Retailer Conn's (CONN) shares dropped 30% last week on a weaker-than-expected earnings report. The degree of the decline, however, was exacerbated by the fact that Conn's is just not a retailer.
The retailer of furniture, electronics and appliances showed a strong quarter with 12% sales growth, something all other retailers would drool over. But Conn's shares, which traded as high as $80 in the past 52 weeks, now trade at $30, near a 52-week low. In addition to being a retailer of consumer products, Conn's also provides credit to its customers -- many who could be labeled subprime.That is another dreadful word today.
Despite the strong top line increase, Conn's experienced greater-than-expected credit losses across its entire loan portfolio. Understandably, Mr. Market was not sparing in today's post-financial-crisis environment. Shares were butchered. The credit losses caused Conn's to reduce full year earnings per share to between $2.70 and $3 a share.Trading at $30 today, an opportunistic investor would see Conn's as a potential bargain. More so, Conn's counts hedge fund manager David Einhorn as an investor.
On the other hand, the market has seen this drama unfold before. One credit problem begets another. If these credit losses are an indication of more losses to come, then Conn's could be headed for continued reductions in earnings potential.
If loose credit policies are fueling Conn's sales growth, that is not an inspiring situation. Sales will look good but cash flow and profits will not.
It's too early to make any commitment here, but clearly the current share price is reflecting some pessimism.That's where opportunity lies for the value investor. In today's value-scarce environment, looking closer at banged-up companies like Conn's is a worthwhile exercise.