Conn's Q1 Revenue Fell on Consumer Spending Pullback, Financing Squeeze

Same-store sales tumbled 9.5% in Q1 at Conn’s for the FY ’23 quarter ended April 30, due to lapping stimulus comparisons, the “challenging macroeconomic environment" and continued third-party lease-to-own tightening, said CEO Chandra Holt on a Wednesday earnings call. CE sales slid 13.5 to $33.6 million, said the earnings release.

Consolidated revenue fell 6.6% to $339.8 million, due to a 6.5% decline in net sales and a 6.7% reduction in finance charges and other revenue, Holt said. Total net sales were $272.2 million, 6.5% lower than Q1 ‘21; credit revenue was $67.3 million, down 6.8%. Net income for the quarter was $6.2 million vs. $45.4 million in Q1 last year, said the company. Shares fell 5.1% Wednesday to close at $12.53.

Conn’s shaved its FY ’23 outlook, now expecting a total revenue decline in the high-single digits, said Chief Financial Officer George Bchara. The change in guidance reflects the tougher economic environment and lower consumer spending, particularly for customers who use Conn’s financing, he said. It also reflects “significantly higher" fuel costs that the company didn't expect in January during its investor event, he said. To offset higher costs and revenue decline, the company is cutting costs in marketing and labor, Bchara said.

The retailer expects high-single digit declines in both retail and its credit business “as our portfolio contracts due to lower retail sales financed through our in-house credit offering,” Bchara said. The company expects operating margin to be 3%-4% on lower sales and a negative near-term impact from its lease-to-own platform acquisition last quarter.

Holt called the lease-to-own transition an “important initiative” to create sales volume. “Continued tightening by our lease-to-own partners has been a significant headwind to our retail performance over the past quarter,” so Conn’s is consolidating its lease-to-own business under one partner, American First Finance, this week, she said. The financing company is committed to supporting a certain level of lease-to-own sales, Holt said.

After a successful Q1 pilot, Conn’s is rolling out a layaway program to more stores over the fiscal year, Holt said. Diverse payment options have been “the cornerstone of our differentiation,” she said, and the company’s goal is to “have a payment option for everyone.” Each year, over 130,000 consumers who apply for lease-to-own financing at Conn’s are turned down, and there are other customers who don’t want to use credit. The layaway program gives those customers a payment option “and provides us with an incremental opportunity to serve additional customers.”

Holt said some stimulus impact from 2021 will continue to affect future quarters. Conn’s has seen softness in spending, as customers shifted away from discretionary categories “due to inflation and an overall decline in consumer confidence.” But consumer payment activity is “strong,” she said, and net charge-offs in Q1 were 11% vs. 15% in the prior-year quarter. During a challenging macroeconomic time, “We want to be appropriately conservative with credit."

Conn’s partnered with department store chain Belk for a store-within-a-store deal that's set to begin in select Belk locations and online at Belk.com this summer, Holt said. The store will launch under a brand name “soon to be announced” and will give Belk customers access to Conn’s “white-glove,” next-day delivery service. Electronics are among the categories Belk customers will be able to shop, the company said Wednesday. The concept will be piloted in 10-20 Belk locations in existing markets where Conn's operates, with locations ranging from 10,000-25,000 square feet, she said.

On the possibility that the Belk deal could cannibalize Conn’s business, Holt said in Q&A that the partnership lets Conn’s reach new customers while using existing distribution capabilities. Holt referenced Conn’s “best-in-class supply chain,” which she said now serves a “pretty narrow segment of the market." The deal will allow Conn’s to add “density” to existing markets and, “eventually,” future ones as the retailer expands, Holt said. Belk has 300 stores in 16 southeastern states.

The Belk arrangement allows Conn’s to leverage its supply chain and service capabilities “for a much, much broader market,” Holt said. To do that, it could either change its real estate and market strategies, “or we partner with retailers who are already overindexed in an incremental customer segment.” Belk’s is a customer segment “that we don’t necessarily serve,” Holt said. “Even though we’re in the same geographic locations, the customer is very different at Belk than at a traditional Conn’s store.”

Conn’s e-commerce sales increased 71.7% to $18.3 million in Q1. It's upgrading its digital infrastructure, including “re-platforming” its e-commerce website. In Q1, it upgraded the website’s homepage and product listing pages, Holt said. Late this quarter, the company will start on phase two, improving the cart and checkout experience, she said. The third stage, expected to be completed this fall, will focus on making it easier for customers to apply for credit and make payments, Holt said.