The Long Case For Conn's

8/10/2019 The Long Case For Conn's

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Chirag Odhav | Kevin Zhang | Raffi Chalian

Conns Inc. (NASDAQ: CONN)


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Agenda

Executive Summary

Company Overview

Industry Overview

Investment Thesis

Valuation


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Company Overview

Conns Inc.


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Company Overview

CONN Key Stats

Market Cap $1.13BN

EV $1.71BN

Stock Price $31.55

12mo. Trailing P/E 11.75EV/EBITDA 9.62

EBITA Margin 14.96%

Number of Stores 86

Conns Inc. is a specialty retailer of durable consumer goods and related services

that offers an in-house financing program for credit-constrained customers

76%

7%

17%

Retail

Services

Credit

Revenue Breakdown

77.3% of CONNs sales are financed

through their in-house financingprogram, for customers with creditscores between 550-650

Executive Summary Company Overview Industry Overview Investment Thesis Valuation


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Store Distribution



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Business Model

Repair & Services

Purchase

SynchronyFinancials

In-housefinancing

Rent-to-Own

550-650


13%

77%

4%


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Industry Overview

Conns Inc.


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Industry Overview

CONN operates in a niche market with high growth prospects

Niche Market Growth

Conns operates in a niche market

offering retail products to subprime

borrowers

No direct competitors in this space

Substantial barriers to entry

-lower returns than non-bank lenders-regulatory and cost obstacles for banks-retailers lack capital and experience

U.S. economy recovering from therecession, but people are still

cautious

Growing discretionary consumerspending in the South, particularlyTexas. ~4% YoY

Credit scores take years to improve


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Investment Thesis

Conns Inc.


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Investment Thesis

CONN is a victimof significant

overselling

CONN has

substantial growthopportunities

Conns has been oversold due to an overreaction to an

increase in 60+ days delinquency

Conns ability to grow comparable same store sales,

expand margins, open new stores, and improve creditcontribution provides growth opportunities


CONN has astrong valueproposition

Conns strong value proposition poises it to capturethe growth in its core customer base


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The Streets View


The Street is overreacting to the slight increase in bad debts

The increase in bad debts is dueto stricter underwriting policies

and an increase in NEWcustomers

Despite the poison pill, activistscurrently hold 29% of the

company

Net insider purchases increasedby 41% in the last 6 months

Bad debts increased from 7% to8.8%, analysts believe this is the

start of a trend

Lawsuit alleging misleadingstatements on credit portfolio

Stock currently has a 49.4%short interest

Streets Negative Mentality Variant Perception


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Market Overreaction

$10

$20

$30

$40

$50

$60

$70

$80

$90

12/26/13 1/26/14 2/26/14 3/26/14 4/26/14 5/26/14 6/26/14 7/26/14 8/26/14 9/26/14 10/26/14


FY14 60+ daydelinquency

increased 180

bps

60+ daydelinquency

increased 50 bps


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Credit Underwriting


Conns is targeting higher credit quality customers, which will help reduce

delinquency rates

Quarter Ended

Wtd. Av. Score of

Outstanding Balance

Wtd. Av.

Origination Scores

4/30/13 596 602

7/31/13 595 601

10/31/13 591 599

1/31/14 594 605

4/30/14 591 605

7/31/14 592 607

Conns short-term no interestcredit options resulted in areduction in the credit qualityof the portfolio

Management ended the six-

month no interest financing Conns no longer finances

customers with a credit scorebelow 525


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Improved Portfolio Quality


Conns is increasing sales in

its Appliance Category

Less reliant on Conns Credit Lower 60+ days delinquency

(5.9% vs 8.7%)


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Value Proposition


Affordability

Top Brands

BetterOptions

People want to feel rich

Conns provides guaranteed competitive pricing, offering a refund+ 10% if a customer finds a lower price

Conns stores hold top brands such as LG, Samsung, HP, Serta,

and Franklin Furniture

Conns in-house financing program gives more options to its corecustomer base, who would otherwise go to rent-to-own centers,

buy used merchandise, or not buy anything at all


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Growth Opportunity


Update Stores Expand Sales & Margins Improve Credit

20-25 new stores to beopened by FY2016

Active consolidation of

underperforming stores.

New store format:

HomePlus

Advertising focused onimproving customerawareness of credit

segment

Repositioning products to

focus on higher margin

products

Change in underwritingstandards to focus onhigher value accounts

Focus on e-commerce

strategy to allow customers

to apply for credit online

Average Transaction Size % of Sales from online credit


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Optionality


Spinoff the credit segment:

Retail Segment will no longer beassociated with bad debtproblems

Low multiple relative to

competitors

Outcome:Multiple Expansion

Option 1 Option 2

Sell the entire company:

5 out of the top 10 holders ofthe company are privateinvestment firms. Could partnerwith a private equity firm to takeit private

Outcome:

Buyout at significant premium

We have decided to conduct a strategic review and explore options to accelerate

the realization of value for our stockholders. - Theodore Wright, CEO


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Valuation

Conns Inc.


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Valuation

MILD

196 201 206 211 216

9 1,763 1,808 1,853 1,898 1,943

9.5 1,861 1,909 1,956 2,004 2,05110 1,959 2,009 2,059 2,109 2,159

11 2,155 2,210 2,265 2,320 2,375

12 2,351 2,411 2,471 2,531 2,591

13 2,547 2,612 2,677 2,742 2,807

MODERATE

207 212 217 222 227

9 1,860 1,905 1,950 1,995 2,040

9.

5 1,964 2,011 2,059 2,106 2,154

10 2,067 2,117 2,167 2,217 2,267

11 2,274 2,329 2,384 2,439 2,494

12 2,480 2,540 2,600 2,660 2,720

13 2,687 2,752 2,817 2,882 2,947

Aggressive

209 214 219 224 229

9 1,880 1,925 1,970 2,015 2,060

9.5 1,985 2,032 2,080 2,127 2,175

10 2,089 2,139 2,189 2,239 2,289

11 2,298 2,353 2,408 2,463 2,518

12 2,507 2,567 2,627 2,687 2,747

13 2,716 2,781 2,846 2,911 2,976

Bear Base Bull

EV 1,959 2,265 2,591

DEBT 521 521 521

Equity 1,438 1,744 2,070Shares 37 37 37

Price/Share 38.87 47.14 55.95

Probability 15% 60% 25%

48.10

Bear Base Bull

EV 1964 2,167 2,720

DEBT 671 671 671

Equity 1293 1,496 2,050

Shares 37 37 37

Price/Share 35 40.44 55.39


40.56

Bear Base Bull

EV 1985 2,189 2,518DEBT 882 882 882

Equity 1102 1,306 1,635

Shares 37 37 37

Price/Share 30 35.31 44.20


37.15


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$48.10


Valuation

$40.56

$37.15

Fair Value: $45.12

51% UpsideAggressive

Moderate

Mild

25%


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Q&A

Conns Inc.


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Appendix

Conns Inc.


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Table of Contents

24EV/EBITDA

25 - Customer Satisfaction26 - Example of Advertisement27 - Unemployment28 - Job growth29 - Credit Distribution

30 - Management31 - Model


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Conns Trades at 9.65x

EBITDA

Competitors trade at 11x

EBITDA

Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14

21.59 15.25 11.58 11.37 13.85 18.72 16.08 15.25 11.13 10.6

EV/EBITDA

Conns Historical EV/EBITDA


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Customer Credit Distribution


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Comparable Companies


Fundamentals

Market

Cap (B)

Enterprise

Value (B)

Sales

Growth

FY

EBITDA

Margin (%)

5 yr.

Sales

CAGR

FY

ROA

FY

ROE FY D/E

Div

Yield

(%)

250.39 303.2 1.52% 7.5 3.34 7.83% 21.22% 0.58 2.5

38.73 52.58 -0.96% 8.35 2.51 3.41% 9.32% 0.78 3

3.54 7.49 -9.20% -0.54 -5 -10.45% --130% 1.63 -

2.16 2.46 20.79% 10.39 - 6.36% 15.61% 0.66 -

56.21 65.82 5.73% 10.69 2.06 7.42% 20.25% 0.85 1.4

128.91 143.5 5.43% 13.86 2.03 13.52% 43.01% 1.17 1.9

59.75 58 7.12% 3.77 9.54 6.50% 17.79% 0.41 1

12.11 10.58 6.49% 4.38 0.98 6.90% 23.47% 0.40 2

1.66 2.58 0.70% 31.73 1.48 2.83% 6.20% 0.68 2.9

1.83 2.36 0.99% 39.03 7.01 3.75% 6.46% 0.13 0.33

0.16 0.485 21.70% - - 6.15% 12.12% 2.25 -

1.13 1.75 38.00% 14.97 6.03 7.95% 16.78% 0.91 -

Valuation

P/E P/CF P/B

FY EV/

EBITDA

FY

EV/EBIT

16.4

0 10.60 3.2 8.53 11.4

25.8 9.9 2.4 9.22 15.84

- -3.3 7.3 -11.23 -4.94

44.4 18 6 18.86 27.1

23.6 12.5 5 10.81 14.84

22.9 16.2 11.2 12.24 14.67

29.3 15.2 4.9 13.59 18.0112.7 7.8 2.7 6.49 10.65

19.7 67.6 1.2 2.73 14.44

20.7 11.4 1.5 2.27 17.76

6.2 2 0.9 10.89 11.92

11.8 -5.2 1.8 9.03 10.12

Industry

Ticker

Number

of Stores

FY

Same

Store

Sales

WMT 10.94k -0.40%

TGT 1.92k -0.40%

SHLD 2.43k -3.80%

MFRM 1.23k 1.30%

LOW 1.83k 4.80%

HD 2.26k 6.80%

COST 663 4.00%

BBY 1.97k -0.80%

RCII 4.67k -2.00%

AAN 2.15k 6.00%

RM 232 17.00%

CON

N 79 26.50%


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Mild Moderate Aggressive Mild Moderate Aggressive

2015 2015 2015 2016 2016 2016

Inventories 131,514.85 139,163.87 146,576.07 135,011.02 150,218.47 168,454.78receivable

1,099,663.03 1,227,768.09 1,353,166.16 1,220,025.31 1,271,950.80 1,431,206.96

Other assets150,000.00 150,000.00 150,000.00 175,000.00 175,000.00 180,000.00

Total assets1,381,177.88 1,516,931.96 1,649,742.23 1,530,036.33 1,597,169.26 1,779,661.74

Payabes 91,664.05 100,655.51 106,016.66 92,473.30 109,062.72 121,841.26

DEBT 560,512.57 589,600.70 708,579.80 514,517.14 673,719.00 885,087.65

Other liabilities

120,000.00 120,000.00 130,000.00 125,000.00 14,000.00 140,000.00

Stockholders'equity 709001.2652 706675.7505 705145.772 798045.89 800387.5386 632732.8241

Provision for bad

debts 115464.62 135054.49 162379.94 115902.40 127195.08 157432.77As % of A/R 0.11 0.11 0.12 0.10 0.10 0.11As % of total revenues

0.09 0.10 0.11 0.09 0.08 0.10Sales 975569.86 1033217.14 1089646.27 1043859.75 1162369.28 1252967.90

Receivable turnover 0.90 0.90 0.90 0.90 0.93 0.90

receivables as % of

sales 1.13 1.19 1.24 1.17 1.09 1.14

COGS 631271.27 667986.58 703565.14 675055.10 751092.33 808582.94

Inventory turnover 5.50 5.50 5.50 5.50 5.50 5.50

4.80 4.80 4.80 5.00 5.00 4.80A/P days 53.00 55.00 55.00 50.00 53.00 55.00

Balance Sheet Projections


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Slow Growth Moderate Growth

Aggressive

Growth Slow Growth

Moderate

Growth

Aggressive

Growth

2015 2015 2015 2016 2016 2016Home appliance 278362.25 294714.72 310662.57 297847.61 331554.07 357226.23

Growth% 0.08 0.14 0.20 0.07 0.13 0.15

Furniture and mattress 277897.33 297006.08 317361.69 297350.14 334131.84 364929.45

Growth% 0.18 0.26 0.35 0.07 0.13 0.15

Consumer electronic 272351.74 286324.57 298699.65 291416.36 322115.14 343470.25

Growth% 0.01 0.06 0.11 0.07 0.13 0.15

Home office 110271.24 116795.62 123187.27 117990.23 131395.07 141651.19

Growth% 0.08 0.14 0.21 0.07 0.13 0.15

Other 36687.30 38376.15 39735.09 39255.41 43173.17 45690.78

Growth% -0.03 0.01 0.05 0.07 0.13 0.15

Total product sales 975569.86 1033217.14 1089646.27 1043859.75 1162369.28 1252967.90

Repair service 0.08 0.14 0.21 0.07 0.13 0.15

agreement

commissions 81724.68 86560.06 91297.06 87445.41 97380.06 104981.12

Growth% 0.08 0.14 0.21 0.07 0.13 0.15

Service revenues 11575.93 12079.16 12459.98 11575.93 12803.91 13455.43

Growth% -0.06 -0.01 0.02 0.00 0.06 0.08Total net sales 1068870.48 1131856.36 1193403.31 1142881.10 1272553.26 1371404.46

Growth% 0.08 0.14 0.20 0.07 0.12 0.15

Finance Charges 193540.69 214859.42 243569.91 219604.56 228951.14 257617.25

Total revenues 1262411.17 1346715.78 1436973.22 1362485.65 1501504.40 1629021.71

Revenue Projections


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2015 Mild Moderate Aggressive 2016 Mild Moderate Aggressive

Cost of goods sold, including

warehousing and occupancy costs 664731 707498 751502 710857 795542 863704Cost of parts sold, including

warehousing and occupancy costs 6527 6527 6527 6527 6527 6527

Selling, general and

administrative expense 379636 410215 438271 404515 449131 488287

SG&A as % of rev. 29% 29% 29% 29% 29% 29%

Provision for bad debts 126015 139434 163164 116571 123968 157541

Charges and credits (4)4000 4000 4000 4000 4000 4000

Total costs and expenses 1180910 1267674 1363464 1242469 1379168 1520059

EBIT 151147 146861 147815 176880 196730 193229

Interest Expense 29240 30537 32341 28531 32083 32499

Other

Pre-tax income121907 116324 115474 148349 164646 160730Provisions for taxes 43886 41877 41571 53406 59273 57863

Tax rate 36% 36% 36% 36% 36% 36%

Operating Profits 78020 74447 73904 94943 105374 102867

D&A 24430 23630 23430 26430 27430 27430

EBITDA 175577 170491 171245 203310 224159 220659

IS Projections

h A


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2015 Mild Moderate Aggressive 2016 Mild Moderate Aggressive

Retail space growth 0.05 0.06 0.07 0.02 0.05 0.05

Customer growth 2015 -0.1 -0.07 -0.05 0 0 -0.0001

Same store sales growthHome appliance

14.55 16.4919.40

5% 8% 10%

Furniture and mattress38.25 43.35

51.005% 8% 10%

Consumer electronic8.925 10.115

11.905% 8% 10%

Home office 31.8 36.04 42.40 5% 8% 10%

Other 2.4 2.72 3.20 5% 8% 10%

Total product sales18.6 21.08

24.805% 8% 10%

RSA commissions24.9 28.22

33.205% 8% 10%

Service revenues-2% 1%

0.05-2% 1% 3%

Growth Assumptions

G M i A i


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GROSS MARGIN

Home appliance 33%

Furniture andmattress 49.5%

Consumerelectronic 29.50%

Home office 22%

Other 40%

Gross Margin Assumptions

Gross Margin Assumptions

I S


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Income StatementYear Ended January 31,

2015 1H 2014 2013 2012 2011 2010

(dollars and shares in thousands,except per share amounts)

Statement Operations:Revenues:

Product sales $518,386 $903,917 $649,516 $596,360 $608,443 $666,381

Repair service agreement commission 40,986 75,671 51,648 42,078 37,795 40,673

Service revenues (2) 6,538 12,252 13,103 15,246 16,487 22,115

Total net sales 565,910 991,840 714,267 653,684 662,725 729,169

Finance charges and other (3) 122,502 201,929 150,765 138,618 146,050 157,920

Total revenues 688,412 1,193,769 865,032 792,302 808,775 887,089

Costs and expenses:

COGS including warehousing andoccupancy

329,499 588,721 454,682 455,493 474,696 529,227

Cost of parts sold, including

warehousing and occupancy costs 3,290 5,327 5,965 6,527 7,779 10,401

SG&A 207,507 339,528 253,189 237,098 239,806 258,579

Provision for bad debts 61,843 96,224 47,659 53,555 51,404 48,779

Charges and credits (4) 3,246 2,117 3,025 9,928 2,321 9,617

Total costs and expenses 605,385 1,031,917 764,520 762,601 776,006 856,603

Operating income 83,027 161,852 100,512 29,701 32,769 30,486Interest expense, net 10,971 15,323 17,047 22,457 28,081 21,986

Loss from early extinguishment of debt - 897 11,056 - -

Cost related to financing

facilities terminated and

transactions not completed (6) - - - 4,283 -

Other (income) expense - 10 -153 70 339 -123

Income (loss) before income taxes 72,056 146,519 82,721 -3,882 66 8,623

Provision (benefit) for income taxes 25,937 53,070 30,109 -159 1,138 4,319

Net income (loss) $46,119 $93,449 $52,612 $(3,723) $(1,072) $4,304

B l Sh


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Balance SheetJanuary 31,

Assets July 31, 2014 2013

Current assets

Cash and cash equivalents $4,021 $5,727 $3,849

Customer accounts receivable, net of allowance of $46,113and$38,447, respectively

583,687 527,267 378,050

Other accounts receivable 49,993 51,480 45,759

Inventories 137,624 120,530 73,685

Deferred income taxes 26,372 20,284 15,302

Prepaid expenses and other assets 15,257 10,307 11,599

Total current assets 816,954 735,595 528,244

Long-term portion of customer accounts receivable, net of

allowance of $39,178 and $33,354, respectively 495,904 457,413 313,011

Property and equipment, net 112,149 86,842 46,994Deferred income taxes 13,612 7,721 11,579

Other assets 10,576 10,415 10,029

Total assets $1,449,195 $1,297,986 $909,857

Liabilities and Stockholders' Equity

Current Liabilities

Current portion of long-term debt $401 $420 $32,526

Accounts payable 95,963 82,861 69,608

Accrued compensation and related expenses 8,099 11,390 8,780

Accrued expenses 32,115 27,944 20,716

Income taxes payable 2,380 2,924 4,618

Deferred revenues and credits 19,626 17,068 14,915

Total current liabilities 158,584 142,607 151,163

Long-term debt 606,980 535,631 262,531

Other long-term liabilities 45,299 30,458 21,713

at July 31, 2014 and January 31, 2014, respectively) 363 361 352

Additional paid-in capital 228,477 225,631 204,372

Accumulated other comprehensive loss -25 -100 -223

Retained earnings 409,517 363,398 269,949Total stockholders' equity 638,332 589,290 474,450

Total liabilities and stockholders' e uit $1 449 195 $1 297 986 $909 857


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The Long Case For Conn's