Conn's, Inc.

Greetings and welcome to CONS, Inc. First Quarter Fiscal Year 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chandra Holt, President and Chief Executive Officer. Thank you. You may begin.

Good morning, and welcome to CON's first quarter fiscal year 2023 earnings conference call. I'll start today's call with a review of the quarter and an update on our strategic priorities before turning the call over to George, who will review our financial results in more detail. As expected, our first quarter retail performance was impacted by overlapping stimulus programs, third-party lease to own tightening, and a challenging macro environment. Our first quarter performance was also affected by higher year-over-year supply chain costs, including fuel and freight. Since we last spoke in March, economic conditions have worsened and our outlook for the remainder of fiscal year 2023 has become more cautious. As a result, we are making adjustments in our business to navigate a more difficult operating environment over the near term while continuing to pursue multiple growth initiatives that strengthen our core, enhance our differentiated credit offering, and transform cons into one of the first unified commerce retailers. We remain focused on providing our customers with a premium shopping experience while pursuing our growth initiatives, and I am encouraged by the progress we have made so far against the long-term strategy we laid out in January. I'm confident our growth initiatives will position cons to become a leading destination for home-related products, and I believe we are on track to achieve $2 to $2.2 billion in annual revenue and high single-digit EBIT margin by fiscal year 2025. During the first quarter, overlapping stimulus programs, tighter underwriting from our third-party lease loan partners, and worsening economic conditions were the primary drivers of the 9.5% decline in first quarter same-store sales. These factors disproportionately impacted first quarter sales for our financial access customers. While the macro environment also affected fast and reliable customers that utilize cash and our private label credit card payment options, total sales for this customer segment increased approximately 2% year-over-year in the first quarter after increasing 67% in the first quarter last fiscal year. In fact, total sales for our fast and reliable customer segment have increased on a year-over-year basis over the past 12 consecutive quarters and represent approximately 39% of our retail sales over the last 12 months, compared to 26% in fiscal year 2020. The overall reduction in retail sales resulted in lower gross margin due to deleveraging our fixed distribution costs, which was compounded by higher fuel costs. Retail gross margin was partially offset by higher RSA commissions. To counteract some of the impact lower sales are having on profitability, we are implementing several near-term cost savings initiatives that we expect to impact the remainder of the fiscal year. Turning to our credit segment, our team continues to produce strong credit results, which provide us with the flexibility to simultaneously navigate the current economic environment and pursue long-term growth opportunities. Indicators of portfolio health remained positive during the first quarter, including the weighted average credit score of outstanding balances, re-aged accounts, and annualized net charge-offs. In fact, re-aged accounts as a percent of the portfolio are at the best levels in over four years. Disciplined underwriting and credit strategies have driven strong portfolio performance, and the first quarter credit spread was over 1,000 basis points for the fourth consecutive quarter. We expect to maintain an annual credit spread of approximately 1,000 basis points going forward as we continue to closely watch credit trends while looking for new credit opportunities that support sales and manage risk. With this overview, I want to spend the remainder of my time reviewing the long-term strategies we are pursuing to drive growth, both in our fast and reliable and financial access customer segments, which we believe will create significant long-term value for our shareholders. In terms of updates on our strategic initiatives, I want to start by sharing we've entered into a strategic partnership with Belk, Inc., to pilot a store-within-a-store concept beginning in Q3 of this year. As I stated when I joined the company approximately 10 months ago, I was impressed by the fact that almost all in-store and online orders at Kahn's receive next-day white-glove delivery. This fulfillment capability is a key competitive advantage, and I believe our established infrastructure can be the foundation for a much larger business. and service capabilities, as well as our high-quality assortment. Our partnership and pilot with Belk is exciting because it expands our retail strategy by providing access to retail markets that over-index to fast and reliable customers. We believe our Store Within a Store program will successfully serve this customer segment by showcasing core differentiators. Belk is one of the largest regional department store chains with nearly 300 locations in 16 states and also has a strong e-commerce presence through Belk.com. The new store-within-a-store concept will be approximately 10,000 to 25,000 square feet per store, and we are planning to enter 10 to 20 Belk locations this year. Pilot will focus on Belk locations in existing cons markets and on Belk.com. both of which will feature a name brand assortment of all major Kahn's product categories under a new brand we plan on introducing in the coming months. This partnership provides us with the opportunity to serve Belk's customers with Kahn's complimentary product categories, as well as our industry-leading next-day white glove delivery and in-house repair service capability. It will also introduce a reimagined brand, giving us the opportunity to pilot a new brand identity and broader value proposition. We believe comms can maximize the value of our key differentiators through additional partnership opportunities in the future. Moving to our e-commerce growth strategy, e-commerce sales for the quarter increased 71.7% to a first quarter record of $18.3 million. As we mentioned last quarter, we are upgrading our digital infrastructure by re-platforming our website. Phase one of our online re-platforming began during the first quarter and we successfully enhanced the front end of our website, including our homepage and product listing pages. Phase two will get started in late Q2 and is focused on improving the cart and checkout experience. The final phase of our digital transformation is focused on functions that make it easier for our customers to apply for credit and make payments. We expect to complete the replatforming of our website this fall, and once complete, our customers will see an enhanced website with improved functionality across their online journey. We are also successfully increasing our online product assortment to enhance our core retail experience and increase online conversion. During the first quarter, we doubled the number of SKUs available online through our recently launched dropship program. By having vendors ship directly to customers we can add entirely new categories of merchandise, such as patio furniture and lighting, without increasing our inventory. Finally, during the first quarter, we 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. These investments will strengthen our core, and we continue to believe Cons is uniquely positioned to become one of the first unified commerce retailers because our back-end supply chain is the same for both stores and e-commerce. Looking at the initiatives that enhance our differentiated credit business, last quarter we announced a transformative acquisition of a technology platform that will enable us to originate and service lease-to-own transactions in-house. We believe we accelerated our in-house lease-to-own roadmap by 12 to 18 months by acquiring an established lease-to-own platform. The integration is on schedule and we expect to begin originating leases under an in-house lease-to-own offering during the fourth quarter of this fiscal year and to be originating the majority of lease-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. We believe that our in-house lease-to-own offering will add approximately $25 million of incremental annual operating income by fiscal year 2025. We believe this will help us achieve our fiscal year 2025 revenue and EBIT margin goals. We are excited by the opportunities this acquisition will have on our business and the value an in-house leased-own offering will have for our customers. We also expect an in-house leased-own program to have strong cash on cash returns that are higher than our traditional in-house credit offering. Our leased-own transition is an important initiative as we create a platform that supports the volume of retail sales we expect to achieve through this payment option. Continued tightening by our lease-to-own partners has been a significant headwind to our retail performance over the past quarter. To improve our lease-to-own performance, we have chosen to consolidate our lease-to-own business under one partner that is committed to supporting a certain level of lease-to-own sales. We expect our expanded strategic partnership with American First Financial to benefit lease-to-own sales once it goes into effect in the coming weeks. Having diverse payment options has been the cornerstone of our differentiation. Our new vision is to have a payment option for everyone. For example, each year there are over 130,000 applicants that apply for lease-to-own at CONS and are turned down. There are also customers that don't want to use credit for a variety of reasons. With this in mind, we decided to launch a layaway program that provides these customers with a payment option and provides us with an incremental opportunity to serve additional customers. I am pleased to report that after a successful pilot of a layaway program in Q1, we are planning to roll this program out to more stores this fiscal year. While recent economic uncertainty has impacted our near-term retail performance, I am confident in the strategic direction our business is headed and our ability to achieve our fiscal year 2025 financial goals. With a challenging macro backdrop and tighter underwriting from our third-party lease-drawn partners, we saw retail sales decline throughout the first quarter as well as into May. As a result, we now expect total annual revenues to be down high single digits in fiscal year 2023. To help navigate a more challenging macro environment, we are implementing near-term cost savings initiatives, including reductions in certain marketing and labor-related expenses that are expected to offset some of the impacts lower sales will have on profitability. To conclude my prepared remarks, our transformation is progressing, and I am encouraged by the strategies underway to create sustainable value for our shareholders. We are making prudent adjustments to our cost structure while simultaneously investing in our long-term growth initiatives and maintaining stable credit trends. We believe this will allow us to successfully navigate near-term economic challenges and emerge from this difficult period stronger and better positioned for profitable and accelerated growth. I am excited by the strategic direction we are headed and proud of the hard work and dedication of our team members. 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. On a consolidated basis, total revenues were $339.8 million for the first quarter of fiscal year 2023, representing a 6.6% decrease from the same period last fiscal year. For the first quarter of fiscal year 2023, net income was $0.25 per diluted share compared to net income of $1.52 per diluted share for the same period last fiscal year. As a reminder, earnings in the first quarter last fiscal year benefited from lower costs as a result of the COVID-19 pandemic and a $17.1 million benefit in our provision for bad debt associated with the release of a portion of our economic reserve. Reconciliations of GAAP to non-GAAP financial measures are available in our first quarter earnings press release that was issued this morning. Looking at our retail segment in more detail, total retail revenues for the first quarter were $272.5 million. The 6.5% year-over-year decline in retail revenue was primarily due to a more challenging retail environment, lapping the benefits stimulus had on first quarter sales last fiscal year, and tighter underwriting from our lease-to-own partners. We opened three stores during the first quarter, including two stores within the state of Florida, and ended the quarter with a total of 161 stores across 15 states. For fiscal year 2023, we are now planning to open 10 to 14 standalone locations and 10 to 20 store-within-a-store locations, all within existing markets, which will leverage fixed costs. We expect the store within store locations will require approximately $100,000 of capital investment plus display inventory, making them a highly capital efficient way to expand our footprint. Retail gross margin for the first quarter was 34.5%, a decrease of 200 basis points from the same period last fiscal year. The decline in retail gross margin was primarily driven by deleveraging of fixed costs, the impact of increased freight and fuel costs, which was partially offset by higher RSA commissions. SG&A expenses in our retail segment increased by 5.7%, primarily due to labor and occupancy costs associated with new store growth, higher stock compensation expense, and investments in our e-commerce growth. As a percent of retail sales, SG&A expenses were 35.2% for the first quarter compared to 31.2% for the same period last fiscal year. As we've discussed throughout today's call, lower retail sales and higher costs contributed to a retail segment operating loss of $2.1 million, compared to retail segment operating income of $15.7 million for the same period last fiscal year. Seasonality also impacted retail segment profitability in the first quarter, as the first quarter typically has the lowest quarterly retail sales during a fiscal year. Turning to our credit segment, finance charges and other revenues were $67.3 million for the first quarter, a 6.8% decline from the same period last fiscal year. The decline in credit segment revenue was due to a 6.5% reduction in the average balance of the customer receivable portfolio over the prior fiscal year period, as our underwriting strategies remained disciplined and we focused on maintaining 1,000 basis points of credit spread. The positive performance of our receivables portfolio is encouraging, which we believe will help us navigate the evolving economic environment. As a percent of the portfolio, the 60-plus day past due balance was 10.3% at April 30, 2022, and is in line with our expectations. This compares to 9.1% for the same period last fiscal year, which benefited from stimulus programs. The balance of re-aged accounts as a percent of the portfolio was 16.4% compared to 23.8% for the same period last fiscal year. For the first quarter, net charge-offs as a percent of the average portfolio balance were 11.9% compared to 15.3% for the same period last fiscal year. During the first quarter of fiscal year 2023, the credit provision for bad debts was $14.6 million compared to a $17.2 million benefit to our provision for bad debts last year. For the first quarter last year, the provision for bad debt benefited primarily from a $20 million release of a portion of our economic reserve. With a smaller average portfolio balance, we deleveraged fixed credit segment SG&A expenses and credit segment income before taxes with $10.5 million, compared to $43.8 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 debts, partially offset by an improvement in interest expense. Turning now to our balance sheet and capital position. Our balance sheet and capital position remains strong, and we continue to benefit from significant year-over-year growth in cash and private label credit card sales and robust cash collections on our customer receivables portfolio. This continues to produce meaningful operating cash flow. We ended the first quarter with $529.9 million in net debt compared to $434.7 million at the end of the first quarter of last year. In addition, net debt as a percent of the ending portfolio balance was approximately 50% at the end of the first quarter compared to approximately 39% at the end of the first quarter of last year. We continue to believe our liquidity and access to capital provides us with flexibility to navigate the challenging economic environment while investing in our long-term growth initiatives. Before we open the call up to questions, I want to review our expectations for the remainder of fiscal year 2023. As Chandra mentioned, we expect total revenue to be down high single digits for fiscal year 2023. Our expectations include a high single-digit decline in annual retail revenue and a high single-digit decline in credit revenue as our portfolio contracts due to lower retail sales financed through our in-house credit offering. We now expect operating margin for the fiscal year to be between 3% and 4%, which reflects deleveraging on lower sales and the negative near-term impact from our lease-to-own platform acquisition, partially offset by cost reductions as compared to our previous guidance. The change to our guidance reflects more challenging macroeconomic outlook, consistent with recent trends and lower consumer spending, particularly for our financial access customer. Reductions to expenses are underway, including to marketing and labor as we look to offset the impact of lower sales in a more challenging environment. Lastly, while our guidance reflects a softer economic environment, we are excited by the initiatives underway, including strategies to drive e-commerce growth enhance our credit offering, and expand our value proposition to more customers, including our store-within-a-store strategy with Belk. We believe these initiatives will improve sales trends in the back half of the year and help us achieve our long-term financial goals. Finally, I also 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 up to questions.