the lead plaintiffs filed a Motion for Leave to File a Second Consolidated Amended Complaint, seeking, among other things, to extend the class period. On October 15, 2014, the court granted plaintiffs’ motion and on October 29, 2014, the plaintiffs’ filed a Second Consolidated Amended Complaint (the “Second Amended Complaint”) with the court. The Second Amended Complaint seeks to certify a class of all persons and entities that purchased or otherwise acquired Conn’s common stock and/or call options, or sold/wrote Conn’s put options between April 3, 2013 and August 29, 2914. The defendants intend to file an amended motion to dismiss and vigorously defend against these claims. It is not possible at this time to predict the timing or outcome of the litigation.

Derivative Litigation. On December 1, 2014, an alleged shareholder filed, purportedly on behalf of the Company, a derivative shareholder lawsuit against the Company and certain of its current and former directors and executive officers in the United States District Court for the Southern District of Texas captioned Robert Hack, derivatively on behalf of Conn’s, Inc., v. Theodore M. Wright, Bob L. Martin, Jon E.M. Jacoby, Kelly M. Malson, Douglas H. Martin, David Schofman, Scott L. Thompson, Brian E. Taylor and Michael J. Poppe and Conn’s, Inc., Case No. 4:14-cv-03442. The complaint asserts claims for breach of fiduciary duty, unjust enrichment, gross mismanagement, and insider trading based on substantially similar factual allegations as those asserted in the consolidated securities class action lawsuit described above. The plaintiff seeks unspecified damages against these persons and does not request any damages from us. The plaintiff did not make a demand on our Board of Directors prior to filing the suit. The defendants intend to vigorously defend against these claims.

Regulatory Matters. The Company received a voluntary request for information dated November 25, 2014 from the Fort Worth Regional Office of the SEC. The information request generally relates to the Company’s underwriting policies and bad debt provisions. The request states that it is part of an informal, non-public, inquiry, which, as noted by the SEC, should not be construed as an indication by the SEC or its staff that any violations of law have occurred. The Company intends to cooperate with the SEC’s inquiry.

In addition, the Company is involved in other routine litigation and claims incidental to its business from time to time which, individually or in the aggregate are not expected to have a material adverse effect on the Company's financial position, results of operations or cash flows. As required, the Company accrues estimates of the probable costs for the resolution of these matters. These estimates have been developed in consultation with counsel and are based upon an analysis of potential results, assuming

12


a combination of litigation and settlement strategies. However, the results of these proceedings cannot be predicted with certainty, and changes in facts and circumstances could impact the Company’s estimate of reserves for litigation.

8.     Segment Reporting
 
Financial information by segment is presented in the following tables: 
 
Three Months Ended October 31, 2014

Three Months Ended October 31, 2013
(in thousands)
Retail

Credit

Total

Retail

Credit

Total
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Product sales
$
278,139

 
$

 
$
278,139

 
$
234,159

 
$

 
$
234,159

Repair service agreement commissions
23,056

 

 
23,056

 
19,601

 

 
19,601

Service revenues
3,414

 

 
3,414

 
3,286

 

 
3,286

Total net sales
304,609

 

 
304,609

 
257,046

 

 
257,046

Finance charges and other revenues
531

 
64,918

 
65,449

 
438

 
53,392

 
53,830

Total revenues
305,140

 
64,918

 
370,058

 
257,484

 
53,392

 
310,876

Costs and expenses:
 

 
 

 
 

 
 

 
 

 
 

Cost of goods sold, including warehousing and occupancy costs
178,976

 

 
178,976

 
151,987

 

 
151,987

Cost of service parts sold, including warehousing and occupancy cost
1,525

 

 
1,525

 
1,286

 

 
1,286

Selling, general and administrative expenses(1)
86,436

 
26,126

 
112,562

 
69,920

 
20,421

 
90,341

Provision for bad debts
54

 
71,965

 
72,019

 
203

 
22,527

 
22,730

Charges and credits
355

 

 
355

 
2,834

 

 
2,834

Total costs and expense
267,346

 
98,091

 
365,437

 
226,230

 
42,948

 
269,178

Operating income
37,794

 
(33,173
)
 
4,621

 
31,254

 
10,444

 
41,698

Interest expense

 
8,950

 
8,950

 

 
3,714

 
3,714

Income (loss) before income taxes
$
37,794

 
$
(42,123
)
 
$
(4,329
)
 
$
31,254

 
$
6,730

 
$
37,984



13


 
Nine Months Ended October 31, 2014
 
Nine Months Ended October 31, 2013
(in thousands)
Retail
 
Credit
 
Total
 
Retail
 
Credit
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Product sales
$
796,525

 
$

 
$
796,525

 
$
628,482

 
$

 
$
628,482

Repair service agreement commissions
64,042

 

 
64,042

 
52,756

 

 
52,756

Service revenues
9,952

 

 
9,952

 
8,968

 

 
8,968

Total net sales
870,519

 

 
870,519

 
690,206

 

 
690,206

Finance charges and other revenues
1,340

 
186,611

 
187,951

 
1,067

 
141,355

 
142,422

Total revenues
871,859

 
186,611

 
1,058,470

 
691,273

 
141,355

 
832,628

Costs and expenses:
 

 
 

 
 

 
 

 
 

 
 

Cost of goods sold, including warehousing and occupancy costs
508,475

 

 
508,475

 
411,484

 

 
411,484

Cost of service parts sold, including warehousing and occupancy cost
4,815

 

 
4,815

 
4,010

 

 
4,010

Selling, general and administrative expenses(1)
245,102

 
74,967

 
320,069

 
188,340

 
54,013

 
242,353

Provision for bad debts
98

 
133,764

 
133,862

 
389

 
57,660

 
58,049

Charges and credits
3,601

 

 
3,601

 
2,834

 

 
2,834

Total costs and expense
762,091

 
208,731

 
970,822

 
607,057

 
111,673

 
718,730

Operating income
109,768

 
(22,120
)
 
87,648

 
84,216

 
29,682

 
113,898

Interest expense

 
19,921

 
19,921

 

 
10,720

 
10,720

Other income, net

 

 

 
(38
)
 

 
(38
)
Income (loss) before income taxes
$
109,768

 
$
(42,041
)
 
$
67,727

 
$
84,254

 
$
18,962

 
$
103,216


 
October 31, 2014
 
January 31, 2014
(in thousands)
Retail
 
Credit
 
Total
 
Retail
 
Credit
 
Total
Total assets(2)
$
420,489

 
$
1,135,517

 
$
1,556,006

 
$
283,637

 
$
1,014,349

 
$
1,297,986


(1)
Selling, general and administrative ("SG&A") expenses include the direct expenses of the retail and credit operations, allocated overhead expenses and a charge to the credit segment to reimburse the retail segment for expenses it incurs related to occupancy, personnel, advertising and other direct costs of the retail segment which benefit the credit operations by sourcing credit customers and collecting payments. The reimbursement received by the retail segment from the credit segment is estimated using an annual rate of 2.5% times the average portfolio balance for each applicable period. The amount of overhead allocated to each segment was $2.8 million and $2.9 million for the three months ended October 31, 2014 and 2013, respectively, and $8.7 million and $8.0 million for the nine months ended October 31, 2014 and 2013, respectively. The amount of reimbursement made to the retail segment by the credit segment was $7.7 million and $5.6 million for the three months ended October 31, 2014 and 2013, respectively, and $21.5 million and $15.3 million for the nine months ended October 31, 2014 and 2013, respectively.
(2)
Retail segment total assets as of October 31, 2014 included $3.3 million of land, buildings and improvements related to a store that was under construction and subject to a sale and lease-back transaction. In November 2014, construction of this store was completed and the store opened for business and the related assets were retired from the Company’s balance sheet.


14


Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Unless the context otherwise indicates, references to “Conn’s,” the “Company,” “we,” “us,” and “our” refer to the consolidated business operations of Conn’s, Inc. and its wholly-owned subsidiaries.
 
Forward-Looking Statements
 
This report contains forward-looking statements that involve risks and uncertainties. Such forward-looking statements include information concerning our future financial performance, business strategy, plans, goals and objectives. Statements containing the words "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "project," "should," or the negative of such terms or other similar expressions are generally forward-looking in nature and not historical facts. Although we believe that the expectations, opinions, projections, and comments reflected in these forward-looking statements are reasonable, we can give no assurance that such statements will prove to be correct. A wide variety of potential risks, uncertainties, and other factors could materially affect our ability to achieve the results either expressed or implied by our forward-looking statements including, but not limited to: whether any potential sale of or other strategic transaction by or related to Conn's will be consummated and, if so, the timing and terms of any such transaction, including any possible sale price; general economic conditions impacting our customers or potential customers; our ability to continue existing or to offer new customer financing programs; changes in the delinquency status of our credit portfolio; unfavorable developments in ongoing litigation; increased regulatory oversight; higher than anticipated net charge-offs in the credit portfolio; the success of our planned opening of new stores and the updating of existing stores; technological and market developments and sales trends for our major product offerings; our ability to protect against cyber-attacks or data security breaches and to protect the integrity and security of individually identifiable data of our customers and our employees; our ability to fund our operations, capital expenditures, debt repayment and expansion from cash flows from operations, borrowings from our revolving credit facility, and proceeds from accessing debt or equity markets; and the other risks detailed in our United States Securities and Exchange Commission (“SEC”) reports, including but not limited to, our Annual Report on Form 10-K for our fiscal year ended January 31, 2014 and this Quarterly Report on Form 10-Q. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Except as required by law, we are not obligated to publicly release any revisions or update to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.
 
General
 
We are a leading specialty retailer that offers a broad selection of quality, branded durable consumer goods and related services in addition to a proprietary credit solution for our core credit constrained consumers. We operate an integrated and scalable business through our retail stores and website. Our complementary product offerings include home appliances, furniture and mattresses, consumer electronics and home office products from leading global brands across a wide range of price points. Our credit offering provides financing solutions to a large, underserved population of credit constrained consumers who typically are unbanked and have credit scores between 550 and 650. We provide customers the opportunity to comparison shop across brands with confidence in our competitive prices as well as affordable monthly payment options, next-day delivery and installation, and product repair services. We believe our large, attractively merchandised stores and credit solutions offer a distinctive shopping experience compared to other retailers that target our core customer demographic.

Our fiscal year ends on January 31. References to a fiscal year refer to the calendar year in which the fiscal year ends.
 
As of October 31, 2014, we operated 89 retail locations in Arizona, Colorado, Louisiana, Mississippi, Nevada, New Mexico, North Carolina, Oklahoma, South Carolina, Tennessee and Texas. Our primary product categories include:
 
Furniture and mattress, including furniture and related accessories for the living room, dining room and bedroom, as well as both traditional and specialty mattresses;
Home appliance, including refrigerators, freezers, washers, dryers, dishwashers and ranges;
Consumer electronic, including LCD, LED, 3-D, Ultra HD and plasma televisions, Blu-ray players, home theater and video game products, digital cameras, and portable audio equipment; and
Home office, including computers, tablets, printers and accessories.

Additionally, we offer a variety of products on a seasonal basis.
 
Our stores typically range in size from 30,000 to 50,000 square feet and are predominately located in areas densely populated by our core customer and are typically anchor stores in strip malls. We utilize a merchandising strategy that offers approximately

15


2,300 quality, branded products from approximately 200 manufacturers and distributors at various price points. Our commissioned sales, consumer credit and service personnel are well-trained and knowledgeable to assist our customers with product selection and the credit application process. We also provide additional services including next-day delivery and installation capabilities, and product repair or replacement services for most items sold in our stores.

We provide multiple financing options to address various customer needs including a proprietary in-house credit program, a third-party financing program and a third-party rent-to-own payment program. The majority of our credit customers use our in-house credit program and typically have a credit score of between 550 and 650, with the average score of new applicants financed by us during the three months ended October 31, 2014 of 608, up from 599 for the same period last year. For customers who do not qualify for our in-house program, we offer rent-to-own payment plans primarily through AcceptanceNow (formerly known as RAC Acceptance). For customers with high credit scores, we have partnered with Synchrony Financial (formerly known as GE Capital) to offer long-term, no-interest and revolving credit plans. AcceptanceNow and Synchrony Financial manage their respective underwriting decisions and collection of their credit programs. For the three months ended October 31, 2014, we financed approximately 77.3% of our retail sales, including down payments, under our in-house financing program.
 
We believe our extensive brand and product selection, competitive pricing, financing alternatives and supporting services combined with our customer service focused store associates make us an attractive alternative to appliance and electronics superstores, department stores and other national, regional, local and internet retailers.
 
Due to the holiday selling season, our business is moderately seasonal, with a greater share of our revenues, operating and net income historically realized during the quarter ending January 31.

Recent Developments and Operational Changes

In October 2014, the Company announced that its Board of Directors authorized management to explore a full range of strategic alternatives for the Company to potentially enhance value for stockholders. The Company has engaged an independent financial advisor to assist and the process is underway. No timetable has been set for the Company’s completion of the process. There can be no assurance that this strategic alternatives review will result in the Company changing its current business plan, pursuing a particular transaction, completing any such transaction, or that any transaction we might enter will prove to be beneficial to our stockholders. Further, it is not certain what impact any potential strategic alternatives, or a decision not to pursue any potential strategic alternatives, may have on the Company's stock price, operating results, financial condition, liquidity, or business prospects.

We have implemented, continued to focus on, or modified operating initiatives, including the following:
 
Opening expanded Conn’s HomePlus stores in new markets. During the nine months ended October 31, 2014, we opened 16 new stores in Arizona (2), Colorado (4), Mississippi (1), Nevada (1), North Carolina (1), South Carolina (2), Tennessee (3) and Texas (2). We opened two additional new stores in November 2014. We plan to open between 15 and 18 stores in fiscal 2016. We opened 14 new stores in fiscal 2014 and five new stores in fiscal 2013. For the nine months ended October 31, 2014, new stores opened since February 1, 2012 accounted for approximately 27.1% of total product sales. New stores opened since February 1, 2012 accounted for approximately 14.8% and 3.4% of total product sales in fiscal 2014 and 2013, respectively;

Reviewing our existing store locations to ensure the customer demographics and retail sales opportunity are sufficient to achieve our store performance expectations, and selectively closing or relocating stores to achieve those goals. In this regard, we have closed a total of 22 retail locations since the beginning of fiscal 2012 that did not perform at the level we expect for mature store locations. We plan to close three additional retail locations over the next twelve months;

Remodeling and relocating existing stores utilizing the Conn’s HomePlus format to increase retail square footage and improve our customers' shopping experience;

Expanding and enhancing our product offering of higher-margin furniture and mattresses;

Focusing on quality, branded products to improve operating performance;

Growing our appliance business by focused advertising, promotions and delivery options;

Increasing use of short-term, no interest credit programs, with terms of 12 months or less, over recent years with the intent to accelerate cash collections, while modestly reducing portfolio interest and fee yield. In August 2014, we discontinued

16


offering six-month, no-interest programs and in September 2014, raised eligibility requirements to qualify for the 12-month program;

Offering 18-month and 24-month equal-payment, no-interest finance programs to certain higher credit quality borrowers;

Raised interest rates charged to customers in October 2014, where possible, in response to the changing market environment;

Continuing to review and modify our underwriting standards to improve the overall quality of our credit portfolio; and

Revising our re-aging policies, as appropriate, and focusing on further improvement of execution within our collection operations to reduce delinquency rates and future charge-offs.

Results of Operations
 
The presentation of our results of operations may not be comparable to some other retailers since we include the cost of our in-home delivery and installation service as part of selling, general and administrative ("SG&A") expense. Similarly, we include the cost related to operating our purchasing function in SG&A expense. It is our understanding that other retailers may include such costs as part of their cost of goods sold. 

The following tables present results of operations on a consolidated and segment basis:
 
Consolidated:
 
Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
(in thousands)
2014
 
2013
 
Change
 
2014
 
2013
 
Change
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Product sales
$
278,139

 
$
234,159

 
$
43,980

 
$
796,525

 
$
628,482

 
$
168,043

Repair service agreement commissions
23,056

 
19,601

 
3,455

 
64,042

 
52,756

 
11,286

Service revenues
3,414

 
3,286

 
128

 
9,952

 
8,968

 
984

Total net sales
304,609

 
257,046

 
47,563

 
870,519

 
690,206

 
180,313

Finance charges and other revenues
65,449

 
53,830

 
11,619

 
187,951

 
142,422

 
45,529

Total revenues
370,058

 
310,876

 
59,182

 
1,058,470

 
832,628

 
225,842

Costs and expenses:
 

 
 

 
 

 
 
 
 
 
 

Cost of goods sold, including warehousing and occupancy costs
178,976

 
151,987

 
26,989

 
508,475

 
411,484

 
96,991

Cost of service parts sold, including warehousing and occupancy cost
1,525

 
1,286

 
239

 
4,815

 
4,010

 
805

Selling, general and administrative expenses(1)
112,562

 
90,341

 
22,221

 
320,069

 
242,353

 
77,716

Provision for bad debts
72,019

 
22,730

 
49,289

 
133,862

 
58,049

 
75,813

Charges and credits
355

 
2,834

 
(2,479
)
 
3,601

 
2,834

 
767

Total costs and expenses
365,437

 
269,178

 
96,259

 
970,822

 
718,730

 
252,092

Operating income
4,621

 
41,698

 
(37,077
)
 
87,648

 
113,898

 
(26,250
)
Interest expense
8,950

 
3,714

 
5,236

 
19,921

 
10,720

 
9,201

Other income, net

 

 

 

 
(38
)
 
38

Income before income taxes
(4,329
)
 
37,984

 
(42,313
)
 
67,727

 
103,216

 
(35,489
)
Provision for income taxes
(1,265
)
 
13,608

 
(14,873
)
 
24,672

 
37,502

 
(12,830
)
Net income
$
(3,064
)
 
$
24,376

 
$
(27,440
)
 
$
43,055

 
$
65,714

 
$
(22,659
)


17


Retail Segment:

Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
(in thousands)
2014
 
2013
 
Change
 
2014
 
2013
 
Change
Revenues:











Product sales
$
278,139

 
$
234,159

 
$
43,980

 
$
796,525

 
$
628,482

 
$
168,043

Repair service agreement commissions
23,056

 
19,601

 
3,455

 
64,042

 
52,756

 
11,286

Service revenues
3,414

 
3,286

 
128

 
9,952

 
8,968

 
984

Total net sales
304,609

 
257,046

 
47,563

 
870,519

 
690,206

 
180,313

Finance charges and other revenues
531

 
438

 
93

 
1,340

 
1,067

 
273

Total revenues
305,140

 
257,484

 
47,656

 
871,859

 
691,273

 
180,586

Costs and expenses:
 

 
 

 


 
 

 
 

 
 
Cost of goods sold, including warehousing and occupancy costs
178,976

 
151,987

 
26,989

 
508,475

 
411,484

 
96,991

Cost of service parts sold, including warehousing and occupancy cost
1,525

 
1,286

 
239

 
4,815

 
4,010

 
805

Selling, general and administrative expenses(1)
86,436

 
69,920

 
16,516

 
245,102

 
188,340

 
56,762

Provision for bad debts
54

 
203

 
(149
)
 
98

 
389

 
(291
)
Charges and credits
355

 
2,834

 
(2,479
)
 
3,601

 
2,834

 
767

Total costs and expenses
267,346

 
226,230

 
41,116

 
762,091

 
607,057

 
155,034

Operating income
37,794

 
31,254

 
6,540

 
109,768

 
84,216

 
25,552

Other income, net

 

 

 

 
(38
)
 
38

Income before income taxes
$
37,794

 
$
31,254

 
$
6,540

 
$
109,768

 
$
84,254

 
$
25,514

Number of stores:
 
 
 
 
 
 
 
 
 
 
 
Beginning of period
86

 
72

 
 
 
79

 
68

 
 
Open
6

 
2

 
 
 
16

 
6

 
 
Closed
(3)

 
(2)

 
 
 
(6)

 
(2)

 
 
End of period
89

 
72

 
 
 
89

 
72

 
 

Credit Segment:

Three Months Ended 
 October 31,
 
Nine Months Ended 
 October 31,
(in thousands)
2014
 
2013
 
Change
 
2014
 
2013
 
Change
Revenues -
 
 
 
 
 
 
 
 
 
 
 
Finance charges and other revenues
$
64,918

 
$
53,392

 
$
11,526

 
$
186,611

 
$
141,355

 
$
45,256

Costs and expenses:
 

 
 

 
 

 
 

 
 

 
 

Selling, general and administrative expenses(1)
26,126

 
20,421

 
5,705

 
74,967

 
54,013

 
20,954

Provision for bad debts
71,965

 
22,527

 
49,438

 
133,764

 
57,660

 
76,104

Total cost and expenses
98,091

 
42,948

 
55,143

 
208,731

 
111,673

 
97,058

Operating income
(33,173
)
 
10,444

 
(43,617
)
 
(22,120
)
 
29,682

 
(51,802
)
Interest expense
8,950

 
3,714

 
5,236

 
19,921

 
10,720

 
9,201

Income (loss) before income taxes
$
(42,123
)
 
$
6,730

 
$
(48,853
)
 
$
(42,041
)
 
$
18,962

 
$
(61,003
)

(1)
Selling, general and administrative ("SG&A") expenses include the direct expenses of the retail and credit operations, allocated overhead expenses and a charge to the credit segment to reimburse the retail segment for expenses it incurs related to occupancy, personnel, advertising and other direct costs of the retail segment which benefit the credit operations by sourcing credit customers and collecting payments. The reimbursement received by the retail segment from the credit segment is estimated using an annual rate of 2.5% times the average portfolio balance for each applicable period. The amount of overhead allocated to each segment was $2.8 million and $2.9 million for the three months ended October 31, 2014 and 2013, respectively, and $8.7 million and $8.0 million for the nine months ended October 31, 2014 and 2013, respectively. The amount of reimbursement made to the retail segment by the credit segment was $7.7 million and $5.6

18


million for the three months ended October 31, 2014 and 2013, respectively, and $21.5 million and $15.3 million for the nine months ended October 31, 2014 and 2013, respectively.

Segment Overview
 
The following provides an overview of our retail and credit segment operations for the three and nine months ended October 31, 2014.
 
Retail Segment
 
Revenue for the three months ended October 31, 2014 increased $47.7 million, or 18.5%, from the same prior-year period. The increase was primarily driven by new store openings partially offset by a decrease of 1.0% in same store sales. The decline in same store sales was primarily the result of the tightening by our credit segment of underwriting standards over the last twelve months and fully lapping changes in marketing strategies last year which drove a 35.1% in same store sales for the three months ended October 31, 2013. Net sales for the nine months ended October 31, 2014 increased by 26.1% over the same prior-year period, driven by new store openings and same store sales growth of 10.1%. This year-over-year growth was partially offset by the impact of the decision to no longer offer lawn equipment and changes in our underwriting standards.

Retail gross margin for the three months ended October 31, 2014 was 40.6%, an increase of 50 basis points over the 40.1% reported in the comparable quarter last year. The expansion in retail margin was driven by a favorable shift in product mix with the higher-margin furniture and mattress category accounting for 31.2% of product sales in the current quarter versus 27.0% in the prior-year period. Retail gross margin for the nine months ended October 31, 2014 increased to 40.9% from 39.6% in the same prior-year period reflecting a favorable shift in product mix and margin expansion in each of the major product categories.

SG&A expenses for the three months ended October 31, 2014 was $86.4 million, an increase of $16.5 million, or 23.6%, over the same prior-year period. The SG&A expenses increase was primarily due to the opening of new stores resulting in higher sales-driven compensation, advertising costs, delivery expenses and facility-related costs. As a percentage of segment revenues, SG&A expenses was 28.3% for the three months ended October 31, 2014, compared to 27.2% in the same prior-year period. The increase in SG&A expenses as a percentage of segment revenues is attributable primarily to costs associated with the six new stores opened during the current quarter. In the prior-year period, we opened two new stores. SG&A expenses for the nine months ended October 31, 2014 increased $56.8 million, or 30.1%, over the same prior-year period, also primarily due to the opening of new stores.

Credit Segment
 
Revenues for the three months ended October 31, 2014 were $64.9 million, an increase of $11.5 million, or 21.6%, over the same prior-year period. The increase reflects the year-over-year growth in the average balance of the customer receivable portfolio partially offset by a 90 basis point decrease in portfolio yield. Total revenues for the nine months ended October 31, 2014 increased by $45.3 million as compared to the same prior year period also due to the rise in the average balance of the customer receivable portfolio.

Credit segment SG&A expenses for the three months ended October 31, 2014 was $26.1 million, an increase of $5.7 million, or 27.9%, from the same prior-year period. The increase is the result of the addition of collections personnel to service the 32.7% year-over-year increase in the customer receivable portfolio balance and anticipated near-term portfolio growth. SG&A expenses as a percent of segment revenues was 40.2% in the current year period, which compares to 38.2% in the same prior-year period. Credit segment SG&A expenses for the nine months ended October 31, 2014 increased by $21.0 million also due to increased compensation and related expenses.

Provision for bad debts for the three months ended October 31, 2014 was $72.0 million, an increase of $49.4 million from the same prior-year period. The provision for bad debts for the nine months ended October 31, 2014 increased $76.1 million. The year-over-year increase was impacted by the following: