Conn's Expects Lower Q4 Retail Revenue Due to Pull-Forward Sales

Global supply chain challenges will continue into next year, said Conn’s CEO Chandra Holt on an earnings call Tuesday for fiscal Q3 ended Oct. 31. Higher international freight costs dinged the cost of goods sold, which rose to $211 million from $160 million in the year-ago quarter, she said.

To shore up gross margin, Conn's is diversifying its sourcing base, flexing its assortment, reducing promotions and “selectively increasing prices,” Holt said. While focusing on providing customers value, Conn’s will continue to “closely monitor market conditions and margins” across categories and “prudently pass along price increases to mitigate higher costs,” she said.

On when supply chain disruptions will ease, Holt said global freight rates are “starting to normalize” after increasing “for quite a while.” Conn’s is seeing a “little bit of a reduction” in freight costs, “but we do anticipate it continuing to be a headwind for the foreseeable future and don’t have a clear line of sight to when that will come down.”

Conn’s expects Q4 sales to be lower than Q3 due to the pull-forward of holiday sales into the October quarter. Categories such as CE that are more “holiday-sensitive” had a larger acceleration in Q3 than other categories, Holt said. She cited TVs, saying Black Friday pricing hit in October. Though that also happened in Q3 2020, “it went earlier this year and the breadth of items that were on sale were far greater than what we saw last year.”

Chief Financial Officer George Bchara said Conn’s positioned itself for an earlier holiday season and saw the benefits of the strategy in October. Though November was “strong, it was just slower than the trends for the third quarter.” The company forecasts a solid Q4 for sales, “but somewhat less strong than the third quarter,” due to the pull-forward of sales into Q3, Bchara said.

Same-store sales grew 20.6% year on year to $334.5 million in Q3, with CE growing 31.6% to $46.7 million, Conn's said. CE was 14% of the Q3 sales mix, home office 5.2%. Comparative sales were up 9.7% on a two-year basis. Same-store sales grew in all categories but home office, which posted a 3.2% sales drop.

Conn’s had $19.2 million in e-commerce sales in the quarter, up 295%, due to efforts to improve the online shopping experience, Holt said. The CEO broke out e-commerce, with the front end being the consumer-facing website and the back end comprising supply chain and delivery. Conn’s is strong on the back end on a robust in-stock position and its next-day, “white glove delivery,” which Holt called a competitive differentiator. In Q3, more than 80% of available items could be delivered to customers next day, she said.

The retailer “has work to do” on improving the functionality of the e-commerce website, Holt said. The company is investing in conversion, focusing on site functionality, shipping pricing and product pricing, she said, saying Conn’s is in early days of its digital transformation.

For the full year, Conn’s expects mid-teens percentage sales growth, Bchara said. It expects finance charges and other revenue to be down year on year due to a lower balance of customer receivables, he said. Ongoing global supply chain issues will cause a 100-150 basis point impact on retail gross margin in Q4, 30-50 basis points for the full year. In fiscal 2023, Conn’s expects to produce positive same-store sales “despite a fluid economic environment,” the CFO said.

The company expects to step up the pace of new store openings in fiscal 2023, above the 12 stores it will open this year, Bchara said. “We anticipate continued investments in our growth strategy to be largely offset by tighter cost controls.”