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EX-10.1 - EXHIBIT 10.1 - CONNS INCconn2015731ex101.htm
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EX-31.2 - EXHIBIT 31.2 - CONNS INCconn2015731ex312.htm
EX-10.2 - EXHIBIT 10.2 - CONNS INCconn2015731ex102.htm
EX-32.1 - EXHIBIT 32.1 - CONNS INCconn2015731ex321.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION 
Washington, D.C.  20549 

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2015

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

For the transition period from _____ to _____

Commission File Number: 1-34956
CONN'S, INC.
(Exact name of registrant as specified in its charter)

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

4055 Technology Forest Blvd, Suite 210, The Woodlands, Texas, 77381
(address of principal executive offices)

(936) 230-5899
(Registrants telephone number, including area code)

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

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

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

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of September 3, 2015
Class
 
Outstanding
Common stock, $0.01 par value per share
 
36,515,901



CONN'S, INC. AND SUBSIDIARIES

FORM 10-Q
FOR THE FISCAL QUARTER ENDED JULY 31, 2015

TABLE OF CONTENTS

 
 
 
 
Page No.
PART I.
 
FINANCIAL INFORMATION
 
 
Item 1.
 
Financial Statements
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
Item 3.
 
 
Item 4.
 
 
PART II.
 
OTHER INFORMATION
 
 
Item 1.
 
 
Item 1A.
 
 
Item 2.
 
 
Item 3.
 
 
Item 4.
 
 
Item 5.
 
 
Item 6.
 
 
 
 
 
 
 
 
 
This Quarterly Report on Form 10-Q may include 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.




PART I.
FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

CONN'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except per share data)
 
July 31,
2015
 
January 31,
2015
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
6,868

 
$
12,223

Customer accounts receivable, net of allowances
685,933

 
643,094

Other accounts receivable
78,939

 
67,703

Inventories
173,577

 
159,068

Deferred income taxes
22,504

 
20,040

Income taxes recoverable
615

 
11,058

Prepaid expenses and other current assets
17,198

 
12,529

Total current assets
985,634

 
925,715

Long-term portion of customer accounts receivable, net of allowances
583,082

 
558,257

Property and equipment, net
133,674

 
120,218

Deferred income taxes
41,386

 
33,505

Other assets
8,296

 
9,627

Total assets
$
1,752,072

 
$
1,647,322

Liabilities and Stockholders’ Equity
 

 
 

Current liabilities:
 

 
 

Current portion of debt
$
789

 
$
395

Accounts payable
105,311

 
85,355

Accrued compensation and related expenses
10,366

 
12,151

Accrued expenses
31,309

 
27,479

Income taxes payable
3,093

 
3,450

Deferred revenues and other credits
16,215

 
16,179

Total current liabilities
167,083

 
145,009

Deferred rent
62,669

 
52,792

Long-term debt
811,240

 
774,015

Other long-term liabilities
22,459

 
21,836

Total liabilities
1,063,451

 
993,652

Commitments and contingencies
 

 
 

Stockholders’ equity:
 

 
 

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

 

Common stock ($0.01 par value, 100,000 shares authorized; 36,506 and 36,352 shares issued, respectively)
365

 
364

Additional paid-in capital
234,130

 
231,395

Retained earnings
454,126

 
421,911

Total stockholders’ equity
688,621

 
653,670

Total liabilities and stockholders' equity
$
1,752,072

 
$
1,647,322


See notes to condensed consolidated financial statements.

1


CONN'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
 
Three Months Ended 
 July 31,
 
Six Months Ended 
 July 31,
 
2015
 
2014
 
2015
 
2014
Revenues:
 
 
 
 
 
 
 
Product sales
$
293,739

 
$
264,166

 
$
565,365

 
$
518,386

Repair service agreement commissions
27,756

 
20,732

 
51,552

 
40,986

Service revenues
3,451

 
3,383

 
6,508

 
6,538

Total net sales
324,946

 
288,281

 
623,425

 
565,910

Finance charges and other revenues
71,104

 
64,683

 
137,701

 
122,502

Total revenues
396,050

 
352,964

 
761,126

 
688,412

Costs and expenses:
 

 
 

 
 
 
 
Cost of goods sold, including warehousing and occupancy costs
187,124

 
168,717

 
360,596

 
329,499

Cost of service parts sold, including warehousing and occupancy costs
1,550

 
1,871

 
2,862

 
3,290

Delivery, transportation and handling costs
13,787

 
13,164

 
26,136

 
25,327

Selling, general and administrative expenses
104,832

 
94,139

 
200,507

 
182,180

Provision for bad debts
51,646

 
39,585

 
99,189

 
61,843

Charges and credits
1,013

 
1,492

 
1,632

 
3,246

Total costs and expenses
359,952

 
318,968

 
690,922

 
605,385

Operating income
36,098

 
33,996

 
70,204

 
83,027

Interest expense
10,055

 
6,247

 
19,483

 
10,971

Income before income taxes
26,043

 
27,749

 
50,721

 
72,056

Provision for income taxes
9,505

 
10,099

 
18,506

 
25,937

Net income
$
16,538

 
$
17,650

 
$
32,215

 
$
46,119

Earnings per share:
 

 
 

 
 
 
 
Basic
$
0.45

 
$
0.49

 
$
0.88

 
$
1.27

Diluted
$
0.45

 
$
0.48

 
$
0.87

 
$
1.25

Weighted average common shares outstanding:
 

 
 

 
 
 
 
Basic
36,466

 
36,209

 
36,416

 
36,172

Diluted
37,042

 
36,972

 
36,967

 
36,951


See notes to condensed consolidated financial statements.

2


CONN'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(in thousands)
 
Three Months Ended 
 July 31,
 
Six Months Ended 
 July 31,
 
2015
 
2014
 
2015
 
2014
Net income
$
16,538

 
$
17,650

 
$
32,215

 
$
46,119

Change in fair value of hedges

 
58

 

 
116

Impact of provision for income taxes on comprehensive income

 
(21
)
 

 
(41
)
Comprehensive income
$
16,538

 
$
17,687

 
$
32,215

 
$
46,194


See notes to condensed consolidated financial statements.

3


CONN'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
 
Six Months Ended 
 July 31,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
32,215

 
$
46,119

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
12,245

 
10,655

Provision for bad debts and uncollectible interest
116,217

 
73,552

Stock-based compensation expense
1,805

 
2,241

Excess tax benefits from stock-based compensation
(474
)
 
(952
)
Charges, net of credits, for store and facility closures and relocations
425

 
3,246

Deferred income taxes
(10,346
)
 
(12,019
)
Loss (gain) on sale of property and equipment
(517
)
 
23

Tenant improvement allowances received from landlords
7,212

 
5,264

Change in operating assets and liabilities:
 

 
 

Customer accounts receivable
(183,881
)
 
(168,463
)
Other accounts receivable
(7,580
)
 
1,501

Inventories
(14,509
)
 
(17,094
)
Other assets
201

 
(1,385
)
Accounts payable
23,658

 
13,102

Accrued expenses
507

 
(8,848
)
Income taxes
10,086

 
(4,109
)
Deferred revenues and other credits
(880
)
 
2,050

     Deferred rent
170

 
2,441

Net cash used in operating activities
(13,446
)
 
(52,676
)
Cash flows from investing activities:
 

 
 

Purchase of property and equipment
(29,656
)
 
(38,120
)
Proceeds from sale of property
35

 
19,279

Net cash used in investing activities
(29,621
)
 
(18,841
)
Cash flows from financing activities:
 

 
 

Borrowings from revolving credit facility
220,246

 
215,983

Payments on revolving credit facility
(184,450
)
 
(389,750
)
Proceeds from issuance of senior notes, net of issuance costs

 
243,400

Proceeds from stock issued under employee benefit plans
1,688

 
607

Excess tax benefits from stock-based compensation
474

 
952

Other
(246
)
 
(1,381
)
Net cash provided by financing activities
37,712

 
69,811

Net change in cash and cash equivalents
(5,355
)
 
(1,706
)
Cash and cash equivalents, beginning of period
12,223

 
5,727

Cash and cash equivalents, end of period
$
6,868

 
$
4,021

Non-cash investing and financing activities:
 
 
 
Capital lease asset additions and related obligations
$
1,720

 
$
304

Property and equipment purchases not yet paid
$
3,406

 
$


See notes to condensed consolidated financial statements.

4


CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     Summary of Significant Accounting Policies
 
Business. 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, under-served population of credit constrained consumers who typically have limited banking options.

We operate two reportable segments: retail and credit. Our retail stores bear the "Conn’s" or "Conn’s HomePlus" name and deliver the same products and services to a common customer group. All of the retail stores follow the same procedures and methods in managing their operations. Our retail business and credit business are operated independently from each other. The credit segment is dedicated to providing short- and medium-term financing for our retail customers. The retail segment is not involved in credit approval decisions. Our management evaluates performance and allocates resources based on the operating results of the retail and credit segments.

Subsequent Events. On September 4, 2015, we entered into an agreement to securitize $1.4 billion of customer receivables, with closing expected on or about September 10, 2015. We will transfer the securitized customer receivables to a bankruptcy-remote variable-interest entity ("VIE"). The VIE will issue bonds at a face amount of $1.12 billion secured by the portfolio balance, which will result in net proceeds to us of approximately $1.08 billion, net of transaction costs, and will be used to pay down the entire balance on our revolving credit facility. The lead partner in this deal was Credit Suisse, which will purchase the issued bonds at an advance rate of 77.5% of the outstanding customer receivables portfolio balance, which is approximately 89.5% of the customer accounts receivable balance net of allowances and deferred interest. We will initially hold the residual equity of the VIE, which we are in the process of selling. We may elect to retain all or a portion of the residual equity of the VIE if that is determined to be in our best economic interest. We also plan to execute periodic securitizations of future originated loans.

Under the terms of the securitization transaction, the customer loan principal and interest payment cash flows will go first to the servicer and the holders of the securitization bonds, and then to the residual equity holders. We will retain the servicing of the securitized loan portfolio and will receive a monthly fee of 4.75% (annualized) based on the outstanding balance of the securitized loans. In addition, we will retain all credit insurance income together with certain recoveries related to credit insurance and repair service agreements on charged-off accounts previously reflected as a reduction of net charge-offs.

While holding all or a significant portion of the residual equity of the VIE, we will consolidate the VIE within our financial statements. If we sell all or a significant portion of the residual equity, we will assess if the transaction achieves sale treatment for accounting purposes, which may result in deconsolidation of the VIE. There is no assurance that we will complete a sale of all or a portion of the residual equity of the VIE and there is no assurance we will achieve sale treatment, and no timetable has been set for completion of this process. As a result, we have determined that the loan portfolio does not meet the criteria for treatment as an asset held for sale, which would require recording at the lower of cost, net of allowances, or fair value. We have not made an adjustment to the customer accounts receivable balance as a result of the transaction or in anticipation of any gain or loss that may occur should a sale of the residual portion of the VIE be completed.

On September 2, 2015, the Board of Directors also an aggregate repurchase program of up to $75.0 million (the maximum amount permitted under the Company’s credit facility and senior note indenture) consisting of (i) shares of the Company's outstanding common stock; (ii) 7.250% Senior Notes Due 2022; or (iii) a combination thereof. Common stock and senior note repurchases may be made from time to time on the open market or through privately negotiated transactions, at management’s discretion, based on market and business conditions. We have no obligation to repurchase shares or senior notes under the authorization, and the timing and value of the shares and notes that are repurchased will be at the discretion of management and will depend on a number of factors, including the price of the Company's common stock and the senior notes. We may suspend or discontinue repurchases at any time without notice.

Basis of Presentation. The accompanying unaudited, condensed consolidated financial statements of Conn’s, Inc. and its wholly-owned subsidiaries have been prepared by management in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, we do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The accompanying financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are

5

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


of a normal recurring nature, except as otherwise described herein. The condensed consolidated financial position, results of operations and cash flows for these interim periods are not necessarily indicative of the results that may be expected in future periods. The balance sheet at January 31, 2015 has been derived from the audited financial statements at that date. The financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2015, filed with the United States Securities and Exchange Commission (the "SEC") on April 1, 2015.

Accounting Policies. The complete summary of significant accounting policies is included in the notes to the consolidated financial statements as presented in our Annual Report on Form 10-K for the fiscal year ended January 31, 2015.

Principles of Consolidation. The consolidated financial statements include the accounts of Conn’s, Inc. and its wholly-owned subsidiaries. Conn’s, Inc., a Delaware corporation, is a holding company with no independent assets or operations other than its investments in its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Fiscal Year. Our fiscal year ends on January 31. References to a fiscal year refer to the calendar year in which the fiscal year ends.
 
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Earnings per Share. Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share include the potential dilutive effects of any stock options and restricted stock units granted, which is calculated using the treasury-stock method. The following table sets forth the shares outstanding for the earnings per share calculations:
 
Three Months Ended 
 July 31,
 
Six Months Ended 
 July 31,
(in thousands)
2015
 
2014
 
2015
 
2014
Weighted average common shares outstanding - Basic
36,466

 
36,209

 
36,416

 
36,172

Dilutive effect of stock options and restricted stock units
576

 
763

 
551

 
779

Weighted average common shares outstanding - Diluted
37,042

 
36,972

 
36,967

 
36,951


For the three months ended July 31, 2015 and 2014, the weighted average number of stock options and restricted stock units not included in the calculation due to their anti-dilutive effect was 69,000 and 80,000, respectively. For the six months ended July 31, 2015 and 2014, the weighted average number of stock options and restricted stock units not included in the calculation due to their anti-dilutive effect was 187,000 and 58,000, respectively.

Customer accounts receivable and related allowance for doubtful accounts. Customer accounts receivable are originated at the time of sale and delivery of the various products and services. Based on contractual terms, we record the amount of principal and accrued interest on customer receivables that is expected to be collected within the next twelve months in current assets with the remaining balance in long-term assets on the consolidated balance sheet. Customer receivables are considered delinquent if a payment has not been received on the scheduled due date. Accounts that are delinquent more than 209 days as of the end of a month are charged-off against the allowance for doubtful accounts and interest accrued subsequent to the last payment is reversed and charged against the allowance for uncollectible interest.
 
In an effort to mitigate losses on our accounts receivable, we may make loan modifications to a borrower experiencing financial difficulty. The loan modifications are intended to maximize net cash flow after expenses and avoid the need to repossess collateral or exercise legal remedies available to us. We may extend the loan term, refinance or otherwise re-age an account. We consider accounts that have been re-aged in excess of three months or refinanced as Troubled Debt Restructurings ("TDR" or "Restructured Accounts").
 
We record an allowance for doubtful accounts, including estimated uncollectible interest, for our non-TDR customer accounts receivable that we expect to charge-off over the next twelve months based on our historical cash collection and net loss experience using a projection of monthly delinquency performance, cash collections and losses. In addition to pre-charge-off cash collections and charge-off information, estimates of post-charge-off recoveries, including cash payments, amounts realized from the repossession of the products financed and payments received under credit insurance policies are also considered. We determine allowances for those accounts that are TDR based on the discounted present value of cash flows expected to be collected over the

6

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


life of those accounts. The excess of the carrying amount over the discounted cash flow amount is recorded as an allowance for loss on those accounts.

Interest income on customer accounts receivableInterest income is accrued using the interest method for installment contracts and is reflected in finance charges and other. Typically, interest income is accrued until the contract or account is paid off or charged-off. We provide an allowance for estimated uncollectible interest. Interest income on installment contracts with our customers is calculated using the rule of 78s. In order to convert the interest income recognized to the interest method, we have recorded the excess earnings of rule of 78s over the interest method as deferred revenue on our balance sheets. This deferred interest will ultimately be brought into income as the accounts pay off or accounts amortize to the point that interest income under the interest method exceeds that which is being earned under rule of 78s. At July 31, 2015 and January 31, 2015, there was $11.1 million and $11.2 million, respectively, of deferred interest included in deferred revenues and other credits and other long-term liabilities.

We offer 12-month no-interest finance programs. If the customer is delinquent in making a scheduled monthly payment or does not repay the principal in full by the end of the no-interest program period (grace periods are provided), the account does not qualify for the no-interest provision and the terms of the account revert back to those of the executed installment contract resulting in interest over the entire term. Interest income is recognized based on our historical experience related to customers that fail to satisfy the requirements of the programs.

In October 2014, we began offering 18- and 24-month equal-payment, no-interest finance programs to certain higher credit quality borrowers, which are discounted to their present value at origination, resulting in a reduction in sales and customer receivables, and the discount amount is amortized into finance charges and other revenues over the term of the contract. If a customer is delinquent in making a scheduled monthly payment (grace periods are provided), the account begins accruing interest based on the contract rate from the date of the last payment made, which is a higher rate than the discount rate.

We recognize interest income on TDR accounts using the interest income method, which requires reporting interest income equal to the increase in the net carrying amount of the loan attributable to the passage of time. Cash proceeds and other adjustments are applied to the net carrying amount such that it always equals the present value of expected future cash flows.

We typically only place accounts in non-accrual status when legally required. Payments received on non-accrual loans will be applied to principal and reduce the amount of the loan. Interest accrual is resumed on those accounts once a legally-mandated settlement arrangement is reached or other payment arrangements are made with the customer. At July 31, 2015 and January 31, 2015, customer receivables carried in non-accrual status were $16.3 million and $13.7 million, respectively. At July 31, 2015 and January 31, 2015, customer receivables that were past due 90 days or more and still accruing interest totaled $93.6 million and $97.1 million, respectively.

Fair Value of Financial Instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value are categorized using defined hierarchical levels related to subjectivity associated with the inputs to fair value measurements as follows:  
Level 1 – Quoted prices available in active markets for identical assets or liabilities
Level 2 – Pricing inputs not quoted in active markets but either directly or indirectly observable
Level 3 – Significant inputs to pricing that have little or no transparency with inputs requiring significant management judgment or estimation.

The fair value of cash and cash equivalents and accounts payable approximate their carrying amounts because of the short maturity of these instruments. The fair value of customer accounts receivables, determined using a Level 3 discounted cash flow analysis using data from the recent securitization transaction, approximates their carrying amount. The fair value of our revolving credit facility approximates carrying value based on the current borrowing rate for similar types of borrowing arrangements. At July 31, 2015, the fair value of our 7.25% senior notes, which was determined using Level 1 inputs, was $238.8 million as compared to the carrying value of $250.0 million, excluding the impact of the related discount.

Stockholders' Rights Plan. On October 6, 2014, we adopted a one-year stockholders' rights plan whereby the Board of Directors of the Company ("Board of Directors") declared a dividend of one right for each outstanding share of the Company's common stock to stockholders of record on October 16, 2014. Each right entitles the registered holder to purchase from the Company one one-thousandth of a share of the Company's Series A Junior Participating Preferred Stock at a price of $155.00 per right. The rights are not presently exercisable and remain attached to the shares of common stock until the occurrence of certain triggering events. Subject to certain exceptions, the rights will separate from the shares of common stock and a distribution date

7

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


will be deemed to occur on the earlier of (i) the tenth business day after a public announcement or filing that a person or group has become a beneficial owner of 10% or more of the Company's outstanding common stock after the adoption of the stockholders’ rights plan, or (ii) the tenth business day (or such later date as the Board of Directors may determine) after the commencement of, or announcement of an intention to commence, a tender or exchange offer that, if consummated, would result in a person or group becoming a beneficial owner of 10% or more of the Company's outstanding common stock. The rights will expire on October 5, 2015, unless exercised, redeemed or exchanged prior to that time. The Board of Directors may terminate the rights plan before the expiration date or extend the expiration date. The rights have no voting or dividend privileges and, unless and until they become exercisable, have no dilutive effect on the earnings of the Company.

On September 2, 2015, the Board of Directors approved the termination of the Company’s stockholder rights plan, effective at the close of the securitization transaction, currently anticipated to be on or about September 10, 2015.

Related Party Transactions. From time to time, we have engaged Stephens Inc. to act as our financial advisor. Stephens Inc. and its affiliates beneficially own shares of our common stock and one of our board of directors, Douglas H. Martin, is a Senior Managing Director of Stephens Inc. On March 31, 2015, we announced that we had engaged Stephens Inc., as a financial advisor to assist us with the process of pursuing a sale of all or a portion of the loan portfolio, or other refinancing of our loan portfolio. We have agreed to pay Stephens Inc. a success fee in the event we consummate one or more of these transactions. The disinterested members of our board of directors have determined that it is in the Company’s best interest to engage Stephens Inc. in such capacity to assist us in analyzing and advising us with respect to the opportunity. The engagement of Stephens Inc. as financial advisor was approved by the independent members of our board of directors after full disclosure of the conflicts of interests of the related parties in the transaction. Douglas H. Martin did not participate in the approval process.

Recent Accounting Pronouncements. In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers, which provides a single comprehensive accounting standard for revenue recognition for contracts with customers and supersedes current guidance. Upon adoption of ASU 2014-09, entities are required to recognize revenue using the following comprehensive model: (1) identify contracts with customers, (2) identify the performance obligations in contracts, (3) determine transaction price, (4) allocate the transaction price to the performance obligations, and (5) recognize revenue as each performance obligation is satisfied. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of Effective Date, which defers the effective date of ASU 2015-14 by one year and allows early adoption on a limited basis. ASU 2014-09 is now effective for us beginning in the first quarter of fiscal year 2019 and will result in retrospective application, either in the form of recasting all prior periods presented or a cumulative adjustment to equity in the period of adoption. We are currently assessing the impact the new standard will have on our financial statements.

In February 2015, the FASB issued ASU 2015-02, Consolidation: Amendments to the Consolidation Analysis, which focuses on a reporting company’s consolidation evaluation to determine whether they should consolidate certain legal entities. ASU 2014-09 is effective for us beginning in the first quarter of fiscal year 2017 and allows early adoption, including adoption in an interim period. We have early adopted ASU 2015-02 beginning with the quarter ended July 31, 2015, which did not have an impact to our financial statements.

Reclassifications. Certain reclassifications have been made to prior year fiscal year amounts to conform to the presentation in the current fiscal year. On the consolidated statement of operations, delivery, transportation and handling costs is shown separately and was reclassified out of selling, general and administrative expenses. On the consolidated statements of cash flows, tenant improvement allowances received from landlords, changes in other accounts receivables and changes in deferred rents is shown separately and was reclassified out of changes in other assets and accrued expenses. These reclassifications did not impact consolidated operating income, net income, or net cash used in operating activities. 
  

8

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


2.     Charges and Credits

Charges and credits consisted of the following:
 
Three Months Ended 
 July 31,
 
Six Months Ended 
 July 31,
(in thousands)
2015
 
2014
 
2015
 
2014
Store and facility closure and relocation costs
$

 
$
1,492

 
$
425

 
$
3,246

Legal and professional fees related to the exploration of strategic alternatives and securities-related litigation
1,013

 

 
1,207

 

 
$
1,013

 
$
1,492

 
$
1,632

 
$
3,246


3.     Finance Charges and Other Revenues
 
Finance charges and other revenues consisted of the following:
 
Three Months Ended 
 July 31,
 
Six Months Ended 
 July 31,
(in thousands)
2015
 
2014
 
2015
 
2014
Interest income and fees
$
57,383

 
$
52,226

 
$
112,802

 
$
98,716

Insurance commissions
13,062

 
12,113

 
24,091

 
22,976

Other revenues
659

 
344

 
808

 
810

 
$
71,104

 
$
64,683

 
$
137,701

 
$
122,502


Interest income and fees and insurance commissions are derived from the credit segment operations, whereas other revenues is derived from the retail segment operations. For the three months ended July 31, 2015 and 2014, interest income and fees was reduced by provisions for uncollectible interest of $8.9 million and $6.6 million, respectively. For the six months ended July 31, 2015 and 2014, interest income and fees was reduced by provisions for uncollectible interest of $17.4 million and $12.0 million, respectively. For the three months ended July 31, 2015 and 2014, the amount included in interest income and fees related to TDR accounts was $3.3 million and $1.8 million, respectively. For the six months ended July 31, 2015 and 2014, the amount included in interest income and fees related to TDR accounts was $6.5 million and $3.1 million, respectively.

4.   
Customer Accounts Receivable

Customer accounts receivable consisted of the following:
 
Total Outstanding Balance
 
Customer Accounts Receivable
 
60 Days Past Due (1)
 
Re-aged (1)
(in thousands)
July 31,
2015
 
January 31,
2015
 
July 31,
2015
 
January 31,
2015
 
July 31,
2015
 
January 31,
2015
Customer accounts receivable
$
1,350,447

 
$
1,277,135

 
$
105,737

 
$
112,365

 
$
87,640

 
$
94,304

Restructured accounts
101,490

 
88,672

 
27,172

 
20,722

 
101,490

 
88,672

Total customer portfolio balance
1,451,937

 
1,365,807

 
$
132,909

 
$
133,087

 
$
189,130

 
$
182,976

Allowance for uncollectible accounts
(164,330
)
 
(146,982
)
 
 
 
 
 
 
 
 
Allowance for short-term, no-interest programs
(18,592
)
 
(17,474
)
 
 
 
 
 
 
 
 
Total customer accounts receivable, net
1,269,015

 
1,201,351

 
 
 
 
 
 
 
 
Short-term portion of customer accounts receivable, net
(685,933
)
 
(643,094
)
 
 
 
 
 
 
 
 
Long-term portion of customer accounts receivable, net
$
583,082

 
$
558,257

 
 
 
 
 
 
 
 


9

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)
Due to the fact that an account can become past due after having been re-aged, accounts could be represented as both past due and re-aged. As of July 31, 2015 and January 31, 2015, the amounts included within both past due and re-aged was $47.7 million and $44.9 million, respectively. As of July 31, 2015 and January 31, 2015, the total customer portfolio balance past due one day or greater was $327.1 million and $316.0 million, respectively. These amounts include the 60 days past due balances shown.

The following presents the activity in our balance in the allowance for doubtful accounts and uncollectible interest for customer receivables: 
 
Six Months Ended July 31, 2015
 
Six Months Ended July 31, 2014
(in thousands)
Customer
Accounts
Receivable
 
 
Restructured
Accounts
 
 
 
Total
 
Customer
Accounts
Receivable
 
 
Restructured
Accounts
 
 
 
Total
Allowance at beginning of period
$
118,786

 
$
28,196

 
$
146,982

 
$
54,448

 
$
17,353

 
$
71,801

Provision (1)
91,821

 
24,396

 
116,217

 
61,317

 
12,235

 
73,552

Principal charge-offs (2)
(71,280
)
 
(14,190
)
 
(85,470
)
 
(49,367
)
 
(8,338
)
 
(57,705
)
Interest charge-offs
(13,056
)
 
(2,599
)
 
(15,655
)
 
(8,824
)
 
(1,490
)
 
(10,314
)
Recoveries (2)
1,881

 
375

 
2,256

 
6,807

 
1,150

 
7,957

Allowance at end of period
$
128,152

 
$
36,178

 
$
164,330

 
$
64,381

 
$
20,910

 
$
85,291

Average total customer portfolio balance
$
1,297,951

 
$
95,652

 
$
1,393,603

 
$
1,057,875

 
$
52,626

 
$
1,110,501


(1)
Includes provision for uncollectible interest, which is included in finance charges and other revenues.
(2)
Charge-offs include the principal amount of losses (excluding accrued and unpaid interest), and recoveries include principal collections during the period shown of previously charged-off balances. Net charge-offs are calculated as the net of principal charge-offs and recoveries.

5.     Accrual for Store Closures
 
We have closed or relocated retail locations that did not perform at a level we expect for mature store locations. Certain of the closed or relocated stores had noncancelable lease agreements, resulting in the accrual of the present value of the remaining lease payments and estimated related occupancy obligations, net of estimated sublease income. Adjustments to these projections for changes in estimated marketing times and sublease rates, as well as other revisions, are made to the obligation as further information related to the actual terms and costs become available.

The following table presents detail of the activity in the accrual for store closures:
 
Six Months Ended 
 July 31,
(in thousands)
2015
 
2014
Balance at beginning of period
$
2,556

 
$
4,316

Accrual for additional closures
318

 
3,108

Adjustments
(32
)
 
138

Cash payments, net of sublease income
(698
)
 
(4,254
)
Balance at end of period
2,144

 
3,308

Current portion, included in accrued expenses
(640
)
 
(1,181
)
Long-term portion, included in other long-term liabilities
$
1,504

 
$
2,127



10

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


6.     Debt
 
Debt consisted of the following:
(in thousands)
July 31,
2015
 
January 31,
2015
Revolving credit facility
$
563,907

 
$
528,112

Senior Notes
250,000

 
250,000

Other debt
2,445

 
933

Total debt
816,352

 
779,045

Less:
 
 
 
Discount on debt
(4,323
)
 
(4,635
)
Current portion of debt
(789
)
 
(395
)
Long-term debt
$
811,240

 
$
774,015


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

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

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

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

On April 24, 2015, the SEC declared effective the Company’s registration statement on Form S-4 pursuant to which we exchanged the Senior Notes for an equivalent amount of 7.25% Senior Notes due July 2022 that are registered under the Securities Act of 1933, as amended (the “Exchange Notes”).  The exchange offer was completed on June 1, 2015, and all of the outstanding Senior Notes were tendered in exchange for the Exchange Notes. The terms of the Exchange Notes are substantially identical to the Senior Notes.
 
Revolving Credit Facility. Conn's, Inc. and certain of its subsidiaries (the "Borrowers") amended its asset-based revolving credit facility in connection with the issuance of the Senior Notes. The amendment provides for, among other things, the issuance of the Senior Notes and Indenture as well as related guarantees, upstream distributions from subsidiaries to Conn’s, Inc. (a holding company) for the payment of interest and principal on the Senior Notes and under certain circumstances optional and mandatory prepayment of the Senior Notes. The amendment also allows holders of the Senior Notes to receive payments even though they may be stockholders of the Company.

Our revolving credit facility with a syndicate of banks has capacity of $880.0 million and matures in November 2017. The revolving credit facility provides funding based on a borrowing base calculation that includes customer accounts receivable and inventory. The amended and restated credit facility bears interest at LIBOR plus a spread ranging from 250 basis points to 325

11

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


basis points, based on a leverage ratio (defined as total liabilities to tangible net worth). As of July 31, 2015, the weighted average interest rate on borrowings outstanding under the revolving credit facility was 3.6%.

In addition to the leverage ratio, the revolving credit facility includes a fixed charge coverage requirement, a minimum customer receivables cash recovery percentage requirement and a net capital expenditures limit. The obligations under the revolving credit facility are secured by all assets of the Borrowers. The revolving credit facility restricts the amount of dividends we can pay. We were in compliance with our debt covenants at July 31, 2015.

As of July 31, 2015, we had immediately available borrowing capacity of $315.0 million under our revolving credit facility, net of standby letters of credit issued, for general corporate purposes. We pay fees in the amount of 25 basis points for the additional commitment amount. Our revolving credit facility provides us the ability to utilize letters of credit to secure deductibles under our property and casualty insurance programs, among other acceptable uses. At July 31, 2015, we had outstanding letters of credit of $1.1 million under this facility.

7.     Contingencies
 
Securities Class Action Litigation. We and two of our current executive officers are defendants in a consolidated securities class action lawsuit pending in the Southern District of Texas, In re Conn’s Inc. Securities Litigation, Cause No. 14-CV-00548 (the “Consolidated Securities Action”). The plaintiffs in the Consolidated Securities Action allege that the defendants made false and misleading statements and/or failed to disclose material adverse facts about our business, operations, and prospects. They allege violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and seek to certify a class of all persons and entities that purchased or otherwise acquired Conn’s common stock and/or call options, or sold/wrote Conn’s put options between April 3, 2013 and December 9, 2014. The complaint does not specify the amount of damages sought.

On June 30, 2015, the Court held a hearing on the defendants’ motion to dismiss plaintiffs’ complaint. At the hearing, the Court dismissed Brian Taylor, a former executive officer, and certain other aspects of the complaint. The Court ordered plaintiffs to further amend their complaint in accordance with its ruling, and the plaintiffs filed their Fourth Consolidated Amended Complaint on July 21, 2015. The remaining defendants filed a motion to dismiss on August 28, 2015.

The defendants intend to vigorously defend against all of these claims. It is not possible at this time to predict the timing or outcome of any of this litigation.

Derivative Litigation. On December 1, 2014, an alleged shareholder filed, purportedly on behalf of the Company, a derivative shareholder lawsuit against us and certain of our current and former directors and executive officers in the United States District Court for the Southern District of Texas captioned Robert Hack, derivatively on behalf of Conn’s, Inc., v. Theodore M. Wright, Bob L. Martin, Jon E.M. Jacoby, Kelly M. Malson, Douglas H. Martin, David Schofman, Scott L. Thompson, Brian Taylor, a former executive officer, and Michael J. Poppe and Conn’s, Inc., Case No. 4:14-cv-03442 (the “Original Derivative Action”). The complaint asserts claims for breach of fiduciary duty, unjust enrichment, gross mismanagement, and insider trading based on substantially similar factual allegations as those asserted in the Consolidated Securities Action. The plaintiff seeks unspecified damages against these persons and does not request any damages from us. The court approved a stipulation among the parties to stay the action pending resolution of the motion to dismiss in the Consolidated Securities Action, and the parties have requested that the Court extend the stay pending resolution of the anticipated motion to dismiss.

Another derivative action was filed on January 27, 2015, captioned, Richard A. Dohn v. Wright, et al., Cause No. 2015-04405, filed in the 281st District Court, Harris County, Texas. This action makes substantially similar allegations to the Original Derivative Action against the same defendants. The parties have entered into an agreed stay pending resolution of the motion to dismiss in the Consolidated Securities Action.

On February 25, 2015, a third derivative action was filed in the United States District Court for the Southern District of Texas, captioned 95250 Canada LTEE, derivatively on Behalf of Conn’s, Inc. v. Wright et al., Cause No. 4:15-cv-00521. This action makes substantially similar allegations to the Original Derivative Action. On March 30, 2015, the plaintiffs in this action and the Original Derivative Action filed a joint motion to consolidate these two derivative actions, which is still pending.

None of the plaintiffs in any of the derivative actions made a demand on our Board of Directors prior to filing their respective lawsuits. The defendants in the derivative actions intend to vigorously defend against these claims.


12

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Regulatory Matters. We are continuing to cooperate with the SEC’s investigation which generally relates to our underwriting policies and bad debt provisions.  The investigation is a non-public, fact-finding inquiry, and the SEC has stated that the investigation does not mean that any violations of law have occurred.

In addition, we are involved in other routine litigation and claims incidental to our business from time to time which, individually or in the aggregate are not expected to have a material adverse effect on our financial position, results of operations or cash flows. As required, we accrue estimates of the probable costs for the resolution of these matters. These estimates have been developed in consultation with counsel and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. However, the results of these proceedings cannot be predicted with certainty, and changes in facts and circumstances could impact our estimate of reserves for litigation.

8.     Segment Reporting
 
Financial information by segment is presented in the following tables: 
 
Three Months Ended July 31, 2015

Three Months Ended July 31, 2014
(in thousands)
Retail

Credit

Total

Retail

Credit

Total
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Furniture and mattress
$
98,882

 
$

 
$
98,882

 
$
81,373

 
$

 
$
81,373

Home appliance
97,260

 

 
97,260

 
84,355

 

 
84,355

Consumer electronic
69,682

 

 
69,682

 
68,945

 

 
68,945

Home office
22,940

 

 
22,940

 
24,061

 

 
24,061

Other
4,975

 

 
4,975

 
5,432

 

 
5,432

Product sales
293,739

 

 
293,739

 
264,166

 

 
264,166

Repair service agreement commissions
27,756

 

 
27,756

 
20,732

 

 
20,732

Service revenues
3,451

 

 
3,451

 
3,383

 

 
3,383

Total net sales
324,946

 

 
324,946

 
288,281

 

 
288,281

Finance charges and other revenues
659

 
70,445

 
71,104

 
343

 
64,340

 
64,683

Total revenues
325,605

 
70,445

 
396,050

 
288,624

 
64,340

 
352,964

Costs and expenses:
 

 
 

 
 

 
 

 
 

 
 

Cost of goods sold, including warehousing and occupancy costs
187,124

 

 
187,124

 
168,717

 

 
168,717

Cost of service parts sold, including warehousing and occupancy costs
1,550

 

 
1,550

 
1,871

 

 
1,871

Delivery, transportation and handling costs
13,787

 

 
13,787

 
13,164

 

 
13,164

Selling, general and administrative expenses (1)
76,683

 
28,149

 
104,832

 
69,172

 
24,967

 
94,139

Provision for bad debts
324

 
51,322

 
51,646

 

 
39,585

 
39,585

Charges and credits
1,013

 

 
1,013

 
1,492

 

 
1,492

Total costs and expense
280,481

 
79,471

 
359,952

 
254,416

 
64,552

 
318,968

Operating income (loss)
45,124

 
(9,026
)
 
36,098

 
34,208

 
(212
)
 
33,996

Interest expense

 
10,055

 
10,055

 

 
6,247

 
6,247

Income (loss) before income taxes
$
45,124

 
$
(19,081
)
 
$
26,043

 
$
34,208

 
$
(6,459
)
 
$
27,749



13

CONN'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


 
Six Months Ended July 31, 2015
 
Six Months Ended July 31, 2014
(in thousands)
Retail
 
Credit
 
Total
 
Retail
 
Credit
 
Total
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Furniture and mattress
$
188,384

 
$

 
$
188,384

 
$
162,265

 
$

 
$
162,265

Home appliance
181,362

 

 
181,362

 
161,470

 

 
161,470

Consumer electronic
141,112

 

 
141,112

 
135,388

 

 
135,388

Home office
44,925

 

 
44,925

 
47,997

 

 
47,997

Other
9,582

 

 
9,582

 
11,266

 

 
11,266

Product sales
565,365

 

 
565,365

 
518,386

 

 
518,386

Repair service agreement commissions
51,552

 

 
51,552

 
40,986

 

 
40,986

Service revenues
6,508

 

 
6,508

 
6,538

 

 
6,538

Total net sales
623,425

 

 
623,425

 
565,910

 

 
565,910

Finance charges and other revenues
808

 
136,893

 
137,701

 
809

 
121,693

 
122,502

Total revenues
624,233

 
136,893

 
761,126

 
566,719

 
121,693

 
688,412

Costs and expenses:
 

 
 

 
 

 
 

 
 

 
 

Cost of goods sold, including warehousing and occupancy costs
360,596

 

 
360,596

 
329,499

 

 
329,499

Cost of service parts sold, including warehousing and occupancy costs
2,862

 

 
2,862

 
3,290

 

 
3,290

Delivery, transportation and handling costs
26,136

 

 
26,136

 
25,327

 

 
25,327

Selling, general and administrative expenses (1)
144,910

 
55,597

 
200,507

 
133,339

 
48,841

 
182,180

Provision for bad debts
393

 
98,796

 
99,189

 
44

 
61,799

 
61,843

Charges and credits
1,632

 

 
1,632

 
3,246

 

 
3,246

Total costs and expense
536,529

 
154,393

 
690,922

 
494,745

 
110,640

 
605,385

Operating income (loss)
87,704

 
(17,500
)
 
70,204

 
71,974

 
11,053

 
83,027

Interest expense

 
19,483

 
19,483

 

 
10,971

 
10,971

Income (loss) before income taxes
$
87,704

 
$
(36,983
)
 
$
50,721

 
$
71,974

 
$
82

 
$
72,056


(1)
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 that 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 $3.4 million and $3.0 million for the three months ended July 31, 2015 and 2014, respectively, and $6.9 million and $5.9 million for the six months ended July 31, 2015 and 2014, respectively. The amount of reimbursement made to the retail segment by the credit segment was $8.9 million and $7.1 million for the three months ended July 31, 2015 and 2014, respectively, and $17.4 million and $13.8 million for the six months ended July 31, 2015 and 2014, respectively.


14


ITEM 2.
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 close the securitization of its loan portfolio or to sell the residual equity on favorable terms; our ability to execute periodic securitizations of future originated loans including the sale of any residual equity 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; 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; and 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 our most recently filed 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 $396.1 million for the three months ended July 31, 2015, compared to $353.0 million for the three months ended July 31, 2014. The increase in total revenue was primarily driven by new store openings, an increase in same store sales of 3.1%, and an increase in credit revenue as a result of growth in the average balance of the customer receivable portfolio partially offset by a 210 basis point decrease in portfolio yield.

Retail gross margin for the three months ended July 31, 2015 was 41.8%, an increase of 100 basis points over the 40.8% reported in the comparable quarter last year. The increase in retail margin was driven by higher retrospective commissions on repair service agreements.

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%, a decrease of 30 basis points over 4.6% in the previous year. The decrease was primarily driven by efficiencies in delivery operations partially offset by higher costs as a result of the shift in product sales mix.

Selling, general and administrative expenses ("SG&A") for the three months ended July 31, 2015 was $104.8 million, an increase of $10.7 million, or 11.4%, over the same prior year period. The SG&A increase in the retail segment was primarily due to the opening of new stores resulting in higher sales-driven compensation and facility-related costs. The SG&A increase in the credit segment is the result of the addition of collections personnel to service the 23.1% increase in the customer receivable portfolio balance and anticipated near-term portfolio growth.


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Provision for bad debts for the three months ended July 31, 2015 was $51.6 million, an increase of $12.1 million from the same prior year period. The year-over-year increase was impacted by the following:
A 24.5% increase in the average receivable portfolio balance resulting from new store openings and same store growth over the past 12 months;
A 26.1% increase in the balances originated during the quarter compared to the prior year quarter;
An increase of 50 basis points in the percentage of customer accounts receivable balances greater than 60 days delinquent to 9.2% at July 31, 2015 as compared to the prior year period. Delinquency increased year-over-year across product categories and years of origination and many of the credit quality levels and geographic regions;
An increase in the proportion of new customers of the total customer portfolio balance compared to the prior year period; and
The balance of customer receivables accounted for as troubled debt restructurings increased to $101.5 million, or 7.0% of the total portfolio balance, driving $3.4 million of the increase in provision for bad debts.

Net income for the three months ended July 31, 2015 was $16.5 million, or $0.45 per diluted share, which included net charges of $1.0 million, or $0.02 per diluted share on an after-tax basis, from legal and professional fees related to the exploration of strategic alternatives and securities-related litigation. This compares to net income for the three months ended July 31, 2014 of $17.7 million, or $0.48 per diluted share, which included net charges of $1.5 million, or $0.03 per diluted share on an after-tax basis, related to store closures and relocations.

Recent Developments and Operational Changes

We announced a number of strategic initiatives that collectively represent a major transformation in the business and position us to execute our growth strategies while reducing risk and enhancing shareholder value. These actions include the appointment of a new Chief Executive Officer, entering into an agreement to securitize $1.4 billion of retail installment contract receivables, Board of Director authorization to repurchase up to $75.0 million of securities, and termination of the stockholders’ rights plan. The actions represent the culmination of an exploration of strategic alternatives that was initiated by the Board of Directors in October 2014.

Further details are as follows:

Management and Governance Changes

The Board of Directors, implementing a long-planned leadership succession, has appointed Norman Miller to serve as Chief Executive Officer and President. Mr. Miller is a seasoned executive with considerable experience in retail and consumer finance, having previously served as President of both Sears Automotive and DFC Global. He succeeds Theodore Wright, who will remain on the Board of Directors as Executive Chairman, transitioning to Non-Executive Chairman at the end of the fiscal year.
As previously reported, the Board of Directors established a Credit Risk and Compliance Committee to review credit risk, underwriting strategy, credit compliance activities, and the provision methodology. An independent evaluation of these areas at the direction of this committee did not result in changes to any of the Company’s practices or procedures.
In the past year, we have added a Chief Credit Officer to provide additional capability in analyzing and assessing credit risk, named a new Chief Financial Officer, and created and filled the role of Credit Compliance Officer.

Securitization Transaction

We entered into an agreement to securitize $1.4 billion of retail installment contract receivables. We intend to execute periodic securitizations of future originated loans including the sale of any remaining residual equity. We intend to retain origination and servicing of contracts.
We will maintain our existing asset-based revolving credit facility and at least a portion of our outstanding senior notes.
This approach creates a diversified capital structure to improve access to multiple debt markets and results in an asset-light business model with less balance sheet risk.
This transaction is an important step toward creating a simplified capital structure that is also intended to provide a model that is more easily understood by investors.

Repurchase of Securities


16


The Board of Directors authorized the repurchase of up to a total of $75.0 million of outstanding shares of its common stock or its 7.250% Senior Notes Due 2022. This authorization is the maximum amount permitted under our credit facility and senior note indenture.
The repurchase program underscores our confidence in our long-term growth prospects, consistent with our overall commitment to generate continued profitable growth and enhanced long-term shareholder value.

Termination of Stockholders’ Rights Plan

The Board of Directors approved the termination of the stockholders’ rights plan, effective at the close of the securitization transaction, currently anticipated to be on or about September 10, 2015.
We had adopted the stockholders’ rights plan in October 2014 to enable us to explore strategic alternatives while reducing the likelihood that any person or group would gain control of the Company through open market accumulation or otherwise without appropriately compensating all of our stockholders.

Taken together, these actions represent the completion of a carefully considered strategic plan, developed under the leadership of the Board of Directors, to position us for continued future growth and enhanced long-term shareholder value.

Company Initiatives

We have continued to focus on initiatives that we believe should positively impact future results, including:  
During the six months ended July 31, 2015, we opened seven new stores in Colorado (1), Georgia (1), North Carolina (2), South Carolina (1), Tennessee (1) and Texas (1). We plan to open between 15 and 18 stores during fiscal year 2016;
During fiscal year 2016, we have discontinued 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 were 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, which we discount to present value, resulting in a reduction in sales and customer receivables, and the discount amount is amortized into finance charges and other revenues over the term of the contract;
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

We believe 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 and 22 to 25 stores during fiscal 2017. 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.


17


Results of Operations
 
The following tables present certain financial and other information, on a consolidated and segment basis: 
Consolidated:
Three Months Ended 
 July 31,
 
Six Months Ended 
 July 31,
(in thousands)
2015
 
2014
 
Change
 
2015
 
2014
 
Change
Revenues:
 
 
 
 
 
 
 
 
 
 
 
Total net sales
$
324,946

 
$
288,281

 
$
36,665

 
$
623,425

 
$
565,910

 
$
57,515

Finance charges and other revenues
71,104

 
64,683

 
6,421

 
137,701

 
122,502

 
15,199

Total revenues
396,050

 
352,964

 
43,086

 
761,126

 
688,412

 
72,714

Costs and expenses: (1)
 

 
 

 
 

 
 
 
 
 
 

Cost of goods sold, including warehousing and occupancy costs
187,124

 
168,717

 
18,407

 
360,596

 
329,499

 
31,097

Cost of service parts sold, including warehousing and occupancy costs
1,550

 
1,871

 
(321
)
 
2,862

 
3,290

 
(428
)
Delivery, transportation and handling costs (2)
13,787

 
13,164

 
623

 
26,136

 
25,327

 
809

Selling, general and administrative expenses
104,832

 
94,139

 
10,693

 
200,507

 
182,180

 
18,327

Provision for bad debts
51,646

 
39,585

 
12,061

 
99,189

 
61,843

 
37,346

Charges and credits
1,013

 
1,492

 
(479
)
 
1,632

 
3,246

 
(1,614
)
Total costs and expenses
359,952

 
318,968

 
40,984

 
690,922

 
605,385

 
85,537

Operating income
36,098

 
33,996

 
2,102

 
70,204

 
83,027

 
(12,823
)
Interest expense
10,055

 
6,247

 
3,808

 
19,483

 
10,971

 
8,512

Income before income taxes
26,043

 
27,749

 
(1,706
)
 
50,721

 
72,056

 
(21,335
)
Provision for income taxes
9,505

 
10,099

 
(594
)
 
18,506

 
25,937

 
(7,431
)
Net income
$
16,538

 
$
17,650

 
$
(1,112
)
 
$
32,215

 
$
46,119

 
$
(13,904
)


18


Retail Segment:
Three Months Ended 
 July 31,
 
Six Months Ended 
 July 31,
(in thousands)
2015
 
2014
 
Change
 
2015
 
2014
 
Change
Revenues:











Product sales
$
293,739

 
$
264,166

 
$
29,573

 
$
565,365

 
$
518,386

 
$
46,979

Repair service agreement commissions
27,756

 
20,732

 
7,024

 
51,552

 
40,986

 
10,566

Service revenues
3,451

 
3,383

 
68

 
6,508

 
6,538

 
(30
)
Total net sales
324,946

 
288,281

 
36,665

 
623,425

 
565,910

 
57,515

Other revenues
659

 
343

 
316

 
808

 
809

 
(1
)
Total revenues
325,605

 
288,624

 
36,981

 
624,233

 
566,719

 
57,514

Costs and expenses: (1)
 

 
 

 


 
 

 
 

 
 
Cost of goods sold, including warehousing and occupancy costs
187,124

 
168,717

 
18,407

 
360,596

 
329,499

 
31,097

Cost of service parts sold, including warehousing and occupancy costs
1,550

 
1,871

 
(321
)
 
2,862

 
3,290

 
(428
)
Delivery, transportation and handling costs (2)
13,787

 
13,164

 
623

 
26,136

 
25,327

 
809

Selling, general and administrative expenses (3)
76,683

 
69,172

 
7,511

 
144,910

 
133,339

 
11,571

Provision for bad debts
324

 

 
324

 
393

 
44

 
349

Charges and credits
1,013

 
1,492

 
(479
)
 
1,632

 
3,246

 
(1,614
)
Total costs and expenses
280,481

 
254,416

 
26,065

 
536,529

 
494,745

 
41,784

Operating income
$
45,124

 
$
34,208

 
$
10,916

 
$
87,704

 
$
71,974

 
$
15,730

Number of stores:
 
 
 
 
 
 
 
 
 
 
 
Beginning of period
91

 
79

 
 
 
90

 
79

 
 
Open
4

 
8

 
 
 
7

 
10

 
 
Closed

 
(1
)
 
 
 
(2
)
 
(3
)
 
 
End of period
95

 
86

 
 
 
95

 
86

 
 

Credit Segment:
Three Months Ended 
 July 31,
 
Six Months Ended 
 July 31,
(in thousands)
2015
 
2014
 
Change
 
2015
 
2014
 
Change
Revenues -
 
 
 
 
 
 
 
 
 
 
 
  Finance charges and other revenues
$
70,445

 
$
64,340

 
$
6,105

 
$
136,893

 
$
121,693

 
$
15,200

Costs and expenses:
 

 
 

 
 

 
 

 
 

 
 

Selling, general and administrative expenses (3)
28,149

 
24,967

 
3,182

 
55,597

 
48,841

 
6,756

Provision for bad debts
51,322

 
39,585

 
11,737

 
98,796

 
61,799

 
36,997

Total cost and expenses
79,471

 
64,552

 
14,919

 
154,393

 
110,640

 
43,753

Operating income (loss)
(9,026
)
 
(212
)
 
(8,814
)
 
(17,500
)
 
11,053

 
(28,553
)
Interest expense
10,055

 
6,247

 
3,808

 
19,483

 
10,971

 
8,512

Income (loss) before income taxes
$
(19,081
)
 
$
(6,459
)
 
$
(12,622
)
 
$
(36,983
)
 
$
82

 
$
(37,065
)

(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.
(2)
Delivery, transportation and handling costs, previously included in selling, general and administrative expenses, are shown separately.
(3)
SG&A includes 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 that 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

19


the average portfolio balance for each applicable period. The amount of overhead allocated to each segment was $3.4 million and $3.0 million for the three months ended July 31, 2015 and 2014, respectively, $6.9 million and $5.9 million for the six months ended July 31, 2015 and 2014, respectively. The amount of reimbursement made to the retail segment by the credit segment was $8.9 million and $7.1 million for the three months ended July 31, 2015 and 2014, respectively, $17.4 million and $13.8 million for the six months ended July 31, 2015 and 2014, respectively.

Three months ended July 31, 2015 compared to three months ended July 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:
 
Three Months Ended July 31,
 
 
 
%
 
Same store
(dollars in thousands)
2015
 
% of Total
 
2014
 
% of Total
 
Change
 
Change
 
% change
Furniture and mattress
$
98,882

 
30.4
%
 
$
81,373

 
28.2
%
 
$
17,509

 
21.5
 %
 
6.9
 %
Home appliance
97,260

 
29.9

 
84,355

 
29.3

 
12,905

 
15.3

 
9.2

Consumer electronic
69,682

 
21.5

 
68,945

 
23.9

 
737

 
1.1

 
(5.9
)
Home office
22,940

 
7.1

 
24,061

 
8.3

 
(1,121
)
 
(4.7
)
 
(9.6
)
Other
4,975

 
1.5

 
5,432

 
1.9

 
(457
)
 
(8.4
)
 
(12.9
)
Product sales
293,739

 
90.4

 
264,166

 
91.6

 
29,573

 
11.2

 
2.2

Repair service agreement commissions
27,756

 
8.5

 
20,732

 
7.2

 
7,024

 
33.9

 
9.7

Service revenues
3,451

 
1.1

 
3,383

 
1.2

 
68

 
2.0

 
 

Total net sales
$
324,946

 
100.0
%
 
$
288,281

 
100.0
%
 
$
36,665

 
12.7
 %
 
3.1
 %

The following provides a summary of items impacting our product categories during the quarter compared to the prior year period:
Furniture unit volume increased 28.3%, offset by a 3.1% decrease in average selling price;
Mattress unit volume increased 26.7%, offset by a 8.3% decrease in average selling price;
Home appliance unit volume increased 21.2%, offset by a 4.6% decrease in average selling price. Refrigeration sales increased 14.9%, laundry sales increased 9.6%, and cooking sales increased by 23.7%;
Consumer electronic average selling price increased by 18.1%, offset by a 13.7% decrease in unit volume. Television sales increased 11.4% as average unit selling price increased 17.5%, offset by a 5.2% decrease in unit volume. Excluding the impact from exiting video game products and digital cameras, consumer electronics same store sales increased 2.1% with an increase in television same store sales of 3.4%;
Home office average selling price increased 12.9%, offset by a 15.2% decrease in unit volume. Excluding the impact from exiting certain tablets, home office same store sales increased 3.0%; and
The increase in repair service agreement commissions was driven by improved program performance resulting in higher retrospective commissions and increased retail sales.

The following table provides the change of the components of finance charges and other revenues:
 
Three Months Ended 
 July 31,
 
 
(in thousands)
2015
 
2014
 
Change
Interest income and fees
$
57,383

 
$
52,226

 
$
5,157

Insurance commissions
13,062

 
12,113

 
949

Other revenues
659

 
344

 
315

Finance charges and other revenues
$
71,104

 
$
64,683

 
$
6,421


Interest income and fees of the credit segment increased over the prior year level primarily driven by a 24.5% increase in the average balance of the portfolio. Portfolio interest income and fee yield on an annualized basis declined 210 basis points year-over-year primarily as a result of the introduction of 18- and 24-month equal-payment, no-interest finance programs beginning in October 2014 to certain higher credit quality borrowers, which we discount to present value upon origination, resulting in a

20


reduction in sales and customer receivables, and the discount amount is amortized into finance charges and other revenues over the term of the contract at a lower rate than the average yield on the rest of the portfolio. Portfolio interest income and fee yield was also negatively impacted by higher provision for uncollectible interest and our discontinuation of charging customers certain payment fees.

The following table provides key portfolio performance information: 
 
Three Months Ended 
 July 31,
(dollars in thousands)
2015
 
2014
Interest income and fees
$
57,383