n's(CONN) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, stockholders' equity, and cash flows, along with detailed notes on significant accounting policies, customer accounts receivable, debt, contingencies, segment information, stock repurchases, and subsequent events for the periods ended October 31, 2022 Condensed Consolidated Balance Sheets Total assets slightly decreased from $1,754,466 thousand at January 31, 2022, to $1,737,132 thousand at October 31, 2022, while total liabilities increased and stockholders' equity decreased significantly Consolidated Balance Sheet Highlights (in thousands) | Metric | October 31, 2022 | January 31, 2022 | | :------------------------------------ | :--------------- | :--------------- | | Total Assets | $1,737,132 | $1,754,466 | | Total Liabilities | $1,194,026 | $1,139,647 | | Total Stockholders' Equity | $543,106 | $614,819 | | Customer accounts receivable, net (current) | $423,827 | $455,787 | | Long-term portion of customer accounts receivable, net | $391,933 | $432,431 | | Long-term debt and finance lease obligations | $591,673 | $522,149 | Condensed Consolidated Statements of Operations The company reported a net loss for both the three and nine months ended October 31, 2022, a significant decline from net income in the prior year periods, primarily driven by decreased total revenues and a substantial increase in the provision for bad debts Consolidated Statements of Operations Highlights (in thousands, except per share amounts) | Metric | Three Months Ended Oct 31, 2022 | Three Months Ended Oct 31, 2021 | Nine Months Ended Oct 31, 2022 | Nine Months Ended Oct 31, 2021 | | :------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Total revenues | $321,200 | $405,458 | $1,007,652 | $1,187,543 | | Operating income (loss) | $(17,995) | $29,547 | $3,960 | $153,666 | | Net income (loss) | $(24,839) | $18,239 | $(16,489) | $100,641 | | Diluted EPS | $(1.04) | $0.60 | $(0.68) | $3.34 | | Provision for bad debts | $35,104 | $26,532 | $77,059 | $19,658 | Condensed Consolidated Statements of Stockholders' Equity Total stockholders' equity decreased from $614,819 thousand at January 31, 2022, to $543,106 thousand at October 31, 2022, primarily due to a net loss and common stock repurchases Stockholders' Equity Changes (in thousands) | Metric | January 31, 2022 | October 31, 2022 | | :------------------------------------ | :--------------- | :--------------- | | Total Stockholders' Equity | $614,819 | $543,106 | | Common stock repurchase (9 months) | N/A | $(68,225) | | Net loss (3 months ended Oct 31, 2022) | N/A | $(24,839) | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities significantly decreased for the nine months ended October 31, 2022, compared to the prior year, primarily due to lower net income and changes in working capital, while investing activities saw increased cash usage and financing activities used less cash due to asset-backed note issuances offsetting revolving credit facility payments and treasury stock purchases Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | Nine Months Ended Oct 31, 2022 | Nine Months Ended Oct 31, 2021 | | :------------------------------------ | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $72,531 | $167,676 | | Net cash used in investing activities | $(50,206) | $(33,150) | | Net cash used in financing activities | $(8,026) | $(158,661) | | Proceeds from issuance of asset-backed notes | $407,690 | $62,900 | | Purchase of treasury stock | $(71,696) | — | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures for the condensed consolidated financial statements, covering significant accounting policies, specific financial instrument details, segment performance, and subsequent events 1. Summary of Significant Accounting Policies This section outlines the company's business model, segment reporting (retail and credit), basis of financial statement presentation, principles of consolidation including Variable Interest Entities (VIEs), and key accounting policies for customer accounts receivable, interest income, allowance for doubtful accounts, debt issuance costs, income taxes, stock-based compensation, and fair value measurements, also detailing recent accounting pronouncements adopted and yet to be adopted - The company operates two reportable segments: retail (durable consumer goods) and credit (financing solutions for credit-constrained consumers)[23] - Variable Interest Entities (VIEs) are consolidated when the company is the primary beneficiary, primarily from securitizing customer accounts receivables[24] - The allowance for doubtful accounts is determined using a risk-based, pool-level segmentation framework based on historical gross charge-off history, post-charge-off recoveries, and forward-looking economic forecasts (24-month period)[30] Effective Tax Rate | Period | Effective Tax Rate | | :----------------------------- | :----------------- | | Nine Months Ended Oct 31, 2022 | 16.9% | | Nine Months Ended Oct 31, 2021 | 23.7% | Stock Awards Granted (in thousands) | Metric | Three Months Ended Oct 31, 2022 | Three Months Ended Oct 31, 2021 | Nine Months Ended Oct 31, 2022 | Nine Months Ended Oct 31, 2021 | | :------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | RSUs | 154,614 | 204,376 | 631,200 | 586,107 | | PSUs | — | 115,688 | 176,509 | 268,037 | | Total stock awards granted | 154,614 | 320,064 | 807,709 | 854,144 | | Aggregate grant date fair value | $1,162 | $8,599 | $16,924 | $17,849 | - ASU 2022-02 (Troubled Debt Restructurings and Vintage Disclosures) is expected to be adopted in Q1 fiscal year 2024, with the impact currently being assessed[40] 2. Customer Accounts Receivable The carrying value of customer accounts receivable, net of allowances, decreased from $888,218 thousand at January 31, 2022, to $815,760 thousand at October 31, 2022, while the allowance for credit losses also decreased and 60+ days past due balances and restructured accounts showed changes Customer Accounts Receivable (in thousands) | Metric | October 31, 2022 | January 31, 2022 | | :----------------------------------------------------------------- | :--------------- | :--------------- | | Carrying value of customer accounts receivable, net of allowance for credit losses | $815,760 | $888,218 | | Allowance for credit losses | $(164,629) | $(193,896) | | Customer accounts receivable 60+ days past due | $119,223 | $112,858 | | Re-aged customer accounts receivable | $161,429 | $181,996 | | Restructured customer accounts receivable | $76,163 | $99,557 | Allowance for Credit Losses Activity (in thousands) | Metric | 9 Months Ended Oct 31, 2022 | 9 Months Ended Oct 31, 2021 | | :------------------------------------ | :-------------------------- | :-------------------------- | | Allowance at beginning of period | $209,020 | $298,037 | | Provision for credit loss expense | $114,849 | $44,924 | | Principal charge-offs | $(134,436) | $(132,401) | | Interest charge-offs | $(32,217) | $(36,349) | | Recoveries | $30,462 | $33,943 | | Allowance at end of period | $187,678 | $208,154 | Delinquency Distribution of Customer Accounts Receivable (Oct 31, 2022, in thousands) | Delinquency Bucket | Amount | % of Total | | :----------------- | :----- | :--------- | | Current | $683,282 | 69.7 % | | 1-30 days | $132,954 | 13.6 % | | 31-60 days | $44,929 | 4.6 % | | 61-90 days | $26,462 | 2.7 % | | 91+ days | $92,762 | 9.4 % | | Total | $980,389 | 100.0 % | 3. Charges and Credits The company recognized $8.0 million in severance costs during the three and nine months ended October 31, 2022, related to executive management changes, and a $1.5 million gain from lease termination was also recognized during the nine-month period Charges and Credits (in thousands) | Metric | Three Months Ended Oct 31, 2022 | Nine Months Ended Oct 31, 2022 | | :------------------ | :------------------------------ | :----------------------------- | | Employee severance | $8,006 | $8,006 | | Lease termination | — | $(1,484) | | Total | $8,006 | $6,522 | 4. Finance Charges and Other Revenues Total finance charges and other revenues decreased by $4.0 million (5.7%) for the three months and $13.4 million (6.2%) for the nine months ended October 31, 2022, primarily due to a decrease in the average outstanding balance of the customer accounts receivable portfolio and a decline in insurance commissions Finance Charges and Other Revenues (in thousands) | Metric | Three Months Ended Oct 31, 2022 | Three Months Ended Oct 31, 2021 | Nine Months Ended Oct 31, 2022 | Nine Months Ended Oct 31, 2021 | | :--------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Interest income and fees | $61,395 | $63,621 | $185,869 | $196,303 | | Insurance income | $5,176 | $6,992 | $14,835 | $17,881 | | Other revenues | $271 | $262 | $815 | $695 | | Total | $66,842 | $70,875 | $201,519 | $214,879 | Provision for Uncollectible Interest (in thousands) | Period | 2022 | 2021 | | :------------------------------ | :----- | :----- | | Three Months Ended Oct 31 | $19,100 | $10,500 | | Nine Months Ended Oct 31 | $38,600 | $25,500 | 5. Debt and Financing Lease Obligations Total debt and financing lease obligations increased to $596,967 thousand at October 31, 2022, from $525,911 thousand at January 31, 2022, primarily driven by the issuance of new asset-backed notes in July 2022, which were used to repay the Revolving Credit Facility, and the company also amended its Revolving Credit Facility in November 2022, waiving interest coverage covenants for a period and adding new liquidity and anti-cash hoarding covenants Debt and Financing Lease Obligations (in thousands) | Metric | October 31, 2022 | January 31, 2022 | | :------------------------------------ | :--------------- | :--------------- | | Total debt and financing lease obligations | $596,967 | $525,911 | | Revolving Credit Facility | $114,000 | $149,000 | | 2022-A VIE Asset-backed Class A Notes | $191,174 | — | | 2022-A VIE Asset-backed Class B Notes | $132,090 | — | - On July 21, 2022, the company issued approximately $407.7 million in aggregate principal amount of asset-backed notes, with net proceeds of $402.8 million used to repay the Revolving Credit Facility and for general corporate purposes[56] - As of October 31, 2022, the company had immediately available borrowing capacity of $155.4 million under its $650.0 million Revolving Credit Facility, with an additional $358.3 million potentially available[56] - On November 21, 2022, the Revolving Credit Facility was amended to replace LIBOR with Term SOFR, waive interest coverage covenants for a period (Q3 FY2023 to April 30, 2024), and add minimum liquidity, anti-cash hoarding, and minimum availability covenants[78] 6. Contingencies The company is involved in derivative litigation (Hack Litigation, Dohn State Court Action, Casey lawsuit) alleging breach of fiduciary duty, unjust enrichment, gross mismanagement, and insider trading, with Federal Derivative Actions reaching a settlement, Dohn's appeal voluntarily dismissed, and Casey's lawsuit also moved for dismissal, and the company believes any probable and estimable losses are adequately reflected in financial statements - Federal Derivative Actions were settled and dismissed with prejudice on March 15, 2022[60] - Dohn's appeal of the Federal Derivative Actions settlement was voluntarily dismissed on November 14, 2022, and a motion to dismiss the Dohn State Court Action with prejudice was filed on November 18, 2022[61][63] - Casey filed an unopposed motion to dismiss his state court derivative action with prejudice on November 16, 2022[63] 7. Variable Interest Entities The company consolidates Variable Interest Entities (VIEs) formed for securitizing customer accounts receivables, as it is deemed the primary beneficiary, and the assets of these VIEs serve as collateral for their obligations, with no recourse to assets outside the VIEs for asset-backed note holders - The company securitizes customer accounts receivables by transferring them to bankruptcy-remote VIEs and consolidates these VIEs as the primary beneficiary[64] VIE Assets and Liabilities (in thousands) | Metric | October 31, 2022 | January 31, 2022 | | :------------------------------------ | :--------------- | :--------------- | | Total Assets | $582,224 | $410,036 | | Customer accounts receivable, net | $537,866 | $380,164 | | Restricted cash | $43,394 | $29,872 | | Total Liabilities | $483,104 | $387,248 | | Long-term debt (asset-backed notes) | $473,156 | $367,925 | - Holders of asset-backed notes issued by VIEs have no recourse to assets outside of the respective VIEs[67] 8. Segment Information The company operates two segments: retail and credit, both of which experienced declines in operating income for the three and nine months ended October 31, 2022, compared to the prior year, with the retail segment seeing a significant drop in product sales and the credit segment's operating income turning into a loss for the three-month period - The company has two operating segments: retail (durable consumer goods) and credit (financing solutions), with performance evaluated based on operating income before taxes[68][71] Retail Segment Performance (in thousands) | Metric | Three Months Ended Oct 31, 2022 | Three Months Ended Oct 31, 2021 | Nine Months Ended Oct 31, 2022 | Nine Months Ended Oct 31, 2021 | | :------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Total net sales | $254,358 | $334,583 | $806,133 | $972,664 | | Operating income (loss) | $(17,721) | $22,542 | $(19,670) | $66,925 | Credit Segment Performance (in thousands) | Metric | Three Months Ended Oct 31, 2022 | Three Months Ended Oct 31, 2021 | Nine Months Ended Oct 31, 2022 | Nine Months Ended Oct 31, 2021 | | :--------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Finance charges and other revenues | $66,572 | $70,613 | $200,704 | $214,184 | | Operating income (loss) | $(274) | $7,005 | $23,630 | $86,741 | - As of October 31, 2022, the company operated 165 standalone retail stores and 19 store-within-a-store locations with Belk[88][95] 9. Stock Repurchases The Board of Directors approved a $150.0 million stock repurchase program expiring December 14, 2022, with no shares repurchased during the three months ended October 31, 2022, but 3,316,000 shares repurchased for $68.2 million during the nine months ended October 31, 2022 - A stock repurchase program of up to $150.0 million was approved on December 15, 2021, expiring on December 14, 2022[75] - No shares were repurchased during the three months ended October 31, 2022[75] - During the nine months ended October 31, 2022, 3,316,000 shares were repurchased for an aggregate amount of $68.2 million, at an average weighted cost of $20.57 per share[75] 10. Subsequent Events After the reporting period, the company amended its Revolving Credit Facility on November 21, 2022, replacing LIBOR with Term SOFR, waiving interest coverage covenants for a period, and adding new liquidity and anti-cash hoarding covenants, and additionally, on November 30, 2022, the company sold $63.1 million of previously retained Class C asset-backed notes for $43.7 million net proceeds - On November 21, 2022, the Revolving Credit Facility was amended to replace LIBOR with Term SOFR, waive interest coverage covenants for a period (Q3 FY2023 to April 30, 2024), and add minimum liquidity, anti-cash hoarding, and minimum availability covenants[78] - On November 30, 2022, the company sold $63.1 million in aggregate principal amount of zero coupon Asset Backed Fixed Rate Notes, Class C, Series 2022-A, for net proceeds of $43.7 million[78] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, condition, and operational results for the periods ended October 31, 2022, including an executive summary, strategic updates, outlook, detailed analysis of revenues and expenses by segment, customer accounts receivable portfolio performance, liquidity and capital resources, and critical accounting policies Forward-Looking Statements This section provides a cautionary statement regarding forward-looking statements, highlighting various risks and uncertainties that could cause actual results to differ materially from projections, emphasizing that these statements are based on current expectations and disclaiming any obligation to update them - Forward-looking statements concern future financial performance, business strategy, plans, goals, and objectives, and are subject to risks and uncertainties[80] - Potential risks include general economic conditions, securitization terms, credit portfolio delinquency, litigation, regulatory oversight, net charge-offs, new store success, e-commerce expansion, cyber-attacks, funding ability, and pandemics[80] - The company disclaims any intention or obligation to update publicly or revise forward-looking statements[80] Overview This section encourages readers to review the Management's Discussion and Analysis in conjunction with the Condensed Consolidated Financial Statements and notes, clarifying that the company's fiscal year ends on January 31 - The company's fiscal year ends on January 31[81] Executive Summary Total revenues declined by 20.8% for the three months ended October 31, 2022, driven by a 24.0% decrease in retail revenues (27.0% same-store sales decline) and a 5.7% decrease in credit revenues, with retail gross margin decreasing by 360 basis points and provision for bad debts increasing significantly, leading to a net loss of $24.8 million Executive Summary Highlights (3 months ended Oct 31, 2022 vs 2021, in millions) | Metric | 2022 | 2021 | Change | % Change | | :------------------------------------ | :----- | :----- | :----- | :------- | | Total revenues | $321.2 | $405.5 | $(84.3) | (20.8)% | | Retail revenues | $254.6 | $334.8 | $(80.2) | (24.0)% | | Same store sales | N/A | N/A | N/A | (27.0)% | | Credit revenues | $66.6 | $70.6 | $(4.0) | (5.7)% | | Retail gross margin | 33.2% | 36.8% | (3.6)% | (360 bps) | | SG&A | $126.2 | $138.1 | $(11.8) | (8.6)% | | Provision for bad debts | $35.1 | $26.5 | $8.6 | 32.5% | | Interest expense | $11.5 | $5.2 | $6.3 | 120.5% | | Net loss (income) | $(24.8) | $18.2 | $(43.0) | (236.3)% | | Diluted EPS | $(1.04) | $0.60 | $(1.64) | (273.3)% | How We Evaluate Our Operations Senior management monitors key performance indicators including same store sales, retail gross margin, 60+ day delinquencies, and net yield to assess operational performance and guide strategic decisions - Key performance indicators include same store sales, retail gross margin, 60+ Day Delinquencies, and Net yield[85] - Same store sales reflect the ability to leverage SG&A costs and directly impact total net sales, net income, cash, and working capital[85] - 60+ Day Delinquencies are a key indicator of credit portfolio quality, future credit performance, and interest rates on asset-backed securitizations[85] Company Initiatives In Q3 FY2023, the company experienced a 20.8% decline in total consolidated revenue, a 27.0% decrease in same-store sales, and reported a net loss of $1.04 per diluted share, but despite these challenges, the company expanded its store footprint by adding two new standalone stores and 15 store-within-a-store locations - Total consolidated revenue declined 20.8% to $321.2 million, with same store sales decreasing 27.0%[86] - Reported a net loss of $1.04 per diluted share for the quarter[86] - Added two new standalone stores, bringing the total to 165, and 15 new store-within-a-store locations with Belk, totaling 19[88] Strategic Update In response to macroeconomic pressures, the company has updated its near-term strategic priorities to focus on reducing operating costs (expecting $12.0-$16.0 million in savings in H2 FY2023), lowering capital expenditures (reducing FY2023 investments by $20.0 million), and maintaining conservative credit underwriting standards (weighted average credit score of outstanding balances at 613) - Strategic priorities include reducing operating costs, lowering capital expenditures, and maintaining conservative credit underwriting[89] - Expected cost savings of approximately $12.0 to $16.0 million in the back half of the fiscal year from current initiatives[89] - Planned capital expenditures for fiscal year 2023 are reduced by approximately $20.0 million[89] - Weighted average credit score of outstanding balances was 613 as of October 31, 2022, reflecting conservative credit underwriting[89] Outlook The company anticipates stability and growth through its value proposition, brand recognition, and optimized operations, planning to expand in existing and new markets, leveraging infrastructure to increase purchase volumes, achieve distribution efficiencies, and strengthen vendor relationships, expecting higher net sales to further leverage corporate and regional infrastructure - The company expects to maintain and grow its business by leveraging brand recognition and optimizing marketing, merchandising, distribution, and credit operations[90] - Plans include further penetration in existing markets and expansion into new markets with similar demographic characteristics[90] - Anticipates increased purchase volumes, distribution efficiencies, and strengthened vendor relationships, leading to higher net sales and leverage of existing infrastructure[90] Results of Operations This section provides a detailed comparative analysis of the company's consolidated and segment-specific financial performance for the three and nine months ended October 31, 2022, against the prior year, highlighting key revenue, cost, and profitability trends Consolidated Results of Operations (in thousands) | Metric | Three Months Ended Oct 31, 2022 | Three Months Ended Oct 31, 2021 | Change | Nine Months Ended Oct 31, 2022 | Nine Months Ended Oct 31, 2021 | Change | | :------------------------------------ | :------------------------------ | :------------------------------ | :----- | :----------------------------- | :----------------------------- | :----- | | Total net sales | $254,358 | $334,583 | $(80,225) | $806,133 | $972,664 | $(166,531) | | Finance charges and other revenues | $66,842 | $70,875 | $(4,033) | $201,519 | $214,879 | $(13,360) | | Total revenues | $321,200 | $405,458 | $(84,258) | $1,007,652 | $1,187,543 | $(179,891) | | Cost of goods sold | $169,842 | $211,298 | $(41,456) | $530,942 | $612,219 | $(81,277) | | Selling, general and administrative expense | $126,243 | $138,081 | $(11,838) | $389,169 | $402,000 | $(12,831) | | Provision for bad debts | $35,104 | $26,532 | $8,572 | $77,059 | $19,658 | $57,401 | | Charges and credits | $8,006 | — | $8,006 | $6,522 | — | $6,522 | | Total costs and expenses | $339,195 | $375,911 | $(36,716) | $1,003,692 | $1,033,877 | $(30,185) | | Operating income (loss) | $(17,995) | $29,547 | $(47,542) | $3,960 | $153,666 | $(149,706) | | Interest expense | $11,478 | $5,206 | $6,272 | $23,807 | $20,498 | $3,309 | | Income (loss) before income taxes | $(29,473) | $24,341 | $(53,814) | $(19,847) | $131,950 | $(151,797) | | Provision (benefit) for income taxes | $(4,634) | $6,102 | $(10,736) | $(3,358) | $31,309 | $(34,667) | | Net income (loss) | $(24,839) | $18,239 | $(43,078) | $(16,489) | $100,641 | $(117,130) | Three months ended October 31, 2022 compared to three months ended October 31, 2021 Total revenues decreased by $84.3 million (20.8%) to $321.2 million, primarily due to a 24.0% decline in total net sales (27.0% same-store sales decrease) and a 5.7% reduction in finance charges and other revenues, with retail gross margin falling by 360 basis points to 33.2% and the provision for bad debts increasing by $8.6 million Retail Net Sales by Product Category (3 months ended Oct 31, in thousands) | Product Category | 2022 Sales | % of Total | 2021 Sales | % of Total | Change | % Change | Same Store % Change | | :----------------------- | :--------- | :--------- | :--------- | :--------- | :----- | :------- | :------------------ | | Furniture and mattress | $79,927 | 31.4 % | $106,756 | 31.9 % | $(26,829) | (25.1)% | (28.3)% | | Home appliance | $102,884 | 40.4 | $128,385 | 38.3 | $(25,501) | (19.9) | (22.5) | | Consumer electronics | $31,911 | 12.5 | $46,751 | 14.0 | $(14,840) | (31.7) | (33.9) | | Home office | $8,630 | 3.4 | $17,373 | 5.2 | $(8,743) | (50.3) | (51.0) | | Other | $9,824 | 4.0 | $9,036 | 2.7 | $788 | 8.7 | (14.5) | | Product sales | $233,176 | 91.7 | $308,301 | 92.1 | $(75,125) | (24.4) | (27.6) | | Repair service agreement commissions | $18,804 | 7.4 | $23,769 | 7.1 | $(4,965) | (20.9) | (20.8) | | Service revenues | $2,378 | 0.9 | $2,513 | 0.8 | $(135) | (5.4) | | | Total net sales | $254,358 | 100.0 % | $334,583 | 100.0 % | $(80,225) | (24.0)% | (27.0)% | Key Portfolio Performance (3 months ended Oct 31, in thousands) | Metric | 2022 | 2021 | Change | | :------------------------------------ | :----- | :----- | :----- | | Interest income and fees | $61,395 | $63,621 | $(2,226) | | Net charge-offs | $(35,439) | $(22,336) | $(13,103) | | Interest expense | $(11,478) | $(5,206) | $(6,272) | | Net portfolio income | $14,478 | $36,079 | $(21,601) | | Average outstanding portfolio balance | $1,034,579 | $1,116,234 | $(81,655) | | Interest income and fee yield (annualized) | 23.5 % | 22.6 % | 0.9 % | | Net charge-off % (annualized) | 13.7 % | 8.0 % | 5.7 % | - Retail gross margin decreased by 360 basis points to 33.2% (from 36.8% in prior year), primarily due to deleveraging of fixed distribution costs, higher freight, fuel costs, and financing fees[99] - Consolidated SG&A decreased by $11.8 million (8.6%) to $126.2 million, driven by cost savings initiatives in variable costs, labor, and advertising in the retail segment, and decreased labor and general operating costs in the credit segment[100] - Provision for bad debts increased by $8.6 million to $35.1 million, primarily due to a $13.1 million increase in net charge-offs[101][103] Nine months ended October 31, 2022 compared to nine months ended October 31, 2021 Total revenues decreased by $179.9 million (15.2%) to $1,007.7 million, driven by a 17.1% decline in total net sales (20.0% same-store sales decrease) and a 6.2% reduction in finance charges and other revenues, with retail gross margin falling by 300 basis points to 34.1% and the provision for bad debts increasing significantly by $57.4 million Retail Net Sales by Product Category (9 months ended Oct 31, in thousands) | Product Category | 2022 Sales | % of Total | 2021 Sales | % of Total | Change | % Change | Same Store % Change | | :----------------------- | :--------- | :--------- | :--------- | :--------- | :----- | :------- | :------------------ | | Furniture and mattress | $254,341 | 31.6 % | $310,505 | 31.9 % | $(56,164) | (18.1)% | (21.6)% | | Home appliance | $333,359 | 41.3 | $377,090 | 38.8 | $(43,731) | (11.6) | (14.1) | | Consumer electronics | $97,375 | 12.1 | $133,202 | 13.7 | $(35,827) | (26.9) | (29.0) | | Home office | $27,676 | 3.4 | $49,881 | 5.1 | $(22,205) | (44.5) | (44.8) | | Other | $25,847 | 3.2 | $27,079 | 2.8 | $(1,232) | (4.5) | (13.1) | | Product sales | $738,598 | 91.6 | $897,757 | 92.3 | $(159,159) | (17.7) | (20.6) | | Repair service agreement commissions | $60,256 | 7.5 | $66,600 | 6.8 | $(6,344) | (9.5) | (14.6) | | Service revenues | $7,279 | 0.9 | $8,307 | 0.9 | $(1,028) | (12.4) | | | Total net sales | $806,133 | 100.0 % | $972,664 | 100.0 % | $(166,531) | (17.1)% | (20.0)% | Key Portfolio Performance (9 months ended Oct 31, in thousands) | Metric | 2022 | 2021 | Change | | :------------------------------------ | :----- | :----- | :----- | | Interest income and fees | $185,869 | $196,303 | $(10,434) | | Net charge-offs | $(103,974) | $(98,458) | $(5,516) | | Interest expense | $(23,807) | $(20,498) | $(3,309) | | Net portfolio income | $58,088 | $77,347 | $(19,259) | | Average outstanding portfolio balance | $1,061,985 | $1,135,379 | $(73,394) | | Interest income and fee yield (annualized) | 23.4 % | 23.1 % | 0.3 % | | Net charge-off % (annualized) | 13.1 % | 11.6 % | 1.5 % | - Retail gross margin decreased by 300 basis points to 34.1% (from 37.1% in prior year), primarily due to increased product costs from deleveraging fixed distribution costs, higher freight, fuel costs, and financing fees[110] - Consolidated SG&A decreased by $12.8 million (3.2%) to $389.2 million, mainly due to declines in variable costs, labor, and advertising from cost savings initiatives in the retail segment, and decreased labor costs in the credit segment[111][113] - Provision for bad debts increased by $57.4 million to $77.1 million, driven by a smaller decrease in the allowance for bad debts and a $5.5 million increase in net charge-offs[114] Customer Accounts Receivable Portfolio The company provides in-house financing for durable goods, primarily to higher-risk, subprime borrowers, with interest rates generally between 18% and 36%, and the weighted average credit score of outstanding balances increased slightly to 613, while balances 60+ days past due as a percentage of total portfolio increased to 12.2% and the allowance for uncollectible accounts for non-restructured accounts increased to 16.1% - The company provides in-house financing to higher-risk, subprime borrowers with contractual interest rates generally ranging from 18% to 36%[118][119] - The 12-month no-interest option program waives interest if the principal is repaid in full by the end of the period and scheduled payments are made[120] Customer Portfolio Performance Metrics | Metric | October 31, 2022 | October 31, 2021 | | :------------------------------------------------------------------------------------------------------------------------------------------------------- | :--------------- | :--------------- | | Weighted average credit score of outstanding balances | 613 | 607 | | Balances 60+ days past due as a percentage of total customer portfolio carrying value | 12.2 % | 8.8 % | | Re-aged balance as a percentage of total customer portfolio carrying value | 16.5 % | 18.3 % | | Carrying value of account balances re-aged more than six months (in thousands) | $31,521 | $61,807 | | Allowance for bad debts and uncollectible interest as a percentage of total customer accounts receivable portfolio balance | 18.2 % | 18.5 % | | Percent of total customer accounts receivable portfolio balance represented by no-interest option receivables | 33.0 % | 32.0 % | Credit Origination Metrics (3 months ended Oct 31) | Metric | 2022 | 2021 | | :----------------------------------------------------------------- | :----- | :----- | | Total applications processed | 231,526 | 337,112 | | Weighted average origination credit score of sales financed | 621 | 616 | | Percent of total applications approved and utilized | 23.8 % | 21.5 % | | Average income of credit customer at origination | $50,900 | $49,100 | | Percent of retail sales paid for by: In-house financing | 54.0 % | 52.9 % | | Percent of retail sales paid for by: Third-party financing | 17.6 % | 17.9 % | | Percent of retail sales paid for by: Third-party lease-to-own option | 7.2 % | 9.2 % | - The allowance for uncollectible accounts as a percentage of the total non-restructured customer accounts receivable portfolio balance increased to 16.1% as of October 31, 2022, from 15.8% in the prior year[124] - The percentage of the carrying value of non-restructured accounts greater than 60 days past due increased by 410 basis points to 10.8% as of October 31, 2022, from 6.7% in the prior year[124] Liquidity and Capital Resources The company relies on cash flow from operations, its Revolving Credit Facility, and securitizations of customer receivables for liquidity, with net cash from operating activities decreasing significantly, investing activities increasing due to new stores and technology, and financing activities using less cash due to asset-backed note issuances, and while the company believes it has sufficient liquidity for the next 12 months, it has amended its Revolving Credit Facility to include new covenants - Net cash provided by operating activities for the nine months ended October 31, 2022, was $72.5 million, a decrease from $167.7 million in the prior year[125] - Net cash used in investing activities increased to $50.2 million for the nine months ended October 31, 2022, primarily for new stores and technology investments[125] - Net cash used in financing activities decreased to $8.0 million for the nine months ended October 31, 2022, largely due to proceeds from asset-backed note issuances offsetting payments on the Revolving Credit Facility and treasury stock purchases[125] - The company repurchased 3,462,848 shares of common stock for $71.7 million during the nine months ended October 31, 2022, under a $150.0 million program[128] - As of October 31, 2022, the company had $155.4 million in immediately available borrowing capacity under its Revolving Credit Facility and $8.4 million of cash on hand[139] - Anticipated capital expenditures for the remainder of fiscal year 2023 are between $20.0 million and $25.0 million for new stores and distribution centers[138] Off-Balance Sheet Liabilities and Other Contractual Obligations The company has no off-balance sheet arrangements and provides a summary of minimum contractual commitments and obligations as of October 31, 2022, totaling $1,439.3 million, primarily consisting of debt, financing lease obligations, operating leases, and inventory purchase commitments - The company does not have any off-balance sheet arrangements[140] Summary of Contractual Commitments and Obligations (Oct 31, 2022, in thousands) | Category | Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | | :------------------------------------ | :------ | :--------------- | :-------- | :-------- | :---------------- | | Debt, including estimated interest payments | $698,573 | $32,960 | $175,081 | $541,672 | $0 | | Financing lease obligations | $7,278 | $1,198 | $2,120 | $1,161 | $2,799 | | Operating leases | $610,530 | $93,972 | $177,790 | $137,841 | $200,902 | | Contractual commitments | $98,332 | $94,380 | $3,900 | $52 | $0 | | Total | $1,439,318 | $224,845 | $364,646 | $646,126 | $203,701 | Issuer and Guarantor Subsidiary Summarized Financial Information This section provides combined summarized financial information for Conn's, Inc. (Issuer) and its Guarantor Subsidiaries, excluding Non-Guarantor Subsidiaries (VIEs and minor subsidiaries), showing a net loss of $25.5 million for the nine months ended October 31, 2022, and a decrease in total assets and liabilities compared to January 31, 2022 - Summarized financial information is presented on a combined basis for the Issuer and Guarantor Subsidiaries, excluding Non-Guarantor Subsidiaries (VIEs and minor subsidiaries)[142] Summarized Balance Sheet (Issuer and Guarantor Subsidiaries, in thousands) | Metric | October 31, 2022 | January 31, 2022 | | :------------------------------------ | :--------------- | :--------------- | | Total Assets | $1,157,829 | $1,359,333 | | Total Liabilities | $713,842 | $767,301 | Summarized Statement of Operations (Issuer and Guarantor Subsidiaries, 9 months ended Oct 31, 2022, in thousands) | Metric | Amount | | :------------------------------------------ | :----- | | Total revenues | $955,479 | | Total costs and expenses | $980,987 | | Net loss | $(25,508) | Critical Accounting Policies and Estimates The company's critical accounting policies and estimates, which involve significant judgment and inherent uncertainty, are consistent with those disclosed in its 2022 Form 10-K, with no additional policies noted beyond those already discussed - Critical accounting policies and estimates are consistent with those disclosed in the 2022 Form 10-K[145] - These policies are particularly dependent on estimates about matters that are inherently uncertain and could materially impact financial statements[145] Recent Accounting Pronouncements This section refers to Note 1, Summary of Significant Accounting Policies, for detailed information regarding recent accounting pronouncements adopted and yet to be adopted by the company - Information related to recent accounting pronouncements is incorporated by reference from Note 1, Summary of Significant Accounting Policies[146] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, particularly concerning its Revolving Credit Facility, which bears interest at a variable rate (LIBOR/alternate base rate plus a margin), and a 100 basis point increase in interest rates would increase borrowing costs by $1.1 million annually based on the October 31, 2022 outstanding balance, while asset-backed notes bear fixed interest rates and are not affected by rate changes - The primary market risk is interest rate risk, specifically related to the variable interest rate on the Revolving Credit Facility[147] - A 100 basis point increase in interest rates on the Revolving Credit Facility would increase borrowing costs by $1.1 million over a 12-month period, based on the $114.0 million outstanding balance at October 31, 2022[147] - Asset-backed notes bear fixed interest rates and are not affected by interest rate changes[147] Item 4. Controls and Procedures The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of October 31, 2022, and there have been no material changes in internal controls over financial reporting during the quarter - The CEO and CFO concluded that disclosure controls and procedures were effective as of October 31, 2022[148] - No material changes in internal controls over financial reporting occurred during the quarter ended October 31, 2022[148] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section incorporates by reference the information on legal proceedings from Note 6, Contingencies, of the Condensed Consolidated Financial Statements - Information on legal proceedings is incorporated by reference from Note 6, Contingencies[149] Item 1A. Risk Factors As of the filing date, there have been no material changes to the risk factors previously disclosed in the company's 2022 Form 10-K - No material changes to the risk factors previously disclosed in Part I, Item 1A, of the 2022 Form 10-K as of the filing date[150] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No shares of common stock were repurchased by the company or its affiliates during the three months ended October 31, 2022, under the $150.0 million stock repurchase program expiring December 14, 2022 - No shares of common stock were purchased by the company or its affiliates during the three months ended October 31, 2022[153] - The stock repurchase program, authorized for up to $150.0 million, expires on December 14, 2022[153] - Approximately $23.0 million remained available under the stock repurchase program as of October 31, 2022[153] Item 3. Defaults Upon Senior Securities No defaults upon senior securities were reported for the period - No defaults upon senior securities were reported[154] Item 4. Mine Safety Disclosure This item is not applicable to the company's operations - Mine Safety Disclosure is not applicable[155] Item 5. Other Information No other information was reported for the period - No other information was reported[156] Item 6. Exhibits This section lists all exhibits filed as part of the 10-Q report, including certificates of incorporation, bylaws, offer letters, loan agreement amendments, certifications, and XBRL financial information - Exhibits include corporate governance documents (Certificate of Incorporation, Bylaws), employment agreements (Offer Letter for Norman L. Miller), debt agreements (Amendment No. 1 to Fifth Amended and Restated Loan and Security Agreement), and regulatory certifications (Rule 13a-14(a)/15d-14(a) and Section 1350 Certifications)[158] - Financial information is provided in Inline Extensible Business Reporting Language (iXBRL) format as Exhibit 101[158]