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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
Form 10-K
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended January 31, 2015
 or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 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 Number)
 4055 Technology Forest Blvd, Suite 210
The Woodlands, Texas  77381
(Address of principal executive offices)
 (936) 230-5899
(Registrant's telephone number, including area code)
 Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock, par value $0.01 per share
 
NASDAQ Global Select Market
 Securities registered pursuant to Section 12(g) of the Act:  None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes x No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
 Indicate by check mark whether the registrant (1) 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 x   No o
 Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 x   No o
 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 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 x
 The aggregate market value of the voting and non-voting common equity held by non-affiliates as of July 31, 2014, was $1.1 billion based on the closing price of the registrant’s common stock as reported on the NASDAQ Global Select Market, on such date.
There were 36,352,324 shares of common stock, $0.01 par value per share, outstanding on March 25, 2015.
DOCUMENTS INCORPORATED BY REFERENCE:
 Certain information required to be furnished pursuant to Part III of this Form 10-K is set forth in, and is hereby incorporated by reference herein from, Conn’s definitive proxy statement for its 2015 Annual Meeting of Stockholders, to be filed by Conn’s with the Securities and Exchange Commission pursuant to Regulation 14A within 120 days after January 31, 2015.
 




TABLE OF CONTENTS 
 
 
Page No.
 
PART I
 
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
PART II
 
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
PART III
 
ITEM 10.
ITEM 11.
ITEM 12
ITEM 13.
ITEM 14.
PART IV
 
ITEM 15.
 
This Annual Report on Form 10-K includes our trademarks such as "Conn’s," "Conn’s HomePlus," "YES Money," "YE$ Money," and our logos, which are protected under applicable intellectual property laws and are the property of Conn’s, Inc.  This report also contains trademarks, service marks, trade names and copyrights of other companies, which are the property of their respective owners.  Solely for convenience, trademarks and trade names referred to in this Annual Report may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names.

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.


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PART I

The following discussion contains various statements regarding our current initiatives, financial position, results of operations, cash flows, operating and financial trends and uncertainties, as well as certain forward-looking statements regarding our future expectations. When used in this discussion, words such as "anticipate," "believe," "estimate," "expect," "could," "may," "will," "should," "plan," "predict," "potential," and similar expressions are intended to identify such forward-looking statements. Our forward-looking statements are based on our current expectations and are subject to numerous risks and uncertainties. As such, our actual future results, performance or achievements may differ materially from the results expressed in, or implied by, our forward-looking statements. Refer to Item 1A. Risk Factors, in this Form 10-K. We assume no obligation to update our forward-looking statements or to provide periodic updates or guidance.

ITEM 1.
BUSINESS
 
Company Overview 

Conn’s is 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 its core credit constrained consumers. We operate an integrated and scalable business through our retail stores and website. Our complementary product offerings include furniture and mattresses, home appliances, 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 have limited banking options 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 service. 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.
 
We operate two reportable segments: retail and credit. Information regarding segment performance is included in Part II, Item Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, and Part II, Item 8. in Note 16. Segment Information, of the Consolidated Financial Statements of this Annual Report on Form 10-K.
 
Retail Segment. We began as a small plumbing and heating business in 1890 and started selling home appliances to the retail market in 1937 through one store located in Beaumont, Texas. As of January 31, 2015, we operated 90 retail stores located in 11 states: Arizona (10), Colorado (6), Louisiana (5), Mississippi (1), Nevada (1), New Mexico (3), North Carolina (1), Oklahoma (3), South Carolina (2), Tennessee (3) and Texas (55). 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 2,900 quality, branded products from approximately 200 manufacturers and distributors across a wide range of price points. This wide selection allows us to offer products and price points that appeal to the majority of our core consumers. Our primary retail 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. We represent such brands as Franklin, Jackson Furniture, Catnapper, Home Stretch, Elements, Steve Silver, Bello, Z-line, Serta, Sealy, and Tempur-Pedic.
Home appliance, including refrigerators, freezers, washers, dryers, dishwashers and ranges. We represent such brands as Samsung, LG, Electrolux, General Electric, Frigidaire, Friedrich, Weber, and Dyson.
Consumer electronics, including LCD, LED, 3-D, and Ultra HD televisions, Blu-ray players, home theater and video game products, digital cameras and portable audio equipment. We represent such brands as Samsung, LG, Sharp, Sony, Toshiba, Beats, Bose, Haier, Monster, Canon, and Nikon. During fiscal year 2016, we will discontinue offering video game products and digital cameras.
Home office, including computers, tablets, printers and accessories. We represent such brands as HP, Samsung, Dell, Toshiba, and ASUS. During fiscal year 2016, we will discontinue offering certain tablets.

We strive to ensure that our customers’ shopping experience at Conn’s is equal to, or exceeds, their experience with other providers of durable consumer goods targeting our core customer demographic. We offer a high level of customer service through our commissioned and trained sales force as well as next day delivery and installation, and product repair or replacement services for most items sold in our stores. Flexible payment alternatives offered through our proprietary in-house credit program and third-party financing alternatives provide our customers the ability to make aspirational purchases. We believe our extensive brand and product selection, competitive pricing, financing alternatives and supporting services, combined with our customer service-focused

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store, delivery and service associates make us an attractive alternative to appliance and electronics superstores, department stores and other national, regional, local and internet retailers.
 
Credit Segment. Our in-house consumer credit program is an integral part of our business and is a major driver of customer loyalty. We believe our proprietary credit model is a significant competitive advantage we have developed over our 50-plus years of experience in providing credit. We have developed a proprietary underwriting model that provides standardized credit decisions, including down payment, limit amounts and credit terms, based on customer risk and income level. We use our proprietary auto-approval algorithm and in-depth evaluations of creditworthiness performed by qualified in-house credit underwriters to complete all credit decisions. In order to improve the speed and consistency of underwriting decisions, we continually review our auto-approval algorithm. Additionally, we provide access to monthly payment options to a wider range of consumers through our relationship with AcceptanceNow and Synchrony Bank (previously known as GE Capital Retail Bank). AcceptanceNow and Synchrony Bank manage their own respective underwriting decisions and are responsible for their own collections. Our in-house credit program and access to third-party financing allows us to provide credit to a large and underserved customer base and differentiates us from our competitors that do not offer similar programs.

Our goal is to provide every customer that enters our stores or applies for credit on our website an affordable monthly payment option. Currently, we make the following payment options available to our customers, based on a review of their credit worthiness: 
For customers with credit scores that are typically above 650, we offer special low or no-interest financing programs on select products, either through our proprietary in-house financing program or through a Conn's branded revolving credit card from Synchrony Bank;
For customers with credit scores that are generally between 550 and 650, we offer our proprietary in-house financing program, which is a fixed term, fixed payment installment contract; and
For customers that do not qualify for our credit program, we offer a rent-to-own payment option through AcceptanceNow.

Additionally, we continue to review alternative financing programs that may give us the ability to provide more customers with the ability to purchase the products and services we offer.

Our retail business and credit business are operated independently from each other. The retail segment is not involved in credit approval decisions or collections. Decisions to extend consumer credit to our retail customers under our in-house program is made by our internal credit underwriting department. In addition to underwriting, we manage the collection process of our in-house consumer credit portfolio. Sales financed through our in-house credit program are secured by the products purchased, which we believe gives us a distinct advantage over other creditors when pursuing collections. Also, the products we sell and finance are typically necessities for the home.
 
We believe our attractive credit program generates strong customer loyalty and repeat business. For fiscal year 2015, 2014 and 2013, 52%, 56% and 69%, respectively, of our credit customers were repeat customers, based on the number of credit invoices written. As of January 31, 2015 and 2014, 61% and 66%, respectively, of balances due under our in-house credit program were from customers that have had previous credit accounts with us. The percentage of new customers in our credit program has grown primarily due to increased marketing in our existing markets and new store additions resulting from our entry into new markets.
 
Recent Developments

In October 2014, we announced that our Board of Directors authorized management to explore a full range of strategic alternatives to enhance value for stockholders, including, but not limited to, a sale of the Company, separating its retail and credit businesses or slowing store openings and returning capital to investors. The Company and its advisors have conducted a thorough review of strategic alternatives, including alternatives not identified in the October announcement. After appropriate diligence and consideration, the Board of Directors has authorized management to actively pursue the sale of all or a portion of the loan portfolio, or other refinancing of our loan portfolio. We have engaged BofA Merrill Lynch and Stephens Inc., as financial advisors, to assist with this process.

There is no assurance that we will complete a sale of all or a portion of the loan portfolio, or other refinancing, and no timetable has been set for completion of this process. The Board of Directors may also determine that no transaction is in the best interests of shareholders. We do not intend to comment further regarding the process, or any specific transaction, until such time as the Board of Directors deems disclosure is appropriate or necessary.


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Industry and Market Overview
 
The products we sell are often times considered home necessities, used by our customers in their everyday lives. We believe, over time, we have and may benefit from several key industry trends and characteristics, including: 
Introduction of new technologies driving consumers to upgrade existing appliances and electronics (such as large-capacity, high-efficiency laundry; internet-ready, OLED and ultra HD televisions; and touch screen electronics);
Increasing demand for large-screen (60 inches and greater) televisions, which are sold at a higher price point, typically requiring financing by our customers and are large items that cannot be easily carried out of the retail store, and therefore typically require delivery and installation;
Rationalization of several national and regional retailers leading to market share opportunities; and
Reductions in consumer lending, especially for lower tier credit score customers.

With 55 of our 90 stores in Texas, we believe we continue to benefit from strong demographic trends. According to the Bureau of Economic Analysis, Texas was the second largest state by nominal GDP in 2014. In addition, from calendar year 2010 to 2014 Texas experienced population growth of 7.2% compared to the U.S. population growth of 3.3% over the same period. Moreover, Texas’ average unemployment rate of 4.4% continues to trend below the national rate of 5.7% as of January 2015.

Furniture and Mattress. According to the U.S. Department of Commerce's Bureau of Economic Analysis, personal consumption expenditures for household furniture was $97.2 billion for calendar year 2014, compared to $94.5 billion in 2013. The household furniture and mattress market is highly fragmented with sales coming from manufacturer-owned stores, independent dealers, furniture centers, specialty sleep product stores, national and local chains, mass market retailers, department stores and, to a lesser extent, home improvement centers, decorator showrooms, wholesale clubs, catalog retailers and the internet. For fiscal year 2015, we generated 30.4% of total product sales from the sale of furniture and mattresses. The furniture and mattress category generated our highest individual product category gross margin. Given our ability to provide customer financing and next-day delivery, we believe that we have strong competitive advantages and significant growth opportunities in this market and expect to continue to expand our offering of furniture and the floor space in our stores dedicated to this category.
 
In the furniture and mattress market, many factors influence sales, including consumer confidence, economic conditions, household formations and new product introductions. Product design and innovation has also been a key driver of sales in this market, while reduced sales of homes has negatively impacted sales. Products introduced include specialty mattresses and motion furniture products, and variations on these products, including new features.

Home Appliance. According to the U.S. Department of Commerce's Bureau of Economic Analysis, personal consumption expenditures for home appliances were $45.8 billion for calendar year 2014, compared to $45.7 billion in 2013. Major household appliances, such as refrigerators and washer/dryers, account for 86.4% of this total at $39.6 billion in 2014. For fiscal year 2015, we generated 29.4% of total product sales from the sale of home appliances. The retail appliance market is large and concentrated among a few major dealers, with sales coming primarily from department stores, home improvement centers, large appliance and electronics superstores, national chains and small regional chains.
 
In the home appliance market, many factors impact sales, including consumer confidence, economic conditions, household formations and new product introductions. Key drivers of sales in the appliance market include product design and innovation as well as trends in the sale of homes. Products introduced include large-capacity, high-efficiency laundry appliances and refrigerator design innovation, and variations on these products, including new features.
 
Consumer Electronics and Home Office. According to the U.S. Department of Commerce's Bureau of Economic Analysis, electronics spending was $217.4 billion for calendar year 2014, a 3.3% increase from 2013. Televisions accounted for $38.3 billion of the overall personal consumption expenditures, versus $37.3 billion in the prior year. Personal computers and peripheral equipment accounted for $56.5 billion of the overall expenditures, compared to $53.8 billion in the prior year. For fiscal year 2015, we generated 28.4% of total product sales from the sale of consumer electronics and 9.7% of total product sales from the sale of home office products. The electronics market is highly fragmented with sales coming from large appliance and electronics superstores, national chains, small regional chains, single-store operators, consumer electronics departments of selected department and discount stores and internet retailers.

Technological advancements and the introduction of new products have largely driven demand in the electronics market. Historically, industry growth has been fueled primarily by the introduction of products that incorporate digital high-definition technology and other new features for televisions (including 3-D, OLED, Ultra HD, LCD, LED and internet-ready technology), Blu-ray players, home theater and video game products, tablets, touch-screen computers and digital cameras. Digital products

5


offer significant advantages, including better clarity and quality of video and audio, durability of recording and compatibility with computers and tablets.

During fiscal year 2016, we will discontinue offering video game products, digital cameras, and certain tablets due to these products having lower gross margins and higher delinquency rates when compared to our other product offerings.
 
Consumer Credit. Based on data from the Federal Reserve System, estimated total consumer credit outstanding, which excludes primarily loans secured by real estate, was $3.31 trillion as of December 31, 2014, an increase of 6.8% from $3.10 trillion at December 31, 2013. Consumers obtain credit from banks, credit unions, finance companies and non-financial businesses that offer credit, including retailers. The credit obtained takes many forms, including revolving (e.g., credit cards) and fixed-term (e.g., automobile loans), and at times is secured by the products being purchased.
 
Competition. Our competitive strength is based on enhanced customer service and customer shopping experience through our unique sales force training and product knowledge, next day delivery capabilities, offering of financing options for most customers, including our proprietary in-house credit program, low price guarantee and product repair service. Currently, we compete against a diverse group of retailers, including national mass merchants such as Sears, Wal-Mart, Target, Sam’s Club and Costco, specialized national retailers such as Best Buy, Rooms To Go and Mattress Firm, home improvement stores such as Lowe’s and Home Depot, and locally-owned regional or independent retail specialty stores that sell furniture and mattresses, home appliances, and consumer electronics similar, and often identical, to those items we sell. We also compete with retailers that market products through store catalogs and the internet. In addition, there are few barriers to entry into our current and contemplated markets, and new competitors may enter our current or future markets at any time. These competitors; however, typically do not provide a credit offering similar to our proprietary in-house credit program for credit constrained consumers. We also compete, to some extent, against companies offering credit constrained consumers products for the home similar to those offered by us under weekly or monthly rent-to-own payment options. Competitors include Aaron’s and Rent-A-Center, as well as many smaller, independent companies.

Customers

We have a well-defined core consumer base that is comprised of working individuals who typically earn between $25,000 to $60,000 in annual income, live in densely populated and mature neighborhoods, and typically shop our stores to replace older household goods with newer items. Our product line is comprised of durable home necessities which enables us to appeal to a diverse range of cultural and socioeconomic backgrounds and to operate stores in diverse markets.

We do not have a significant concentration of sales with any individual customer and, therefore, the loss of any one customer would not have a material impact on our business. No single customer accounts for more than 10% of our total revenues. As a result of our relationship with AcceptanceNow, we recognized sales of $56.8 million during the year ended January 31, 2015 for customers that do not qualify for our in-house credit program.

Seasonality
 
Our business is seasonal with a higher portion of sales and operating profit realized during the fourth quarter due primarily to the holiday selling season. In addition, our results of operations and portfolio performance are stronger during our first quarter due primarily to the timing of personal income tax refunds received by our customers.

Merchandising
 
Vendors. We purchase products from approximately 200 manufacturers and distributors. Our agreements with these manufacturers and distributors typically cover a one-year time period, are renewable at the option of the parties and are terminable upon 30 days written notice by either party. Similar to other specialty retailers, we purchase a significant portion of our total inventory from a limited number of vendors. During fiscal year 2015, 62.5% of our total inventory purchases were from six vendors, including 25.7%, 18.4% and 6.8% of our total inventory purchases from Samsung, LG, and GE, respectively. The loss of any one or more of these key vendors or our failure to establish and maintain relationships with these and other vendors could have a material adverse effect on our results of operations and financial condition. Other than industry-wide shortages that occur from time to time, we have not experienced significant difficulty in maintaining adequate sources of merchandise and we generally expect that adequate sources of merchandise will continue to exist for the types of products we sell.
 

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Merchandise. We focus on providing a comprehensive selection of quality merchandise at a wide range of price points to appeal to a broad range of potential customers. We primarily sell brand name warranted merchandise. Our established relationships with furniture and mattress, home appliance and consumer electronics vendors give us purchasing power that allows us to offer custom-featured appliances and electronics at prices that compare favorably with national retailers and provides us a competitive selling advantage over other independent retailers. Additionally, we are able to purchase furniture inventory in volumes that allow us to provide next-day delivery and at competitive prices, giving us a competitive advantage over smaller furniture retailers in the marketplace today.
 
Pricing. We emphasize competitive pricing on all of our products and maintain a low price guarantee on advertised items that is valid in all markets for 10 to 30 days after the sale, depending on the product. We also offer promotional priced products through specially discounted purchases from our vendors, allowing us to offer our customers unique bargains while maintaining acceptable profitability.
 
Credit Operations
 
General. We sell our products for cash or for payment through major credit cards and third-party financing, in addition to offering our customers financing through our proprietary in-house credit program. We offer our customers financing through our installment credit plan. Additionally, some customers are eligible for no-interest financing plans at various terms. We use a third-party finance company to provide a portion of our no-interest financing offerings. We also use a third-party provider to offer a rent-to-own financing option to our customers. Our underwriting department operates independently from our credit monitoring and collections department.
 
The following table presents our customers' method of purchases for our product and repair service agreements sales:
 
Year ended January 31,
 
2015
 
2014
 
2013
(dollars in thousands)
Amount
 
%
 
Amount
 
%
 
Amount
 
%
Cash and other credit cards
$
78,515

 
6.5
%
 
$
74,449

 
7.6
%
 
$
75,726

 
10.8
%
Credit offerings:
 

 
 

 
 

 
 

 
 

 
 

In-house financing, including down payment
942,176

 
78.0

 
757,222

 
77.3

 
497,125

 
70.9

Third-party promotional financing
130,455

 
10.8

 
117,551

 
12.0

 
103,772

 
14.8

Third-party rent-to-own option
56,772

 
4.7

 
30,366

 
3.1

 
24,541

 
3.5

Total from monthly payment options
1,129,403

 
93.5

 
905,139

 
92.4

 
625,438

 
89.2

Total of all payment options
$
1,207,918

 
100.0
%
 
$
979,588

 
100.0
%
 
$
701,164

 
100.0
%
 
Underwriting. Decisions to extend credit to our retail customers is made by our internal credit underwriting department, which is separate and distinct from our other operations, including credit monitoring and collections and retail sales. In addition to an auto-approval algorithm, we employ a team of credit underwriting personnel of approximately 45 individuals to make credit granting decisions using our proprietary underwriting process and oversee our credit underwriting process. Our underwriting process considers one or more of the following elements: credit bureau information; income and address verification; current income and debt levels; a review of the customer’s previous credit history with us; and the particular products being purchased. Our underwriting model determines the finance terms, including down payment, limit amounts and credit terms. During fiscal year 2015, for the credit applications that were approved and utilized, 73.4% were approved automatically. The remaining credit decisions were based on the evaluation of the customer’s creditworthiness by a qualified in-house credit underwriter or required additional documentation from the applicant. For certain credit applicants that may have past credit problems or lack credit history, we use stricter underwriting criteria. The additional requirements include verification of employment and recent work history, reference checks and minimum down payment levels. Our underwriting employees are trained to follow our methodology in approving credit and are required to complete regular refresher training.
 
Part of our ability to control delinquency and net charge-off is based on the level of down payments and limits that we require, the maximum contract terms we allow and the purchase money security interest that we obtain in the product financed, which reduce our credit risk and increase our customers’ ability and willingness to meet their future obligations. We require the customer to provide proof of property insurance coverage on all installment credit purchases to offset potential losses relating to theft or damage of the product financed. We do not require customers to purchase property insurance from us if they have or acquire such insurance from another third-party.

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Credit monitoring and collections. Our collection activities involve a combination of efforts that take place in our Beaumont and San Antonio, Texas collection centers. We employed over 700 individuals in our collections department who service our active customer credit portfolio. We also utilize collection agencies to service portions of our active and charged-off portfolio, which provide approximately 130 additional agents located in Phoenix, Arizona. Our in-house, credit-financed sales are secured by the products purchased, which we believe gives us a distinct advantage over other creditors when pursuing collections, especially given that many of the products we finance are generally necessities for the home. We employ a credit collection strategy that includes dialer-based calls, virtual calling and messaging systems, inside collectors that contact borrowers, collection letters, e-mails, and text messages, a legal staff that processes claims and attends bankruptcy hearings, and voluntary repossession. We also utilize current technologies that assist us in locating contact information for customers who have moved and left no contact information. Our employees are trained to follow our methodology in collecting our accounts and charging off any uncollectible accounts based on pre-determined aging criteria, depending on their area of responsibility. All collection personnel are required to complete classroom training, which includes negotiation techniques and credit policy training to ensure customer retention and compliance with debt collection regulations. Post-graduation, the collection trainees undergo skill assessment training, coaching and call monitoring within their respective departments. Our personnel are required to complete regular refresher training and testing.
 
We closely monitor the credit portfolio to identify delinquent accounts early and dedicate resources to contacting customers concerning past due accounts. We believe that our unique underwriting model, secured interest in the products financed, required down payments and limits, local presence, ability to work with customers relative to their product and service needs, and the flexible financing alternatives we offer help mitigate the loss experience on our portfolio. In addition, our customers have the opportunity to make their monthly payments in our stores. We received 47.3% of the payments on credit accounts during the twelve months ended January 31, 2015 in one of our store locations. We believe that these factors help us maintain a relationship with the customer that keeps losses lower while encouraging repeat purchases.
 
We regularly extend or "re-age" a portion of our delinquent customer accounts as a part of our normal collection procedures. Generally, extensions are granted to customers who have experienced a financial difficulty (such as the temporary loss of employment), which was subsequently resolved and the customer indicates a willingness and ability to resume making monthly payments. Re-ages are not granted to debtors who demonstrate a lack of intent or ability to service the obligation. These re-ages involve modifying the payment terms to defer a portion of the cash payments currently required of the customer to help them improve their financial condition and eventually be able to pay us. Our re-aging of customer accounts does not reduce the contractual payments due from the customer. Typically, we also charge the customer an extension fee, which approximates the interest owed for the time period the contract was past due. To a much lesser extent, we may provide the customer the ability to re-age their obligation by refinancing the account or making two consecutive payments. Under these options, as with extensions, the customer must resolve the reason for delinquency and show a willingness and ability to resume making contractual monthly payments. Our re-aging programs reduce our ultimate net charge-offs and enhance our ability to collect the full amounts due to us from sales under our credit programs and results in building long-term relationships with those customers that help drive future sales.

We deem accounts to be uncollectible and charge off when the account is more than 209 days past due at the end of a month. Over the last 12 months, we have recovered 10.0% of charged-off amounts through our collection activities and the sale of previously charged off accounts. It is to our advantage to manage the portfolio to balance the combined servicing costs and net losses on the credit portfolio with the benefit of repeat retail sales. We may incur higher servicing costs in order to build customer relationships that may result in future retail sales.
 
Our credit and accounting staff consistently monitor trends in charge-offs by examining the various characteristics of the charge-offs, including store of origination, product type, customer credit and income information, down payment amounts and other identifying information. We track our charge-offs both gross, before recoveries, and net, after recoveries. We periodically adjust our credit granting, collection and charge-off policies based on this information.


8


Store Operations
 
Stores. We operate retail stores in 11 states. The following table summarizes the number of stores in operation at January 31, 2015 in each of our markets: 
Geographic Location
 
Number of Locations
 
Retail Square Feet
 
Storage/Other
Square Feet
Texas:
 
 
 
 
 
 
Houston
 
19

 
567,939

 
86,276

Dallas/Fort Worth
 
11

 
331,874

 
76,737

San Antonio/Austin
 
10

 
319,323

 
42,720

Other
 
15

 
445,409

 
125,133

Arizona
 
10

 
354,634

 
52,221

Colorado
 
6

 
202,864

 
41,614

Louisiana
 
5

 
156,252

 
56,463

Mississippi
 
1

 
34,370

 
8,642

Nevada
 
1

 
39,335

 
10,815

New Mexico
 
3

 
94,474

 
19,342

Oklahoma
 
1

 
89,661

 
17,974

North Carolina
 
3

 
36,438

 
5,937

South Carolina
 
2

 
66,447

 
12,450

Tennessee
 
3

 
101,876

 
21,262

Store totals
 
90

 
2,840,896

 
577,586

Distribution Centers and Cross-dock Facilities
 
21

 

 
2,328,317

Corporate Offices
 
3

 

 
168,478

Total
 
114

 
2,840,896

 
3,074,381

Our stores have an average selling space of approximately 32,000 square feet, plus a rear storage area for fast-moving and smaller products that customers prefer to carry out rather than wait for in-home delivery.
 
We continuously evaluate our existing and potential sites to position our stores in desirable locations and relocate stores that are not properly positioned. We typically lease rather than purchase our stores to retain the flexibility of managing our financial commitment to a location if we later decide that the store is performing below our standards or the market would be better served by relocation. As of January 31, 2015, we leased all of our current open store locations.
 
Personnel and compensation.  We staff a typical store with a store manager, an assistant manager, an average of 16 sales personnel and other support staff, including cashiers and porters based on store size and location. Managers have an average tenure with us of approximately 5 years and typically have prior sales floor experience. In addition to store managers, we have 15 district managers, which generally oversee from seven to 10 stores in each market. The senior management team of retail operations has an average of approximately 30 years of experience with us.
 
We compensate the majority of our sales associates on a straight commission arrangement. Assistant store managers receive earned commissions plus base salary, while store managers are compensated on a salary plus bonus basis. We believe that because our store compensation plans are primarily tied to sales, they generally provide us an advantage in attracting and retaining highly motivated employees.
 
Training.  New sales personnel complete an intensive two-week classroom training program in the markets where they will be assigned, under the direction of sales management personnel in those markets. In addition, our employees benefit from on-site training conducted by many of our vendors.
 
We attempt to identify store manager candidates early in their careers with us and place them in a training program. They attend our in-house training program, which provides guidance and direction for the development of managerial and supervisory skills. After completion of the training program, manager candidates work as assistant managers for six to twelve months and are then allowed to manage one of our smaller stores, where they are supervised closely by the store’s district manager. We give new managers an opportunity to operate larger stores as they become more proficient in their management skills. Each store manager

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attends mandatory training sessions on a regular basis and also attends sales training meetings where participants receive and discuss new product information.
 
Marketing
 
We design our marketing and advertising programs to increase our brand name recognition, educate consumers about our products and services, and generate customer traffic in order to increase sales. We conduct our advertising programs primarily through direct mail, television, newspaper, radio, telephone and our website. Our promotional programs include the use of discounts, rebates, product bundling and no-interest financing plans.

Our website provides customers the ability to apply for credit and purchase our products on-line. Our website averaged approximately 36,000 credit applications per month during fiscal year 2015. This compares to average monthly website applications of approximately 23,000 and 11,000 during fiscal year 2014 and 2013, respectively. The website is linked to a call center, allowing us to better assist customers with their credit and product needs.
 
Distribution and Inventory Management
 
We currently operate nine regional distribution centers located in Houston, San Antonio, Dallas, Beaumont, El Paso, and McAllen, Texas; Phoenix, Arizona; Denver, Colorado and Charlotte, North Carolina and twelve smaller cross-dock facilities. This enables us to deliver products to our customers quickly, reduces inventory requirements at the individual stores and facilitates regional inventory and accounting controls.
 
In our retail stores, we maintain an inventory of certain fast-moving items and products that the customer is likely to carry out of the store. Our computer system and the use of scanning technology in our distribution centers allow us to determine, on a real-time basis, the location of any product we sell. If we do not have a product at the desired retail store at the time of sale, we can provide it through one of our distribution centers on a next day basis.
 
We primarily use third-party providers to move products from market to market and from distribution centers to stores to meet customer needs. We outsource the majority of our in-home deliveries to third-party providers. Our fleet of home delivery vehicles enables our highly-trained delivery and installation specialists, in combination with the outsourced distribution arrangements, to quickly complete the sales process, enhancing customer service. We also may receive a delivery fee based on the products sold and the services needed to complete the delivery.
 
Product Support Services

Next-day delivery and installation. We provide next-day delivery and installation services in all of the markets in which we operate. We believe next-day delivery of our goods is a highly valued service to our customers.

Credit insurance. Acting as licensed agents for third-party insurance companies, we offer property, life, disability and involuntary unemployment credit insurance, which we collectively refer to as credit insurance, at all of our stores on sales financed through our offered credit programs. These insurance products protect the customer's purchase by covering their payments on their credit account if covered events occur, and can be canceled at any time. We receive sales commissions from the third-party insurance company at the time we sell the coverage, and we receive retrospective commissions, which are additional commissions paid by the insurance carrier if insurance claims are less than earned premiums.
 
We require proof of property insurance on all installment credit purchases; however, we do not require that customers purchase this insurance from us if they have or acquire such insurance from others. Premiums charged on the credit products we sell are regulated and vary by state.
 
Product repair service. We believe that providing product repair and replacement services is an important differentiation and reinforces customer loyalty. We provide service for most of the products we sell and only for the products we sell.

Repair service agreements. Customers may purchase repair service agreements that we sell for third-party insurers at the time the product is purchased. These agreements broaden and extend the period of covered manufacturer warranty service for up to four years from the date of purchase, depending on the product, and protect the customer against repair costs. Customers may finance the cost of the agreements along with the purchase price of the associated product. Through a third-party insurer, customers are contacted to provide them the opportunity to purchase an extended period of coverage after the manufacturer warranty and repair service agreement expire and we receive a commission on each sale.  
 

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We have contracts with third-party insurers that issue the initial repair service agreements to cover the costs of repairs performed under these agreements. The initial service agreement is between the customer and the third-party insurance company, and, through our agreements with the third-party insurance company, we provide service when it is needed under each agreement sold. We receive a commission on the sale of the contract and we may receive retrospective commissions, which are additional commissions paid by the insurance carrier over time if the cost of repair claims are less than earned premiums. Additionally, we bill the insurance company for the cost of the service work that we perform.

Regulation

The extension of credit to consumers is a highly regulated area of our business. Numerous federal and state laws impose disclosure and other requirements on the origination, servicing and enforcement of credit accounts. These laws include, but are not limited to, the Federal Truth in Lending Act, Equal Credit Opportunity Act, Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act") and Federal Trade Commission Act. State laws impose limitations on the maximum amount of finance charges that we can charge and also impose other restrictions on consumer creditors, such as us, including restrictions on collection and enforcement. We routinely review our contracts and procedures to ensure compliance with applicable consumer credit laws. Failure on our part to comply with applicable laws could expose us to substantial penalties and claims for damages and, in certain circumstances, may require us to refund finance charges already paid and to forgo finance charges not yet paid under non-complying contracts. We believe that we are in substantial compliance with all applicable federal and state consumer credit and collection laws.
 
Our sale of property, life, disability and involuntary unemployment credit insurance products is also highly regulated. State laws currently impose disclosure obligations with respect to our sales of credit and other insurance products similar to those required by the Federal Truth in Lending Act, impose restrictions on the amount of premiums that we may charge and require licensing of certain of our employees and operating entities. We believe we are in substantial compliance with all applicable laws and regulations relating to our credit insurance business.
 
Employees
 
As of January 31, 2015, we had approximately 4,300 employees. We offer a comprehensive benefits package for eligible employees, including health, life, short- and long-term disability, and dental insurance coverage as well as a 401(k) plan, employee stock purchase plan, paid vacation and holiday pay. None of our employees are subject to collective bargaining agreements governing their employment with us, and we believe that our employee relations are good. We have a formal dispute resolution plan that requires mandatory arbitration for employment-related issues.
 
Tradenames and Trademarks
 
We have registered the trademarks "Conn’s," "Conn’s HomePlus," "YES Money," "YE$ Money," and our logos, which are protected under applicable intellectual property laws and are the property of Conn’s, Inc. Our trademarks generally last for a period of ten years and are renewed prior to expiration for additional ten-year periods.
 
Available Information
 
We are subject to reporting requirements of the Securities and Exchange Act of 1934, or the Exchange Act, and its rules and regulations. The Exchange Act requires us to file reports, proxy and other information statements and other information with the Securities and Exchange Commission ("SEC"). Copies of these materials can be inspected and copied at the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You may also obtain these materials electronically by accessing the SEC’s website at www.sec.gov.
 
Our Board of Directors have adopted a code of business conduct and ethics for our employees, code of ethics for our Chief Executive Officer and senior financial professionals and a code of business conduct and ethics for our Board of Directors. A copy of these codes are published on our website at www.conns.com under "Investor Relations — Corporate Governance." We intend to make all required disclosures concerning any amendments to, or waivers from, these codes on our website. In addition, we make available, free of charge on our website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file this material with, or furnish it to, the SEC. You may review these documents, under the heading "Investor Relations — SEC Filings," by accessing our website at www.conns.com. Our website and the information contained on our website is not incorporated in this Annual Report on Form 10-K or any other document filed with the SEC.

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Item 1A.  
Risk Factors
 
The following discussion of risk factors may be important information in understanding our "forward-looking statements," which are discussed in Item 7 in this Form 10-K and elsewhere. These risk factors should also be read in conjunction with Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, and the consolidated financial statements and related notes included in this Form 10-K.
 
You should consider carefully the risks described below, as well as other information presented in this Form 10-K and in other reports, registration statements and materials that we file with the SEC and the other information incorporated by reference in this Form 10-K. If any of the risks described below or elsewhere in this Form 10-K were to materialize, our business, financial condition, results of operations, cash flows or prospects could be materially adversely affected. In such case, the trading price of our common stock could decline and you could lose part or all of your investment. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also adversely affect our financial condition, results of operations and cash flows.

Increasing our revenues depends on opening new stores and we may not be able to open and profitably operate new stores in existing, adjacent and new geographic markets. In fiscal year 2015, we opened 18 new stores and have plans to open 15 to 18 new stores in fiscal year 2016. New stores may not be profitable on an operating basis during the first several months after they open and even after that time period may not be profitable or meet our goals which could result in our financial results to be materially adversely affected. There are a number of factors that could affect our ability to implement our new store opening program and growth strategy, including: 
Difficulties associated with the hiring, training and retention of skilled personnel, including store managers;
The availability of financial resources;
The availability of favorable sites in existing, adjacent and new markets at price levels consistent with our business plan;
Competition in existing, adjacent and new markets;
Competitive conditions, consumer tastes and discretionary spending patterns in adjacent and new markets that are different from those in our existing markets;
A lack of consumer demand for our products or financing programs at levels that can support new store growth;
Inability to make customer financing programs available that allow consumers to purchase products at levels that can support new store growth;
Limitations created by covenants and conditions under our revolving credit facility and the indenture governing our senior notes;
An inability or unwillingness of vendors to supply product on a timely basis at competitive prices;
The failure to open enough stores in new markets to achieve a sufficient market presence and realize the benefits of leveraging our advertising and our distribution system;
Unfamiliarity with local real estate markets and demographics in adjacent and new markets;
Problems in adapting our distribution and other operational and management systems to an expanded network of stores; and
Higher costs for mail, television, print, radio or internet advertising.

These factors may also affect the ability of any newly opened stores to achieve sales and profitability levels comparable with our existing stores or to become profitable at all. As a result, we may determine that we need to close additional stores or reduce the hours of operation in some stores, which could materially adversely affect our business, financial condition, operating results or cash flows, as we may incur additional expenses and non-cash write-offs related to closing a store and settling our remaining lease obligations and our initial investment in fixed assets and related store costs.
 
We are exploring the sale of all or a portion of our loan portfolio, or other refinancing of the Company's loan portfolio, and there can be no assurance that we will be successful in completing a transaction or that such a transaction will yield additional value for our stockholders or that the transaction will not have an adverse impact on our business. In October 2014, we announced that our Board of Directors authorized management to explore a full range of strategic alternatives to enhance value for stockholders, including, but not limited to, a sale of the Company, separating its retail and credit businesses or slowing store openings and returning capital to investors. The Company and its advisors have conducted a thorough review of strategic alternatives, including alternatives not identified in the October announcement. After appropriate diligence and consideration, the

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Board of Directors has authorized management to actively pursue the sale of all or a portion of the loan portfolio, or other refinancing of our loan portfolio. We have engaged BofA Merrill Lynch and Stephens Inc., as financial advisors, to assist with this process.

There is no assurance that we will complete a sale of all or a portion of the loan portfolio, or other refinancing, and no timetable has been set for completion of this process. The Board of Directors may also determine that no transaction is in the best interests of shareholders. We do not intend to comment further regarding the process, or any specific transaction, until such time as the Board of Directors deems disclosure is appropriate or necessary. Further, it is not certain what impact any potential transaction, or a decision not to pursue any potential transaction, may have on our stock price, operating results, financial condition, liquidity, or business prospects.

We expect to incur substantial costs associated with identifying and evaluating potential transactions. Any potential transaction would be dependent upon a number of factors that may be beyond our control, including, among other factors, market conditions, industry trends, the interest of third-parties in our business, and the availability of financing to potential buyers on reasonable terms. The process of exploring a transaction may be time consuming and disruptive to our business operations. We are also subject to other risks in connection with the uncertainty created by the review process, including stock price volatility, ability to attract and retain qualified employees. If we are unable to effectively manage the review process, our business, financial condition, liquidity and results of operations could be materially adversely affected.

If we are unable to manage the growth of our business, our revenues may not increase, our cost of operations may rise and our results of operations may decline. As we grow our store base, we will face many business risks associated with growing companies, including the risk that our management, financial controls and information systems will be inadequate to support our expansion in the future. Our growth will require management to expend significant time and effort and additional resources to ensure the continuing adequacy of our financial controls, operating procedures, information systems, product purchasing, warehousing and distribution systems and employee training programs. We cannot predict whether we will be able to effectively manage these increased demands or respond on a timely basis to the changing demands that our expansion will impose on our management, financial controls and information systems. If we fail to successfully manage the challenges of growth, do not continue to improve our systems and controls or encounter unexpected difficulties during expansion, our business, financial condition, operating results or cash flows could be materially adversely affected.

We may expand our retail or credit offerings which may have different operating or legal requirements than our current operations. In addition to the retail and consumer finance products we currently offer, we may offer other products and services in the future, including new financing products and services. These products and services may require additional or different operating and compliance systems or have additional or different legal or regulatory requirements than the products and services we currently offer. In the event we undertake such an expansion and do not have the proper infrastructure or personnel, do not successfully execute such an expansion, or our customers do not positively respond to such changes, our business, financial condition, operating results or cash flows could be materially adversely affected.
 
An increase in interest rates, a decrease in our credit sales or a decline in credit quality could lead to a decrease in our product sales and profitability. A large portion of our credit portfolio is to customers considered to be sub-prime borrowers, who have limited credit history, low income or past credit problems. Entering into credit arrangements with such customers entail a higher risk of customer default, higher delinquency rates and higher losses than extending credit to more creditworthy customers. While we believe that our pricing and the underwriting criteria and collection methods we employ enable us to manage the higher risks inherent in issuing credit with sub-prime customers, no assurance can be given that such pricing, criteria and methods will afford adequate protection against such risks. We have experienced volatility in delinquency and charge-off rates on our credit contracts. Payments on some of our credit accounts become delinquent from time to time, and some accounts end up in default, due to several factors, such as general and local economic conditions, including the impact of rising interest rates and unemployment rates. As we continue to expand into new markets, we will obtain new credit accounts that may present a higher risk than our existing credit accounts since new credit customers do not have an established credit history with us.

A general decline in the quality of our customer receivable portfolio could lead to a reduction in the advance rates used or eligible customer receivable balances included in the borrowing base calculations under our revolving credit facility and thus a reduction of available credit to fund our finance operations. As a result, if we are required to reduce the amount of credit we grant to our customers, we most likely would sell fewer products, which could result in our financial condition, operating results and cash flows to be materially adversely affected. Further, because 47.3% of our credit account payments received during fiscal year 2015 were delivered to one of our store locations, any decrease in credit sales could reduce traffic in our stores and lower our revenues. A decline in the credit quality of our credit accounts could also cause an increase in our credit losses, which would result in an adverse effect on our earnings. A decline in credit quality could also lead to stricter underwriting criteria which could have a negative impact on net sales.


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We maintain an allowance for uncollectible accounts on our customer installment contracts held on our balance sheet. If the allowance for uncollectible accounts is inadequate, we would recognize the losses in excess of the allowance and our results of operations could be materially adversely affected.

If we lose key management or are unable to attract and retain the qualified sales and credit granting and collection personnel required for our business, our operating results could suffer. Our success depends to a significant degree on the skills, experience and continued service of our key executives or the identification of suitable successors for them. If we lose the services of any of these individuals, or if one or more of them or other key personnel decide to join a competitor or otherwise compete directly or indirectly with us, and we are unable to identify a suitable successor, our business and operations could be harmed, and we could have difficulty in implementing our strategy. In addition, our sales and credit operations are largely dependent upon our labor force. As our business grows, and as we incur turnover in current positions, we will need to locate, hire and retain additional qualified sales personnel in a timely manner and develop, train and manage an increasing number of management level sales associates and other employees. Additionally, if we are unable to attract and retain qualified credit granting and collection personnel, our ability to perform quality underwriting of new credit transactions and maintain workloads for our collections personnel at a manageable level, our operation could be materially adversely impacted and result in higher delinquency and net charge-offs on our credit portfolio. Competition for qualified employees could require us to pay higher wages to attract a sufficient number of employees, and increases in the federal minimum wage or other employee benefits costs could increase our operating expenses. If we are unable to attract and retain personnel as needed in the future, our net sales and operating results could suffer.
 
We have significant future capital needs and the inability to access the capital markets may materially adversely affect our business and expansion plans. As of January 31, 2015, we primarily finance our customer receivables through a revolving credit facility with a capacity of $880.0 million that matures in November 2017. We had $529.2 million outstanding under our revolving credit facility, including standby letters of credit issued as of January 31, 2015. In addition, on July 1, 2014, we issued $250.0 million in senior unsecured notes due July 2022. Our ability to raise additional capital through expansion of our revolving credit facility, securitization transactions or other debt or equity transactions, and do so on economically favorable terms, depends in large part on factors that are beyond our control, including: 
Conditions in the securities and finance markets generally;
Our credit rating or the credit rating of any securities we may issue;
Economic conditions;
Conditions in the markets for securitized instruments, or other debt or equity instruments;
The credit quality and performance of our customer receivables;
Our overall sales performance and profitability;
Our ability to provide or obtain financial support for required credit enhancement;
Our ability to adequately service our financial instruments;
Our ability to meet debt covenant requirements; and
Prevailing interest rates.

If adequate capital and funds are not available at the time we need capital, we may have to curtail future growth, which could materially adversely affect our business, financial condition, operating results or cash flow. The ultimate amount of capital expenditures needed will be dependent on, among other factors, the availability of capital to fund new store openings and customer receivables portfolio growth.
 
In addition, we historically used our customer receivables as collateral to support our capital needs. If we require amendments in the future and are unable to obtain such amendments or we are unable to arrange substitute financing facilities or other sources of capital, we may have to limit or cease offering credit through our finance programs due to our inability to draw under our revolving credit facility upon the occurrence of a default. If availability under the borrowing base calculations of our revolving credit facility is reduced, or otherwise becomes unavailable, or we are unable to arrange substitute financing facilities or other sources of capital, we may have to limit the amount of credit that we make available through our customer credit programs. A reduction in our ability to offer customer credit could materially adversely affect revenues and results of operations. Further, our inability or limitations on our ability to obtain funding through securitization facilities or other sources may materially adversely affect our profitability under our credit programs if existing customers fail to repay outstanding credit due to our refusal to grant additional credit. Additionally, the inability of any of the financial institutions providing our financing facilities to fund their commitment could materially adversely affect our ability to fund our credit programs, capital expenditures and other general corporate needs.
 

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We have in the past, and may again in the future, access the debt or other capital markets to refinance existing debt obligations and to obtain capital to finance growth. Our future access to the capital markets could become restricted due to a variety of factors, including a deterioration of our earnings, cash flows, balance sheet quality, regulatory restrictions or overall business or industry prospects, a significant deterioration in the state of the capital markets or a negative bias toward our industry by market participants. In addition, we may elect to issue securities for which we may seek to obtain a rating from a rating agency. It is possible, however, that one or more rating agencies might independently determine to assign a rating to any of our issued debt securities. If any ratings are assigned to any of our debt or other securities with a rating, such ratings, if they are lower than market expectations or are subsequently lowered or withdrawn, whether as a result of our actions or factors which are beyond our control, could increase our future borrowing costs and impair our ability to access capital and credit markets on terms commercially acceptable to us, or at all. Inability to access the credit markets on acceptable terms, if at all, could have a material adverse effect on our financial condition.

If we do not comply with the covenants in the credit agreement that governs our revolving credit facility and the indenture that will govern our senior notes, we may not have the funds necessary to pay all of our indebtedness that could become due. The credit agreement governing our revolving credit facility and the indenture governing our senior notes contain a number of restrictive covenants that impose operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest, including restrictions on our ability to:
Incur additional indebtedness;
Pay dividends or make other distributions in respect of, or repurchase or redeem, our capital stock;
Prepay, redeem or repurchase certain debt;
Make loans and certain investments;
Sell assets;
Incur liens;
Enter into transactions with affiliates; and
Consolidate, merge or sell all or substantially all of our assets.

In addition, the restrictive covenants in the credit agreement governing our revolving credit facility require us to maintain specified financial ratios, including a maximum leverage ratio and minimum fixed charge coverage ratio, and satisfy other financial condition tests. Our ability to meet those financial ratios can be affected by events beyond our control, and we may be unable to meet them.

A breach of the covenants or restrictions under the agreement governing our revolving credit facility or under our indenture governing our senior notes, could result in an event of default under the applicable indebtedness. Such a default may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In addition, an event of default under the credit agreement governing our revolving credit facility would permit the lenders under our revolving credit facility to terminate all commitments to extend further credit under that facility. Furthermore, if we were unable to repay the amounts due and payable under our revolving credit facility, those lenders could proceed against the collateral granted to them to secure that indebtedness. In the event our lenders of holders or our senior notes accelerate the repayment of our borrowings, we may not have sufficient funds to repay that indebtedness. As a result of these restrictions, we may be:
Limited in how we conduct our business;
Unable to raise additional debt or equity financing to operate during general economic or business downturns; or
Unable to compete effectively or to take advantage of new business opportunities.

These restrictions may affect our ability to grow in accordance with our strategy. In addition, our financial results, our significant indebtedness and our credit ratings could materially adversely affect the availability and terms of our financing.
 
Increased borrowing costs will negatively impact our results of operations. Because most of our consumer credit programs have interest rates equal to the highest rate allowable under applicable state law, we would generally not be able to pass higher borrowing costs along to future consumer credit contracts and our results of operations could be negatively impacted. The interest rates on our revolving credit facility are variable based upon the LIBOR rate. The level of interest rates in the market in general will impact the interest rate on any debt instruments issued, if any. Additionally, we may issue debt securities or enter into credit facilities under which we pay interest at a higher rate than we have historically paid which would further reduce our margins and negatively impact our results of operations.
 

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Deterioration in the performance of our customer receivables portfolio could materially adversely affect our liquidity position and profitability. Our liquidity position and profitability are heavily dependent on our ability to collect our customer receivables. If our customer receivables portfolio were to substantially deteriorate, the liquidity available to us would most likely be reduced due to the challenges of complying with the covenants and borrowing base calculations under our revolving credit facility and our earnings may decline due to higher provisions for bad debt expense, higher servicing costs, higher net charge-off rates and lower interest and fee income.
 
Our ability to collect from credit customers may be impaired by store closings and our need to rely on a replacement servicer in the event of our liquidation. We may be unable to collect a large portion of periodic credit payments should our stores close as many of our customers remit payments in-store. In the event of store closings, credit customers may not pay balances in a timely fashion, or may not pay at all, since a large number of our customers have not traditionally made payments to a central location.

In deciding whether to extend credit to customers, we rely on the accuracy and completeness of information furnished to us by or on behalf of our credit customers. If we and our systems are unable to detect any misrepresentations in this information, our results of operations and financial condition may be materially adversely affected. In deciding whether to extend credit to customers, we rely heavily on information furnished to us by or on behalf of our credit customers and our ability to validate such information through third-party services, including employment and personal financial information. If a significant percentage of our credit customers intentionally or negligently misrepresent any of this information, and our systems do not detect such misrepresentations, it could impair our ability to effectively manage our credit risk, which could have an adverse effect on our results of operations and financial condition.
 
Our policy of re-aging certain delinquent borrowers affects our delinquency statistics and the timing and amount of our write-offs. Re-aging is offered to certain eligible past-due customers if they meet the conditions of our re-age policy. Our decision to offer a delinquent customer a re-age program is based on that borrower’s specific condition, our history with the borrower, the amount of the loan and various other factors. When we re-age a customer’s account, we move the account from a delinquent status to a current status. Management exercises a considerable amount of discretion over the re-aging process and has the ability to re-age an account multiple times during its life. Under our current policy, the maximum number of months an account can be re-aged over the life of the account is limited to 12 months. Treating an otherwise uncollectible account as current affects our delinquency statistics, as well as impacting the timing and amount of charge-offs. If these accounts had been charged off sooner, our net loss rates for earlier periods might have been higher.
 
If we fail to timely contact delinquent borrowers, the number of delinquent customer receivables eventually being charged off could increase. We contact customers with delinquent credit account balances soon after the account becomes delinquent. During periods of increased delinquencies it is important that we are proactive in dealing with customers rather than simply allowing customer receivables to go to charge-off. Historically, when our servicing becomes involved at an earlier stage of delinquency with credit counseling and workout programs, there is a greater likelihood that the customer receivable will not be charged off.
 
The success of our collection efforts depends on being properly staffed and trained to assist borrowers in bringing the delinquent balance current and ultimately avoiding charge-off. If we do not properly staff and train our collections personnel, or if we incur any downtime or other issues with our information systems that assist us with our collection efforts, then the number of accounts in a delinquent status or charged-off could increase. In addition, managing a substantially higher volume of delinquent customer receivables typically increases our operational costs. A rise in delinquencies or charge-offs could result in our business, financial condition, liquidity and results of operations to be materially adversely affected.
 
We rely on internal models to manage risk and to provide accounting estimates. Our results could be materially adversely affected if those models do not provide reliable accounting estimates or predictions of future activity. We make significant use of business and financial models in connection with our efforts to measure and monitor our risk exposures and to manage our credit portfolio. For example, we use models as a basis for credit underwriting decisions, portfolio delinquency, charge-off and collection expectations and other market risks, based on economic factors and our experience. The information provided by these models is used in making business decisions relating to strategies, initiatives, transactions and pricing, as well as the size of our allowance for doubtful accounts, among other accounting estimates.
 
Models are inherently imperfect predictors of actual results because they are based on current and historical data available to us and our assumptions about factors such as credit demand, payment rates, default rates, delinquency rates and other factors that may overstate or understate future experience. Our models could produce unreliable results for a number of reasons, including the limitations of historical data to predict results due to unprecedented events or circumstances, invalid or incorrect assumptions underlying the models, the need for manual adjustments in response to rapid changes in economic conditions, changes in credit policies, incorrect coding of the models, incorrect data being used by the models or inappropriate application of a model to products

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or events outside of the model’s intended use. In particular, models are less dependable when the economic environment is outside of historical experience.

In addition, we continually receive new economic data. Our critical accounting estimates, such as the size of our allowance for doubtful accounts, are subject to change, often significantly, due to the nature and magnitude of changes in economic conditions. However, there is generally a lag between the availability of this economic information and the preparation of our consolidated financial statements. When economic conditions change quickly and in unforeseen ways, there is a risk that the assumptions and inputs reflected in our models are not representative of current economic conditions. We may deem it necessary to increase our allowance for doubtful accounts in the future. If our actual charge-offs exceed the assumption used to establish the allowance, our provision for losses would increase. Increasing our allowance for doubtful accounts would result in a decline in future revenues and earnings materially adversely affecting our results of operations and our financial position.

Changes in the economy, credit policies and practices, and the credit and capital markets have required frequent adjustments to our models and the application of greater management judgment in the interpretation and adjustment of the results produced by our models. The application of greater management judgment reflects the need to take into account updated information while continuing to maintain controlled processes for model updates, including model development, testing, independent validation and implementation. As a result of the time and resources, including technical and staffing resources, that are required to perform these processes effectively, it may not be possible to replace existing models quickly enough to ensure that they will always properly account for the impacts of recent information and actions.
 
An economic downturn or other events may affect consumer purchases from us as well as their ability to repay their credit obligations to us, which could result in our net sales, gross margins and credit portfolio performance to be materially adversely affected. Many factors affect spending, including regional or world events, war, conditions in financial markets, general business conditions, interest rates, inflation, energy and gasoline prices, consumer debt levels, the availability of consumer credit, taxation, unemployment trends and other matters that influence consumer confidence and spending. Our customers’ purchases of our products decline during periods when disposable income is lower or periods of actual or perceived unfavorable economic conditions. Recent turmoil in the national economy, including instability in financial markets, turmoil in Europe, the Middle East and Asia, and decreases in consumer confidence and volatile oil prices have negatively impacted our markets and may present significant challenges to our operations in the future. If this occurs, our net sales and results of operations could decline.

We face significant competition from national, regional, local and internet retailers of furniture and mattresses, home appliances, and consumer electronics. The retail market for consumer electronics, furniture and mattresses is highly fragmented and intensely competitive and the market for home appliances is concentrated among a few major dealers. We currently compete against a diverse group of retailers, including national mass merchants, specialized national retailers, home improvement stores, and locally-owned regional or independent retail specialty stores that sell furniture and mattresses, home appliances, consumer and electronics, similar, and often identical, to those items we sell. We also compete with retailers that market products through store catalogs and the internet. In addition, there are few barriers to entry into our current and contemplated markets, and new competitors may enter our current or future markets at any time. Additionally, we compete to some extent against companies offering products to credit constrained consumers similar to those offered by us for the home under weekly or monthly rent-to-own payment options.  

We may not be able to compete successfully against existing and future competitors. Some of our competitors have financial resources that may be substantially greater than ours and they may be able to purchase inventory at lower costs and better endure economic downturns. As a result, our sales may decline if we cannot offer competitive prices to our customers or we may be required to accept lower profit margins. Our competitors may respond more quickly to new or emerging technologies and may have greater resources to devote to promotion and sale of products and services. If two or more competitors consolidate their businesses or enter into strategic partnerships, they may be able to compete more effectively against us.

Our existing competitors or new entrants into our industry may use a number of different strategies to compete against us, including:
Expansion by our existing competitors or entry by new competitors into markets where we currently operate;
Lower pricing;
Aggressive advertising and marketing;
Extension of credit to customers on terms more favorable than we offer;
Larger store size, which may result in greater operational efficiencies, or innovative store formats; and
Adoption of improved retail sales methods.


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Competition from any of these sources could cause us to lose market share, sales and customers, increase expenditures or reduce prices, any of which could have an adverse effect on our financial condition, results of operations and cash flows.

Changes in customer demand and product mix could materially adversely affect our business. Our products must appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to change. Our ability to maintain and increase sales depends to a large extent on the introduction and availability of new products and technologies and our ability to respond timely to customer demands and preferences for such new products. It is possible that the introduction of new products will never achieve widespread consumer acceptance or will be supplanted by alternative products and technologies that do not offer us a similar sales opportunity or are sold at lower price points or margins. We might be unable to anticipate these buying patterns which could result in our sales and operating performance to be materially adversely affected. In addition, we often make commitments to purchase products from our vendors several months in advance of proposed delivery dates. Significant deviation from the projected demand for products that we sell could affect our inventory strategies which may have an adverse effect on our results of operations and financial condition, either from lost sales or lower margins due to the need to reduce prices to dispose of excess inventory.
    
Furthermore, due to our increasing emphasis on furniture and mattress offerings we are building larger new stores and investing additional capital to expand existing stores to accommodate those offerings. If we are unable to execute on our furniture and mattress offering strategy, we could have an adverse effect on our sales and results of operations.

We may experience significant price pressures over the life cycle of our products from competing technologies and our competitors. Prices for many of our products decrease over their life cycle. Such decreases often result in decreased gross profit margins. Suppliers may also seek to reduce our margins on the sales of their products in order to increase their own profitability. The consumer electronics industry depends on new products to drive increases in sales. Typically, these new products, such as high-definition flat-panel (including 3-D, LCD, LED and internet-ready technology) televisions, Blu-ray players and digital cameras are introduced at relatively high price points that are then gradually reduced as the product becomes mainstream. To sustain same store sales growth, unit sales must increase at a rate greater than the decline in product prices. The affordability of the product helps drive the unit sales growth. However, as a result of relatively short product life cycles in the consumer electronics industry, which limit the amount of time available for sales volume to increase, combined with rapid price erosion in the industry, retailers are challenged to maintain overall gross margin levels and positive same store sales. We continue to adjust our marketing strategies to address this challenge through the introduction of new product categories and new products within our existing categories. If we fail to accurately anticipate the introduction of new technologies, we may possess significant amounts of obsolete inventory that can only be sold at substantially lower prices than we anticipated. In addition, we may not be able to maintain our historical margin levels in the future due to increased sales of lower margin products such as personal electronics products and declines in average selling prices of key products. If sales of lower margin items continue to increase and replace sales of higher margin items or our consumer electronics products average selling prices decreases due to the maturity of their life cycle, our gross margin and overall gross profit levels may be materially adversely affected.

A disruption in our relationships with, in the operations of, or the supply of product from any of our key suppliers could cause our sales to decline. The success of our business and growth strategies depends to a significant degree on our relationships with our suppliers, particularly our brand name suppliers. We do not have long-term supply agreements or exclusive arrangements with the majority of our vendors. We typically order our inventory through the issuance of individual purchase orders to vendors. We have no contractual assurance of the continued supply of merchandise we currently, or would like to, offer our customers. We also rely on our suppliers for funds in the form of vendor allowances. We may be subject to rationing by suppliers with respect to a number of limited distribution items. In addition we rely heavily on a relatively small number of suppliers. The loss of any one or more of our key suppliers or failure to establish and maintain relationships with these and other vendors, and limitations on the availability of inventory or repair parts, could have a materially adverse effect on our supply and assortment of products, as we may not be able to find suitable replacements to supply products at competitive prices, and on our results of operations and financial condition.

If one of our vendors were to go out of business, it could have a materially adverse effect on our results of operations and financial condition if such vendor is unable to fund amounts due to us, including payments due for returns of product and warranty claims. Catastrophic or other unforeseen events, such as the one which impacted Japan during 2011, could materially adversely impact the supply and delivery to us of products manufactured outside the United States and could materially adversely impact our results of operations. In addition, because many of the products we sell are manufactured outside of the United States, we may experience labor unrest or an increase in the cost of imported vendor products at any time for reasons beyond our control. For example, the current port disruption in Long Beach, California, or similar disruption or strike at any other port from which we receive our imported merchandise, could significantly disrupt and create significant risks for our business. Any slow-downs, disruptions or strikes at any of these ports may have a materially adverse effect on our relationships with our customers and our business, potentially resulting in canceled orders by customers and reduced revenues and earnings. If imported merchandise

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becomes more expensive, unavailable or difficult to obtain, we may not be able to meet the demands of our customers. Products from alternative sources may also be more expensive than those our vendors currently import.

Our ability to enter new markets successfully depends, to a significant extent, on the willingness and ability of our vendors to supply merchandise to additional distribution centers and stores. If vendors are unwilling or unable to supply some or all of their products to us at acceptable prices in one or more markets, our results of operations and financial condition could be materially adversely affected.

Furthermore, we rely on credit from vendors to purchase our products. A substantial change in credit terms from vendors or vendors’ willingness to extend credit to us, including providing inventory under consignment arrangements, would reduce our ability to obtain the merchandise that we sell, which could have a materially adverse effect on our sales and results of operations. In addition, if our vendors fail to continue to offer vendor allowances, or we are restricted in our ability to earn such funds, our results of operations could be materially adversely affected.

Turmoil in financial markets and economic disruptions in other parts of the world may also negatively impact our suppliers’ access to capital and liquidity with which to maintain their inventory, production levels, product quality, and to operate their businesses, all of which could materially adversely affect our supply chain. It may also cause them to change their pricing policies, which could impact demand for their products. Economic disruptions and market instability may make it difficult for us and our suppliers to accurately forecast future product demand trends, which could cause us to carry too much or too little merchandise in various product categories. In addition, to the extent that any manufacturer utilizes labor practices that are not commonly accepted in the United States, we could be materially adversely affected by any resulting negative publicity.

You should not rely on our changes in same store sales as an indication of our future results of operations because they fluctuate significantly. Our historical changes in same store sales have fluctuated significantly from quarter to quarter. A number of factors have historically affected, and will continue to affect, our same store sales results, including:
Changes in competition, such as pricing pressure, and the opening of new stores by competitors in our markets;
General economic conditions;
New product introductions;
Changes in our marketing programs;
Consumer trends;
Changes in our merchandise mix;
Changes in the relative sales price points of our major product categories;
Underwriting standards for our customers purchasing merchandise on credit;
Ability to offer credit programs attractive to our customers;
The impact of any new stores on our existing stores;
Weather conditions in our markets;
Timing of promotional events;
Timing, location and participants of major sporting events;
The number of new store openings;
The percentage of our stores that are mature stores;
The locations of our stores and the traffic drawn to those areas;
How often we update our stores; and
Our ability to execute our business strategy effectively.

Our business could be materially adversely affected by changes in consumer protection laws and regulations. Federal and state consumer protection laws, regulations and agencies, such as the Fair Credit Reporting Act and the Consumer Financial Protection Bureau ("CFPB") heavily regulate the way we conduct business and could limit the manner in which we may offer and extend credit and collect on our accounts. Because our customers finance through our credit segment a substantial portion of our sales, any change in the regulation of consumer credit could result in our sales and gross margins to be materially adversely affected.

New laws or regulations could limit the amount of interest or fees that may be charged on consumer credit accounts, including by reducing the maximum interest rate that can be charged in the states in which we operate, or impose limitations on our ability to collect on account balances, which could have a materially adverse effect on our cash flow and results of operations. Compliance with existing and future laws or regulations, including regulations that may be applicable to us under the Dodd-Frank Act, could

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require the expenditure of substantial resources. Failure to comply with these laws or regulations, even if inadvertent, could result in negative publicity, fines or additional licensing expenses, any of which could result in our cash flow and results of operations to be materially adversely affected.

We have procedures and controls in place to monitor compliance with the numerous federal and state laws and regulations and believe we are in compliance with such laws and regulations. However, these laws and regulations are complex, differ between jurisdictions and are often subject to interpretation. As we expand into additional jurisdictions, the complexities grow. Compliance with these laws and regulations is expensive and requires the time and attention of management. These costs divert capital and focus away from efforts intended to grow our business. If we do not successfully comply with laws, regulations, or policies, we could incur fines or penalties, lose existing or new customers, or suffer damage to our reputation. Changes in these laws and regulations can significantly alter our business environment, limit business operations, and increase costs of doing business, and we may not be able predict the impact such changes would have on our profitability.

The Consumer Financial Protection Bureau is a new agency and there continues to be uncertainty as to how the agency's actions will impact our business. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry within the United States, and established the CFPB. It has authority to write regulations under federal consumer financial protection laws, and enforce those laws. The CFPB is authorized to prevent unfair, deceptive, or abusive acts or practices through its supervisory enforcement and regulatory authority. It is authorized to collect fines and provide consumer restitution in the event of violations, engage in consumer financial education, request data, and promote the availability of financial services to underserved consumers and communities. In addition, the CFPB maintains an online complaint system that allows consumers to log complaints with respect to the products we offer. The system could inform future agency decisions with respect to regulatory, enforcement, or examination focus. There continues to be uncertainty as to how, or if, the CFPB and its strategies and priorities will impact our businesses and our results of operations going forward and could result in new regulatory requirements and regulatory costs for us.

In November 2013, the CFPB issued an Advance Notice of Proposed Rulemaking seeking guidance from the public on a wide array of issues relating to debt collection, including debt buying and third-party collectors. From time to time, we have sold, and may continue to sell, charged-off accounts to third-parties to attempt to minimize the losses incurred on those accounts. We also from time to time engage, or may engage, persons who may be deemed to be debt collectors, to collect accounts on our behalf. Although we have committed resources to enhancing our compliance programs, changes in regulatory expectations, interpretations or practices could increase the risk of enforcement actions, fines and penalties. Actions by the CFPB could result in requirements to alter our products and services that would make our products less attractive to consumers and impair our ability to offer them profitably. Future actions by regulators that discourage the use of products we offer or steer consumers to other products or services could result in reputational harm and a loss of customers. Should the CFPB change regulations adopted in the past by other regulators, or modify past regulatory guidance, our compliance costs and litigation exposure could increase. Our litigation exposure could also increase if the CFPB exercises its authority to limit or ban pre-dispute arbitration clauses. This additional focus and regulatory oversight could significantly increase operating costs.

We are required to comply with laws and regulations regulating credit extensions and other dealings with customers and our failure to comply with applicable laws and regulations, or any adverse change in those laws or regulations, could have a negative impact on our business. Our customers finance through our credit segment a substantial portion of our sales. Providing credit and other financial products and otherwise dealing with consumers and information provided by consumers does or could subject us to the jurisdiction of various federal, state and local government authorities, including the CFPB, the Federal Trade Commission, the SEC, state regulators having jurisdiction over persons engaged in consumer sales, consumer credit and other financial products and consumer debt collection, and state attorney generals. Our business practices, including the terms of our marketing and advertising, our procedures and practices for credit applications and underwriting, the terms of our credit extensions and related disclosures, our data privacy and protection practices, and our collection practices, may be subject to periodic or special reviews by these regulatory and enforcement authorities. These reviews could range from investigations of specific consumer complaints or concerns to broader inquiries into our practices generally. If as part of these reviews the regulatory authorities conclude that we are not complying with applicable law or regulations, they could request or impose a wide range of sanctions and remedies including requiring changes in advertising and collection practices, changes in our credit application and underwriting practices, changes in our data privacy or protection practices, changes in the terms of our credit or other financial products (such as decreases in interest rates or fees), the imposition of fines or penalties, or the paying of restitution or the taking of other remedial action with respect to affected customers. They also could require us to stop offering some of our credit or other financial products within one or more states, or nationwide.

Negative publicity relating to any specific inquiry or investigation, regardless of whether we have violated any applicable law or regulation or the extent of any such violation, could negatively affect our reputation and our brand as well as our stock price, which would materially adversely affect our ability to raise additional capital and would raise our costs of doing business.

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If any deficiencies or violations of law or regulations are identified by us or asserted by any regulator or other person, or if any regulatory or enforcement authority or court requires us to change any of our practices, the correction of such deficiencies or violations, or the making of such changes, could have a material adverse effect on our financial condition, results of operations or business. We face the risk that restrictions or limitations resulting from the enactment, change, or interpretation of federal or state laws and regulations, such as the Dodd-Frank Act, could negatively affect our business activities, require us to make significant expenditures or effectively eliminate credit products or other financial products currently offered to customers.

Any failure on our part to comply with legal requirements in connection with credit or other financial products, or in connection with servicing our accounts or collecting debts or otherwise dealing with consumers, could significantly impair our ability to collect the full amount of the account balances and could subject us to substantial liability for damages or penalties. The institution of any litigation of this nature, or the rendering of any judgment, against us or any other industry participant in any litigation of this nature, could materially adversely affect our business and financial condition.

We may also expand into additional jurisdictions. We must comply with the laws of each state we operate in, which are not uniform. The difference of the laws from the jurisdictions where we currently operate, or even changes to the laws in those jurisdictions, could negatively impact our operations.

We have been named as a defendant in multiple securities class action lawsuits, shareholder derivative lawsuits, and we have also received a non-public voluntary request for information from the SEC. Potential similar or related litigation or inquiries could result in substantial damages and may divert management's time and attention from our business. We and certain of our current and former officers and directors are named as defendants in securities class action lawsuits and in related shareholder derivative lawsuits. We have also received a non-public, voluntary request for information from the SEC. Each of these matters is described in more detail in Part II, Item 8, under the heading "Litigation" in Note 15. Contingencies, of the Consolidated Financial Statements of this Annual Report on Form 10-K.

There can be no assurance that any litigation to which we are, or in the future may become, a party will be resolved in our favor. These lawsuits and any other lawsuits that we may become party to are subject to inherent uncertainties, and the costs incurred relating to defending litigation matters will depend upon many unknown factors. Any claim that is successfully decided against us may cause us to pay substantial damages, including punitive damages, and other related fees or prevent us from selling certain of our products. Regardless of whether lawsuits are resolved in our favor or if we are the plaintiff or the defendant in the litigation, any lawsuits to which we are a party will likely be expensive and time consuming to defend or resolve.

Furthermore, we are unable to predict the timing or outcome of the SEC inquiry or estimate the nature or amount of any possible sanction or enforcement action the SEC could seek to impose, which could include fines, penalties, damages, sanctions, administrative remedies and modifications to our disclosure, accounting and business practices, including a prohibition on specific conduct or a potential restatement of our financial statements, any of which could be material.

The lawsuits and SEC inquiry, along with any reputation issues raised by the lawsuits or inquiry, could result in the diversion of management's time and attention away from business operations, which could harm our business and also harm our relationships with existing customers and vendors. Our legal expenses incurred in defending the lawsuits and responding to the SEC inquiry could be significant, and a ruling against us, or a settlement of any of these matters could materially adversely affect our cash flow, financial results and stock price.

Pending litigation relating to the sale of credit insurance and the sale of repair service agreements in the retail industry could materially adversely affect our business. State attorney generals and private plaintiffs have filed lawsuits against other retailers relating to improper practices conducted in connection with the sale of credit insurance in several jurisdictions around the country. We offer credit insurance in our stores on sales financed under our credit programs and require customers to purchase property insurance from us, or provide evidence from a third-party insurance provider, at their election, in connection with sales of merchandise on installment credit; therefore, similar litigation could be brought against us. While we believe we are in full compliance with applicable laws and regulations, if we are found liable in any future lawsuit regarding credit insurance or repair service agreements, we could be required to pay substantial damages or incur substantial costs as part of an out-of-court settlement or require us to modify or suspend certain operations any of which could have a material adverse effect on our results of operations. An adverse judgment or any negative publicity associated with our repair service agreements or any potential credit insurance litigation could also affect our reputation, which could have a negative impact on our cash flow and results of operations.

Pending and potential litigation regarding alleged patent infringements could result in significant costs to us to defend what we consider to be spurious claims. Recently the manufacturing, retail and software industries have been the targets of patent litigation claimants making demands or filing claims based upon alleged patent infringement through the manufacturing and selling, either in merchandise or through software and internet websites, of product or merely providing access through website

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portals. We, in conjunction with multiple other parties, have been and are the targets of such claims. While we believe that we have not violated or infringed any third-party alleged patent rights, and intend to defend vigorously any such claims, the cost to defend, settle or pay any such claims could be substantial and could have a material adverse effect on our cash flow and results of operations.

Our governance documents and state law provide certain anti-takeover measures which could prevent or delay a change in control of the Company, even if such changes would be beneficial to our stockholders. Provisions of our amended and restated certificate of incorporation and amended and restated bylaws as well as provisions of Delaware law could discourage, delay or prevent a merger, acquisition or other change in control of the Company, even if such change in control would be beneficial to our stockholders. These provisions include:
No stockholder action may be taken without a meeting, unless such action has been approved in advance by our Board of Directors;
Stockholders cannot call special meetings of stockholders;
Advance notice requirements for nominations for election to the Board of Directors or for proposing matters that can be acted upon by stockholders at stockholder meetings; and
Authorization of the issuance of "blank check" preferred stock that could be issued by our Board of Directors to increase the number of outstanding shares and thwart a takeover attempt.

On October 6, 2014, we also adopted a one-year stockholders’ rights plan, the purpose of which is, among other things, to enhance our Board of Director's ability to protect stockholder interests against unsolicited attempts to acquire control of us that do not offer a fair price to our stockholders. The stockholder rights plan could make it more difficult for a third-party to acquire, or could discourage a third-party from acquiring, the Company or a large block of the Company's common stock. The effect of these rights may impact the price that investors are willing to pay for securities.

Further, we are subject to Section 203 of the Delaware General Corporation Law, which limits certain transactions and business combinations between a corporation and a stockholder owning 15% or more of the corporation’s outstanding voting stock for a period of three years from the date the stockholder becomes a 15% stockholder. These provisions and our stockholders’ rights plan, either alone or in combination with each other, could delay, deter or prevent a change of control, whether or not it is desired by, or beneficial to, our stockholders.

Our corporate actions may be substantially controlled by our principal stockholders and affiliated entities. Luxor Capital Group, L.P, Stephens Inc., The Stephens Group, LLC, Anchorage Capital Group, LLC, Greenlight Capital, Inc., Morgan Stanley, Citadel Advisors LLC, and Susquehanna Securities (together with each of their respective affiliates), each own more than 5% or more of our outstanding shares common stock, and beneficially own, in the aggregate, a majority of our outstanding shares of common stock. The concentration of ownership of our shares of common stock by the relatively small number of hedge funds and investors may:
Have significant influence in determining the outcome of all matters submitted to stockholders for approval, including the election of directors, mergers, consolidations, and the sale of all or substantially of our assets or other significant corporate actions;
Delay or deter a change of control of the Company;
Deprive stockholders of an opportunity to receive a premium for their shares as part of a sale of the Company; and
Affect the market price volatility and liquidity of our shares of common stock.

The interests of these investors and their respective affiliates may differ from or be adverse to the interests of our other stockholders. If any of these investors sells a substantial number of shares in the public market, the market price of our shares could fall. The perception among the public that these sales will occur could also contribute to a decline in the market price of the shares.

Our costs of doing business could increase as a result of changes in federal, state or local regulations. Changes in the federal, state or local minimum wage requirements or changes in other wage or workplace regulations could increase our cost of doing business. In addition, changes in federal, state or local regulations governing the sale of some of our products or tax regulations could increase our cost of doing business. Also, passage of the Employer Free Choice Act or similar laws in Congress could lead to higher labor costs by encouraging unionization efforts among our associates and disruption of store operations.


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Our stores are concentrated in certain regions of the United States, which subjects us to regional risks, such as the economy, weather conditions, hurricanes and other natural or man-made disasters. If the region suffers a continued or another economic downturn or any other adverse regional event, such as inclement weather, there could be a material adverse effect on our sales and results of operations. Several of our competitors operate stores across the United States and thus may not be as vulnerable to the risks of operating in a concentrated region. The states and the local economies where many of our stores are located are dependent, to a degree, on the oil and gas industries, which can be very volatile. Because of fears of climate change and adverse effects of drilling explosions and oil spills in the Gulf of Mexico, legislation has been considered, and governmental regulations and orders have been issued, which, combined with the local economic and employment conditions caused by both, could materially adversely impact the oil and gas industries and the areas in which a significant number of our stores are located. To the extent the oil and gas industries are negatively impacted by changes in commodity prices, climate change or other legislation and other factors, we could be negatively impacted by reduced employment, or other negative economic factors that impact the local economies where we have our stores.

Our information technology infrastructure is vulnerable to damage that could harm our business. Our ability to operate our business from day to day, in particular our ability to manage our credit operations and inventory levels, largely depends on the efficient operation of our computer hardware and software systems. We use management information systems to track inventory information at the store level, communicate customer information, aggregate daily sales information and manage our credit portfolio, including processing of credit applications and management of collections. These systems and our operations are subject to damage or interruption from:
Power loss, computer systems failures and internet, telecommunications or data network failures;
Operator negligence or improper operation by, or supervision of, employees;
Physical and electronic loss of data or security breaches, misappropriation and similar events;
Computer viruses;
Intentional acts of vandalism and similar events; and
Hurricanes, fires, floods and other natural disasters.

In addition, the software that we have developed internally to use in our daily operations may contain undetected errors that could cause our network to fail or our expenses to increase. Any failure of our systems due to any of these causes, if it is not supported by our disaster recovery plan, could cause an interruption in our operations and result in reduced net sales and results of operations. Though we have implemented contingency and disaster recovery processes in the event of one or several technology failures, any unforeseen failure, interruption or compromise of our systems or our security measures could affect our flow of business and, if prolonged, could harm our reputation. The risk of possible failures or interruptions may not be adequately addressed by us or the third-parties on which we rely, and such failures or interruptions could occur. The occurrence of any failures or interruptions could have a material adverse effect on our business, financial condition, liquidity and results of operations.

Our management information systems may not be adequate to meet our evolving business and emerging regulatory needs and the failure to successfully implement new systems could negatively impact the business and our financial results. We are investing significant capital in new information technology systems and implementing modifications and upgrades to existing systems to support our growth plan. These investments include replacing legacy systems, making changes to existing systems, building redundancies, and acquiring new systems and hardware with updated functionality. We are taking appropriate actions to ensure the successful implementation of these initiatives, including the testing of new systems and the transfer of existing data, with minimal disruptions to the business. These efforts may take longer and may require greater financial and other resources than anticipated, may cause distraction of key personnel, may cause disruptions to our existing systems and our business, and may not provide the anticipated benefits. The disruption in our information technology systems, or our inability to improve, upgrade, integrate or expand our systems to meet our evolving business and emerging regulatory requirements, could impair our ability to achieve critical strategic initiatives and could materially adversely impact our sales, collections efforts, cash flows and financial condition.

Changes in premium and commission rates on the insurance products we sell or our inability to maintain our insurance licenses requirements in the states we operate could materially adversely affect our results of operations. We derive a significant portion of our revenues and operating income from the commissions we earn from the sale of various insurance products of third-party insurers to our customers. These products include credit insurance, repair service agreements and product replacement policies. We also are the direct obligor on certain extended repair service agreements we offer to our customers. If for any reason we were unable to maintain our insurance licenses in the states we operate or if there are material claims or future material litigation involving our repair service agreements or product replacement policies, our results of operations would suffer. If the commission we retain from sales of those products declines, our operating results may be materially adversely affected.


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If we are unable to continue to offer third-party repair service agreements to our customers, we could incur additional costs or repair expenses, which could materially adversely affect our financial condition and results of operations. There are a limited number of insurance carriers that provide repair service agreement programs. If insurance becomes unavailable from our current providers for any reason, we may be unable to provide repair service agreements to our customers on the same terms, if at all. Even if we are able to obtain a substitute provider, higher premiums may be required, which could have a material adverse effect on our profitability if we are unable to pass along the increased cost of such coverage to our customers. Inability to maintain the repair service agreement program could cause fluctuations in our repair expenses and greater volatility of earnings and could require us to become the obligor under new contracts sold.

If we are unable to maintain group credit insurance policies from insurance carriers, which allow us to offer their credit insurance products to our customers purchasing our merchandise on credit, our revenues would be reduced and the provision for bad debts might increase. There are a limited number of insurance carriers that provide credit insurance coverage for sale to our customers. If credit insurance becomes unavailable for any reason we may be unable to offer substitute coverage on the same terms, if at all. Even if we are able to obtain substitute coverage, it may be at higher rates or reduced coverage, which could affect the customer acceptance of these products, reduce our revenues or increase our credit losses.

Changes in trade regulations, currency exchange rate fluctuations and other factors beyond our control could affect our business. A significant portion of our inventory is manufactured and/or assembled overseas and in Mexico. Changes in trade regulations, currency fluctuations or other factors beyond our control may increase the cost of items we purchase or create shortages of these items, which in turn could have a material adverse effect on our results of operations and financial condition. Conversely, significant reductions in the cost of these items in U.S. dollars may cause a significant reduction in the retail prices of those products, resulting in a material adverse effect on our sales, margins or competitive position. In addition, commissions earned on our credit insurance, repair service agreement or product replacement agreement products could be materially adversely affected by changes in statutory premium rates, commission rates, adverse claims experience and other factors.

Our costs to protect our intellectual property rights, infringement of which could impair our name and reputation, could be significant. We believe that our success and ability to compete depends in part on consumer identification of the name "Conn’s" and rely on certain trademark registrations and common law rights to protect the distinctiveness of our brand. We intend to protect vigorously our trademarks against infringement, misappropriation or dilution by others. A third-party, however, could attempt to misappropriate our intellectual property or claim that our intellectual property infringes or otherwise violates third-party trademarks in the future. Any litigation or claims brought by or against us, whether with or without merit, or whether successful or not, could result in substantial costs and diversion of our resources, which could have a material adverse effect on our financial condition or results of operations.

Failure to protect the security of our customer’s information or failure to comply with data privacy and protection laws could expose us to litigation, compromise the integrity of our products, damage our reputation and materially adversely affect our financial results. Our business regularly captures, collects, handles, processes, transmits and stores significant amounts of sensitive information about our customers, employees and others, sensitive information, including financial records, credit and business information, and certain other personally identifiable or other sensitive personal information. A number of retailers have experienced actual security breaches, including a number of highly publicized incidents with well-known retailers. To our knowledge, we have not had what we believe to be a significant security breach. In addition, we rely on the secure operation of our website, the internet and other third-party systems generally to assist us in the collection and transmission of this data. Our information systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches including credit card information breaches, vandalism, catastrophic events and human error and/or malfeasance. A compromise of our information security controls or of those businesses with whom we interact, which results in confidential information being accessed, obtained, damaged, or used by unauthorized or improper persons, could harm our reputation and expose us to regulatory actions and claims from customers and clients, financial institutions, payment card associations and other persons, any of which could materially adversely affect our business, financial position, and results of operations. Moreover, a data security breach could require that we expend significant resources related to our information systems and infrastructure, and could distract management and other key personnel from performing their primary operational duties. If our information systems are damaged, fail to work properly or otherwise become unavailable, we may incur substantial costs to repair or replace them, and may experience loss of critical information, customer disruption and interruptions or delays in our ability to perform essential functions and implement new and innovative services. In addition, compliance with changes in privacy and information security laws and standards may result in considerable expense due to increased investment in technology and the development of new operational processes.

We maintain data breach and network security liability insurance; however, we cannot be certain that our coverage will be adequate for any liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms,

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or at all. We may need to devote significant resources to protect against security breaches or to address problems caused by breaches, diverting resources from the growth and expansion of our business.

Any changes in the tax laws of the states in which we operate could affect our state tax liabilities. Additionally, beginning operations in new states could also affect our state tax liabilities. Legislation could be introduced at any time that changes our state tax liabilities in a way that has a material adverse impact on our results of operations. The Texas margin tax, which is based on gross profit rather than earnings, can create significant volatility in our effective tax rate. Our entry into new states in the future could subject us to additional tax rate volatility, dependent upon the tax laws in place in those states, which could materially adversely effect our results of operations.

Significant volatility in oil and gasoline prices could affect our customers’ determination to drive to our store and our third-party delivery service. Significant volatility in oil and gasoline prices could materially adversely affect our customers’ shopping decisions and patterns. We rely heavily on our distribution system and our next day delivery policy to satisfy our customers’ needs and desires, and increases in oil and gasoline prices could result in increased distribution costs and delivery charges. If we are unable to effectively pass increased transportation costs on to the consumer, either by increased delivery costs or higher prices, such costs have materially affect our results of operations. Such increases may not significantly affect our competitors.

Failure to successfully utilize and manage e-commerce could materially adversely affect our business and prospects. Our website provides new and existing customers with the ability to review our product offerings and prices, apply for credit, and access and make payments on their credit accounts. Customers may also purchase products on our website using a credit card. Our website is a significant component of our advertising strategy. We believe our website represents a possible source for future sales and growth in our credit collections. In order to promote our products and services, allow our customers to complete credit applications in the privacy of their homes and on their mobile devices, make payments on their account and drive traffic to our stores, we must effectively create, design, publish and distribute content over the internet. There can be no assurance that we will be able to design and publish web content with a high level of effectiveness or grow our e-commerce business in a profitable manner.

If we fail to maintain adequate systems and processes to detect and prevent fraudulent activity, our business could be materially adversely impacted. Criminals are using increasingly sophisticated methods to engage in illegal activities such as paper instrument counterfeiting, fraudulent payment or refund schemes and identity theft. As we make more of our services available over the internet and other media, and as we expand into new geographies without an established customer base, we subject ourselves to consumer fraud risk. Certain former retail agents have also engaged in fraud against consumers or us, and existing agents could engage in fraud against consumers or us. While we believe past incidents of fraudulent activity have been relatively isolated, we cannot be certain that our systems and processes will always be adequate in the face of increasingly sophisticated and ever-changing fraud schemes. We use a variety of tools to protect against fraud; however, these tools may not always be successful. Allegations of fraud may result in increased costs, including possible settlement and litigation expenses, and could have a material adverse effect on our results of operations.
 
We are subject to risks associated with leasing substantial amounts of space, including future increases in occupancy costs. We lease most of our store locations, our corporate headquarters and our distribution centers. Our continued growth and success depends in part on our ability to locate property for new stores and renew leases for existing locations. There is no assurance that we will be able to locate real estate for new store, or renegotiate leases for existing locations at similar or favorable terms at the end of the lease and we could be forced to move or exit a market if another favorable arrangement cannot be made. Furthermore, a significant rise in real estate prices or real property taxes could result in an increase in store lease expense as we open new locations and renew leases for existing locations, thereby negatively impacting our results of operations. Our inability to renew, extend or replace expiring store leases could have a material adverse effect on our results of operations.

We depend on cash flow from operations to pay our lease expenses. If our business does not generate sufficient cash flow from operating activities to fund these expenses, we may not be able to service our lease expenses, which could materially adversely affect our business. If an existing or future store is not profitable, and we decide to close it, we may be nonetheless committed to perform our obligations under the applicable lease including, among other things, paying the base rent for the balance of the lease term. Moreover, even if a lease has an early cancellation clause, we may not satisfy the contractual requirements for early cancellation under that lease. Our inability to enter into new leases or renew existing leases on terms acceptable to us or be released from our obligations under leases for stores that we close could materially adversely affect our business, financial condition, operating results or cash flows.

Failure to maintain positive brand perception and recognition could have a negative impact on our business. Maintaining a good reputation is critical to the business. The considerable expansion of technological outreach, including through the use of social media, has increased the risk that our reputation could be negatively impacted in a short amount of time. If we are unable

25


to quickly and effectively respond to such incidents, we may suffer declines in customer loyalty and traffic, vendor relationship issues, and other factors, all of which could negatively impact our financial results and reputation.
 
If our third-party delivery services are unable to meet our promised delivery schedule, our net sales may decline due to a decline in customer satisfaction. We offer next day delivery to our customers that we outsource to third-party delivery services. These third-parties are subject to risks that are beyond our control and, if they fail to timely deliver our products, we may lose business from these customers in the future and it could damage our reputation. The loss of customers and/or damage to our reputation could have a material adverse effect on our results of operation.

Our failure to maintain an effective system of internal controls could result in inaccurate reporting of financial results and harm our business. We are required to comply with a variety of reporting, accounting and other rules and regulations. As such, we maintain a system of internal control over financial reporting, but there are limitations inherent in internal control systems. A control system can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints and the benefit of controls must be appropriate relative to their costs. Furthermore, compliance with existing requirements is expensive and we may need to implement additional finance and accounting and other systems, procedures and controls to satisfy our reporting requirements. If our internal control over financial reporting is determined to be ineffective, such failure could cause investors to lose confidence in our reported financial information, negatively affect the market price of our common stock, subject us to regulatory investigations and penalties, and materially adversely impact our business and financial condition

Stock market volatility may materially adversely affect the market price of our common stock. The Company’s common stock price has been and is likely to continue to be subject to significant volatility. A variety of factors could cause the price of our common stock to fluctuate substantially, including:
General market fluctuations resulting from factors not directly related to our operations or the inherent value of our common stock;
State or federal legislative or regulatory proposals, initiatives, actions or changes that are, or are perceived to be, adverse to our operations;
Announcements of developments related to our business or our competitors;
Fluctuations in our operating results and the provision for bad debts;
General conditions in the consumer financial service industry, the domestic or global economy or the domestic or global credit or capital markets;
Changes in financial estimates by securities analysts;
Our failure to meet the expectations of securities analysts or investors;
Negative commentary regarding us and corresponding short-selling market behavior;
Adverse developments in our relationships with our customers;
Legal proceedings brought against the Company or its officers and directors; and
Significant changes in our senior management team.

Due to the volatility of our stock price, we are and may be in the future the target of securities litigation. Such lawsuits generally result in the diversion of management's time and attention away from business operations, which could materially adversely affect our business. In addition, the costs of defense and any damages resulting from litigation, a ruling against us, or a settlement of the litigation could materially adversely affect our financial results.

We face risks with respect to product liability claims and product recalls, which could materially adversely affect our reputation, our business, and our consolidated results of operations. We purchase merchandise from third-parties and offer this merchandise to customers for sale. This merchandise could be subject to recalls and other actions by regulatory authorities. Changes in laws and regulations could also impact the type of merchandise we offer to customers. We have experienced, and may in the future experience, issues that result in recalls of merchandise. In addition, individuals may in the future assert claims, that they have sustained injuries from third-party merchandise offered by us, and we may be subject to future lawsuits relating to these claims. There is a risk that these claims or liabilities may exceed, or fall outside the scope of, our insurance coverage. Any of the issues mentioned above could result in damage to our reputation, diversion of development and management resources, or reduced sales and increased costs, any of which could harm our business.

ITEM 1B.
UNRESOLVED STAFF COMMENTS.
 
None.

26


 
ITEM 2.
PROPERTIES.
 
The number of stores, distribution centers/cross-dock facilities, and corporate offices we operate, together with location and square footage information, are disclosed in Part I, Item 1. Business, under the caption "Store Operations," of this Annual Report on Form 10-K and is incorporated herein by reference.  
 
ITEM 3.
LEGAL PROCEEDINGS.
 
The information set forth in Part II, Item 8, under the heading "Litigation" in Note 15. Contingencies, of the Consolidated Financial Statements of this Annual Report on Form 10-K is incorporated herein by reference.

ITEM 4.
MINE SAFETY DISCLOSURES
 
Not applicable.
 
PART II

ITEM 5.
MARKET FOR CONN'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
As of March 23, 2015, we had approximately 130 common stockholders of record and an estimated 7,300 beneficial owners of our common stock.  The principal market for our common stock is the NASDAQ Global Select Market ("NASDAQ"), where it is traded under the symbol "CONN." Information regarding the high and low sales prices for our common stock for each quarterly period within the two most recent fiscal years as reported by the NASDAQ is summarized as follows: 
 
Price Range
 
High
 
Low
Fiscal Year 2014:
 
 
 
First quarter
$
45.18

 
$
28.22

Second quarter
$
65.02

 
$
40.81

Third quarter
$
69.32

 
$
47.65

Fourth Quarter
$
80.34

 
$
54.78

Fiscal Year 2015:
 

 
 

First quarter
$
61.15

 
$
31.17

Second quarter
$
51.99

 
$
39.33

Third quarter
$
46.59

 
$
26.60

Fourth Quarter
$
36.12

 
$
14.02


Dividends Declared
 
No cash dividends were declared or paid in fiscal year 2015 or fiscal year 2014. We do not anticipate paying dividends in the foreseeable future. Any future payment of dividends will be at the discretion of our Board of Directors and will depend upon our results of operations, financial condition, cash requirements and other factors deemed relevant by the Board of Directors, including the terms of our indebtedness. Provisions in agreements governing our long-term indebtedness restrict the amount of dividends that we may pay to our stockholders. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources.
 
Unregistered  Sale of Equity Securities
 
None.
 
Share Repurchases
 
We have not, and no one on our behalf and no affiliated purchasers have, purchased any of our securities during the past fiscal quarter.


27


ITEM 6.
SELECTED FINANCIAL DATA
 
The following tables set forth selected historical financial information and should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Historical data is not necessarily indicative of our future results of operations or financial condition. Refer to Part 1, Item 1A. Risk Factors, included in this Annual Report on Form 10-K. We have derived the selected statement of operations and balance sheet data as of and for each of the years ended January 31, 2015, 2014, 2013, 2012 and 2011 from our audited consolidated financial statements.
 
As of and for the Year Ended January 31,
(dollars and shares in thousands, except per share amounts)
2015
 
2014
 
2013 (1)
 
2012 (2)
 
2011 (3)
Statement of Operations Data:
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
Total net sales
$
1,220,976

 
$
991,840

 
$
714,267

 
$
653,684

 
$
662,725

Finance charges and other
264,242

 
201,929

 
150,765

 
138,618

 
146,050

Total revenues
$
1,485,218

 
$
1,193,769

 
$
865,032

 
$
792,302

 
$
808,775

Operating income (4)
$
119,867

 
$
161,852

 
$
100,512

 
$
29,701

 
$
32,769

Net income (loss)
$
58,513

 
$
93,449

 
$
52,612

 
$
(3,723
)
 
$
(1,072
)
Earnings (loss) per common share:
 

 
 

 
 

 
 

 
 

Basic
$
1.61

 
$
2.61

 
$
1.60

 
$
(0.12
)
 
$
(0.04
)
Diluted
$
1.59

 
$
2.54

 
$
1.56

 
$
(0.12
)
 
$
(0.04
)
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Working capital (5)
$
780,706

 
$
606,668

 
$
383,502

 
$
363,508

 
$
395,333

Inventories
$
159,068

 
$
120,530

 
$
73,685

 
$
62,540

 
$
82,354

Customer portfolio balance
$
1,365,807

 
$
1,068,270

 
$
741,544

 
$
643,301

 
$
675,766

Total assets
$
1,647,322

 
$
1,297,986

 
$
909,857

 
$
783,298

 
$
842,060

Total debt, net of discount
$
774,410

 
$
536,051

 
$
295,057

 
$
321,704

 
$
373,736

Total stockholders' equity
$
653,670

 
$
589,290

 
$
474,450

 
$
353,371

 
$
352,897

Selected Operating Data:
 

 
 

 
 

 
 

 
 

Change in same stores sales (5)
8.0
%
 
26.5
%
 
14.3
%
 
2.8
 %
 
(9.6
)%
Retail gross margin (7)
40.5
%
 
39.9
%
 
35.2
%
 
28.7
 %
 
26.5
 %
Interest income and fee yield
17.7
%
 
17.9
%
 
18.6
%
 
18.7
 %
 
17.9
 %
Delivery, transportation and handling costs as a percent of product sales and repair service agreement
commissions (8)
4.3
%
 
3.7
%
 
3.2
%
 
3.0
 %
 
3.0
 %
Selling, general and administrative expense as a percent of total revenues (8)
26.3
%
 
25.4
%
 
26.6
%
 
27.5
 %
 
27.2
 %
Provision for bad debts as a percentage of average outstanding balance (9)
16.1
%
 
11.0
%
 
7.0
%
 
8.5
 %
 
7.2
 %
Percent of bad debt charge-offs (net of recoveries) to average outstanding balance
10.1
%
 
8.0
%
 
8.0
%
 
7.5
 %
 
7.3
 %
Operating margin
8.1
%
 
13.6
%
 
11.6
%
 
3.7
 %
 
4.1
 %
Return on average equity (10)
9.4
%
 
17.6
%
 
12.7
%
 
(1.1
)%
 
(0.3
)%
Percent of retail sales financed in-house, including down payment
78.0
%
 
77.3
%
 
70.9
%
 
60.4
 %
 
61.2
 %
Weighted average monthly payment rate (11)
5.11
%
 
5.28
%
 
5.42
%
 
5.60
 %
 
5.37
 %
Number of stores:
 
 
 
 
 
 
 
 
 
Beginning of fiscal year
79

 
68

 
65

 
76

 
76

Opened
18

 
14

 
5

 

 

Closed
(7
)
 
(3
)
 
(2
)
 
(11
)
 

End of fiscal year
90

 
79

 
68

 
65

 
76

 

28


(1)
Fiscal year 2013 net income includes the write-off of unamortized financing fees of $0.9 million associated with amendment and restatement of our revolving credit facility.
(2)
Fiscal year 2012 net loss includes a prepayment premium and the write-off of unamortized discount and financing costs of $11.1 million associated with the repayment of a term loan.
(3)
Fiscal year 2011 net loss includes $4.3 million incurred related to financing facilities terminated and transactions that were not completed.
(4)
Operating income includes the following charges and credits:
 
Year Ended January 31,
(in thousands)
2015
 
2014
 
2013
 
2012
 
2011
Store and facility closure and relocation costs
$
3,646

 
$
2,117

 
$
869

 
$
7,096

 
$

Legal and professional fees related to the exploration of strategic alternatives and a class action lawsuit
1,135

 

 

 

 

Impairment of long-lived assets

 

 

 
2,019

 
2,321

Costs related to office relocation

 

 
1,202

 

 

Employee severance
909

 

 
628

 
813

 

Vehicle lease terminations

 

 
326

 

 

Charges and credits
$
5,690

 
$
2,117

 
$
3,025

 
$
9,928

 
$
2,321

 
(5)
Certain reclassifications have been made to prior year fiscal year balances to conform to the presentation in the current fiscal year that had an impact on previously reported working capital. On the consolidated balance sheets, long-term portion of deferred rent and certain long-term deferred revenue balances were reclassified out of current liabilities.
(6)
Same store sales is calculated by comparing the reported sales for all stores that were open during the entirety of a period and the entirety of the same period during the prior fiscal year. Sales from closed stores, if any, are removed from each period. Sales from relocated stores have been included in each period as each such store was relocated within the same general geographic market. Sales from expanded stores have also been included in each period.
(7)
Retail gross margin percentage is defined as the sum of product sales and repair service agreement commissions less cost of goods sold, including warehousing and occupancy cost, divided by the sum of product sales and repair service agreement commissions. The presentation of our retail gross margin and costs and expenses may not be comparable to other retailers since we do not include delivery, transportation and handling costs in cost of goods sold and we include the cost of merchandising our products, including amounts related to purchasing the product, in selling, general and administrative expense. Other retailers may include such costs as part of cost of goods sold.
(8)
Delivery, transportation and handling costs are now presented separately from selling, general and administrative expenses on our consolidated statements of operations, and we are providing delivery, transportation and handling costs as a percentage of product sales and repair service agreement commissions (the same basis used for calculating retail margins). Previously reported selling, general and administrative expense as a percent of total revenues included the impact delivery, transportation and handling costs (all prior periods presented have been recalculated to conform to the current presentation).
(9)
Amount does not include retail segment provision for bad debts.
(10)
Return on average equity is calculated as net income (loss) divided by the average of the beginning and ending equity.
(11)
Represents the weighted average of monthly gross cash collections received on the credit portfolio as a percentage of the average monthly beginning portfolio balance for each period.


29


ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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: general economic conditions impacting our customers or potential customers; our ability to execute a sale of our loan portfolio or another strategic transaction on favorable terms; our ability to continue existing customer financing programs 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. Additional risks and uncertainties are detailed in Part I, Item 1A. Risk Factors, of this Annual Report on Form 10-K and other filings that we make with the SEC. If one or more of these or other risks or uncertainties materialize (or the consequences of such a development changes), or should our underlying assumptions prove incorrect, actual outcomes may vary materially from those reflected in our forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We disclaim any intention or obligation to update publicly or revise such statements, whether as a result of new information, future events or otherwise. All forward-looking statements attributable to us, or to persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements.

Overview

We encourage you to read this Management's Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the accompanying consolidated financial statements and related notes. Our fiscal year ends on January 31. References to a fiscal year refer to the calendar year in which the fiscal year ends.

Executive Summary

Total revenues increased to $1.5 billion for fiscal year 2015 compared to $1.2 billion for fiscal year 2014. The increase in total revenue was primarily driven by new store openings, same store sales growth of 8.0% and credit revenue as a result of the increase in the average balance of the customer receivable portfolio offset by a 20 basis point decrease in portfolio yield.

Retail gross margin for fiscal year 2015 was 40.5%, an increase of 60 basis points over 39.9% in the previous 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 30.4% of product sales in the current year versus 26.0% in the prior year.

Delivery, transportation and handling costs as a percentage of product sales and repair service agreement commissions (the same basis used for calculating retail margins) was 4.3%, an increase of 60 basis points over 3.7% in the previous year. The increase was primarily driven by the shift in product sales mix and the increase in promotional offerings of free delivery.

Selling, general and administrative expenses ("SG&A") for fiscal year 2015 was $390.2 million, an increase of $86.8 million, or 28.6%, over the prior year. The SG&A increase in the retail segment was primarily due to the opening of new stores resulting in higher sales-driven compensation, advertising costs, and facility-related costs. The SG&A increase in the credit segment is the result of the addition of collections personnel to service the 27.9% increase in the customer receivable portfolio balance and anticipated near-term portfolio growth.

Provision for bad debts for fiscal year 2015 was $192.4 million, an increase of $96.2 million from the prior year. The year-over-year increase was impacted by the following:

30


A 37.2% increase in the average receivable portfolio balance resulting from new store openings and same store growth over the past 12 months;
A 22.5% increase in the balances originated during the year compared to the prior year;
An increase of 90 basis points in the percentage of customer accounts receivable balances greater than 60 days delinquent to 9.7% at January 31, 2015. Delinquency increased year-over-year across product categories, geographic regions, years of origination and many of the credit quality levels;
Higher expected charge-offs over the next twelve-month period as losses are occurring at a faster pace than previously experienced, due to the increased number of new customers and continued elevation of our delinquency rates;
The decision to pursue collection of past and future charged-off accounts internally rather than selling charged off accounts to a third-party. This change resulted in $7.6 million in additional provision recorded during the third quarter of fiscal 2015 as recoveries are expected to occur over an extended time period, which resulted in a reduction in expected cash recoveries over the next twelve months; and
The balance of customer receivables accounted for as troubled debt restructurings increased to $88.7 million, or 6.5% of the total portfolio balance, driving $11.8 million of the increase in provision for bad debts.

Net income for fiscal year 2015 was $58.5 million, or $1.59 per diluted share, which included charges and credits of $5.7 million, or $0.10 per diluted share on an after-tax basis, related to store closures and relocations, legal and professional fees related to our exploration of strategic alternatives and class action lawsuits, and severance charges. Net income for fiscal year 2014 was $93.4 million, or $2.54 per diluted share, which included charges and credits of $2.1 million, or $0.04 per diluted share on an after-tax basis, related to store closures and relocations, the relocation of certain of our corporate operations, and severance and other costs.

Recent Developments and Operational Changes

In October 2014, we announced that our Board of Directors authorized management to explore a full range of strategic alternatives to enhance value for stockholders, including, but not limited to, a sale of the Company, separating its retail and credit businesses or slowing store openings and returning capital to investors. The Company and its advisors have conducted a thorough review of strategic alternatives, including alternatives not identified in the October announcement. After appropriate diligence and consideration, the Board of Directors has authorized management to actively pursue the sale of all or a portion of the loan portfolio, or other refinancing of our loan portfolio. We have engaged BofA Merrill Lynch and Stephens Inc., as financial advisors, to assist with this process.

There is no assurance that we will complete a sale of all or a portion of the loan portfolio, or other refinancing, and no timetable has been set for completion of this process. The Board of Directors may also determine that no transaction is in the best interests of shareholders. We do not intend to comment further regarding the process, or any specific transaction, until such time as the Board of Directors deems disclosure is appropriate or necessary.

Additionally, the Board of Directors continues to search for additional senior leadership. For our Credit Risk Officer position, who will report to the Chief Operating Officer and will provide periodic reporting to the Credit Risk and Compliance Committee of the Board of Directors, we have an accepted offer from a candidate who is expected to join the Company in late April.
 
Company Initiatives

We have continued to focus on initiatives that we believe should positively impact future results, including:  
Opening expanded Conn’s HomePlus stores in new markets. During the twelve months ended January 31, 2015, we opened 18 new stores in Arizona (2), Colorado (6), Mississippi (1), Nevada (1), North Carolina (1), South Carolina (2), Tennessee (3) and Texas (2). We plan to open between 15 and 18 stores in fiscal year 2016;
During fiscal year 2016, we will discontinue offering video game products, digital cameras, and certain tablets, which have lower gross margins and higher delinquency rates when compared to our other product offerings. During fiscal year 2015, net sales and product margin from the sale of these products was approximately $50.0 million and $5.0 million, respectively;
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;
Offering 18-month and 24-month equal-payment, no-interest finance programs to certain higher credit quality borrowers;
Reduced the use of short-term, no-interest financing to improve interest income yield;

31


Raised interest rates charged to customers in certain markets 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.

Outlook

The broad appeal of the Conn’s store to our geographically diverse core demographic, the historical unit economics and current retail real estate market conditions provide us ample room for continued expansion. We plan to open 15 to 18 new stores during fiscal year 2016. There are many markets in the United States with similar demographic characteristics as our current successful store base, which provides substantial opportunities for future growth. We plan to continue to improve our operating results by leveraging our existing infrastructure and seeking to continually optimize the efficiency of our marketing, merchandising, sourcing, distribution and credit operations. As we penetrate new markets, we expect to increase our purchase volumes, achieve distribution efficiencies and strengthen our relationships with our key vendors. We also expect our increased store base and higher net sales to further leverage our existing corporate and regional infrastructure.

Results of Operations

The following tables present certain financial and other information, on a consolidated and segment basis:
Consolidated:
Year ended January 31,
 
Change
(in thousands)
2015
 
2014
 
2013
 
2015 vs. 2014
 
2014 vs. 2013
Revenues:
 
 
 
 
 
 
 
 
 
Total net sales
$
1,220,976

 
$
991,840

 
$
714,267

 
$
229,136

 
$
277,573

Finance charges and other
264,242

 
201,929

 
150,765

 
62,313

 
51,164

Total revenues
1,485,218

 
1,193,769

 
865,032

 
291,449

 
328,737

Cost and expenses: (1)
 

 
 

 
 

 
 

 
 

Cost of goods sold, including warehousing and occupancy costs
718,622

 
588,721

 
454,682

 
129,901

 
134,039

Cost of parts sold, including warehousing and occupancy costs
6,220

 
5,327

 
5,965

 
893

 
(638
)
Delivery, transportation and handling costs (2)
52,204

 
36,177

 
22,678

 
16,027

 
13,499

Selling, general and administrative expense
390,176

 
303,351

 
230,511

 
86,825

 
72,840

Provision for bad debts
192,439

 
96,224

 
47,659

 
96,215

 
48,565

Charges and credits
5,690

 
2,117

 
3,025

 
3,573

 
(908
)
Total costs and expenses
1,365,351

 
1,031,917

 
764,520

 
333,434

 
267,397

Operating income
119,867

 
161,852

 
100,512

 
(41,985
)
 
61,340

Interest expense
29,365

 
15,323

 
17,047

 
14,042

 
(1,724
)
Other expense, net

 
10

 
744

 
(10
)
 
(734
)
Income before income taxes
90,502

 
146,519

 
82,721

 
(56,017
)
 
63,798

Provision for income taxes
31,989

 
53,070

 
30,109

 
(21,081
)
 
$
22,961

Net income
$
58,513

 
$
93,449

 
$
52,612

 
$
(34,936
)
 
$
40,837


Retail Segment:
Year ended January 31,
 
Change
(in thousands)
2015
 
2014
 
2013
 
2015 vs. 2014
 
2014 vs. 2013
Revenues:
 
 
 
 
 
 
 
 
 
Product sales
$
1,117,909

 
$
903,917

 
$
649,516

 
$
213,992

 
$
254,401

Repair service agreement  commissions
90,009

 
75,671

 
51,648

 
14,338

 
24,023

Service revenues
13,058

 
12,252

 
13,103

 
806

 
(851
)
Total net sales
1,220,976

 
991,840

 
714,267

 
229,136

 
277,573

Finance charges and other
2,566

 
1,522

 
1,236

 
1,044

 
286

Total revenues
1,223,542

 
993,362

 
715,503

 
230,180

 
277,859

Costs and Expenses: (1)
 
 
 

 
 
 
 

 
 

Cost of goods, including warehousing and occupancy costs
718,622

 
588,721

 
454,682

 
129,901

 
134,039

Cost of parts, including warehousing and occupancy costs
6,220

 
5,327

 
5,965

 
893

 
(638
)
Delivery, transportation and handling costs (2)

52,204

 
36,177

 
22,678

 
16,027

 
13,499

Selling, general and administrative expense (3)
286,925

 
226,525

 
174,820

 
60,400

 
51,705

Provision for bad debts
551

 
468

 
758

 
83

 
(290
)
Charges and credits
5,690

 
2,117

 
2,498

 
3,573

 
(381
)
Total costs and expenses
1,070,212

 
859,335

 
661,401

 
210,877

 
197,934

Operating income
153,330

 
134,027

 
54,102

 
19,303

 
79,925

Other expense (income), net

 
10

 
(153
)
 
(10
)
 
163

Income before income taxes
$
153,330

 
$
134,017

 
$
54,255

 
$
19,313

 
$
79,762

Number of stores:
 
 
 
 
 
 
 
 
 
Beginning of fiscal year
79

 
68

 
65

 
 
 
 
Opened
18

 
14

 
5

 
 
 
 
Closed
(7
)
 
(3
)
 
(2
)
 
 
 
 
End of fiscal year
90

 
79

 
68

 
 
 
 

Credit Segment:
Year ended January 31,
 
Change
(in thousands)
2015
 
2014
 
2013
 
2015 vs. 2014
 
2014 vs. 2013
Revenues -
 
 
 
 
 
 
 
 
 
Finance charges and other revenues
$
261,676

 
$
200,407

 
$
149,529

 
$
61,269

 
$
50,878

Costs and expenses:
 
 
 
 
 
 
 
 
 
Selling, general and administrative expense (3)
103,251

 
76,826

 
55,691

 
26,425

 
21,135

Provision for bad debts
191,888

 
95,756

 
46,901

 
96,132

 
48,855

Charges and credits

 

 
527

 

 
(527
)
Total cost and expenses
295,139

 
172,582

 
103,119

 
122,557

 
69,463

Operating income (loss)
(33,463
)
 
27,825

 
46,410

 
(61,288
)
 
(18,585
)
Interest expense
29,365

 
15,323

 
17,047

 
14,042

 
(1,724
)
Other expense, net

 

 

 

 

Income (loss) before income taxes
$
(62,828
)
 
$
12,502

 
$
28,466

 
$
(75,330
)
 
$
(16,861
)
 
(1)
The presentation of our costs and expenses may not be comparable to other retailers since we do not include the cost of delivery, transportation and handling costs as part of cost of goods. Similarly, we include the cost of merchandising our products, including amounts related to purchasing the product, in selling, general and administrative expense. Other retailers may include such costs as part of cost of goods.

32


(2)
Delivery, transportation and handling costs, previously included in selling, general and administrative expenses, is shown separately.
(3)
Selling, general and administrative 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 $12.4 million, $11.4 million and $9.0 million for the years ended January 31, 2015, 2014 and 2013, respectively. The amount of reimbursement made to the retail segment by the credit segment was $29.8 million, $21.7 million and $16.7 million for the years ended January 31, 2015, 2014 and 2013, respectively.

Year ended January 31, 2015 compared to the year ended January 31, 2014

Revenues. The following table provides an analysis of retail net sales by product category in each period, including repair service agreement commissions and service revenues, expressed both in dollar amounts and as a percent of total net sales:  
 
Year Ended January 31,



%

Same Store
(dollars in thousands)
2015

% of Total

2014

% of Total

Change

Change

% Change
Furniture and mattress
$
339,414

 
27.8
%
 
$
235,257

 
23.7
%
 
$
104,157

 
44.3
 %
 
22.5
 %
Home appliance
328,742

 
26.9

 
258,713

 
26.1

 
70,029

 
27.1

 
14.8

Consumer electronic
317,482

 
26.0

 
269,889

 
27.2

 
47,593

 
17.6

 
5.2

Home office
108,700

 
8.9

 
102,103

 
10.3

 
6,597

 
6.5

 
(3.0
)
Other
23,571

 
1.9

 
37,955

 
3.8

 
(14,384
)
 
(37.9
)
 
(50.5
)
Product sales
1,117,909

 
91.5

 
903,917

 
91.1

 
213,992

 
23.7

 
8.3

Repair service agreement commissions
90,009

 
7.4

 
75,671

 
7.6

 
14,338

 
18.9

 
5.9

Service revenues
13,058

 
1.1

 
12,252

 
1.3

 
806

 
6.6

 
 

Total net sales
$
1,220,976

 
100.0
%
 
$
991,840

 
100.0
%
 
$
229,136

 
23.1
 %
 
8.0
 %
 
The following provides a summary of items impacting our product categories during the year ended January 31, 2015, compared to the prior fiscal year: 
Furniture unit volume increased 35.1% and the average selling price increased 7.5%;
Mattress unit volume increased 38.1% and the average selling price increased 9.1%;
Home appliances unit volume increased 40.5% offset by a 9.7% decrease in average selling price. Laundry sales increased 30.5%, refrigeration sales increased 26.6%, and cooking sales increased 22.6%;
Consumer electronic unit volume increased 13.5% and the average selling price increased 3.8%. Television sales increased 11.6% in total and was flat on a same store basis. Gaming hardware sales increased 347.1%;
Home office average selling priced increased 16.1% offset by a 8.2% decrease in unit volume. Computer sales increased 8.9% while tablet sales declined 40.4%;
Other sales declined due to the exit of the lawn equipment category, which reduced year-over-year sales by $16.9 million;
The increase in repair service agreement commissions was driven primarily by increased product sales; and
Service revenue increased by 6.6% due to increased service technician staffing and in-house performance of certain warranty repair services.

The following table provides the change of the components of finance charges and other revenues:
 
Year ended January 31,
 
 
(in thousands)
2015
 
2014
 
Change
Interest income and fees
$
211,063

 
$
155,703

 
$
55,360

Insurance commissions
50,613

 
44,704

 
5,909

Other income
2,566

 
1,522

 
1,044

Finance charges and other revenues
$
264,242

 
$
201,929

 
$
62,313

 

33


Interest income and fees of the credit segment increased over the prior year level primarily driven by a 37.2% increase in the average balance of the portfolio. Portfolio interest and fee yield declined 20 basis points year-over-year as a result of higher provision for uncollectible interest. Receivables under our no-interest finance programs averaged 35.1% of the portfolio balance for the year ended January 31, 2015, which compares to 32.2% in the prior year.

The following table provides key portfolio performance information: 
 
Year ended January 31,
(dollars in thousands)
2015

2014
Interest income and fees
$
211,063

 
$
155,703

Net charge-offs
(120,112
)
 
(69,430
)
Interest expense
(29,365
)
 
(15,323
)
Net portfolio yield
$
61,586

 
$
70,950

Average portfolio balance
$
1,193,211

 
$
869,561

Interest income and fee yield
17.7
%
 
17.9
%
Net charge-off %
10.1
%
 
8.0
%
 
Cost of Goods and Service Parts Sold and Gross Margin
 
Year ended January 31,
 
 
(dollars in thousands)
2015
 
2014
 
Change
Cost of goods sold, including warehousing and occupancy costs
$
718,622

 
$
588,721

 
$
129,901

Product gross margin percentage
35.7
%
 
34.9
%
 
 

Cost of service parts sold, including warehousing and occupancy costs
$
6,220

 
$
5,327

 
$
893

Service gross margin percentage
47.6
%
 
43.5
%
 
 
 
Product gross margin increased 80 basis points for the twelve months ended January 31, 2015. Product gross margin was favorably impacted by a shift in product mix, primarily towards the furniture and mattress category. Furniture and mattress sales generate higher product margins and accounted for 30.4% of total product sales for the year ended January 31, 2015 compared to 26.0% in the prior year.

Delivery, transportation and handling costs
 
Year ended January 31,
 
 
(dollars in thousands)
2015
 
2014
 
Change
Delivery, transportation and handling costs
$
52,204

 
$
36,177

 
$
16,027

As a percent of retail product sales and repair service agreement commissions
4.3
%
 
3.7
%
 
 


The increase in delivery, transportation and handling costs in the retail segment was primarily due to the opening of new stores, the shift in product sales mix, and the increase in promotional offerings of free delivery.

Selling, general and administrative expenses
 
Year ended January 31,
 
 
(dollars in thousands)
2015
 
2014
 
Change
Selling, general and administrative expenses:
 
 
 
 
 
Retail segment
$
286,925

 
$
226,525

 
$
60,400

Credit segment
103,251

 
76,826

 
26,425

Selling, general and administrative expenses - Consolidated
$
390,176

 
$
303,351

 
$
86,825

As a percent of total revenues
26.3
%
 
25.4
%
 
 



34


The SG&A increase in the retail segment was primarily due to the opening of new stores resulting in higher sales-driven compensation, advertising costs, and facility-related costs. As a percent of segment revenues, SG&A for the retail segment in the current period increased 70 basis points as compared to the prior-year period primarily due to costs associated with store openings in new markets.

The increase in SG&A for the credit segment was driven by the hiring of additional collections personnel to service the 27.9% year-over-year increase in the customer receivable portfolio balance and anticipated near-term portfolio growth.

Provision for Bad Debts
 
Year ended January 31,
 
 
(dollars in thousands)
2015
 
2014
 
Change
Provision for bad debts:
 
 
 
 
 
Retail Segment
$
551

 
$
468

 
$
83

Credit Segment
191,888

 
95,756

 
96,132

Provision for bad debts - Consolidated
$
192,439

 
$
96,224

 
$
96,215

Provision for bad debts - Credit segment, as a percent of average portfolio balance
16.1
%
 
11.0
%
 
 

 
The year-over-year increase in provision for bad debts was impacted by the following:
A 37.2% increase in the average receivable portfolio balance resulting from new store openings and same store growth over the past 12 months;
A 22.5% increase in the balances originated during the year compared to the prior year;
An increase of 90 basis points in the percentage of customer accounts receivable balances greater than 60 days delinquent to 9.7% at January 31, 2015. Delinquency increased year-over-year across product categories, geographic regions, years of origination and many of the credit quality levels;
Higher expected charge-offs over the next twelve-month period as losses are occurring at a faster pace than previously experienced, due to the increased number of new customers and continued elevation of our delinquency rates;
The decision to pursue collection of past and future charged-off accounts internally rather than selling charged off accounts to a third-party. This change resulted in $7.6 million in additional provision recorded during the third quarter of fiscal 2015 as recoveries are expected to occur over an extended time period, which resulted in a reduction in expected cash recoveries over the next twelve months; and
The balance of customer receivables accounted for as troubled debt restructurings increased to $88.7 million, or 6.5% of the total portfolio balance, driving $11.8 million of the increase in provision for bad debts.

Charges and credits
 
Year ended January 31,

 
(in thousands)
2015

2014

Change
Store and facility closure and relocation costs
$
3,646

 
$
2,117

 
$
1,529

Legal and professional fees related to the exploration of strategic alternative and class action lawsuits
1,135

 

 
1,135

Employee severance
909

 

 
909


$
5,690

 
$
2,117

 
$
3,573

 
During fiscal years 2015 and 2014, we have closed and relocated a number of under-performing retail locations and have recorded the related charges. In connection with prior closures, we adjust the related lease obligations as more information becomes available. In addition, during fiscal year 2015 we had charges for severance and costs associated with legal and professional fees related to the Company's exploration of strategic alternatives and class action lawsuits.

Interest Expense

Net interest expense for the year ended January 31, 2015 increased by $14.0 million primarily due to an increase in the average debt balance outstanding and an increase in the effective interest rate. The increase in the effective interest rate was primarily due to our issuance of Senior Notes on July 1, 2014.
 

35


Provision for Income Taxes
 
Year ended January 31,
 
 
(dollars in thousands)
2015
 
2014
 
Change
Provision for income taxes
$
31,989

 
$
53,070

 
$
(21,081
)
As a percent of income before income taxes
35.3
%
 
36.2
%
 
 


The income tax rate for the year ended January 31, 2015 included a tax benefit due to the reversal of the valuation allowance against our net deferred tax assets related to individual state net operating loss carryfforwards.

Year ended January 31, 2014 compared to the year ended January 31, 2013

Revenues. The following table provides an analysis of retail net sales by product category in each period, including repair service agreement commissions and service revenues, expressed both in dollar amounts and as a percent of total net sales:  
 
Year ended January 31,

 

%

Same store
(dollars in thousands)
2014

% of Total

2013

% of Total

Change

Change

% change
Furniture and mattress
$
235,257


23.7
%

$
132,583


18.6
%

$
102,674


77.4
 %

51.0
%
Home appliance
258,713


26.1


199,077


27.9


59,636


30.0


19.4

Consumer electronic
269,889


27.2


218,506


30.6


51,383


23.5


11.9

Home office
102,103


10.3


65,381


9.1


36,722


56.2


42.4

Other
37,955


3.8


33,969


4.8


3,986


11.7


3.2

Total product sales
903,917


91.1


649,516


91.0


254,401


39.2


24.8

Repair service agreement commissions
75,671