Registrant’s telephone number, including area code: (i936) i230-5899
Not Applicable
(Former name, former
address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol
Name of Each Exchange on Which Registered
iCommon Stock, par value $0.01 per share
iCONN
iNASDAQ
Global Select Market
Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYesý No
o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). iYesý No o
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
iAccelerated
filer
ý
Non-accelerated filer
o
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes i☐ No ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of May 24, 2021:
This Quarterly Report on Form 10-Q includes our trademarks such as “Conn’s,”“Conn’s HomePlus,”“YE$ YOU’RE APPROVED,”“YES Money,”“YE$ Money,”“YES Lease,”“YE$ Lease,” and our logos, which are protected
under applicable intellectual property laws and are the property of Conn’s, Inc. This report also contains trademarks, service marks, trade names and copyrights of other companies, which are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this Quarterly Report may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names.
References to “we,”“our,”“us,”“the Company,”“Conn’s” or “CONN” refer to Conn’s, Inc. and, as apparent from the context, its consolidated bankruptcy-remote variable-interest entities (“VIEs”), and its wholly-owned subsidiaries.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. iSummary
of Significant Accounting Policies
i
Business. Conn’s, Inc., a Delaware corporation, is a holding company with no independent assets or operations other than its investments in its subsidiaries. References to “we,”“our,”“us,”“the Company,”“Conn’s” or “CONN” refer to Conn’s, Inc. and, as
apparent from the context, its subsidiaries. Conn’s is a leading specialty retailer that offers a broad selection of quality, branded durable consumer goods and related services in addition to proprietary credit solutions for its core credit-constrained consumers. We operate an integrated and scalable business through our retail stores and website. Our complementary product offerings include furniture and mattresses, home appliances, consumer electronics and home office products from leading global brands across a wide range of price points. Our credit offering provides financing solutions to a large, under-served population of credit-constrained consumers who typically have limited credit alternatives.
We operate
itwo reportable segments: retail and credit. Our retail stores bear the “Conn’s HomePlus” name with all of our stores providing the same products and services to a common customer group. Our stores follow the same procedures and methods in managing their operations. Our retail business and credit business are operated independently from each other. The credit segment is dedicated to providing short- and medium-term financing to our retail customers. The retail segment is not involved in credit approval decisions or collection efforts. Our management
evaluates performance and allocates resources based on the operating results of the retail and credit segments.
Basis of Presentation. The accompanying unaudited Condensed Consolidated Financial Statements of Conn’s, Inc. and its wholly-owned subsidiaries, including its Variable Interest Entities (“VIEs”), have been prepared by management in accordance with U.S. generally accepted accounting principles (“GAAP”) and prevailing industry practice for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, we do not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation
of the results for the interim periods presented. All such adjustments are of a normal recurring nature. The condensed consolidated financial position, results of operations and cash flows for these interim periods are not necessarily indicative of the results that may be expected in future periods. The balance sheet at January 31, 2021 has been derived from the audited financial statements at that date. The financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2021 (the “2021 Form 10-K”) filed with the United States Securities and Exchange Commission (the “SEC”) on March 31, 2021.
/
iFiscal
Year. Our fiscal year ends on January 31. References to a fiscal year refer to the calendar year in which the fiscal year ends.
iPrinciples of Consolidation. The Condensed Consolidated Financial Statements include the accounts of Conn’s, Inc. and its wholly-owned subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.
i
Variable
Interest Entities. VIEs are consolidated if the Company is the primary beneficiary. The primary beneficiary of a VIE is the party that has (i) the power to direct the activities that most significantly impact the performance of the VIE and (ii) the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.
We securitize customer accounts receivables by transferring the receivables to various bankruptcy-remote VIEs. We retain the servicing of the securitized portfolio and have a variable interest in each corresponding VIE by holding the residual equity. We have determined that we are the primary beneficiary of each respective VIE because (i) our servicing responsibilities for the securitized portfolio give us the power to direct the activities that most significantly
impact the performance of the VIE and (ii) our variable interest in the VIE gives us the obligation to absorb losses and the right to receive residual returns that potentially could be significant. As a result, we consolidate the respective VIEs within our Condensed Consolidated Financial Statements.
Refer to Note 5, Debt and Financing Lease Obligations, and Note 7, Variable Interest Entities, for additional information.
iUse of Estimates. The preparation of financial
statements in accordance with GAAP requires management to make informed judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Changes in facts and circumstances or additional information may result in revised estimates, and actual results may differ, even significantly, from these estimates. Management evaluates its estimates and related assumptions regularly, including those related to the allowance for doubtful accounts and allowances for no-interest option credit programs, which are particularly sensitive given the size of our customer portfolio balance.
iCash
and Cash Equivalents. As of April 30, 2021 and January 31, 2021, cash and cash equivalents included cash and credit card deposits in transit. Credit card deposits in transit included in cash and cash equivalents were $i4.9 million and $i7.9
million as of April 30, 2021 and January 31, 2021, respectively. /
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Restricted Cash. The restricted cash balance as of April 30, 2021 and January 31,
2021 includes $i42.6 million and $i41.6 million, respectively, of cash we collected as servicer on the securitized receivables that was subsequently remitted to
the VIEs and $i7.0 million and $i7.0 million, respectively, of cash held by the VIEs as additional collateral for the asset-backed notes.
i
Customer
Accounts Receivable. Customer accounts receivable reported in the Condensed Consolidated Balance Sheet includes total receivables managed, including both those transferred to the VIEs and those not transferred to the VIEs. Customer accounts receivable are recognized at the time the customer takes possession of the product. Expected lifetime losses on customer accounts receivable are recognized upon origination through an allowance for credit losses account that is deducted from the customer account receivable balance and presented net. Customer accounts receivable include the net of unamortized deferred fees charged to customers and origination costs. Customer receivables are considered delinquent if a payment has not been received on the scheduled due date. Accounts that are delinquent more than 209 days as of the end of a month are charged-off against the allowance for doubtful accounts along with interest accrued subsequent to the last
payment.
In an effort to mitigate losses on our accounts receivable, we may make loan modifications to a borrower experiencing financial difficulty. The loan modifications are intended to maximize net cash flow after expenses and avoid the need to exercise legal remedies available to us. We may extend or “re-age” a portion of our customer accounts, which involves modifying the payment terms to defer a portion of the cash payments due. Our re-aging of customer accounts does not change the interest rate or the total principal amount due from the customer and typically does not reduce the monthly contractual payments. To a much lesser extent, we may provide the customer the ability to refinance their account, which typically does not change the interest rate or the total principal amount due from the customer but does reduce the monthly contractual payments and extend the term. We consider accounts that have been re-aged
in excess of three months or refinanced as Troubled Debt Restructurings (“TDR” or “Restructured Accounts”).
On March 27, 2020 the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law to address the economic impact of the COVID-19 pandemic. Under the CARES Act, modifications deemed to be COVID-19 related are not considered a TDR if the loan was current (not more than 30 days past due as of March 31, 2020) and the deferral was executed between April 1, 2020 and the earlier of 60 days after the termination of the COVID-19 national emergency or December 31, 2020. In response to the CARES Act, the
Company implemented short-term deferral programs for our customers. The carrying value of the customer receivables on accounts which were current prior to receiving a COVID-19 related deferment was $i44.5 million and $i65.2 million
as of April 30, 2021 and January 31, 2021, respectively.
i
Interest Income on Customer Accounts Receivable. Interest income, which includes interest income and amortization of deferred fees and origination costs, is recorded using the interest method and is reflected in finance charges and other revenues. Typically, interest income is recorded until the customer account is paid off or charged-off and we provide an allowance for estimated uncollectible interest. We reserve for interest that
is more than 60 days past due. Any contractual interest income received from customers in excess of the interest income calculated using the interest method is recorded as deferred revenue on our balance sheets. At April 30, 2021 and January 31, 2021, there was $i8.5 million and $i8.9
million, respectively, of deferred interest included in deferred revenues and other credits and other long-term liabilities. The deferred interest will ultimately be brought into income as the accounts pay off or charge-off.
We offer a 12-month no-interest option program. If the customer is delinquent in making a scheduled monthly payment or does not repay the principal in full by the end of the no-interest option program period (grace periods are provided), the account does not qualify for the no-interest provision and none of the interest earned is waived. Interest income is recognized based on estimated accrued interest earned to date on all no-interest option finance programs with an offsetting reserve for those customers expected to satisfy the requirements of the program based on our historical experience.
We recognize interest income on TDR accounts using the interest
income method, which requires reporting interest income equal to the increase in the net carrying amount of the loan attributable to the passage of time. Cash proceeds and other adjustments are applied to the net carrying amount such that it equals the present value of expected future cash flows.
We place accounts in non-accrual status when legally required. Payments received on non-accrual loans are applied to principal and reduce the balance of the loan. At April 30, 2021 and January 31, 2021, the carrying value of customer accounts receivable in non-accrual status was $i6.9
million and $i8.5 million, respectively. At April 30, 2021 and January 31, 2021, the carrying value of customer accounts receivable that were past due 90 days or more and still accruing interest totaled $i75.7
million and $i111.5 million, respectively. At April 30, 2021 and January 31, 2021, the carrying value of customer accounts receivable in a bankruptcy status that were less than 60 days past due of $i4.1
million and $i5.2 million, respectively, were included within the customer receivables balance carried in non-accrual status.
/
iAllowance
for Doubtful Accounts. The determination of the amount of the allowance for credit losses is, by nature, highly complex and subjective. Future events that are inherently uncertain could result in material changes to the level of the allowance for credit losses. General economic conditions, changes to state or federal regulations and a variety of other factors that affect the ability of borrowers to service their debts or our ability to collect will impact the future performance of the portfolio.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
We
establish an allowance for credit losses, including estimated uncollectible interest, to cover expected credit losses on our customer accounts receivable resulting from the failure of customers to make contractual payments. Our customer accounts receivable portfolio balance consists of a large number of relatively small, homogeneous accounts. None of our accounts are large enough to warrant individual evaluation for impairment. The allowance for credit losses is measured on a collective (pool) basis where similar risk characteristics exist. The allowance for credit losses is determined for each pool and added to the pool’s carrying amount to establish a new amortized cost basis.
We use a risk-based, pool-level segmentation framework to calculate the expected loss rate. This framework is based on our historical gross charge-off history. In addition to adjusted historical gross charge-off rates, estimates of post-charge-off
recoveries, including cash payments from customers, sales tax recoveries from taxing jurisdictions, and payments received under credit insurance and repair service agreement (“RSA”) policies are also considered. We also consider forward-looking economic forecasts based on a statistical analysis of economic factors (specifically, forecast of unemployment rates over the reasonable and supportable forecasting period). To the extent that situations and trends arise which are not captured in our model, management will layer on additional qualitative adjustments.
Pursuant to ASC 326 requirements, the Company uses a 24-month reasonable and supportable forecast period for the customer accounts receivable portfolio. We estimate losses beyond the 24-month forecast period based on historic loss rates experienced over the life of our historic
loan portfolio by loan pool type. We revisit our measurement methodology and assumption annually, or more frequently if circumstances warrant.
As of April 30, 2021 and January 31, 2021, the balance of allowance for doubtful accounts and uncollectible interest for non-TDR customer receivables was $i166.4 million and $i219.7 million,
respectively. As of April 30, 2021 and January 31, 2021, the amount included in the allowance for doubtful accounts associated with principal and interest on TDR accounts was $i60.9 million and $i78.3 million,
respectively.
iDebt Issuance Costs. Costs that are direct and incremental to debt issuance are deferred and amortized to interest expense using the effective interest method over the expected life of the debt. All other costs related to debt issuance are expensed as incurred. We present debt issuance costs associated with long-term debt as a reduction of the carrying amount of the debt. Unamortized costs related to the Revolving Credit Facility, as defined in Note 5, Debt and Financing Lease Obligations,
are included in other assets on our Condensed Consolidated Balance Sheet and were $i6.3 million and $i3.5 million as of April 30, 2021 and January 31,
2021, respectively./
Loss on Extinguishment. During the three month period ended April 30, 2021, we incurred a loss of $i1.0 million related to the retirement of the remaining $i141.2 million
aggregate principal amount of our i7.25% Senior Notes due 2022 (“Senior Notes”) and a loss of $i0.2 million related to the amendment of our Fifth
Amended and Restated Loan and Security Agreement.
i
Income Taxes. For the three months ended April 30, 2021 and 2020, we utilized the estimated annual effective tax rate based on our estimated fiscal year 2022 and 2021 pre-tax income, respectively, in determining income tax expense.
Provision for income taxes for interim periods is based on an estimated annual income tax rate, adjusted for
discrete tax items. As a result, our interim effective tax rates may vary significantly from the statutory tax rate and the annual effective tax rate.
For the three months ended April 30, 2021 and 2020, the effective tax rate was i23.7% and i27.2%,
respectively. The primary factor affecting the decrease in our effective tax rate for the three months ended April 30, 2021 was the impact of the tax loss carryback provisions of the CARES Act that was reflected in the prior period.
i
Stock-based Compensation. During the three months ended April 30, 2021, the
Company granted performance stock awards (“PSUs”) and restricted stock awards (“RSUs”). The awards had a combined aggregate grant date fair value of $i8.3 million. The PSUs will vest in fiscal year 2025, if at all, upon certification by the Compensation Committee of the Board of Directors of satisfaction of certain total stockholder return
performance conditions over the three fiscal years commencing with fiscal year 2022. The RSUs will vest ratably, over periods of ithree years to ifour
years from the date of grant.
Stock-based compensation expense is recorded, net of actual forfeitures, for share-based compensation awards over the requisite service period using the straight-line method. For equity-classified share-based compensation awards, expense is recognized based on the grant-date fair value. For stock option grants, we use the Black-Scholes model to determine fair value. For grants of restricted stock units, the fair value of the grant is the market value of our stock at the date of issuance. For grants of performance-based restricted stock units, the fair value is the market value of our stock at the date of issuance adjusted for the market condition using a Monte Carlo model.
(1)The
RSUs issued during the three months ended April 30, 2021 and 2020 are scheduled to vest ratably over periods of ithree years to ifour
years from the date of grant.
(2)The weighted-average assumptions used in the Monte Carlo model for the PSUs granted during the three months ended April 30, 2021 included expected volatility of i83.0%, an expected term of i3 years
and risk-free interest rate of i0.17%. iNo dividend
yield was included in the weighted-average assumptions for the PSUs granted during the three months ended April 30, 2021. The weighted-average assumptions used in the Monte Carlo model for the PSUs granted during the three months ended April 30, 2020 included expected volatility of i60.0%, an expected term of i3
years and risk-free interest rate of i1.42%. No dividend yield was included in the weighted average assumptions for the PSUs granted during the three months ended April 30, 2020.
/
For
the three months ended April 30, 2021 and 2020, stock-based compensation expense was $i2.0 million and $i2.4
million, respectively.
i
Earnings (loss) per Share. Basic earnings (loss) per share for a particular period is calculated by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted earnings per share includes the dilutive effects of any stock options, RSUs and PSUs, which are calculated using the treasury-stock method. iThe
following table sets forth the shares outstanding for the earnings per share calculations:
Weighted-average common shares outstanding - Basic
i29,324,052
i28,822,396
Dilutive
effect of stock options, PSUs and RSUs
i557,355
i—
Weighted-average
common shares outstanding - Diluted
i29,881,407
i28,822,396
For
the three months ended April 30, 2021 and 2020, the weighted average number of stock options, RSUs and PSUs not included in the calculation due to their anti-dilutive effect, was i1,033,650 and i1,832,902,
respectively.
/i
Fair Value of Financial Instruments. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value are categorized using defined hierarchical levels related to subjectivity associated with
the inputs to fair value measurements as follows:
•Level 1 – Inputs represent unadjusted quoted prices in active markets for identical assets or liabilities.
•Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (for example, quoted market prices for similar assets or liabilities in active markets or quoted market prices for identical assets or liabilities in markets not considered to be active, inputs other than quoted prices that are observable for the asset or liability, or market-corroborated inputs).
•Level 3 – Inputs that are not observable from objective sources such as our internally developed assumptions used in pricing an asset or liability (for example, an estimate
of future cash flows used in our internally developed present value of future cash flows model that underlies the fair-value measurement).
In determining fair value, we use observable market data when available, or models that incorporate observable market data. When we are required to measure fair value and there is not a market-observable price for the asset or liability or for a similar asset or liability, we use the cost or income approach depending on the quality of information available to support management’s assumptions. The cost approach is based on management’s best estimate of the current asset replacement cost. The income approach is based on management’s best assumptions regarding expectations of future net cash flows and discounts the expected cash flows using a commensurate risk-adjusted discount rate. Such evaluations involve significant judgment, and the results are based on expected future events or conditions
such as sales prices, economic and regulatory climates, and other
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
factors, most of which are often outside of management’s control. However, we believe assumptions used reflect a market participant’s view of long-term prices, costs, and other factors and are consistent with assumptions used in our business plans and investment decisions.
In arriving at fair-value estimates, we use relevant observable inputs available for the
valuation technique employed. If a fair-value measurement reflects inputs at multiple levels within the hierarchy, the fair-value measurement is characterized based on the lowest level of input that is significant to the fair-value measurement.
The fair value of cash and cash equivalents, restricted cash and accounts payable approximate their carrying amounts because of the short maturity of these instruments. The fair value of customer accounts receivable, determined using a Level 3 discounted cash flow analysis, approximates their carrying value, net of the allowance for doubtful accounts. The fair value of our Revolving Credit Facility approximates carrying value based on the current borrowing rate for similar types of borrowing arrangements. At April 30, 2021, the fair value of the asset backed notes was $i344.2
million as compared to the carrying value of $i342.4 million and was determined using Level 2 inputs based on inactive trading activity.
iDeferred Revenue. Deferred
revenue related to contracts with customers consists of deferred customer deposits and deferred RSA administration fees. During the three months ended April 30, 2021, we recognized $i4.7 million of revenue for customer deposits deferred as of January 31, 2021. During the three months ended April 30, 2021, we recognized
$i0.9 million of revenue for RSA administrative fees deferred as of January 31, 2021.
i
Recent
Accounting Pronouncements Adopted.
Simplifying the Accounting for Income Taxes. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, an update intended to simplify various aspects related to accounting for income taxes. This guidance removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This accounting standards update became effective for us in the first quarter of fiscal year 2022. The adoption did not have a material impact on our consolidated financial statements.
Recent Accounting Pronouncements Yet to Be Adopted.
Reference Rate Reform on Financial Reporting. In March 2020, the
FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, an update that provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848), Scope, to clarify the scope of the guidance and reduce potential diversity in practice. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference
rate reform. These accounting standard updates were effective upon issuance, with adoption permitted through December 31, 2022. We expect to adopt ASC 2020-04 and ASC 2021-01 upon transition from LIBOR, prior to December 31, 2022. We do not expect the adoption to have a material impact on our consolidated financial statements.
Customer accounts receivable 60+ days past due (3)
$
i97,406
$
i146,820
Re-aged
customer accounts receivable (4)
i255,680
i306,845
Restructured
customer accounts receivable (5)
i151,027
i178,374
(1)As
of April 30, 2021 and January 31, 2021, the customer accounts receivable balance included $i22.4 million and $i31.1 million,
respectively, in interest receivable. Net of the allowance for uncollectible interest, interest receivable outstanding as of April 30, 2021 and January 31, 2021 was $i7.5 million and $i9.7
million, respectively.
(2)Our current methodology to estimate expected credit losses utilized macroeconomic forecasts as of April 30, 2021 and January 31, 2021, which incorporated the continued estimated impact of the global COVID-19 outbreak on the U.S. economy. Our forecast utilized economic projections from a major rating service reflecting a decrease in unemployment rates.
(3)As of April 30, 2021 and January 31, 2021, the carrying value of customer accounts receivable past due one day or greater was $i250.8
million and $i340.8 million, respectively. These amounts include the 60+ days past due balances shown above.
(4)The re-aged carrying value as of April 30, 2021 and January 31, 2021 includes $i53.1
million and $i88.0 million, respectively, in carrying value that are both 60+ days past due and re-aged.
/
(5)The restructured carrying value as of April 30, 2021 and January 31, 2021 includes $i34.6
million and $i57.1 million, respectively, in carrying value that are both 60+ days past due and restructured.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
i
The
allowance for credit losses included in the current and long-term portion of customer accounts receivable, net as shown in the Condensed Consolidated Balance Sheet were as follows:
Allowance
at beginning of period, prior to adoption of ASC 326
$
i219,739
$
i78,298
$
i298,037
$
i145,680
$
i88,123
$
i233,803
Impact
of adoption ASC 326
i—
i—
i—
i95,136
i3,526
i98,662
Provision
for credit loss expense (1)
(i16,197)
i6,567
(i9,630)
i109,065
i28,224
i137,289
Principal
charge-offs (2)
(i34,794)
(i22,464)
(i57,258)
(i46,351)
(i18,501)
(i64,852)
Interest
charge-offs
(i9,873)
(i6,375)
(i16,248)
(i12,314)
(i5,300)
(i17,614)
Recoveries
(3)
i7,486
i4,833
i12,319
i3,988
i1,977
i5,965
Allowance
at end of period
$
i166,361
$
i60,859
$
i227,220
$
i295,204
$
i98,049
$
i393,253
Average
total customer portfolio balance
$
i998,226
$
i172,812
$
i1,171,038
$
i1,333,197
$
i224,565
$
i1,557,762
(1)Includes
provision for uncollectible interest, which is included in finance charges and other revenues, and changes in expected future recoveries.
(2)Charge-offs include the principal amount of losses (excluding accrued and unpaid interest). Recoveries include the principal amount collected during the period for previously charged-off balances. Net charge-offs are calculated as the net of principal charge-offs and recoveries.
(3)Recoveries include the principal amount collected during the period for previously charged-off balances.
/i
We
manage our customer accounts receivable portfolio using delinquency as a key credit quality indicator. The following table presents the delinquency distribution of the carrying value of customer accounts receivable by year of origination. The information is presented as of April 30, 2021:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. iCharges and Credits
i
Charges
and credits consisted of the following:
Three Months Ended April 30,
(in thousands)
2021
2020
Professional fees
$
i—
$
i2,055
Total
charges and credits
$
i—
$
i2,055
/
During
the three months ended April 30, 2020, we recognized $i2.1 million in professional fees associated with non-recurring expenses related to fiscal year 2020.
4. iFinance
Charges and Other Revenues
i
Finance charges and other revenues consisted of the following:
Three Months Ended April 30,
(in thousands)
2021
2020
Interest
income and fees
$
i67,679
$
i81,843
Insurance
income
i4,518
i4,752
Other
revenues
i209
i235
Total finance charges and other revenues
$
i72,406
$
i86,830
/
Interest
income and fees and insurance income are derived from the credit segment operations, whereas other revenues are derived from the retail segment operations. Insurance income is comprised of sales commissions from third-party insurance companies that are recognized when coverage is sold and retrospective income paid by the insurance carrier if insurance claims are less than earned premiums.
During the three months ended April 30, 2021 and 2020, interest income and fees reflected provisions for uncollectible interest of $i7.5
million and $i20.1 million, respectively. The amounts included in interest income and fees related to TDR accounts for the three months ended April 30, 2021 and 2020 were $i7.5
million and $i9.5 million, respectively.
Current
maturities of long-term debt and financing lease obligations
(i898)
(i934)
Long-term
debt and financing lease obligations
$
i492,055
$
i608,635
/
Senior
Notes. On July 1, 2014, we issued an aggregate principal amount of $i250.0 million in unsecured i7.25% Senior
Notes due 2022, (the “Senior Notes”) pursuant to an indenture dated July 1, 2014 (as amended, the “Indenture”), among Conn’s, Inc., its subsidiary guarantors (the “Guarantors”) and U.S. Bank National Association, as trustee. On April 15, 2021 we completed the redemption of all of our outstanding Senior Notes in an aggregate principal amount of $i141.2
million.
Asset-backed Notes. From time to time, we securitize customer accounts receivables by transferring the receivables to various bankruptcy-remote VIEs. In turn, the VIEs issue asset-backed notes secured by the transferred customer accounts receivables and restricted cash held by the VIEs.
Under the terms of the securitization transactions, all cash collections and other cash proceeds of the customer receivables go first to the servicer and the holders of issued notes, and then to us as the holder of non-issued notes, if any, and residual equity. We retain the servicing of the securitized portfolios and receive a monthly fee of i4.75%
(annualized) based on the outstanding balance of the securitized receivables. In addition, we, rather than the VIEs, retain all credit insurance income together with certain recoveries related to credit insurance and RSAs on charge-offs of the securitized receivables, which are reflected as a reduction to net charge-offs on a consolidated basis.
The asset-backed notes were offered and sold to qualified institutional buyers pursuant to the exemptions from registration provided by Rule 144A under the Securities Act of 1933. If an event of default were to occur under the indenture that governs the respective asset-backed notes, the payment of the outstanding amounts may be accelerated, in which event the cash proceeds of the receivables that otherwise might be released to the residual equity holder would instead be directed entirely toward
repayment of the asset-backed notes, or if the receivables are liquidated, all liquidation proceeds could be directed solely to repayment of the asset-backed notes as governed by the respective terms of the asset-backed notes. The holders of the asset-backed notes have no recourse to assets outside of the VIEs. Events of default include, but are not limited to, failure to make required payments on the asset-backed notes or specified bankruptcy-related events.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
i
The
asset-backed notes outstanding as of April 30, 2021 consisted of the following:
(dollars
in thousands)
Asset-Backed Notes
Original Principal Amount
Original Net Proceeds (1)
Current Principal Amount
Issuance Date
Maturity
Date
Contractual Interest Rate
Effective Interest Rate (2)
2019-A Class A Notes
$
i254,530
$
i253,026
$
i11,620
4/24/2019
10/16/2023
i3.40%
i4.84%
2019-A
Class B Notes
i64,750
i64,276
i14,923
4/24/2019
10/16/2023
i4.36%
i5.29%
2019-A
Class C Notes
i62,510
i61,898
i14,407
4/24/2019
10/16/2023
i5.29%
i6.32%
2019-B
Class B Notes
i85,540
i84,916
i57,420
11/26/2019
6/17/2024
i3.62%
i4.60%
2019-B
Class C Notes
i83,270
i82,456
i83,270
11/26/2019
6/17/2024
i4.60%
i5.21%
2020-A
Class A Notes
i174,900
i173,716
i32,645
10/16/2020
6/16/2025
i1.71%
i4.55%
2020-A
Class B Notes
i65,200
i64,754
i65,200
10/16/2020
6/16/2025
i4.27%
i5.49%
2020-A
Class C Notes
i62,900
i62,535
i62,900
2/24/2021
6/16/2025
i4.20%
i5.51%
Total
$
i853,600
$
i847,577
$
i342,385
(1)After
giving effect to debt issuance costs.
/
(2)For the three months ended April 30, 2021, and inclusive of the impact of changes in timing of actual and expected cash flows.
On February 24, 2021, the Company completed the sale of $i62.9 million
aggregate principal amount of i4.20% Asset Backed Notes, Class C, Series 2020-A, which were previously issued and held by the Company. The asset-backed notes are secured by the transferred customer accounts receivables and restricted cash held by a consolidated VIE, which resulted in net proceeds to us of $i62.5 million,
net of debt issuance costs. Net proceeds from the sale were used to repay amounts outstanding under the Company’s Revolving Credit Facility.
On May 12, 2021, the Company completed the redemption of the 2019-A Asset Backed Notes at an aggregate redemption price of $i41.1 million (which was equal to the entire
outstanding principal balance plus accrued interest). See Note 9. Subsequent Events, for details.
Revolving Credit Facility. On March 29, 2021, Conn’s, Inc. and certain of its subsidiaries (the “Borrowers”) entered into the Fifth Amended and Restated Loan and Security Agreement (the “Fifth Amended and Restated Loan Agreement”), with certain lenders, which provides for a $i650.0
million asset-based revolving credit facility (as amended, the “Revolving Credit Facility”) under which credit availability is subject to a borrowing base and a maturity date of March 29, 2025.
The Fifth Amended and Restated Loan Agreement, among other things, permits borrowings under the Letter of Credit Subline (as defined in the Fifth Amended and Restated Loan Agreement) that exceed the cap of $i40 million to $i100 million,
solely at the discretion of the lenders for such amounts in excess of $i40 million. The obligations under the Revolving Credit Facility are secured by substantially all assets of the Company, excluding the assets of the VIEs. As of April 30, 2021, we had immediately available borrowing capacity of $i290.4
million under our Revolving Credit Facility, net of standby letters of credit issued of $i22.5 million. We also had $i190.6 million that
may become available under our Revolving Credit Facility were we to grow the balance of eligible customer receivables and total eligible inventory balances.
Loans under the Revolving Credit Facility bear interest, at our option, at a rate of LIBOR plus a margin ranging from i2.50% to i3.25%
per annum (depending on a pricing grid determined by our total leverage ratio) or the alternate base rate plus a margin ranging from i1.50% to i2.25% per annum
(depending on a pricing grid determined by our total leverage ratio). We also pay an unused fee on the portion of the commitments that is available for future borrowings or letters of credit at a rate ranging from i0.25% to i0.50%
per annum, depending on the average outstanding balance and letters of credit of the Revolving Credit Facility in the immediately preceding quarter. The weighted-average interest rate on borrowings outstanding and including unused line fees under the Revolving Credit Facility was i9.6% for the three months ended April 30, 2021.
The Revolving Credit Facility places restrictions on our ability to incur additional indebtedness, grant liens on assets, make distributions on equity interests, dispose of assets,
make loans, pay other indebtedness, engage in mergers, and other matters. The Revolving Credit Facility restricts our ability to make dividends and distributions unless no event of default exists and a liquidity test is satisfied. Subsidiaries of the Company may pay dividends and make distributions to the Company and other obligors under the Revolving Credit Facility without restriction. As of April 30, 2021, we were restricted from making distributions in excess of $i180.0 million
as a result of the Revolving Credit Facility distribution and payment restrictions. The Revolving Credit Facility contains customary default provisions, which, if triggered, could result in acceleration of all amounts outstanding under the Revolving Credit Facility.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Debt Covenants. We were in compliance with our debt covenants at April 30, 2021. iA
summary of the significant financial covenants that govern our Revolving Credit Facility compared to our actual compliance status at April 30, 2021 is presented below:
Actual
Required Minimum/ Maximum
Interest Coverage Ratio for the quarter must equal or exceed minimum
i11.71:1.00
i1.00:1.00
Interest
Coverage Ratio for the trailing two quarters must equal or exceed minimum
i8.12:1.00
i1.50:1.00
Leverage
Ratio must not exceed maximum
i1.26:1.00
i4.50:1.00
ABS
Excluded Leverage Ratio must not exceed maximum
i0.77:1.00
i2.50:1.00
Capital
Expenditures, net, must not exceed maximum
$i23.8 million
$i100.0 million
All
capitalized terms in the above table are defined in the Revolving Credit Facility and may or may not match directly to the financial statement captions in this document. The covenants are calculated quarterly, except for capital expenditures, which is calculated for a period of four consecutive fiscal quarters, as of the end of each fiscal quarter.
6. iContingencies
Securities
Litigation. On May 15, 2020, a putative securities class action lawsuit was filed against us and two of our executive officers in the United States District Court for the Southern District of Texas, captioned Uddin v. Conn’s, Inc., et al., No. 4:20-1705 (“Uddin Action”). On November 16, 2020, the lead plaintiff voluntarily dismissed the action without prejudice. The court entered an order recognizing the dismissal on November 17, 2020.
On April 2, 2018, MicroCapital Fund, LP, MicroCapital Fund, Ltd., and MicroCapital LLC (collectively, “MicroCapital”) filed a lawsuit against us and certain of our former executive officers in the U.S. District Court for the Southern District of Texas, Cause No.
4:18-CV-01020 (the “MicroCapital Action”). The plaintiffs in this action allege that the defendants made false and misleading statements or failed to disclose material facts about our credit and underwriting practices, accounting and internal controls. Plaintiffs allege violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, Texas and Connecticut common law fraud, and Texas common law negligent misrepresentation against all defendants; as well as violations of section 20A of the Securities Exchange Act of 1934; and Connecticut common law negligent misrepresentation against certain defendants arising from plaintiffs’ purchase of Conn’s, Inc. securities between April 3, 2013 and February 20, 2014. The complaint does not specify the amount of damages sought.
The
Court previously stayed the MicroCapital Action pending resolution of other outstanding litigation (In re Conn’s Inc. Sec. Litig., Cause No. 14-CV-00548 (S.D. Tex.) (the “Consolidated Securities Action”)), which was settled in October 2018. After that settlement, the stay was lifted, and the defendants filed a motion to dismiss plaintiff’s complaint in the MicroCapital Action on November 6, 2018. On July 26, 2019, the magistrate judge issued a report recommending that defendants’ motion to dismiss the complaint be granted in part and denied in part. On September 25, 2019, the district court adopted the magistrate judge’s report, which permitted MicroCapital to file an amended complaint, which MicroCapital filed on October 30, 2019. Defendants filed their answer to
the amended complaint on November 27, 2019.
We intend to vigorously defend our interests in the MicroCapital Action. It is not possible at this time to predict the timing or outcome of this litigation, and we cannot reasonably estimate the possible loss or range of possible loss from these claims.
Derivative Litigation. On December 1, 2014, an alleged shareholder, purportedly on behalf of the Company, filed a derivative shareholder lawsuit against us and certain of our current and former directors and former executive officers captioned as Robert Hack, derivatively on behalf of Conn’s, Inc., v. Theodore M. Wright (former executive officer and former director), Bob L. Martin, Jon E.M. Jacoby (former
director), Kelly M. Malson, Douglas H. Martin, David Schofman, Scott L. Thompson (former director), Brian Taylor (former executive officer) and Michael J. Poppe (former executive officer) and Conn’s, Inc., Case No. 4:14-cv-03442 (S.D. Tex.) (the “Original Derivative Action”). The complaint asserts claims for breach of fiduciary duty, unjust enrichment, gross mismanagement, and insider trading based on substantially similar factual allegations as those asserted in the Consolidated Securities Action. The plaintiff seeks unspecified damages against these persons and does not request any damages from Conn’s. Setting forth substantially similar claims against the same defendants, on February 25, 2015, an additional federal derivative action, captioned 95250 Canada LTEE, derivatively on Behalf of Conn’s, Inc. v. Wright et al., Cause No. 4:15-cv-00521 (S.D. Tex.), which was consolidated with the Original Derivative Action.
The
Court previously approved a stipulation among the parties to stay the Original Derivative Action pending resolution of the Consolidated Securities Action. The stay was lifted on November 1, 2018, and the defendants filed a motion to dismiss plaintiff’s complaint. Briefing on the motion to dismiss was completed December 3, 2018. On May 29, 2019, the magistrate
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
judge
issued a report, recommending that defendants’ motion to dismiss the complaint be granted, but recommended that the plaintiff be permitted to replead his claims. The district court adopted the recommendation on July 5, 2019.
On July 19, 2019, plaintiff filed an amended complaint. On November 1, 2019, the magistrate judge heard argument on the motion to dismiss and postponed certain deadlines. Adopting the report and recommendation issued by the magistrate judge on July 22, 2020, the district court entered an order on September 25, 2020 denying defendant’s motion on the breach of fiduciary duty claims and granting defendants’ motion on the insider trading claims. The district court
also allowed plaintiff leave to amend to add 95250 Canada LTEE, which had been omitted from the amended complaint, as a party to the case. Plaintiffs filed a corrected amended complaint on October 21, 2020 in accordance with the district court’s order.
Another derivative action was filed on January 27, 2015, captioned as Richard A. Dohn v. Wright, et al., Cause No. 2015-04405, in the 281st Judicial District Court, Harris County, Texas. This action makes substantially similar allegations to the Original Derivative Action against the same defendants. This case is stayed until at least July 15, 2021.
Prior to filing a lawsuit, an alleged shareholder, Robert J. Casey II (“Casey”), submitted a demand under Delaware law, which our Board
of Directors refused. On May 19, 2016, Casey, purportedly on behalf of the Company, filed a lawsuit against us and certain of our current and former directors and former executive officers in the 55th Judicial District Court, Harris County, Texas, captioned as Casey, derivatively on behalf of Conn’s, Inc., v. Theodore M. Wright (former executive officer and former director), Michael J. Poppe (former executive officer), Brian Taylor (former executive officer), Bob L. Martin, Jon E.M. Jacoby (former director), Kelly M. Malson (former director), Douglas H. Martin, David Schofman, Scott L. Thompson (former director) and William E. Saunders Jr., and Conn’s, Inc., Cause No. 2016-33135. The complaint asserts claims for breach of fiduciary duties and unjust enrichment based on substantially similar factual allegations as those asserted in the
Original Derivative Action. The complaint does not specify the amount of damages sought. Since April 2018, this case has been abated pending the resolution of related cases. At a hearing on October 2, 2020, the court took under advisement whether the abatement should continue pending further developments in the Original Derivative Action.
Other than Casey, none of the plaintiffs in the other derivative actions made a demand on our Board of Directors prior to filing their respective lawsuits. The defendants in the derivative actions intend to vigorously defend against these claims. It is not possible at this time to predict the timing or outcome of any of this litigation, and we cannot reasonably estimate the possible loss or range of possible loss from these claims.
We are involved in other routine litigation and claims, incidental
to our business from time to time which, individually or in the aggregate, are not expected to have a material adverse effect on us. As required, we accrue estimates of the probable costs for the resolution of these matters. These estimates have been developed in consultation with counsel and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. However, the results of these proceedings cannot be predicted with certainty, and changes in facts and circumstances could impact our estimate of reserves for litigation. The Company believes that any probable and reasonably estimable loss associated with the foregoing has been adequately reflected in the accompanying financial statements.
7.
iVariable Interest Entities
From time to time, we securitize customer accounts receivables by transferring the receivables to various bankruptcy-remote VIEs. Under the terms of the respective securitization transactions, all cash collections and other cash proceeds of the customer receivables go first to the servicer and the holders of the asset-backed notes, and then to the residual equity holder. We retain the servicing of the securitized portfolio and receive a monthly fee of i4.75%
(annualized) based on the outstanding balance of the securitized receivables, and we currently hold all of the residual equity. In addition, we, rather than the VIEs, will retain certain credit insurance income together with certain recoveries related to credit insurance and RSAs on charge-offs of the securitized receivables, which will continue to be reflected as a reduction of net charge-offs on a consolidated basis for as long as we consolidate the VIEs.
We consolidate VIEs when we determine that we are the primary beneficiary of these VIEs, we have the power to direct the activities that most significantly impact the performance of the VIEs and our obligation to absorb losses and the right to receive residual returns are significant.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
i
The following table presents the assets and liabilities held by the VIEs (for legal purposes, the assets and liabilities of the VIEs will remain distinct from Conn’s, Inc.):
The
assets of the VIEs serve as collateral for the obligations of the VIEs. The holders of asset-backed notes have no recourse to assets outside of the respective VIEs.
8.iSegment Information
Operating segments are defined as components of an enterprise that
engage in business activities and for which discrete financial information is available that is evaluated on a regular basis by the chief operating decision maker to make decisions about how to allocate resources and assess performance. We are a leading specialty retailer and offer a broad selection of quality, branded durable consumer goods and related services in addition to a proprietary credit solution for our core credit-constrained consumers. We have itwo operating segments: (i) retail and (ii) credit. Our operating segments complement one another. The retail
segment operates primarily through our stores and website. Our retail segment product offerings include furniture and mattresses, home appliances, consumer electronics and home office products from leading global brands across a wide range of price points. Our credit segment offers affordable financing solutions to a large, under-served population of credit-constrained consumers who typically have limited credit alternatives. Our operating segments provide customers the opportunity to comparison shop across brands with confidence in our competitive prices as well as affordable monthly payment options, next day delivery and installation in the majority of our markets, and product repair service. The operating segments follow the same accounting policies used in our Condensed Consolidated Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
We evaluate a segment’s performance based upon operating income before taxes. Selling, general and administrative expenses (“SG&A”) includes the direct expenses of the retail and credit operations, allocated overhead expenses, and a charge to the credit segment to reimburse the retail segment for expenses it incurs related to occupancy, personnel, advertising and other direct costs of the retail segment, which benefit the credit operations by sourcing credit customers and collecting payments. The reimbursement received by the retail segment from the credit segment is calculated using an annual rate of i2.5%
times the average outstanding portfolio balance for each applicable period.
As of April 30, 2021, we operated retail stores in i15 states with ino
operations outside of the United States. No single customer accounts for more than 10% of our total revenues.
i
Financial information by segment is presented in the following tables:
(1)For
the three months ended April 30, 2021 and 2020, the amount of corporate overhead allocated to each segment reflected in SG&A was $i9.1 million and $i7.3
million, respectively. For the three months ended April 30, 2021 and 2020, the amount of reimbursement made to the retail segment by the credit segment was $i7.3 million and $i9.8
million, respectively.
/
9. iSubsequent Event
Redemption of 2019-A Notes. On May 12, 2021, the
Company completed the redemption of the 2019-A Asset Backed Notes at an aggregate redemption price of $i41.1 million (which was equal to the entire outstanding principal balance plus accrued interest). We funded the redemption with cash on hand and borrowings under our Revolving Credit Facility.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
This report contains forward-looking statements within the meaning of the federal securities laws, including, but not limited to, the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Such forward-looking statements include information concerning our future financial performance, business strategy, plans, goals and objectives. Statements containing the words “anticipate,”“believe,”“could,”“estimate,”“expect,”“intend,”“may,”“plan,”“project,”“should,”“predict,”“will,”“potential,” or the negative of such terms or other similar
expressions are generally forward-looking in nature and not historical facts. Such forward-looking statements are based on our current expectations. We can give no assurance that such statements will prove to be correct, and actual results may differ materially. A wide variety of potential risks, uncertainties, and other factors could materially affect our ability to achieve the results either expressed or implied by our forward-looking statements including, but not limited to: general economic conditions impacting our customers or potential customers; our ability to execute periodic securitizations of future originated customer loans on favorable terms; our ability to continue existing customer financing programs or to offer new customer financing programs; changes in the delinquency status of our credit portfolio; unfavorable developments in ongoing litigation; increased regulatory oversight; higher than anticipated net charge-offs in the credit portfolio; the success
of our planned opening of new stores; technological and market developments and sales trends for our major product offerings; our ability to manage effectively the selection of our major product offerings; our ability to protect against cyber-attacks or data security breaches and to protect the integrity and security of individually identifiable data of our customers and employees; our ability to fund our operations, capital expenditures, debt repayment and expansion from cash flows from operations, borrowings from our Revolving Credit Facility, proceeds from accessing debt or equity markets; the effects of epidemics or pandemics, including the COVID-19 outbreak; and other risks detailed in Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended January 31, 2021 (the “2021 Form 10-K”) and other reports filed with the SEC. If one or more of these or other risks or uncertainties
materialize (or the consequences of such a development changes), or should our underlying assumptions prove incorrect, actual outcomes may vary materially from those reflected in our forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We disclaim any intention or obligation to update publicly or revise such statements, whether as a result of new information, future events or otherwise, or to provide periodic updates or guidance. All forward-looking statements attributable to us, or to persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements.
The Company makes available in the investor relations section of its website
at ir.conns.com updated monthly reports to the holders of its asset-backed notes. This information reflects the performance of the securitized portfolio only, in contrast to the financial statements contained herein, which reflect the performance of all of the Company’s outstanding receivables, including those originated subsequent to those included in the securitized portfolio. The website and the information contained on our website is not incorporated in this Quarterly Report on Form 10-Q or any other document filed with the SEC.
Overview
We
continue to monitor the evolving nature of COVID-19 and respond to its impact on our business. We have experienced and continue to experience challenges related to the pandemic. These challenges increased the complexity of our business, including with respect to supply chain and sales, and, despite our strong performance during the first quarter of fiscal year 2022, will likely continue until the effects of COVID-19 diminish. The full impact of COVID-19 remains uncertain and will depend on future developments, including the duration and spread of the pandemic, and related actions taken by federal, state and local government officials to prevent and manage disease spread and mitigate its economic impact, all of which are uncertain and unpredictable.
We encourage you to read this Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the accompanying Condensed Consolidated Financial
Statements and related notes. Our fiscal year ends on January 31. References to a fiscal year refer to the calendar year in which the fiscal year ends.
Executive Summary
Total revenues were $363.7 million for the three months ended April 30, 2021 compared to $317.2 million for the three months ended April 30, 2020, an increase of $46.5 million or 14.7%. Retail revenues were $291.5 million for the three months ended April 30, 2021 compared to $230.6 million for the three months ended April 30, 2020, an increase of $60.9 million or 26.4%. The
increase in retail revenue was primarily driven by an increase in same store sales of 19.4% and by new store growth. The increase in same store sales reflects higher cash and third-party credit sales and increase in demand across most of the Company’s home-related product categories. The increase also reflects the impact of prior year reductions in store hours, state mandated stay-at-home orders and lower sales of discretionary categories as a result of the COVID-19 pandemic. Credit revenues were $72.2 million for the three months ended April 30, 2021 compared to $86.6 million for the three months ended
April 30, 2020, a decrease of $14.4 million or 16.6%. The decrease in credit revenue was primarily due to a 24.8% decrease in the average outstanding balance of the customer accounts receivable portfolio. These decreases were partially offset by an increase in the yield rate, from 21.3% for the three months ended April 30, 2020 to 23.7% for the three months ended April 30, 2021.
Retail gross margin for the three months ended April 30, 2021 was 36.5%, an increase of 30 basis points from the 36.2% reported for the three months ended April 30, 2020. The year-over-year increase in retail gross margin was primarily
driven by a shift in sales from lower margin products to higher margin products and the impact of fixed logistics costs on higher sales.
Selling, general and administrative expense (“SG&A”) for the three months ended April 30, 2021 was $126.0 million compared to $113.0 million for the three months ended April 30, 2020, an increase of $13.0 million or 11.5%. The SG&A increase in the retail segment was primarily due to an increase in labor, delivery and transportation, advertising, and occupancy costs. The SG&A increase in the credit segment was primarily due to an increase in labor and general operating costs.
Provision for bad debts decreased to $(17.1) million for the three months ended April 30, 2021 from $117.3
million for the three months ended April 30, 2020, a decrease of $134.4 million. The year-over-year decrease was primarily driven by a decrease in the allowance for bad debts during the three months ended April 30, 2021 compared to an increase during the three months ended April 30, 2020 and by a year-over-year decrease in net charge-offs of $13.9 million. The decrease in the allowance for bad debts during the three months ended April 30, 2021 was primarily driven by a decrease in the rate of delinquencies and re-ages, a decrease in the customer account receivable portfolio and an improvement in the forecasted unemployment rate that drove a $20.0 million decrease in the economic adjustment. During the three months ended April 31, 2020, the increase in the allowance for bad
debts was primarily due to a $65.5 million increase in the economic adjustment driven by an increase in forecasted unemployment rates stemming from the COVID-19 pandemic.
Interest expense was $9.2 million for the three months ended April 30, 2021 and $15.0 million for the three months ended April 30, 2020, a decrease of $5.8 million or 38.7%. The decrease was primarily driven by a lower average outstanding balance of debt, partially offset by a higher effective interest rate.
Net income for the three months ended April 30, 2021 was $45.4 million or $1.52 per diluted share, compared to net loss of $56.2 million, or $1.95 per diluted share, for the three months ended April 30, 2020.
How
We Evaluate Our Operations
Senior management focuses on certain key indicators to monitor our performance including:
•Same store sales - Our management considers same store sales, which consists of both brick and mortar and e-commerce sales, to be an important indicator of our performance because they reflect our attempts to leverage our SG&A costs, which include rent and other store expenses, and they have a direct impact on our total net sales, net income, cash and working capital. Same store sales is calculated by comparing the reported sales for all stores that were open during both comparative fiscal years, starting in the first period in which the store has been open for a full quarter. Sales from closed stores, if any, are removed from each period. Sales from relocated stores have been included in each period if each such store was relocated within
the same general geographic market. Sales from expanded stores have also been included in each period.
•Retail gross margin - Our management views retail gross margin as a key indicator of our performance because it reflects our pricing power relative to the prices we pay for our products. Retail gross margin is calculated by comparing retail total net sales to the cost of goods sold.
•60+ Day Delinquencies - Our management views customer account delinquencies as a key indicator of our performance because it reflects the quality of our credit portfolio, drives future credit performance and credit offerings, and impacts the interest rates we pay on our asset-backed securitizations. Delinquencies are measured as the percentage of balances that are 60+ days past due.
•Net
yield - Our management considers yield to be a key performance metric because it drives future credit decisions and credit offerings and directly impacts our net income. Yield reflects the amount of interest we receive from our portfolio.
Company Initiatives
In the first quarter of fiscal year 2022, we delivered strong results, driven by our store and e-commerce performance, a continued focus on cash collections and the reduction of COVID-19 restrictions in many of the states in which we operate. We delivered the following financial and operational results in the first quarter of fiscal year 2022:
•Net earnings for the first quarter increased to a quarterly record of $1.52 per diluted share, compared to a loss of $1.95 per diluted share for the same period last fiscal year;
•Same store sales increased 19.4% for the first quarter of fiscal year 2022 as compared to the first quarter of fiscal year 2021 and increased 1.8% on a two-year basis as compared to the first quarter of fiscal year 2020, primarily due to higher cash and third-party credit sales and increase in demand across most of the Company’s home-related product categories;
•E-commerce sales during the first quarter of fiscal year 2022 increased 95.7% as compared to the prior fiscal year period;
•Lease-to-own sales during the first quarter of fiscal year 2022 increased 82.0%, as compared to the prior fiscal year period;
•During
the first quarter of fiscal year 2022, the Company added six new showrooms, including five within the state of Florida, bringing the total number of showrooms at April 30, 2021 to 152, compared to 139 at April 30, 2020;
•At April 30, 2021, the carrying value of customer accounts receivable 60+ days past due declined 49.4% year-over-year to the lowest level in seven fiscal years, and the carrying value of re-aged accounts declined 45.1% year-over-year to the lowest level in four fiscal years; and
•During the first quarter of fiscal year 2022, the
Company generated $130.8 million in cash provided by operating activities further strengthening the Company’s balance sheet.
We believe that we have laid the foundation to execute our long-term growth strategy and prudently manage financial and operational risk while maximizing shareholder value. We remain focused on the following strategic priorities for fiscal year 2022:
•Increase net income by improving performance across our core operational and financial metrics: same store sales, retail margin, delinquencies and net yield;
•Open 11 to 13 new stores in our current geographic footprint to leverage our existing infrastructure (inclusive of the six new stores opened during the first quarter of fiscal
year 2022);
•Optimize our mix of quality, branded products and gain efficiencies in our warehouse, delivery and transportation operations to increase our retail gross margin;
•Continue to grow our lease-to-own sales;
•Continue to grow our e-commerce sales;
•Maintain disciplined oversight of our SG&A;
•Ensure that the Company has the leadership and human capital pipeline and capability to drive results and meet present and future business objectives as the Company
continues to expand its retail store base; and
•Leverage technology and shared services to drive efficient, effective and scalable processes.
Outlook
Throughout the COVID-19 pandemic, we have generally been classified as an essential business by government authorities in the jurisdictions in which we operate as we provide essential goods and services to our communities. As a result, despite the widespread stay-at-home orders that were in effect from time to time at the beginning of the pandemic, most of our stores remained open, though at times operating on reduced schedules as mandated. As of June 3, 2021, all of our stores are open and conduct regular in-store shopping hours. However, as noted in the “Overview” above, our business and industry continue to
be impacted by the COVID-19 pandemic in the United States. Going forward, the full extent to which the pandemic will impact our supply chain, future business and operating results is uncertain. Government support, including the American Rescue Plan Act of 2021, has provided our customers with additional financial means which we expect has helped, and may continue to help, our business. We feel we are well positioned to continue serving our customers and supporting our employees as we continue to monitor and respond to the pandemic.
The broad appeal of our value proposition to our geographically diverse core demographic, the unit economics of our business and the current retail real estate market should provide the stability necessary to maintain and grow our business. Further, as states fully re-open and the COVID-19 pandemic is contained, we expect our brand recognition and long history in our core markets to give us the
opportunity to further penetrate our existing footprint, particularly as we leverage existing marketing spend, logistics infrastructure, and service footprint. There are also many markets in the U.S. with demographic characteristics similar to those in our existing footprint, which provides substantial opportunities for future growth. We plan to improve our operating results by leveraging our existing infrastructure and seeking to continually optimize the efficiency of our marketing, merchandising, distribution and credit operations. As we expand in existing markets and penetrate new markets, we expect to increase our purchase volumes, achieve distribution efficiencies and strengthen our relationships with our key vendors. Over
time, we also expect our increased store base and higher net sales to further leverage our existing corporate and regional infrastructure.
Results of Operations
The following tables present certain financial and other information, on a condensed consolidated basis:
Consolidated:
Three
Months Ended April 30,
(in thousands)
2021
2020
Change
Revenues:
Total net sales
$
291,296
$
230,330
$
60,966
Finance
charges and other revenues
72,406
86,830
(14,424)
Total revenues
363,702
317,160
46,542
Costs and expenses:
Cost
of goods sold
184,879
147,014
37,865
Selling, general and administrative expense
126,049
113,007
13,042
Provision for bad debts
(17,136)
117,326
(134,462)
Charges
and credits
—
2,055
(2,055)
Total costs and expenses
293,792
379,402
(85,610)
Operating income (loss)
69,910
(62,242)
132,152
Interest
expense
9,204
14,993
(5,789)
Loss on extinguishment of debt
1,218
—
1,218
Income (loss) before income taxes
59,488
(77,235)
136,723
Provision
(benefit) for income taxes
14,090
(21,033)
35,123
Net income (loss)
$
45,398
$
(56,202)
$
101,600
Supplementary Operating Segment Information
Operating
segments are defined as components of an enterprise that engage in business activities and for which discrete financial information is available that is evaluated on a regular basis by the chief operating decision maker to make decisions about how to allocate resources and assess performance. We are a leading specialty retailer and offer a broad selection of quality, branded durable consumer goods and related services in addition to a proprietary credit solution for our core credit-constrained consumers. We have two operating segments: (i) retail and (ii) credit. Our operating segments complement one another. The retail segment operates primarily through our stores and website and its product offerings include furniture and mattresses, home appliances, consumer electronics and home office products from leading global brands across a wide range of
price points. Our credit segment offers affordable financing solutions to a large, under-served population of credit-constrained consumers who typically have limited credit alternatives. Our operating segments provide customers the opportunity to comparison shop across brands with confidence in our competitive prices as well as affordable monthly payment options, next day delivery and installation in the majority of our markets, and product repair service. We believe our large, attractively merchandised retail stores and credit solutions offer a distinctive value proposition compared to other retailers that target our core customer demographic. The operating segments follow the same accounting policies used in our Condensed Consolidated Financial Statements.
We evaluate a segment’s performance based upon operating income (loss). SG&A includes the direct expenses of the retail and credit operations, allocated corporate
overhead expenses, and a charge to the credit segment to reimburse the retail segment for expenses it incurs related to occupancy, personnel, advertising and other direct costs of the retail segment which benefit the credit operations by sourcing credit customers and collecting payments. The reimbursement received by the retail segment from the credit segment is calculated using an annual rate of 2.5% multiplied by the average outstanding portfolio balance for each applicable period.
The following table represents total revenues, costs and expenses, operating income (loss) and income (loss) before taxes attributable
to these operating segments for the periods indicated:
Retail Segment:
Three Months Ended April 30,
(dollars in thousands)
2021
2020
Change
Revenues:
Product
sales
$
269,211
$
207,198
$
62,013
Repair service agreement commissions
19,131
20,101
(970)
Service revenues
2,954
3,031
(77)
Total
net sales
291,296
230,330
60,966
Finance charges and other
209
235
(26)
Total revenues
291,505
230,565
60,940
Costs
and expenses:
Cost of goods sold
184,879
147,014
37,865
Selling, general and administrative expense (1)
90,893
78,174
12,719
Provision
for bad debts
18
168
(150)
Total costs and expenses
275,790
225,356
50,434
Operating income
$
15,715
$
5,209
$
10,506
Number
of stores:
Beginning of period
146
137
Opened
6
2
End of period
152
139
Credit
Segment:
Three Months Ended April 30,
(in thousands)
2021
2020
Change
Revenues:
Finance charges and other revenues
$
72,197
$
86,595
$
(14,398)
Costs
and expenses:
Selling, general and administrative expense (1)
35,156
34,833
323
Provision for bad debts
(17,154)
117,158
(134,312)
Charges
and credits
—
2,055
(2,055)
Total costs and expenses
18,002
154,046
(136,044)
Operating income (loss)
54,195
(67,451)
121,646
Interest
expense
9,204
14,993
(5,789)
Loss on extinguishment of debt
1,218
—
1,218
Income (loss) before income taxes
$
43,773
$
(82,444)
$
126,217
(1)For
the three months ended April 30, 2021 and 2020, the amount of overhead allocated to each segment reflected in SG&A was $9.1 million and $7.3 million, respectively. For the three months ended April 30, 2021 and 2020, the amount of reimbursement made to the retail segment by the credit segment was $7.3 million and $9.8 million, respectively.
Revenues. The following table provides an analysis of retail net sales by product category in each period, including repair service agreement (“RSA”) commissions and service revenues, expressed both in dollar amounts and as a percent of total net sales:
Three
Months Ended April 30,
%
Same Store
(dollars in thousands)
2021
% of Total
2020
% of Total
Change
Change
% Change
Furniture
and mattress
$
94,491
32.4
%
$
68,893
29.9
%
$
25,598
37.2
%
27.0
%
Home
appliance
113,261
38.9
81,285
35.3
31,976
39.3
32.3
Consumer electronics
38,038
13.1
35,776
15.5
2,262
6.3
3.6
Home
office
14,521
5.0
17,366
7.5
(2,845)
(16.4)
(19.3)
Other
8,900
3.1
3,878
1.8
5,022
129.5
116.7
Product
sales
269,211
92.5
207,198
90.0
62,013
29.9
22.9
Repair service agreement commissions (1)
19,131
6.6
20,101
8.7
(970)
(4.8)
(7.6)
Service
revenues
2,954
0.9
3,031
1.3
(77)
(2.5)
Total net sales
$
291,296
100.0
%
$
230,330
100.0
%
$
60,966
26.5
%
19.4
%
(1) The
total change in sales of RSA commissions includes retrospective commissions, which are not reflected in the change in same store sales.
The increase in product sales for the three months ended April 30, 2021 was primarily driven by an increase in same store sales of 19.4% and by new store growth. The increase in same store sales reflects higher cash and third-party credit sales and increase in demand across most of the Company’s home-related product categories. The increase also reflects the impact of prior year reductions in store hours, state mandated stay-at-home orders and lower sales of discretionary categories as a result of the COVID-19 pandemic.
The following table provides the change of the components of finance charges and other revenues:
Three
Months Ended April 30,
(in thousands)
2021
2020
Change
Interest income and fees
$
67,679
$
81,843
$
(14,164)
Insurance income
4,518
4,752
(234)
Other
revenues
209
235
(26)
Finance charges and other revenues
$
72,406
$
86,830
$
(14,424)
The decrease in finance charges and other revenues was primarily due to a 24.8% decrease in the average outstanding balance
of the customer accounts receivable portfolio. These decreases were partially offset by an increase in the yield rate, from 21.3% for the three months ended April 30, 2020 to 23.7% for the three months ended April 30, 2021.
The following table provides key portfolio performance information:
The increase in retail gross margin was primarily driven by a shift in sales from lower margin products to higher margin products and the impact of fixed logistics costs on higher sales.
Selling, General and Administrative Expense
Three
Months Ended April 30,
(dollars in thousands)
2021
2020
Change
Retail segment
$
90,893
$
78,174
$
12,719
Credit segment
35,156
34,833
323
Selling,
general and administrative expense - Consolidated
$
126,049
$
113,007
$
13,042
Selling, general and administrative expense as a percent of total revenues
34.7
%
35.6
%
The SG&A
increase in the retail segment was primarily due to an increase in labor, delivery and transportation, advertising, and occupancy costs. The SG&A increase in the credit segment was primarily due to an increase in labor and general operating costs.
As a percent of average total customer portfolio balance (annualized), SG&A for the credit segment was 12.0% for the three months ended April 30, 2021 as compared to 8.9% for the three months ended April 30, 2020.
Provision for Bad Debts
Three
Months Ended April 30,
(dollars in thousands)
2021
2020
Change
Retail segment
$
18
$
168
$
(150)
Credit segment
(17,154)
117,158
(134,312)
Provision
for bad debts - Consolidated
$
(17,136)
$
117,326
$
(134,462)
Provision for bad debts - Credit segment, as a percent of average outstanding portfolio balance (annualized)
(5.9)
%
30.1
%
The
provision for bad debts decreased to $(17.1) million for the three months ended April 30, 2021 from $117.3 million for the three months ended April 30, 2020, a decrease of $134.4 million. The year-over-year decrease was primarily driven by a decrease in the allowance for bad debts during the three months ended April 30, 2021 compared to an increase during the three months ended April 30, 2020 and by a year-over-year decrease in net charge-offs of $13.9 million. The decrease in the allowance for bad debts during the three months ended April 30, 2021 was primarily driven by a decrease in the rate of delinquencies and re-ages, a decrease in the customer account receivable portfolio and an improvement in the forecasted unemployment
rate that drove a $20.0 million decrease in the economic adjustment. During the three months ended April 31, 2020, the increase in the allowance for bad debts was primarily due to a $65.5 million increase in the economic adjustment driven by an increase in forecasted unemployment rates stemming from the COVID-19 pandemic.
During the three months ended April 30, 2020, we recognized $2.1 million in professional fees associated with non-recurring expenses related to fiscal year 2020.
Interest Expense
Interest expense was $9.2 million for the three months ended April 30, 2021 and $15.0 million for the three months ended April 30, 2020, a decrease of $5.8 million or 38.7%. The decrease was primarily driven by a lower average outstanding balance of debt, partially offset by a higher effective interest rate.
Loss on Extinguishment of Debt
During the three month period ended April
30, 2021, we incurred a loss of $1.0 million related to the retirement of the remaining $141.2 million aggregate principal amount of our 7.25% Senior Notes due 2022 (“Senior Notes”) and a loss of $0.2 million related to the amendment of our Fifth Amended and Restated Loan and Security Agreement.
Provision for Income Taxes
Three Months Ended April 30,
(dollars
in thousands)
2021
2020
Change
Provision (benefit) for income taxes
$
14,090
$
(21,033)
$
35,123
Effective tax rate
23.7
%
27.2
%
The
increase in income tax expense for the three months ended April 30, 2021 compared to the three months ended April 30, 2020 was driven by a $136.7 million increase in pre-tax earnings at the statutory rate of 21%. An additional $4.9 million benefit was also recognized in the prior year period as a result of net operating loss provisions within the CARES Act that provides for a five year carryback of losses.
Customer Accounts Receivable Portfolio
We provide in-house financing to individual consumers on a short- and medium-term basis (contractual terms generally range from 12 to 36 months) for the purchase of durable products for
the home. A significant portion of our customer credit portfolio is due from customers that are considered higher-risk, subprime borrowers. Our financing is executed using contracts that require fixed monthly payments over fixed terms. We maintain a secured interest in the product financed. If a payment is delayed, missed or paid only in part, the account becomes delinquent. Our collection personnel attempt to contact a customer once their account becomes delinquent. Our loan contracts generally reflect an interest rate of between 18% and 36%. We have implemented our direct consumer loan program across all Texas, Louisiana, Tennessee and Oklahoma locations. The states of Texas, Louisiana, Tennessee and Oklahoma represented approximately 72% of our originations during the three months
ended April 30, 2021, with maximum equivalent interest rates of up to 27% in Oklahoma, up to 30% in Texas and Tennessee, and up to 36% in Louisiana. In states where regulations do not generally limit the interest rate charged, our loan contracts generally reflect an interest rate between 29.99% and 35.99%. These states represented 15% of our originations during the three months ended April 30, 2021.
We offer qualified customers a 12-month no-interest option finance program. If the customer is delinquent in making a scheduled monthly payment or does not repay the principal in full by the end of the no-interest option program period (grace periods are provided), the account does not qualify for the no-interest provision and none of the
interest earned is waived.
We regularly extend or “re-age” a portion of our delinquent customer accounts as a part of our normal collection procedures to protect our investment. Generally, extensions are granted to customers who have experienced a financial difficulty (such as the temporary loss of employment), which is subsequently resolved, and when the customer indicates a willingness and ability to resume making monthly payments. These re-ages involve modifying the payment terms to defer a portion of the cash payments currently required of the debtor to help the debtor improve his or her financial condition and eventually be able to pay the account balance. Our re-aging of customer accounts does not change the interest rate or the total principal amount due from the customer and typically does not reduce the monthly contractual payments. We may also charge the customer an extension fee, which approximates the
interest owed for the time period the contract was past due. Our re-age programs consist of extensions and two payment updates, which include unilateral extensions to customers who make two full payments in three calendar months in certain states. Re-ages are not granted to debtors who demonstrate a lack of intent or ability to service the obligation or have reached our limits for account re-aging. To a much lesser extent, we may provide the customer the ability to re-age their obligation by refinancing the account, which typically does not change the interest rate or the total principal amount due from the customer but does reduce the monthly contractual payments and extends the term. Under these options, as with extensions, the customer must resolve the reason for delinquency and show a willingness and ability to resume making contractual monthly payments.
On March 27, 2020 the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law to address the economic impact of the COVID-19 pandemic. Under the CARES Act, modifications deemed to be COVID-19 related are not considered a TDR if the loan was current (not more than 30 days past due as of March 31, 2020) and the deferral was executed between April 1, 2020 and the earlier of 60 days after the termination of the COVID-19 national emergency or December 31, 2020. In response to the CARES Act, the Company implemented short-term deferral programs for our customers. The carrying value of the customer
receivables on accounts which were current prior to receiving a COVID-19 related deferment was $44.5 million as of April 30, 2021. All COVID-19 specific deferral programs ended during the third quarter of fiscal year 2021.
The following tables present, for comparison purposes, information about our managed portfolio (information reflects on a combined basis the securitized receivables transferred to the VIEs and receivables not transferred to the VIEs):
Weighted average origination credit score of sales financed (1)
617
609
Percent of total applications approved and utilized
21.8
%
22.3
%
Average income
of credit customer at origination
$
48,500
$
45,800
Percent of retail sales paid for by:
In-house financing, including down payments received
48.7
%
63.3
%
Third-party financing
16.8
%
17.1
%
Third-party
lease-to-own option
12.3
%
8.5
%
77.8
%
88.9
%
(1)Credit scores exclude non-scored accounts.
(2)Accounts that become delinquent after being re-aged are included in both the delinquency and re-aged amounts.
(3)Carrying value reflects the total customer accounts receivable portfolio
balance, net of deferred fees and origination costs, the allowance for no-interest option credit programs and the allowance for uncollectible interest.
(4)Decrease was primarily due to an increase in cash collections and the tightening of underwriting standards that occurred in fiscal year 2021.
(5)Decrease was primarily due to an increase in cash collections, the change in the unilateral re-age policy that occurred in the second quarter of fiscal year 2021 and the tightening of underwriting standards that occurred in fiscal year 2021.
Our customer portfolio balance and related allowance for uncollectible accounts are segregated between customer accounts receivable and restructured accounts. Customer accounts receivable include all accounts for which the payment term has not been cumulatively
extended over three months or refinanced. Restructured accounts include all accounts for which payment term has been re-aged in excess of three months or refinanced.
For customer accounts receivable (excluding restructured accounts), the allowance for uncollectible accounts as a percentage of the total customer accounts receivable portfolio balance decreased to 17.4% as of April 30, 2021 from 23.3% as of April 30, 2020. The decrease was primarily related to a decline in the non-TDR re-age balance, improvements in 60+
day delinquencies and a decrease in the economic adjustment due to an improved macroeconomic outlook.
The percentage of the carrying value of non-restructured accounts greater than 60 days past due decreased 380 basis points over the prior year period to 6.8% as of April 30, 2021 from 10.6% as of April 30, 2020. The decrease was primarily due to higher payment rates, continued focus on cash collections and the tightening of underwriting standards that occurred in fiscal year 2021.
For restructured accounts, the allowance for uncollectible accounts as a percentage of the portfolio balance was 38.5% as of April 30, 2021 as compared to 41.7% as of April 30, 2020. This 320 basis point
decrease reflects the impact of lower delinquencies on restructured accounts.
The percent of bad debt charge-offs, net of recoveries, to average outstanding portfolio balance was 15.3% for the three months ended April 30, 2021 compared to 15.1% for the three months ended April 30, 2020.
As of April 30, 2021 and 2020, balances under no-interest programs included within customer receivables were $275.6 million and $259.3 million, respectively.
Liquidity and Capital Resources
We
require liquidity and capital resources to finance our operations and future growth as we add new stores to our operations, which in turn requires additional working capital for increased customer receivables and inventory. We generally finance our operations through a combination of cash flow generated from operations, the use of our Revolving Credit Facility, and through periodic securitizations of originated customer receivables. We plan to execute periodic securitizations of future originated customer receivables.
We believe, based on our current projections, that we have sufficient sources of liquidity to fund our operations, store expansion and renovation activities, and capital expenditures for at least the next 12 months.
Operating cash flows. For the three months ended April 30, 2021, net cash
provided by operating activities was $130.8 million compared to $152.5 million for the three months ended April 30, 2020. The decrease in net cash provided by operating activities was primarily driven by an increase in inventory and a decrease in payables in comparison to the prior year period when we were preserving liquidity in the midst of the COVID-19 pandemic.
Investing cash flows. For the three months ended April 30, 2021, net cash used in investing activities was $9.5 million compared to $16.7 million for the three months ended April 30, 2020. The cash used during the three months ended April 30, 2021 was primarily for investments in new stores. The cash used during the three months ended April
30, 2020 was primarily for investments in two new distribution centers and technology investments.
Financing cash flows. For the three months ended April 30, 2021, net cash used in financing activities was $123.4 million compared to net cash provided by financing activities of $144.1 million for the three months ended April 30, 2020. During the period ended April 30, 2021, we issued 2020-A Class C VIE asset backed notes resulting in net proceeds to us of approximately $62.5 million, net of transaction costs. The proceeds from the 2020-A VIE asset-backed notes were used to partially pay down the balance of the Company's Revolving Credit Facility. Cash collections
from the securitized receivables were used to make payments on asset-backed notes of approximately $134.5 million during the three months ended April 30, 2021 compared to approximately $161.5 million in the comparable prior year period. During the period ended April 30, 2021, net borrowings under the Revolving Credit Facility were $94.5 million compared to net borrowings of $306.9 million during the comparable prior year period. The net borrowings during the three months ended April 30, 2020 included $275.0 million borrowed to preserve financial flexibility in the midst of the COVID-19 pandemic. During the three months ended April 30, 2021, we retired the remaining $141.2 million aggregate principal amount of our Senior Notes outstanding.
Senior
Notes. On July 1, 2014, we issued an aggregate principal amount of $250.0 million in unsecured 7.25% Senior Notes due 2022, (the “Senior Notes”) pursuant to an indenture dated July 1, 2014 (as amended, the “Indenture”), among Conn’s, Inc., its subsidiary guarantors (the “Guarantors”) and U.S. Bank National Association, as trustee. On April 15, 2021 we completed the redemption of all of our outstanding Senior Notes in an aggregate principal amount of $141.2 million.
Asset-backed Notes. From time to time, we securitize customer accounts
receivables by transferring the receivables to various bankruptcy-remote VIEs. In turn, the VIEs issue asset-backed notes secured by the transferred customer accounts receivables and restricted cash held by the VIEs.
Under the terms of the securitization transactions, all cash collections and other cash proceeds of the customer receivables go first to the servicer and the holders of issued notes, and then to us as the holder of non-issued notes, if any, and residual equity. We retain the servicing of the securitized portfolios and receive a monthly fee of 4.75% (annualized) based on the outstanding
balance
of the securitized receivables. In addition, we, rather than the VIEs, retain all credit insurance income together with certain recoveries related to credit insurance and RSAs on charge-offs of the securitized receivables, which are reflected as a reduction to net charge-offs on a consolidated basis.
The asset-backed notes were offered and sold to qualified institutional buyers pursuant to the exemptions from registration provided by Rule 144A under the Securities Act of 1933. If an event of default were to occur under the indenture that governs the respective asset-backed notes, the payment of the outstanding amounts may be accelerated, in which event the cash proceeds of the receivables that otherwise might be released to the residual equity holder would instead be directed entirely toward repayment of the asset-backed notes, or if
the receivables are liquidated, all liquidation proceeds could be directed solely to repayment of the asset-backed notes as governed by the respective terms of the asset-backed notes. The holders of the asset-backed notes have no recourse to assets outside of the VIEs. Events of default include, but are not limited to, failure to make required payments on the asset-backed notes or specified bankruptcy-related events.
The asset-backed notes outstanding as of April 30, 2021 consisted of the following:
(dollars
in thousands)
Asset-Backed Notes
Original Principal Amount
Original Net Proceeds (1)
Current Principal Amount
Issuance Date
Maturity
Date
Contractual Interest Rate
Effective Interest Rate (2)
2019-A Class A Notes
$
254,530
$
253,026
$
11,620
4/24/2019
10/16/2023
3.40%
4.84%
2019-A
Class B Notes
64,750
64,276
14,923
4/24/2019
10/16/2023
4.36%
5.29%
2019-A Class C Notes
62,510
61,898
14,407
4/24/2019
10/16/2023
5.29%
6.32%
2019-B
Class B Notes
85,540
84,916
57,420
11/26/2019
6/17/2024
3.62%
4.60%
2019-B Class C Notes
83,270
82,456
83,270
11/26/2019
6/17/2024
4.60%
5.21%
2020-A
Class A Notes
174,900
173,716
32,645
10/16/2020
6/16/2025
1.71%
4.55%
2020-A Class B Notes
65,200
64,754
65,200
10/16/2020
6/16/2025
4.27%
5.49%
2020-A
Class C Notes
62,900
62,535
62,900
2/24/2021
6/16/2025
4.20%
5.51%
Total
$
853,600
$
847,577
$
342,385
(1)After
giving effect to debt issuance costs.
(2)For the three months ended April 30, 2021, and inclusive of the impact of changes in timing of actual and expected cash flows.
On February 24, 2021, the Company completed the sale of $62.9 million aggregate principal amount of 4.20% Asset Backed Notes, Class C, Series 2020-A, which were previously issued and held by the Company. The asset-backed notes are secured by the transferred customer accounts receivables and restricted cash held by a consolidated VIE, which resulted in net proceeds to us of $62.5 million, net of debt issuance costs. Net proceeds
from the sale were used to repay amounts outstanding under the Company’s Revolving Credit Facility.
On May 12, 2021, the Company completed the redemption of the 2019-A Asset Backed Notes at an aggregate redemption price of $41.1 million (which was equal to the entire outstanding principal balance plus accrued interest). See Note 9. Subsequent Events, for details.
Revolving Credit Facility. On March 29, 2021, Conn’s, Inc. and certain of its subsidiaries
(the “Borrowers”) entered into the Fifth Amended and Restated Loan and Security Agreement (the “Fifth Amended and Restated Loan Agreement”), with certain lenders, which provides for a $650.0 million asset-based revolving credit facility (as amended, the “Revolving Credit Facility”) under which credit availability is subject to a borrowing base and a maturity date of March 29, 2025.
The Fifth Amended and Restated Loan Agreement, among other things, permits borrowings under the Letter of Credit Subline (as defined in the Fifth Amended and Restated Loan Agreement) that exceed the cap of $40 million to $100 million, solely at the discretion of the lenders for such amounts in excess of $40 million. The obligations under the Revolving Credit Facility are secured by substantially all assets of the
Company, excluding the assets of the VIEs. As of April 30, 2021, we had immediately available borrowing capacity of $290.4 million under our Revolving Credit Facility, net of standby letters of credit issued of $22.5 million. We also had $190.6 million that could have become available under our Revolving Credit Facility were we to grow the balance of eligible customer receivables and total eligible inventory balances.
Loans under the Revolving Credit Facility bear interest, at our option, at a rate of LIBOR plus a margin ranging from 2.50% to 3.25% per annum (depending on a pricing grid determined by our total leverage ratio) or the alternate base rate plus a margin ranging from 1.50% to 2.25% per annum (depending on a pricing grid determined by our total leverage ratio). We also pay an unused fee on the portion of the commitments that is available for future borrowings
or letters of credit at a rate ranging from
0.25% to 0.50% per annum, depending on the average outstanding balance and letters of credit of the Revolving Credit Facility in the immediately preceding quarter. The weighted-average interest rate on borrowings outstanding and including unused line fees under the Revolving Credit Facility was 9.6% for the three months ended April 30, 2021.
The Revolving Credit Facility places restrictions on our ability to incur additional indebtedness, grant liens on assets, make distributions
on equity interests, dispose of assets, make loans, pay other indebtedness, engage in mergers, and other matters. The Revolving Credit Facility restricts our ability to make dividends and distributions unless no event of default exists and a liquidity test is satisfied. Subsidiaries of the Company may pay dividends and make distributions to the Company and other obligors under the Revolving Credit Facility without restriction. As of April 30, 2021, we were restricted from making distributions in excess of $180.0 million as a result of the Revolving Credit Facility distribution and payment restrictions. The Revolving Credit Facility contains customary default
provisions, which, if triggered, could result in acceleration of all amounts outstanding under the Revolving Credit Facility.
Debt Covenants. We were in compliance with our debt covenants at April 30, 2021. A summary of the significant financial covenants that govern our Revolving Credit Facility compared to our actual compliance status at April 30, 2021 is presented below:
Actual
Required
Minimum/ Maximum
Interest Coverage Ratio for the quarter must equal or exceed minimum
11.71:1.00
1.00:1.00
Interest Coverage Ratio for the trailing two quarters must equal or exceed minimum
8.12:1.00
1.50:1.00
Leverage Ratio must not exceed maximum
1.26:1.00
4.50:1.00
ABS Excluded Leverage Ratio must not exceed maximum
0.77:1.00
2.50:1.00
Capital
Expenditures, net, must not exceed maximum
$23.8 million
$100.0 million
All capitalized terms in the above table are defined by the Revolving Credit Facility and may or may not match directly to the financial statement captions in this document. The covenants are calculated quarterly, except for capital expenditures, which is calculated for a period of four consecutive fiscal quarters, as of the end of each fiscal quarter.
Capital Expenditures. We lease the majority of our stores under operating leases and our plans for future store locations anticipate operating leases, but do not exclude store ownership. Our capital expenditures for future new store projects should primarily be for our tenant improvements
to the property leased (including any new distribution centers and cross-dock facilities), the cost of which is estimated to be between $1.7 million and $2.5 million per store (before tenant improvement allowances), and for our existing store remodels, estimated to range between $0.8 million and $1.0 million per store remodel (before tenant improvement allowances), depending on store size. In the event we purchase existing properties, our capital expenditures will depend on the particular property and whether it is improved when purchased. We are continuously reviewing new relationships and funding sources and alternatives for new stores, which may include “sale-leaseback” or direct “purchase-lease” programs, as well as other funding sources for our purchase and construction of those projects. If we do not purchase the real property for new stores, our direct cash needs should include only our capital expenditures for tenant improvements to leased properties
and our remodel programs for existing stores. We opened six new stores during the three months ended April 30, 2021 and currently plan to open a total of 11 to 13 new stores during fiscal year 2022. Our anticipated capital expenditures for the remainder of fiscal year 2022 are between $35.0 million and $45.0 million, which includes expenditures for new stores we plan to open in fiscal year 2022.
Cash Flow
We periodically evaluate our liquidity requirements, capital needs and availability of resources in view of inventory levels, expansion plans, debt service requirements and other operating cash needs. To meet our short- and long-term liquidity requirements, including payment of operating expenses, funding of capital expenditures and repayment of debt, we rely primarily on cash from operations. As of April 30,
2021, beyond cash generated from operations, we had (i) immediately available borrowing capacity of $290.4 million under our Revolving Credit Facility and (ii) $6.6 million of cash on hand. However, we have, in the past, sought to raise additional capital.
We expect that, for the next 12 months, cash generated from operations, proceeds from potential accounts receivable securitizations and our Revolving Credit Facility will be sufficient to provide us the ability to fund our operations, provide the increased working capital necessary to support our strategy and fund planned capital expenditures discussed above in Capital Expenditures.
We may repurchase or otherwise retire our debt and take other steps to reduce our debt or otherwise improve our financial position. These actions could include open market debt repurchases, negotiated
repurchases, other retirements of outstanding debt and opportunistic refinancing of debt. The amount of debt that may be repurchased or otherwise retired, if any, will
depend on market conditions, the Company’s cash position, compliance with debt covenants and restrictions and other considerations.
Off-Balance Sheet Liabilities and Other Contractual Obligations
We do not have any off-balance sheet arrangements as defined by Item 303(a)(4) of
Regulation S-K. The following table presents a summary of our minimum contractual commitments and obligations as of April 30, 2021:
Payments
due by period
(in thousands)
Total
Less Than 1 Year
1-3 Years
3-5 Years
More Than
5Years
Debt, including estimated interest payments (1):
Revolving
Credit Facility (1)
$
161,556
$
3,846
$
7,691
$
150,019
$
—
2019-A Class A Notes (2)(3)
12,593
395
12,198
—
—
2019-A
Class B Notes (2)(3)
16,525
651
15,874
—
—
2019-A Class C Notes (2)(3)
16,284
762
15,522
—
—
2019-B
Class B Notes (2)
63,935
2,079
4,157
57,699
—
2019-B Class C Notes (2)
95,275
3,830
7,661
83,784
—
2020-A
Class A Notes (2)
34,951
558
1,116
33,277
—
2020-A Class B Notes (2)
76,702
2,784
5,568
68,350
—
2020-A
Class C Notes (2)
73,815
2,642
5,284
65,889
—
Financing lease obligations
7,739
1,194
2,005
1,410
3,130
Operating
leases:
Real estate
528,784
83,619
161,658
122,484
161,023
Equipment
277
209
49
19
—
Contractual
commitments (4)
171,722
164,092
7,237
393
—
Total
$
1,260,158
$
266,661
$
246,020
$
583,324
$
164,153
(1)Estimated
interest payments are based on the outstanding balance as of April 30, 2021 and the interest rate in effect at that time.
(2)The payments due by period for the asset-backed notes were based on their respective maturity dates at their respective fixed annual interest rate. Actual principal and interest payments on the asset-backed notes will reflect actual proceeds from the securitized customer accounts receivables.
(3)On May 12, 2021, the Company completed the redemption of the 2019-A Asset Backed Notes at an aggregate redemption price of $41.1 million. See Note 9. Subsequent Events, for details.
(4)Contractual
commitments primarily include commitments to purchase inventory of $145.1 million.
Issuer and Guarantor Subsidiary Summarized Financial Information
Conn’s, Inc. is a holding company with no independent assets or operations other than its investments in its subsidiaries. The Senior Notes, which were issued by Conn’s, Inc., were fully and unconditionally guaranteed on a joint and several senior unsecured basis by the Guarantors prior to our redemption of all outstanding Senior Notes in an aggregate principal amount of $141.2 million on April 15, 2021. As of April 30,
2021 and January 31, 2021, the direct or indirect subsidiaries of Conn’s, Inc. that were not Guarantors (the “Non-Guarantor Subsidiaries”) were the VIEs and minor subsidiaries. There are no restrictions under the Indenture on the ability of any of the Guarantors to transfer funds to Conn’s, Inc. in the form of dividends or distributions.
The following tables present on a combined basis for the Issuer and the Guarantor Subsidiaries, a summarized Balance Sheet as of April 30, 2021 and January 31, 2021, and a summarized Statement of Operations on a consolidated basis for the three months ended April 30, 2021. The information presented below excludes eliminations necessary to arrive at the information on a consolidated basis. Investments in subsidiaries are accounted for by the parent company using the equity method for purposes of this presentation. Amounts provided do not represent our total consolidated amounts,
as of April 30, 2021 and January 31, 2021, and for the three months ended April 30, 2021:
Servicing fee revenue from non-guarantor subsidiary
6,490
Total revenues
337,688
Total costs and expenses
(296,727)
Net income
$
40,961
Critical
Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with GAAP requires us to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Certain accounting policies are considered “critical accounting policies” because they are particularly dependent on estimates made by us about matters that are inherently uncertain and could have a material impact to our Condensed Consolidated Financial Statements. We base our estimates on historical experience and on other assumptions that we believe are reasonable. As a result, actual results could differ because of the use of estimates. Other than with respect to the additional policy below, the description of critical accounting policies is included in our 2021 Form 10-K, filed with the SEC on March
31, 2021.
The information related to recent accounting pronouncements as set forth in Note 1, Summary of Significant Accounting Policies, of the Condensed Consolidated Financial Statements in Part I, Item 1, of this quarterly report on Form 10-Q is incorporated herein by reference.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in our financial instruments represents the potential loss arising from adverse changes in interest rates. We have not been materially impacted by fluctuations in foreign currency exchange rates, as substantially all of our business is transacted in, and is expected to continue to be transacted in, U.S. dollars or U.S. dollar-based currencies. Our asset-backed notes bear interest at a fixed rate and would not be affected by interest rate changes.
During the three months ended April 30, 2021, loans under the Revolving Credit Facility bore interest, at our option, at a rate equal to LIBOR plus a margin ranging from 2.50% to 3.25% per annum (depending on a pricing grid determined by our total leverage ratio) or the alternate base rate plus a
margin ranging from 1.50% to 2.25% per annum (depending on a pricing grid determined by our total leverage ratio).Accordingly, changes in our quarterly total leverage ratio and LIBOR or the alternate base rate will affect the interest rate on, and therefore our costs under, the Revolving Credit Facility. As of April 30, 2021, the balance outstanding under our Revolving Credit Facility was $146.5 million. A 100 basis point increase in interest rates on the Revolving Credit Facility would increase our borrowing costs by $1.5 million over a 12-month period, based on the outstanding balance at April 30, 2021.
ITEM 4. CONTROLS
AND PROCEDURES
Based on management’s evaluation (with the participation of our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”)), as of the end of the period covered by this report, our CEO and CFO have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
For the quarter ended April
30, 2021, there have been no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth in Note 6, Contingencies, of the Condensed Consolidated Financial Statements in Part I, Item 1, of this quarterly report on Form
10-Q is incorporated herein by reference.
ITEM 1A. RISK FACTORS
As of the date of the filing, there have been no material changes to the risk factors previously disclosed in Part I, Item 1A, of our 2021 Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The exhibits filed as part of this report are as follows (exhibits incorporated by reference are set forth with the name of the registrant, the type of report and registration number or last date of the period for which it was filed, and the exhibit number in such filing):
The following financial information from our Quarterly Report on Form 10-Q for the first quarter of fiscal year 2022, filed with the SEC on June 3, 2021, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) the Condensed Consolidated Balance Sheets at April 30,
2021 and January 31, 2021, (ii) the Condensed Consolidated Statements of Operations for the three months ended April 30, 2021 and 2020, (iii) the Condensed Consolidated Statements of Shareholders Equity for the periods ended April 30, 2021 and 2020, (iv) the Condensed Consolidated Statements of Cash Flows for the three months ended April 30, 2021 and 2020 and (v) the notes to the Condensed Consolidated Financial Statements.
104*
Cover Page Interactive Data File (embedded within the
Inline XBRL Document and included in Exhibit 101)
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
