Specialty retailer and in-house financing provider CONN’s Inc (NASDAQ:CONN) reported mixed Q4 earnings that the Street was split on. Although sales did increase 16.4% for the fourth quarter of 2015 FY, their reported earnings were hugely disappointing coming in at 46 cents a share (excluding a 4 cent charge) and missing Capital IQ’s consensus estimate of 64 cents per share by 28%. Though not yet finalized, in an effort to improve shareholder value, the board of directors has authorized management to sell off all or a portion of the loan portfolio.

Sub-par End to 2014

CONN Q4 2014 Income statement

As mentioned above, Q4 2015 FY of $426.7 million beat analyst estimates of $451.52 million and represented an 18.2% increase over the same period a year ago and a 15.3% increase over the previous quarter. This growth in sales was attributable to the addition of 11 new stores over the past fiscal year as same-store sales grew by only 1.3%. Earnings per share came in below expectations because of the residuals effects of the delivery disturbances and disappointing TV sales trends outside of Super Bowl, March Madness and Black Friday periods.

In terms of their two business segments, their retail operating margin dropped from 16.3% for Q4 2014 FY to 12.4% in Q4 2015 FY. Although Conn’s credit segment did experience a 15.6% increase in revenues from the third to fourth quarter 2015 FY, the segment incurred a net operating loss of $11 million in Q4. This loss was fueled by an increase of provisions for bad debts which grew $20 million to $58 million from a year ago which was primarily due to a 30.7% increase in the loan portfolio balance, a 23% increase in origination volume and 90 basis point bump in 60+ day delinquency rates year over year (below).

CONN 60 day delinquency rates

Borrowings outstanding from their revolving credit facility were $529.2 million for the year ended January 31 2015 and Conn’s has a borrowing capacity of $350.8 million (below). The company expects to remain in compliance with its debt covenants and to have sufficient liquidity for the near future.

Conscious Effort to Improve

Throughout 2015 FY Conn’s has made some significant changes to their underwriting policies in order to reduce total delinquency rates and charge offs. One of the more recent changes was the offering of 18-24 month non interest programs to high FICO score customers (below).

CONN goals

These changes which have increased the conservativeness of their lending policies are estimated to have reduced total sales rate by 5% to 7% in Q4 2015 FY compared to the same period a year ago.

Drastic changes coming?

In late October 2014 Conn’s board of directors gave management the task of exploring possible initiatives towards improving shareholder value including: the complete sale of the business, decreasing the new store openings rate, the segregation of the retail and financing division. After careful consideration and analysis, management settled on and was giving authority to sell or refinance all or part of the loan portfolio.

Conn’s CEO Theo Wright stated in yesterday’s earnings call: “If we can sell the portfolio, it has potential to significantly change our financial profile, dramatically increase our returns on shareholder’s capital and reduce earnings volatility at least in the short term.” Though nothing has been finalized yet, he mentions that there is strong interest from multiple parties for their portfolio assets and that is what drove them in that particular direction.

Guidance for 2016 FY is underwhelming: sales growth is expected to be in the lower single digits (at the upper end) and gross retail margins will slightly improve with a 40%-41% target. However, with the upper management reshuffle and extreme likeliness of the portfolio sale, it is quite possible that we will see a drastically different company by the end of the second quarter.