Funny tweet this morning from Barbarian Capital:
"$CONN discovers Marketing 101: giving stuff away works. SSS up double digits, credit performance collapses."
And therein lies the issue with Conn's (CONN), the Texas retailer famous for providing credit for the un-creditworthy.
While same-store sales rose, the company missed second-quarter earnings expectations and guided down, as it increased its provision for bad debts. As I noted in Columnist Conversation this morning, credit has always been the bearish story at Conn's.
In retrospect, cracks in the company's credit story have been getting wider and wider, quarter after quarter.
As far back as a year ago, the company was blaming "short-term execution issues in our collections operations" for unexpectedly bad performance in its credit operations, which account for nearly a quarter of all revenue.
The situation worsened in February, with a twist: the company blamed the weather (and a bunch of other stuff) for its poor credit performance, which in turn led to an earnings warning.
As is the case today, the stock collapsed on that news, only to slowly recover as investors unwisely shrugged off credit concerns.
From today's release:
"Our credit operations ran into unexpected headwinds, resulting in portfolio performance deterioration. Despite tighter underwriting, lower early-stage delinquency and improved collections staffing and execution, delinquency unexpectedly deteriorated across all credit quality levels, customer groups, product categories, geographic regions and years of origination. Tighter underwriting and better collections execution did not offset deterioration in our customers' ability to resolve delinquency."
The company went on to say delinquency rates improved, but then quickly added:
"However, over 60-day delinquency rates unexpectedly deteriorated a combined 90 basis points in July and August. We now expect future 60-plus day delinquency to increase to levels above our historical highs in the third and fourth quarter of fiscal 2015."
Then, a few sentences later:
"Longer term, we believe the changes necessary to optimize portfolio performance are in place, although we may not return to credit loss rates of prior years."
In other words, after years of brushing off concerns that it faced a credit issue, Conn's is conceding that it does face one, that it's not necessarily fixable and that, as it braces for more credit losses, its earnings will suffer.
That's something to keep in mind if you get around to scanning through an amended class-action lawsuit initially filed last March. Amended complaints, such as the July amendment to this case, often include interviews with former employees or others who claim to have the inside scoop.
In this case, according to the lawsuit, "confidential witnesses" allege, among other things:
"In order to drive sales (including sales in its new stores) in the months leading up to the start of the Class Period, Conn's had dramatically loosened its lending policies and underwriting guidelines, contrary to its assurances to investors, and had allowed non-creditworthy customers to receive substantial lines of credit at Conn's retail
locations, thereby exposing the Company to high amounts of bad debt and increased collections risks."
"During the first few months of opening, new stores provided up to $5,000 of credit to each customer who applied for credit¿ regardless of the customer's FICO score, income level, employment status, or prior foreclosure history. In addition, store employees were
not only instructed, but practically forced, to ensure that all customers who were approved for credit in a new store (meaning virtually everyone who applied) exhausted their full $5,000 credit line¿regardless of their ability to pay Conn's back. In this manner, Conn's was able to generate record sales levels in the first few months of opening each new store¿a metric watched closely by the financial community."
These are just allegations, of course, and the company will likely claim they're not true. But given what's happened lately at Conn's, they certainly can't be ignored.