Conn's, Inc.

Good morning and thank you for holding. Welcome to the CONS, Inc. conference call to discuss earnings for the fiscal quarter ended April 30, 2023. My name is Donna and I will be your operator today. During the presentation, all participants will be in a listen-only mode. After the speaker's remarks, you will 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 June 1st, 2023 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 retail segment operating loss, adjusted net loss per share, and net debt. 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 meetings of the federal securities laws. These forward-looking statements represent the company's present expectations or beliefs concerning future events. The company cautions that such statements aren't necessarily based on certain assumptions, which are subject to risks and uncertainties, which could cause actual results to differ materially from those indicated today. Your speakers today are Norm Miller, the company's interim CEO, and George Pacharo, the company's CFO. I will now turn the conference over to Mr. Miller. Please go ahead.

Good morning and welcome to Kahn's first quarter fiscal year 2024 earnings conference call. I'll start today's call with an update on our strategic priorities before turning the call over to George who will review our financial results in more detail. Our first quarter results were generally in line with our expectations and reflect a challenging macroeconomic environment. Despite a difficult backdrop, we continue to position the business for a return to profitable sales growth by refocusing our efforts to better serve our core credit-constrained customers, launching an in-house lease-to-own offering and expanding our e-commerce business. During the first quarter, we successfully executed against these strategic priorities, and we have started to see progress against these initiatives. This includes growing applications, improving sales trends within our cons in-house and lease-to-own segments, and accelerating e-commerce sales. While we expect a challenging economic landscape to continue throughout the year, We believe we are on the right track to emerge from this period as a stronger company that is well positioned to serve the growing needs of our customers. With this introduction, I want to highlight the progress we are making, starting with our efforts to better serve our core credit-constrained customers. Since I rejoined the company in October 2022, I have consistently discussed the importance of refocusing our strategy to leverage our unique credit retail business model. I have a strong belief that our business resonates with our core customers who now, more than ever, need the multiple payment offerings we provide. By combining unmatched payment options across the entire credit spectrum with essential home-based product categories and an elevated shopping experience, we provide a powerful value proposition to our customers. We have recently made two significant changes to drive sales to our core customers. First, we adjusted our marketing spend towards channels that are most effective with our credit customer and changed our marketing message to emphasize our credit-oriented value proposition. Second, as we discussed last quarter, We launched a new, innovative application process that makes it easier for the millions of visitors to our stores and to our website to apply for our payment options with little to no impact on their credit score. These two changes are having a positive impact on applications and CONS credit sales, and we experienced a meaningful acceleration in application volume during the first quarter. Applications increased approximately 10%, which represents the first quarter of application growth in the past 16 months. Applications are a critical leading indicator of sales, and our application growth is starting to drive sales within our in-house financing and lease to own segments. We have also experienced steady improvements in overall sales trends, which have accelerated since February, as our renewed marketing efforts take hold and sales benefit from our new application process, our growing e-commerce business, and our refocus strategy. In March and April 2023, monthly retail sales through our in-house financing option were positive and this trend accelerated into May. We have maintained a consistent approach to credit underwriting and recent improvements in retail sales are being driven by the growth strategies we are pursuing. In addition, we believe demand for our payment options will continue to increase as other lenders tighten their credit standards and consumers look for solutions that spread out payments of big-ticket, home-related products. Sales within our lease-to-own segment are experiencing similar improvements, which helps manage credit risk and supports the success of our refocused growth strategies. As demand from our core customer segment increases, Kahn's, like other retailers, is seeing evolving consumer behavior, especially from cash and higher credit quality customers. We believe this is being impacted by several factors, including lower discretionary spending for home-related products, following an extended period of excess consumer liquidity, pulled forward demand, and tighter underwriting in general from prime lenders. We expect these trends to impact demand from higher credit quality customers throughout the remainder of this fiscal year. Overall, sales trends have improved or remained stable since last year's third quarter as we refocus the business on our core credit-constrained customers. Positive momentum in both cons in-house finance sales and LTO sales has continued in May, but has been offset by weaker trends to cash and higher credit quality customers. As a result, total retail sales for the month of May were down approximately 14%, while same-store sales were down approximately 17%. We believe we are well positioned to offset the softness from cash and higher credit quality consumers later this year as we benefit from our strategic initiatives, including the recent launch of our in-house lease-to-own product known as Improvement Financial. Like other transformations the company has been through over the last 20 years, bringing the LTO business in-house has the potential to contribute to significant growth in both revenue and earnings in the coming years. Improvement Financial allows us to provide another profitable option to target a larger addressable market, including the approximately 600,000 applicants that did not qualify for CONS in-house financing over the past 12 months. Since our differentiated credit retail business model enables us to capture both the retail gross margin and lease income, we believe CONS can ultimately approve more LTO applicants and provide greater purchasing power than other providers. We also believe we have a compelling opportunity to drive repeat customer relationships by leveraging insight from the payment history of our LTO customers. We will use this information to graduate in-house LTO customers to future CONS credit customers, building deeper relationships, and helping our customers improve their credit. As we mentioned on our last call, Improvement Financial went live in early 2023 in three Houston area stores, and as of today's call, we have expanded to 46 locations. We are taking a measured approach to implementing the program to ensure its long-term success. By the end of this fiscal year, we expect Improvement Financial will be offered across the majority of our stores and at cons.com. Once mature in the coming years, we continue to believe annual LTO sales can more than double from approximately $81 million last year and grow to over 15% of our retail sales. As you can see, Improvement Financial is a transformative opportunity that we believe will unlock significant value over the coming years. Our e-commerce expansion is the next strategic priority I'd like to review today. We continue to optimize our e-commerce strategy after last year's successful platform conversion and recent enhancements to our application process. During the quarter, we expanded our dropship program and overall assortment, launched new AI-driven technologies, and improve the photography and content of our online furniture offering. The powerful e-commerce platform and strategy we have created produced record first quarter e-commerce sales of $22.7 million. In fact, after only a slight year-over-year increase in the previous quarter, e-commerce growth accelerated during the first quarter and increased in total by 24.6%. I am encouraged by the progress we are making and anticipate e-commerce sales this fiscal year can increase to well over $100 million. We have a tremendous opportunity to scale our online business, which we expect to grow to over $300 million in annual sales over the next several years. Now, looking at our retail footprint. During the first quarter, we decided to end our test with Belk, as we couldn't offer their customers our in-house financing and lease-to-own payment options, limiting our sales opportunities. While we were disappointed by the outcome of the test with Belk, we have learned valuable lessons about the strength of our unmatched payment options. In addition, our leadership team continues to promote a culture focused on pursuing innovative opportunities to reach more customers. Additionally, as we mentioned on our last call, after we open 11 new stores planned for this year, we intend to pause new store openings over the next couple of years. With major investments across our retail and credit segments behind us, we believe we have a multi-year opportunity to drive retail growth within our existing locations and online without the need to open new stores or distribution centers. We believe this strategy will maximize profitability by increasing revenue per store and leveraging our fixed operating costs. Before I turn the call over to George to share more details on our financials, I want to reiterate my confidence in our business. The progress we made during the first quarter, growing applications, improving sales within both our cons in-house and leased-owned segments, and accelerating e-commerce sales are encouraging signs that our refocused strategies are helping turn around our financial and operating results. I have a deep conviction that our business resonates with our customers and a strong belief in our leadership team's ability to deliver on our strategic priorities. With this overview, I'll turn the call over to George.

Thanks, Norm. We're excited by the progress we are making across several aspects of our business, including growing applications, improving sales trends, and accelerating e-commerce sales. We believe we have an enormous opportunity to profitably grow as we pursue strategies aimed at refocusing on our core customer. On a consolidated basis, total revenues were $284.6 million for the first quarter, representing a 16.3% year-over-year decline. For the first quarter, the company reported a GAAP net loss of $1.47 per diluted share compared to net income of 25 cents per diluted share for the same period in fiscal year 2023. On a non-GAAP basis, we reported a net loss of $1.52 per diluted share for the first quarter, which excluded the gain related to the sale of a single store location partially offset by store closure costs associated with the decision to end the store within a store test with Belk. There were no adjustments to net income in the first quarter of last fiscal year and reconciliations of GAAP to non-GAAP financial measures are available in our first quarter earnings press release that was issued this morning. Looking at the performance of our retail segment in more detail. Total retail revenues were $224 million in the first quarter representing a 17.8% year-over-year decline. The decrease in retail revenue was primarily driven by a 20.1% decline in same-store sales, partially offset by new store growth. Same-store sales during the first quarter were impacted by lower discretionary spending for home-related products following an extended period of excess consumer liquidity, which resulted in accelerated sales. Retail gross margin for the first quarter declined to 33.5% compared to 34.5% for the same period in fiscal year 2023, primarily driven by higher freight costs and deleveraging of fixed distribution costs from lower sales. We expect retail gross margin to improve over time as retail sales recover and we realize the benefit of lower international shipping costs. SG&A expenses in our retail segment for the first quarter decreased to $95.8 million compared to $96 million for the same period last fiscal year. Lower SG&A expenses reflect the effort of our cost savings initiatives and declines in variable costs that more than offset increases related to new store growth. Due to lower retail sales, SG&A expenses were 42.8% of retail sales for the first quarter compared to 35.2% for the same period in fiscal year 2023. For the first quarter, retail segment operating loss was $19.7 million compared to a retail segment operating loss of $2.1 million for the same period in fiscal year 2023. On a non-GAAP basis, retail segment operating loss for the first quarter was $20.5 million compared to a loss of $2.1 million for the same period in fiscal year 2023. Turning to our first quarter credit segment performance, finance charges and other revenues declined 8.2% year over year to $61.8 million, primarily due to a decline in the average balance of the customer receivable portfolio, as well as a reduction in insurance commissions. Underlying portfolio health remains stable. However, normalizing trends, current economic conditions, and a more restrictive re-age policy have impacted overall performance. As a percent of the portfolio, the 60-day delinquency balance was 11.6% at April 30th, 2023, compared to 10.3% at April 30th, 2022, which benefited from excess cut consumer liquidity. The balance of re-aged accounts as a percent of the portfolio was 16.6%, compared to 16.4% for the same period in fiscal year 2023. In addition, the carrying value of re-aged accounts continues to improve and remains at one of the lowest levels in almost a decade. For the first quarter of fiscal year 2024, net charge-offs as a percent of the average portfolio balance were 15.6% compared to 11.9% for the same period last fiscal year. During the first quarter, the credit provision for bad debts was $28.8 million, compared to $14.6 million for the same period last fiscal year. The $14.2 million year-over-year increase in the credit provision for bad debts was primarily driven by higher net charge-offs and a smaller year-over-year decline in the customer accounts receivable portfolio. The company reported a credit segment loss before taxes of $17.2 million in the first quarter compared to a credit segment income of $10.5 million for the same period last fiscal year. The greater credit segment loss before taxes was primarily due to higher interest expense, as well as a reduction in our credit spread, which declined to 7.8% compared to 11.6% in the same period last fiscal year. Turning now to our balance sheet. At April 30, 2023, we had $570.1 million in net debt, compared to $529.9 million at April 30, 2022. Net debt as a percent of the ending portfolio balance was approximately 58% at the end of the first quarter, which remains below pre-pandemic levels, and we have no near-term debt maturities. April 30th, 2023, we had $228.1 million of cash plus availability under our $650 million revolving credit facility. We continue to believe our liquidity and access to capital provides us with flexibility to support the current needs of our business while investing in our long-term growth initiatives, and we expect to complete our next ABS transaction later this fiscal year. Given the uncertain economic environment and in lieu of official guidance, I want to provide an update regarding our expectations for the remainder of the year. We expect continued improvements in total retail sales and same-store sales as we benefit from the growth strategies we have discussed today. Retail gross margins are expected to stabilize and benefit from lower freight expenses this fiscal year. We also are focused on continuously identifying opportunities to further reduce expenses. As a result, we now expect annual SG&A to increase year-over-year by $15 to $25 million versus our prior expectation of $25 to $35 million. This revised outlook also reflects lower expenses as a result of the decision to close all belt locations. We are closely monitoring the current rate environment, and we believe our annual interest expense will increase year-over-year by approximately $40 to $45 million, as we stated in our fourth quarter conference call. We expect our effective tax rate for the remainder of the fiscal year to be impacted by further adjustments to the valuation allowance. Finally, I want to share my thanks to all our team members for their continued hard work, service, and dedication. So with this overview, Norm and I are happy to take your questions. Operator, please open the call up to questions.