When the economy is humming along, extending consumers credit can help keep the wheels oiled up and running. Lending eases up across the economy from mortgages for homes to auto loans to consumer credit. Today’s Bear of the Day is a company that had been readily extending consumers credit to buy their products. The problem is, this last quarter they saw a dramatic rise in delinquencies that is hurting their bottom line.
Zacks Rank #5 (Strong Sell) Conns (CONN) is a specialty retailer with 90 retail locations across 11 states. The company sells furniture and related accessories for your entire house, as well as appliances, consumer electronics and home office equipment. Unlike many of its competitors, the company provides flexible in-house credit options for its customers in addition to third-party financing programs and third-party rent-to-own payment plans.
It’s the in-house credit facility that helped to drag the stock down so much following the last earnings report. Shares of the stock dropped over 40% after a downright depressing quarterly report coupled with the exit of its Chief Financial Officer. Analysts were looking for 68 cents per share profit out of Q3 2014. Instead what they got was an 8 cents per share loss.
Not only did this destroy the stock price but also it caused two analysts to dramatically cut their earnings estimates for current quarter and next year. The resulting drop in consensus took the current quarter number down to 80 cents versus previous estimates for 92 cents while next year’s number dropped from $3.39 per share down to $3.16 per share.
A big reason for the negative number was the rise in delinquencies and higher anticipated charge-offs over the next year. Delinquencies rose 10% last quarter and the company was forced to increase its provision for bad debts to $72 million versus $22.6 million the previous quarter. That nearly $50 million write-down is what sunk the ship for Q3. Another negative in the report was same store sales dropping 1% year over year. Not something you want to see from a growth company.
That’s the bad news. The good news is gross margins are up year-over-year by 60 basis points. Consolidated revenues for the quarter were up 19% year-over-year as well. Also, the company opened up six new stores during the quarter and has added two stores in November.
Obviously the stock didn’t respond too well to the report. The day the stock dropped over 40%. What’s worse is the bleeding hasn’t yet stopped. After closing at $20.83 on the news the stock has continued to plummet, reaching a price of $17.07 at yesterday’s close. This is the second earnings report in a row where the stock has taken it on the chin. The previous report saw the stock fall from $45 all the way to $31 in a single day.