n's(CONN) - 2020 Q4 - Annual Report

PART I ITEM 1. BUSINESS Conn's, Inc. operates as a specialty retailer of durable consumer goods with integrated retail and credit segments, offering proprietary financing to credit-constrained consumers and relying on a concentrated vendor base Company Overview Conn's, Inc. is a specialty retailer providing durable consumer goods and proprietary credit solutions to credit-constrained consumers through its integrated business model - Conn's operates as a specialty retailer with an integrated business model combining the sale of durable consumer goods with proprietary credit solutions for its core credit-constrained customer base[10] Operating Segments The company operates through Retail and Credit segments, with Retail managing 137 stores and Credit providing proprietary and third-party financing, significantly serving repeat customers - The Retail segment operated 137 stores in 14 states as of January 31, 2020, offering furniture, mattresses, home appliances, consumer electronics, and home office products[11][13] - The Credit segment offers proprietary in-house financing and partners with third-party providers like Synchrony Bank and Progressive Leasing to provide a spectrum of payment options based on customer creditworthiness[13] - Repeat customers are a key part of the credit business, accounting for 49% of originations in fiscal year 2020 and 60% of outstanding balances as of January 31, 2020[13][14] Industry and Market Overview The company competes in large, diverse markets for home goods and consumer credit, facing intense competition from various retail formats across significant U.S. personal consumption expenditure categories U.S. Personal Consumption Expenditures (Calendar Year 2019) | Category | 2019 Expenditures (billions) | | :--- | :--- | | Furniture and Mattress | $132.7 | | Home Appliance | $58.9 | | Consumer Electronics | $248.4 | - The company's primary product categories by sales in fiscal year 2020 were furniture and mattresses (35.6%), home appliances (34.6%), and consumer electronics (21.2%)[15] - Competition is significant and comes from national mass merchants, specialized retailers, home improvement stores, internet retailers, and lease-to-own companies[15][17] Customers The core customer base comprises working individuals with annual incomes between $25,000 and $60,000, residing in densely populated areas, with no single customer representing over 10% of total revenues - The core consumer demographic earns between $25,000 and $60,000 annually[18] Seasonality The business experiences seasonality, with peak sales and operating profit in the fourth quarter due to holidays, and improved credit portfolio performance in the first quarter from tax refunds - The fourth quarter is the strongest for sales and operating profit due to the holiday season[19] - The first quarter sees improved portfolio performance due to customers using tax refunds for payments[19] Merchandising The company sources merchandise from various manufacturers but exhibits significant vendor concentration, with six key vendors accounting for 85.7% of fiscal year 2020 inventory purchases - The company has significant vendor concentration, with 85.7% of fiscal year 2020 inventory purchases coming from six vendors[20] Top Vendor Purchase Concentration (FY 2020) | Vendor | % of Total Inventory Purchases | | :--- | :--- | | Samsung | 33.6% | | LG | 16.3% | | Corinthian | 11.0% | Credit Operations Credit operations are integral, with 67.6% of FY2020 purchases financed in-house, supported by proprietary underwriting models and a substantial collection team, with a quarter of payments made in-store Sales by Payment Type (FY 2020) | Payment Type | % of Purchases | | :--- | :--- | | In-house Credit | 67.6% | | Third-party Financing | 24.8% | | Cash or Credit Card | 7.6% | - The underwriting department is separate from retail sales and uses proprietary auto-decision algorithms for 59% of approved and utilized applications in FY2020[21] - Collection activities are handled by approximately 440 in-house personnel and 270 third-party agents; in FY2020, 25.5% of credit payments were made in-store[23] Store Operations As of January 31, 2020, the company operated 137 leased retail stores across 14 states, with 64 locations concentrated in Texas, averaging 36,000 square feet of selling space Store Count by State (as of Jan 31, 2020) | State | Number of Locations | | :--- | :--- | | Texas | 64 | | North Carolina | 11 | | Arizona | 11 | | Louisiana | 10 | | Colorado | 7 | | Other (9 states) | 34 | | Total | 137 | E-Commerce The company is enhancing e-commerce to drive traffic, enabling online purchases, credit applications, and payments, with monthly credit applications increasing to 65,000 in FY2020 - The company's website averaged approximately 65,000 credit applications per month in FY2020, up from 59,000 in FY2019[28] - In late FY2019, the company enabled certain credit-qualified customers to complete entire financed purchase transactions online through its proprietary in-house credit programs[28] Regulation The company's credit business is extensively regulated by federal and state consumer credit laws, with the CFPB's broad authority posing significant regulatory and enforcement risks - The business is subject to extensive federal and state consumer credit laws, including TILA, ECOA, FCRA, and FDCPA[34] - The Consumer Financial Protection Bureau (CFPB) has broad authority to regulate and enforce consumer financial laws, including prohibiting 'unfair, deceptive or abusive acts or practices' (UDAAP), representing a significant regulatory risk[34] ITEM 1A. RISK FACTORS The company faces material risks from the COVID-19 pandemic, economic downturns, substantial indebtedness, operational challenges, a sub-prime credit portfolio, regulatory changes, and intense competition - The COVID-19 outbreak poses a significant risk by reducing customer traffic, forcing store closures or reduced hours, and potentially increasing credit defaults due to customer job losses[41] - A material weakness was identified in internal controls over financial reporting related to Information Technology General Controls (ITGCs), specifically in user access and program change management for new systems[43] - The company's significant level of indebtedness ($1.03 billion as of Jan 31, 2020) and reliance on capital markets for securitizing customer receivables create financial vulnerability[48][45] - The credit portfolio is comprised of a significant portion of sub-prime borrowers, which entails a higher risk of default, delinquency, and losses[50] - The business is heavily regulated by consumer protection laws, and changes in regulations by agencies like the CFPB could adversely affect credit offerings and collection practices[64] - The company is highly dependent on a small number of key suppliers, with six vendors accounting for 85.7% of inventory purchases in fiscal year 2020, posing a supply chain risk[59] ITEM 1B. UNRESOLVED STAFF COMMENTS The company reports no unresolved staff comments from the Securities and Exchange Commission - There are no unresolved staff comments[82] ITEM 2. PROPERTIES Details on the company's properties, including stores, distribution centers, and corporate offices, are incorporated by reference from the 'Store Operations' section in Part I, Item 1 - Details on company properties are incorporated by reference from the 'Store Operations' section in Part I, Item 1[83] ITEM 3. LEGAL PROCEEDINGS The company is involved in securities and shareholder derivative litigation, facing allegations of false and misleading statements regarding credit practices, which it intends to vigorously defend - The company is a defendant in the MicroCapital Action, a securities lawsuit alleging false and misleading statements about credit and underwriting practices[260] - Several shareholder derivative lawsuits have been filed against current and former directors and officers, asserting claims for breach of fiduciary duty, unjust enrichment, and insider trading[260][262] ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to the company's operations - Not applicable[84] PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The company's common stock trades on NASDAQ under 'CONN', with no dividends paid in FY2020 or FY2019, and 348,000 shares repurchased in the quarter ended January 31, 2020 - The company's common stock is traded on the NASDAQ Global Select Market under the symbol 'CONN'[90] - No cash dividends were declared or paid in fiscal year 2020 or 2019, and future dividends are not anticipated[90] Issuer Purchases of Equity Securities (Quarter Ended Jan 31, 2020) | Period | Total Shares Purchased (thousands) | Average Price Paid per Share | | :--- | :--- | :--- | | Nov 1 - 30 | 139 | $21.63 | | Dec 1 - 31 | 209 | $20.05 | | Jan 1 - 31 | — | $— | | Total | 348 | | ITEM 6. SELECTED FINANCIAL DATA Over FY2016-2020, total revenues remained stable around $1.5-$1.6 billion, while net income fluctuated, store count grew to 137, same-store sales declined, and in-house financed retail sales decreased to 67.6% Selected Historical Financial Data (in thousands, except per share amounts) | Metric | FY 2020 | FY 2019 | FY 2018 | FY 2017 | FY 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total revenues | $1,543,686 | $1,549,813 | $1,516,031 | $1,596,848 | $1,613,178 | | Operating income | $134,519 | $161,255 | $115,068 | $64,098 | $113,716 | | Net income (loss) | $56,004 | $73,849 | $6,463 | ($25,562) | $30,855 | | Diluted EPS | $1.82 | $2.28 | $0.20 | ($0.83) | $0.87 | | Total assets | $2,168,769 | $1,884,907 | $1,900,799 | $1,941,134 | $2,025,300 | | Total debt, net | $1,026,140 | $955,331 | $1,091,012 | $1,145,242 | $1,249,678 | | Change in same store sales | (8.2)% | (2.2)% | (11.4)% | (6.3)% | 0.5% | | Number of stores (End of year) | 137 | 123 | 116 | 113 | 103 | ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FY2020 saw a slight revenue decrease to $1.54 billion, driven by retail declines offset by credit revenue growth, with net income falling to $56.0 million, while liquidity is maintained through operations, a revolving credit facility, and securitizations Results of Operations In FY2020, total revenues decreased to $1.54 billion, with retail operating income falling due to lower sales and margins, while credit operating income significantly improved despite a higher provision for bad debts Consolidated Results of Operations (FY2020 vs. FY2019) | (in thousands) | FY 2020 | FY 2019 | Change | | :--- | :--- | :--- | :--- | | Total revenues | $1,543,686 | $1,549,813 | ($6,127) | | Operating income | $134,519 | $161,255 | ($26,736) | | Net income | $56,004 | $73,849 | ($17,845) | Retail Net Sales by Product Category (FY2020 vs. FY2019) | (in thousands) | FY 2020 | FY 2019 | % Change | | :--- | :--- | :--- | :--- | | Furniture and mattress | $370,931 | $382,975 | (3.1)% | | Home appliance | $360,441 | $332,609 | 8.4% | | Consumer electronics | $221,449 | $262,088 | (15.5)% | | Home office | $73,074 | $86,260 | (15.3)% | | Total net sales | $1,163,235 | $1,194,674 | (2.6)% | - Retail gross margin decreased by 120 basis points to 40.0% in FY2020 from 41.2% in FY2019, attributed to higher margins in the prior year from tariff-related appliance price increases and increased logistics costs in the current year[120] - SG&A expenses increased by $22.5 million (4.7%) in FY2020, driven by new store occupancy costs in the retail segment and higher operational and legal expenses in the credit segment[122] Customer Accounts Receivable Portfolio As of January 31, 2020, the $1.60 billion customer accounts receivable portfolio showed increased delinquency (12.5% for 60+ days past due) and a higher allowance for bad debts (14.6%), attributed to underwriting changes and system implementation challenges Key Portfolio Statistics (as of Jan 31) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Weighted average credit score | 591 | 593 | | Balances 60+ days past due % | 12.5% | 9.5% | | Re-aged balance % | 29.4% | 25.7% | | Allowance for bad debts % | 14.6% | 13.5% | - The increase in the 60+ day delinquency rate was primarily driven by underwriting adjustments, an increase in new customers, and collection challenges from the implementation of a new loan management system[151][153] Liquidity and Capital Resources The company's liquidity relies on operations, a $650.0 million revolving credit facility, and securitizations, with FY2020 net cash from operations at $80.1 million and $416.8 million available borrowing capacity as of January 31, 2020 - Net cash provided by operating activities decreased to $80.1 million in FY2020 from $151.8 million in FY2019, mainly due to changes in working capital and a prior-year income tax refund[154] - The company has a $650.0 million asset-based revolving credit facility maturing in May 2022; as of January 31, 2020, available borrowing capacity was $416.8 million[162] - During FY2020, the company repurchased 3.5 million shares of common stock for $66.3 million under its share repurchase program[157] - The company was in compliance with all debt covenants as of January 31, 2020, including its Interest Coverage Ratio and Leverage Ratio[164] ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company's primary market risk is interest rate exposure from its variable-rate Revolving Credit Facility, where a 100 basis point increase would raise annual borrowing costs by $0.3 million - The main market risk is interest rate risk from the variable-rate Revolving Credit Facility[175] - A 100 basis point increase in interest rates would increase annual borrowing costs by $0.3 million, based on the $29.1 million outstanding balance as of January 31, 2020[175] ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This section presents consolidated financial statements and Ernst & Young LLP's report, which includes an unqualified opinion on financials but an adverse opinion on internal controls, with notes detailing accounting policies, debt, and a restatement for Q3 FY2020 Report of Independent Registered Public Accounting Firm Ernst & Young LLP issued an unqualified opinion on the consolidated financial statements but an adverse opinion on internal control over financial reporting due to a material weakness - The auditor, Ernst & Young LLP, issued an adverse opinion on the Company's internal control over financial reporting as of January 31, 2020[182] Notes to Consolidated Financial Statements The notes detail accounting policies, a $1.6 billion customer accounts receivable portfolio, $1.03 billion in debt, segment data, litigation, a Q3 FY2020 restatement due to system errors, and subsequent events including a $275.0 million precautionary borrowing due to COVID-19 - The company adopted new accounting standards for leases (ASC 842) and revenue from contracts with customers (ASC 606) in fiscal years 2020 and 2019, respectively[208][217] - As of January 31, 2020, total debt and financing lease obligations were $1.03 billion, consisting primarily of a Revolving Credit Facility, Senior Notes, and various series of Asset-Backed Notes[233] - Financial statements for the three and nine months ended October 31, 2019 were restated due to errors in the calculation of finance charges and provision for bad debts related to the implementation of a new loan management system[297] - Subsequent to year-end, on March 18, 2020, the company borrowed an additional $275.0 million under its Revolving Credit Facility as a precautionary measure due to uncertainty from the COVID-19 outbreak[306] ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The company reports no disagreements with its accountants regarding accounting principles, financial disclosure, or auditing scope - None reported[308] ITEM 9A. CONTROLS AND PROCEDURES Management concluded that disclosure controls were ineffective as of January 31, 2020, due to a material weakness in IT general controls, with a remediation plan underway for completion in fiscal year 2021 - Management concluded that disclosure controls and procedures were not effective as of January 31, 2020[309] - A material weakness was identified in IT general controls (ITGCs) concerning user access and program change management for new financially significant applications[312] - A remediation plan is in progress to expand IT governance, enhance user access controls, and improve segregation of duties, with expected completion in fiscal year 2021[313][314][315] ITEM 9B. OTHER INFORMATION During the internal controls assessment, Mr. John Davis, President of Credit and Collections, resigned effective March 27, 2020, and entered a consulting agreement for transition services - The President of Credit and Collections, Mr. John Davis, resigned effective March 27, 2020, during the period when the company was assessing its internal controls[323] PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's 2020 Annual Meeting of Stockholders Proxy Statement - Information is incorporated by reference from the 2020 Proxy Statement[324] ITEM 11. EXECUTIVE COMPENSATION Information concerning executive compensation is incorporated by reference from the company's 2020 Annual Meeting of Stockholders Proxy Statement - Information is incorporated by reference from the 2020 Proxy Statement[325] ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information regarding security ownership of certain beneficial owners and management is incorporated by reference from the company's 2020 Annual Meeting of Stockholders Proxy Statement - Information is incorporated by reference from the 2020 Proxy Statement[325] ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information concerning certain relationships, related transactions, and director independence is incorporated by reference from the company's 2020 Annual Meeting of Stockholders Proxy Statement - Information is incorporated by reference from the 2020 Proxy Statement[325] ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information regarding principal accountant fees and services is incorporated by reference from the company's 2020 Annual Meeting of Stockholders Proxy Statement - Information is incorporated by reference from the 2020 Proxy Statement[325] PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES This section provides a detailed index of all exhibits and financial statements filed with the Form 10-K report, noting the omission of inapplicable financial statement schedules - This item provides a list of the financial statements filed with the report and an index of all exhibits[328][329] ITEM 16. FORM 10-K SUMMARY No summary is provided under this item in the report - None[338]