A few years ago in Dallas, Texas I made a last minute Christmas Eve gift purchase at a Conn’s appliance and electronics store. The shopping experience was horrible. The store reminded me of the Army commissary on Fort Monmouth in the late 1970s when I was a young kid and my dad was in the Army reserves. In the age of Amazon and just a few dominant big box stores I was perplexed this store could exist in the present day, and I was even more perplexed that the stock (CONN) had recently been trading at record highs. I became far less confused when the publicly traded stock came tumbling down in 2014. CONN is now down 85% from its all time highs made in early 2014, and down 73% from its 52 week highs, and down 50% in 2016 alone:
I don’t know much about the company to be honest and the decline over the last year, while dramatic is fitting with the weakness we have seen in stocks of department stores like Macy’s (M), Nordstrom (JWN) and J.C. Penny (JCP) over the last 4 years. From its highs, CONN has lost more than $2 billion in market capitalization, to its current $350 million. From the highs in early 2014, annual eps topped out at $2.57 in fiscal 2014 to an expected to be 73 cents in fiscal 2017, despite sales growing from $1.2 billion in 2014 to and expected $1.7 billion in fiscal 2017.
A quick check of the internet and It appears that the company’s eps growth in the lead up to its top in 2014 was a fairly un-conventional customer financing plan that came un-done as sup-prime credit deteriorated, per MotleyFool:
Conn’s secret sauce: an in-house financing program that allowed the company to make money not only by selling merchandise, but also by lending to its customers. Most retailers outsource financing to third parties, which typically only lend to customers with prime credit scores. Conn’s specifically targets those with credit scores between 550 and 650 for its in-house financing, allowing the company to serve a population unable to finance purchases at other retailers.
Everything fell apart for Conn’s in 2014. The stock cratered, falling 75%, as comparable-store sales growth slowed and margins collapsed. In the third quarter, comparable-store sales actually declined by 1%, a stark shift from the 26.5% growth in 2013, and a huge charge related to Conn’s credit business wiped out nearly all of the company’s operating profit.
Investors hate this stock and are pricing the equity at very near zero. That’s while their $1.25 billion in debt sticks out like a sore thumb on their balance sheet. Short interest sits at a whopping 40% of the float.
Event: CONN is scheduled to report their Q1 results tomorrow before the open, the options market is implying about a 15% move in either direction. Over the last two years the average one day post earnings move has been about 15.5%, but importantly there have been 3 massive one day declines, 24.5% last qtr, and a 30 and 40% consecutive declines in late 2014.
Options in CONN trade by appointment, and you can drive a truck through the spread between the bid and the ask, so even if I had a directional inclination options are a very tough way to express a view with only 28,000 contracts of open interest. Which is a shame.
The stock caught my eye given its massive ytd decline and equally massive short interest. It will be fun to watch even if the options are un-tradeable.