Conn's, Inc.

Good morning and thank you for holding. Welcome to the CONS Incorporated conference call to discuss earnings for the fiscal quarter ended January 31st, 2022. My name is Robert and I'll be your operator today. During the presentation, all participants will be in a listen-only mode. After the speaker's remarks, you'll be invited to participate in the question and answer session. As a reminder, this conference call is being recorded. The company's earnings release dated March 29th, 2022 and was distributed before market opened this morning and can be accessed via the company's investor relations website at ir.cons.com. During today's call, management will discuss, among other financial performance measures, adjusted net income and adjusted earnings per diluted share. Please refer to the company's earnings release that was issued today for reconciliation of these non-GAAP measures to their most comparable GAAP measures. I must remind you that some of the statements made in this call are forward-looking statements within the means of federal security laws. These forward-looking statements represent the company's present expectations or beliefs concerning future events. The company cautions that such statements are necessarily based on certain assumptions which are subject to risk and uncertainties, which could cause actual results to differ materially from those indicated today. Your speakers today are Jindra Holt, the company's CEO, and George Bashar, the company's CFO. I would now like to turn the conference over to your host, Ms. Holt. Thank you. You may begin.

Good morning and welcome to TAN's fourth quarter fiscal year 2022 earnings conference call. I'll start today's call with a review of the quarter and our strategic priorities before turning the call over to George, who will review our financial results. Fiscal year 2022 was a record year for cons, and I'm proud of our team's strong execution in a very dynamic operating environment. Throughout the fiscal year, we successfully navigated unprecedented supply chain challenges and the ongoing COVID-19 pandemic, including the emergence of the Omicron variant to produce record annual earnings of $3.61 per diluted share and the strongest annual retail sales in five fiscal years. I'm encouraged by our strong fiscal year 2022 performance and excited by the direction we are headed. At our January 2022 Investor Day, we announced a new strategic growth plan, which we believe will unlock the significant potential of our expanding retail, digital, and payment offerings. We also shared our three-year financial targets, which include increasing annual consolidated revenues to approximately $2 billion to $2.2 billion and and achieving a high single-digit EBIT margin by fiscal year 2025. As we follow our three-year strategic growth plan and focus on achieving our long-term financial targets, I want to use my time today to review our recent performance and the progress we are making against our strategic plan. Fiscal year 2023 will be a transformative year as we pursue initiatives to further enhance our competitive position and support our long-term growth opportunities. The strategic initiatives we are undertaking this year include launching an in-house lease-to-own platform, replatforming our website, and preparing to rebrand our business. I will discuss these initiatives throughout today's call. Moving to our fourth quarter, I am pleased with the positive retail performance we achieved during the quarter as same-store sales increased 6.2% and total retail sales grew 13%. This performance is especially encouraging as we offset the demand pull forward from the traditional holiday shopping season that we discussed on our third quarter earnings call. We also believe the emergence of the Omicron variant as well as tightening by our lease to own partners negatively impacted fourth quarter retail sales. I'm proud of our ability to deliver double digit retail sales growth during the fourth quarter and throughout fiscal year 2022 as our powerful value proposition resonates with more customers and we strengthen our core retail experience. As I mentioned at our Investor Day, we have a growing segment of customers that are choosing cons because of our fast and reliable shopping experience. This customer segment represents cash and all credit card sales, including our private label credit card offering, and typically consists of customers with FICO scores above 650. According to FICO, US consumers with FICO scores above 650 represent 75% of the population, yet our fast and reliable customer segment represented only 39% of our total retail sales in fiscal year 2022. As you can see, the fast and reliable customer segment makes up a large part of the market and we believe this provides us with a significant opportunity for growth. In fact, For the fourth quarter, retail sales of our fast and reliable customer segment outpaced total retail sales growth. We are capturing more fast and reliable customers because of our white glove next day delivery and in-house service capabilities, as well as the enhancements we are making to our product assortment and e-commerce experience. Looking at our core financial access customer segment in more detail, the financial access customer typically has a FICO score below 650 and represents approximately 25% of the US population. This customer segment uses our in-house financing or lease-to-own offerings to complete their retail purchase. Our financial access customer is our largest segment and increased at a double-digit rate in the fourth quarter. We believe there are opportunities to further grow our financial access customer segment while prudently managing the higher risk profile of this customer. Historically, we have relied exclusively on third-party leased-owned partners to support our efforts, and we continue to maintain strong relationships with our existing leased-owned partners. However, after a comprehensive review of our leased-owned strategy, we identified a unique opportunity to acquire a technology platform that will enable us to originate and service leased-owned transactions in-house. While it will take time to fully transition to a full in-house leased-owned offering, We are excited by the growth opportunities today's announcement represents. We expect to begin originating leases under an in-house leased to own offering during the fourth quarter of this fiscal year and to be originating the majority of leased to own transactions with our in-house offering next fiscal year. The transition will take approximately three years to be fully reflected in our financial statements and we believe that our in-house leased to own offering will add approximately $25 million to annual operating income once the program is mature, helping us achieve our fiscal year 2025 revenue and EBIT margin goals. We are excited by the opportunities this transaction will have on our business and the value an in-house leased-own offering will have for our customers. Turning back to our fourth quarter retail performance, the double-digit growth from both our fast and reliable and financial access customer segments drove robust sales growth across our top product categories. Within our appliance category, sales remained strong during the quarter as same-store sales increased 13% over the prior year. Sales growth continues to be driven by our expanding assortment, a favorable in-stock position, rapid e-commerce growth, and our next-day delivery capabilities. In fiscal year 2022, appliances was our largest and fastest-growing category, and we achieved record sales. As a top 10 appliance retailer in the US, we are doubling down on our efforts to drive growth within the category and expect to further expand our assortment both in-store and online in fiscal year 2023. Furniture and mattress same-store sales increased 2.4% over the prior year. More than any other category, we have pivoted the furniture assortment through creative sourcing actions to maintain a consistent flow of product and ensure a broad range of next day delivery options for our customers. DreamSpot, our first private label brand, continues to exceed our expectations and remains our number one selling mattress brand in both units and dollars. In addition, our expanded mattress-in-a-box assortment continues to drive our online growth in the category. During fiscal year 2023, we are focused on increasing our furniture and mattress assortment online and introducing a new private label furniture brand. Same-store sales within our consumer electronics category increased 2.3% over the prior year, driven primarily by higher TV, home theater, and gaming sales. I am pleased with the positive trends we experienced within this category, even as consumers pulled forward some of their holiday purchases into our third quarter amid supply chain concerns. The performance of new stores is also contributing to our retail growth. For the quarter and full year, recently opened new stores added 6.8% and 7.4% to total retail sales growth respectively. We opened 12 stores in fiscal year 2022, primarily within the state of Florida, and ended the fiscal year with a total of 158 stores across 15 states. For fiscal year 2023, we plan to open 13 to 16 new locations, all within existing markets, which will leverage fixed costs. Looking at our supply chain in more detail, we are pleased with our domestic logistics capabilities as approximately 80% of our products are currently available for next day delivery. Over the past year, our distribution centers provided the flexibility to maintain a high level of in-stock merchandise and supported our leading next day white glove delivery offering. However, ongoing global supply chain disruptions and elevated international freight costs had a greater impact than expected on our retail segment in the fourth quarter. While global supply chain issues and freight costs have stabilized, they have not improved and we expect challenges will continue throughout fiscal year 2023. We continue to pursue actions that offset these impacts to margins by diversifying our sourcing base, flexing our assortments, and reducing promotions. In addition, while we remain focused on providing our customers with compelling value, We are closely monitoring market conditions and margins across our categories and expect to continue to prudently pass along price increases to mitigate higher costs. Our unique supply chain capabilities support many aspects of our business, including our fast-growing e-commerce business. E-commerce sales for the quarter increased 132% to a record of $24.1 million. For the year, e-commerce sales exceeded our expectations and increased 171% to an annual record of $71.3 million. The e-commerce growth we've experienced over the last year is the result of our investments to improve the functionality of our website, while also leveraging our best-in-class next-day white glove delivery capabilities. As we discussed at our Investor Day, we have a large opportunity to increase conversion on our website, and expanding our online assortment will be an important initiative to achieve our conversion goal. Plans for fiscal year 2023 including adding depth to our appliance category, including new colors and sizes, as well as adding new categories such as outdoor living, lighting, and smart home. In fact, by the end of the first quarter, we expect to double our online assortment. Our digital customer experience is another important driver to improve conversion and grow e-commerce sales. During the current fiscal year, we are upgrading our digital infrastructure by re-platforming our website. This transformation will occur in phases and is expected to start in the second quarter. We expect the bulk of the transition to be completed by this fall. Once finished, our customers will see a modern, enhanced website with improved functionality across their online journey. I have led multiple digital transformations throughout my career and I have learned short-term disruptions occur even during successful implementations. As a result, we expect the growth rate of e-commerce sales to temporarily slow in this year's second and third quarters before re-accelerating in the fourth quarter and beyond. Ultimately, the digital initiatives we are pursuing support our vision for unified commerce. We believe unified commerce will drive the next digital opportunity for retailers because it streamlines engagement across channels and customer touchpoints. Cons is uniquely positioned to deliver on unified commerce because our backend supply chain is the same for both stores and e-commerce. We recently took a significant step forward in our pursuit of becoming a leading unified commerce retailer by enabling our store associates to add online-only items to in-store transactions. Our digital transformation and unified commerce initiatives support our vision to achieve over $300 million in e-commerce sales by fiscal year 2025. Having a robust digital offering is critically important and supports our strategies to serve both our core financial access customer and our growing fast and reliable customer. To accelerate our growth and further enable our transformation, we have decided to introduce a new brand that will better position us to bring to life our value proposition. Our branding efforts are underway, and I look forward to updating investors in the coming quarters. We are confident in the direction the business is headed and our ability to achieve our fiscal year 2025 financial targets. However, we expect a softer first half of this fiscal year as we lap government stimulus let more difficult leased-to-own comparisons, and invest in our growth initiatives that we expect to benefit sales in the second half of the year. Growth initiatives that we expect to benefit the second half of the year include credit-related initiatives that are currently testing and expect to roll out during the second quarter, the significant expansion of our online assortment, and the replatforming of our website, which we believe will improve the customer experience and increase online conversions. Turning to our credit segment growth strategies and performance. Pursuing growth opportunities across the spectrum of payment options has de-risked our business and enhanced credit segment performance. As a result, for fiscal year 2022, we achieved an annual credit spread of 11.7%, representing the highest spread in over five years and helped drive record annual credit segment profitability. Since optimizing our credit strategy, higher credit quality customers represent a greater percentage of Khan's in-house finance sales. This has occurred even as these in-house finance sales have increased. In addition, these newer, higher-credit quality vintages are outperforming older vintages. Our disciplined approach to risk has helped proactively manage our 60-plus-day delinquency and re-age balances. Both indicators of portfolio health remain well below pre-COVID levels. As a percent of the portfolio, the 60-plus day past due balance was 10.4% compared to 12.4% for the same period last fiscal year. The balance of re-aged accounts as a percent of the portfolio was 16.8% compared to 25.9% for the same period last fiscal year. We continue to believe delinquency and charge-off trends will remain below pre-COVID levels based on our enhanced credit strategy and current economic outlook. As a result, I believe we are well positioned to target an annual credit spread of approximately 1,000 basis points going forward. With a stable credit platform in place, we are well positioned to pursue credit strategies that enable retail growth within both our financial access and our fast and reliable customer segments. This includes providing both customer segments with a seamless online credit transaction through the digital transformation actions we are pursuing this year. In addition, we believe bringing lease-to-own transactions in-house will allow us to deliver a more seamless experience, capture a greater number of customers, and financially benefit from the vertical integration of the lease-to-own business. To conclude my prepared remarks, we are excited by the strategies we are pursuing to create sustainable value for our shareholders. In December, the Board authorized a $150 million share repurchase program reflecting the positive momentum underway across our business and the confidence we have in our future. As of March 25, 2022, we have repurchased 5.9 million shares of our common stock at an average price of $21.41 per share, which equates to approximately 20% of the company's outstanding shares as of October 31, 2021. We are committed to creating value for our shareholders by continuing to prioritize initiatives that support our growth strategies, maintain flexibility to pursue inorganic opportunities, and return capital to shareholders. Since I joined CONS, we've established and communicated the new vision and strategy for the company. We've also focused on attracting, developing, and retaining a strong and motivated team, while adding significant diversity to our leadership team to better align with the diversity of our organization, our customers, and the communities we serve. And now, with our leadership team in place, we're executing on our strategic plan. Our strong fiscal year 2022 results and exciting vision for the future is possible because of the dedication and resilience of our over 4,000 associates. I want to thank our entire team for their commitment to our company, our customers, and our local communities. Now, let me turn the call over to George to review our financial performance.

Thanks, Chandra. I'm encouraged by our record fiscal year 2022 earnings and our strong position headed into the new fiscal year. On a consolidated basis, total revenues were $402.5 million for the fourth quarter, representing a 9.4% increase from the same period last fiscal year. We reported fourth quarter net income of 26 cents per diluted share compared to net income of 85 cents per diluted share for the same period last fiscal year. On a non-GAAP basis, adjusting for certain charges and credits, we reported net income of 33 cents per diluted share for the fourth quarter compared to 91 cents per diluted share for the same period last fiscal year. As a reminder, earnings last year benefited from lower costs as a result of the COVID-19 pandemic and a discrete tax benefit as a result of tax planning in connection with the CARES Act, which impacted the provision for income taxes by $12.4 million and benefited earnings by 42 cents per diluted share. Reconciliations of GAAP to non-GAAP financial measures are available in our fourth quarter earnings press release that was issued this morning. Looking at our retail segment in more detail, total retail revenues for the fourth quarter were $333 million, a 13% increase from the same period last fiscal year. Higher retail revenue was driven by an increase in same-store sales of 6.2% and new store growth. As Chandra mentioned, we experienced strong double-digit growth rates across both our financial access and fast and reliable customer segments during the fourth quarter, reflecting our success attracting customers across a larger addressable market. Retail gross margin for the fourth quarter was 35.8%, a decrease of 160 basis points from the same period last fiscal year. The larger-than-expected year-over-year decline in retail gross margin was primarily driven by the impact of increased product and freight costs. Higher retail sales continued to help leverage retail SG&A expenses during the quarter. As a percent of retail sales, SG&A expenses were 31.6% for the fourth quarter compared to 32.2% for the same period last fiscal year. Retail segment operating income was $10.9 million compared to $12.7 million for the same period last fiscal year as higher retail sales and improved SG&A leverage were offset by lower retail gross margin. Turning to our credit segment, finance charges and other revenues were $69.5 million for the fourth quarter. The 4.9% decline from the same period last fiscal year was primarily a result of a 10.2% reduction in the average balance of the customer receivable portfolio. Our strong credit results continue to show that our receivable portfolio is performing well. For the fourth quarter, net charge-offs as a percent of the average portfolio balance were 9.8% compared to 14.1% for the same period last fiscal year. For the year, net charge-offs as a percent of the average portfolio balance were 11.1% compared to 16.3% last fiscal year. During the fourth quarter, the credit provision for bad debts was $28.2 million, compared to $25.1 million last fiscal year. The year-over-year increase was primarily driven by an increase in the change in the allowance for bad debts, partially offset by a decrease in net charge-offs of $16.9 million. We reported a $1.1 million loss before taxes in our credit segment, compared to credit segment income before taxes of $4.4 million for the same period last fiscal year. The reduction in credit segment income before taxes was primarily due to lower credit segment revenue, higher SG&A expenses, and a higher provision for bad debt partially offset by an improvement in interest expense. As our portfolio begins to grow, we will continue to focus on controlling risk, limiting portfolio volatility, and achieving approximately 1,000 basis points of annual credit spread while supporting our long-term growth opportunity. Consolidated SG&A expenses for the fourth quarter were $142.5 million. The $14.2 million increase from the prior year period was due to higher variable operating expenses associated with sales growth, additional new stores, and an increase in advertising costs as we lapped prior year reductions due to the COVID-19 pandemic. Turning now to our balance sheet and capital position. We ended the fourth quarter with a strong balance sheet in capital position as we continue to benefit from significant year-over-year growth in cash and third-party finance sales and robust cash collections on our customer receivables portfolio. This has produced meaningful operating cash flow over the past eight quarters. We ended the fourth quarter with $483.4 million in net debt compared to $549.3 million at the end of the fourth quarter of last year. In addition, net debt as a percent of the ending portfolio balance declined to approximately 42.8% at the end of the fourth quarter compared to approximately 44.5% at the end of the fourth quarter of last year. I am pleased with our success strengthening the balance sheet, de-risking the business, and executing our growth initiatives. These efforts have built underlying strength in our business. Before we open up the call to questions, I want to review the impacts of our recent technology platform acquisition and emerging in-house lease-to-own strategy, as well as our expectations for fiscal year 2023. Starting with our lease-to-own transition, we expect to begin originating leases under our in-house lease-to-own offering by the fourth quarter of fiscal year 2023. From an accounting standpoint, in our consolidated financial results, Revenue from sales made through our in-house lease-to-own offering will be reported as lease income recognized over the life of the lease, rather than as a retail sale recognized at the time of sale. As a result, the transition from third-party lease-to-own sales to in-house lease-to-own revenue will negatively impact revenue and profitability in the first two years of the transition, beginning in the fourth quarter of this fiscal year. We also expect to incur additional costs associated with the lease-to-own platform beginning in the first quarter of fiscal year 2023 as we assume the costs associated with the lease-to-own acquisition and begin investing in our new in-house lease-to-own capabilities. For fiscal year 2023, we expect the combination of the different revenue accounting and incremental costs associated with the lease-to-own business to reduce operating income by $15 to $20 million. As in-house lease to own sales grow in fiscal year 2024, we expect our operating income to be negatively impacted by approximately $25 to $30 million driven by these two factors. However, by fiscal year 2025, we believe our in-house lease to own offering will add approximately $25 million to annual operating income. As a result, the acquisition and transition to offering an in-house lease to own product will help us achieve our fiscal year 2025 financial targets. Additional information on our lease to own acquisition is available in our fourth quarter investor presentation on our investor relations website. Looking at our expectations for the year in more detail, we are excited by the progress we are making and the opportunities we have for growth. But as Chandra mentioned, several items are expected to impact our quarterly results during the year. For fiscal year 2023, we expect low single-digit total revenue growth with mid-single-digit retail revenue growth and high single-digit decline in finance charges and other revenue driven by an increase in promotional financing programs. We expect operating margin for the fiscal year to be between 5% and 6%, which includes an approximately 100 basis point impact from lease-to-own platform acquisition. We also expect interest expense to be between $25 million and $30 million. Given the ongoing issues related to the global supply chain, we expect fiscal year 2023 retail gross margin to be down from fiscal year 2022. SG&A expenses are expected to increase in fiscal year 2023, primarily driven by the opening of new stores and continued investments in our growth initiatives. Our provision is expected to be up versus the prior year, driven primarily by portfolio growth and a smaller decline in our allowance for bad debts. While uncertainty remains high, our guidance reflects a macroeconomic outlook consistent with recent trends and lowers consumer spending, particularly for a financial access customer, driven by inflationary pressures and lapping last year's government stimulus programs. Lastly, our guidance reflects a softer first half of the year, as Chandra and I have discussed throughout today's prepared remarks. I'm excited by the direction we are headed as our business transformation accelerates and we execute against our fiscal year 2025 financial targets. Finally, I want to share my thanks to all our team members for their continued hard work, service, and dedication. So with this overview, Chendra and I are happy to take your questions. Operator, please open the call to questions.