Conn's latest report shows that even as the company continues to grow the gross margins on its retail sales, the performance of its in-house financing programs is only getting worse.
Conn's is a rapidly-expanding retailer that serves a target audience with poor credit and aspirations for luxury goods. The average television sold at Conn's costs $1,219, but the average credit score of a customer approved for financing is 614. It's Ye$ Money (or Dinero $i) at Conn's, even if the consumer is buying a television at a price that is equivalent to what he or she earns in two weeks.
The disconnect between price and ability-to-repay is driven by Conn's practice of offering easy credit. Perhaps its most appealing option is its no-interest promotional financing program Ye$ Money. The share of borrowers who use this program is growing, to the point where the overall yield on their receivables portfolio is now below 17 percent. The credit drives demand for its high-margin retail. The company's investor presentation explains how it upsells consumers to stimulate profits with the example of two potential washer-dryer purchases. In the first, the company sells a low-efficiency top-loading set for $400 at a 25 percent gross margin, thus realizing a profit of $100. In the second, it sells a high-efficiency front-loading version for $1,000 at a 35 percent markup - thus realizing a gross profit of $350. Moreover, if the former item is purchased on its own, it does not qualify for financing, whereas the latter can be purchased on credit.
But easy credit to non-prime consumers is catching up with the company. The next chart reviews the changes in the performance of its portfolio over the last few years.
This table shows many things about the evolution of their credit strategy. First, it shows that consumers are taking out larger loans, which is not an accident. Conn's will not make loans below a certain ticket size. For those who want to apply for Ye$ Money, the minimum is even higher.
Secondly, is reveals that re-aging is growing. In the years before this period, re-aging was an even more common occurrence. The company says that it re-ages when a consumer shows a willingness to meet a debt obligation even if there is a temporary disruption in income. For example, in a 2013 SEC filing, the company stated that it was a policy to offer a re-aging when a borrower lost work but still indicated an intention to repay. Of concern here is that the company also sells Assurant's involuntary unemployment credit insurance. Does this mean that the company sells policies that provide a service that the consumer would receive otherwise?
Third, past due balances are now higher than ever. At the end of January, 14.5 percent of the company's receivables were 60 days or more past due - independent of the debt that had been re-aged.
Lastly, charge-offs continue to go up.
Sales are going up at Conn's because their ability to access corporate debt is growing. Conn's can make more loans to consumers because they can sell their receivables to institutional investors. In the last two years, they have completed two securitizations worth a combined total of $1.2 billion. They have opened new stores. Additionally, many of the older stores now carry larger inventories. They approach their capital structure in a manner that is somewhat akin to that of Credit Acceptance, where low-quality debt is sold at a discount to face value but still serviced at a substantial fee. Conn's earns four percent on servicing.
According to Conn's, they facilitate what the company refers to as "aspirational purchases." They are willing to sell a $1,200 wide-screen HD television on credit, even though most retailers would refuse the same customer the chance to borrow to buy a similar item for about $400. But having a tv isn't the same as owning one, so for many people, the experience is only a positive one for a short time. At the end of the day, this week's report shows that a lot of people are unable to afford what Conn's is selling.