Conn’s, Inc. Reports Fourth Quarter Fiscal 2017 Financial Results

Differentiated Business Model Drives Strong Retail Performance

New Lending Program Fully Implemented in Texas and Louisiana

Record Fourth Quarter Retail Gross Margin and Controlled SG&A Drive
Strong Retail Operating Margin

Conn’s Expects to Return to Full Year Profitability in Fiscal 2018

THE WOODLANDS, Texas–(BUSINESS WIRE)–Conn’s, Inc. (NASDAQ:CONN), a specialty retailer of furniture and
mattresses, home appliances, consumer electronics and home office
products, and provider of consumer credit, today announced its financial
results for the fourth quarter ended January 31, 2017.

“Fiscal 2017 was a transitional year, focused on creating a strong
credit platform to improve Conn’s near-term results and support the
pursuit of the Company’s long-term growth strategy. While much of our
focus during fiscal 2017 was on turning around the credit operation,
Conn’s retail business performed well. The Company has created a
differentiated and valuable retail experience by offering customers a
large selection of brand name, top-of-the-line products, leading
customer service and affordable credit programs. Our credit operation
continues to benefit from the structural changes we are making to
increase yield, reduce losses and improve credit segment profitability.
During the fourth quarter, all originations in Texas were under the new
direct loan program, and in early March, we fully implemented our direct
loan program in Louisiana. Over 80% of current originations now have a
weighted average interest rate of over 28%, compared to almost 22% in
September,” commented Norm Miller, Conn’s Chairman, Chief Executive
Officer and President.

“Conn’s retail business had a strong fourth quarter, despite the
approximately 1,000 basis points impact underwriting refinements made
earlier this fiscal year had on same store sales. We do not believe
there was any material negative impact on retail or credit trends in the
fourth quarter as a result of October’s implementation of the direct
loan program in Texas. Favorable mix within product categories and lower
warehouse, delivery, and transportation costs improved retail gross
margin 280 basis points compared to the fiscal 2016 fourth quarter, and
140 basis points from the fiscal 2017 third quarter. Retail operating
margins in the 2017 fourth quarter were 15.7%, compared to 11.9% for the
same period last fiscal year, as a result of record quarterly gross
margins and a 6.7% decline in SG&A expenses. Conn’s fourth quarter
retail results demonstrate the resiliency of our unique operating model
to recent challenges many retailers are experiencing. We are excited
about our recently announced partnership with Progressive Leasing and
the opportunity to significantly expand Conn’s lease-to-own sales.

“Finance charges and other income in the fiscal 2017 fourth quarter was
the second highest quarterly result Conn’s has recorded. Interest income
and fee yield increased 150 basis points from the third quarter,
primarily due to the implementation of the Texas direct loan program.
Interest income and fee yield is expected to increase further as more
accounts are originated at higher APRs. During the remainder of this
fiscal year, we intend to implement similar direct loan credit offerings
in three additional states. Overall credit results continued to be
impacted by slower growth, changes in credit strategy, and the
performance of accounts originated under prior underwriting standards.
As expected, a cohort of late stage delinquency went to charge-off in
the fourth quarter, which impacted the fourth quarter’s provision rate.
Additionally, charge-off and provision may remain elevated in early
fiscal 2018 as legacy accounts either mature or charge-off. We are
optimistic overall credit results will improve throughout fiscal 2018,
as these legacy accounts leave the portfolio and are replaced with
accounts benefiting from tighter underwriting and higher yields.

“Over the past 12 months we have assembled a strong leadership team with
significant credit and retail experience. We have created a roadmap to
turn around our near-term financial results, while creating a
sustainable and profitable business platform that appropriately balances
credit risk with retail growth. We remain confident our turnaround
strategies are taking hold and are encouraged by the direction we are
headed. While we still have more hard work in front of us, we expect
financial results to continue improving throughout fiscal 2018 and
beyond. Based on our current outlook, we expect to return to full year
profitability in fiscal 2018.”

Retail Segment Fourth Quarter Results (on a year-over-year basis
unless otherwise noted)

Total retail revenues were $356.2 million for the fourth quarter of
fiscal year 2017, a decrease of $20.7 million, or 5.5% from the fourth
quarter of fiscal year 2016, primarily resulting from the decline in
same store sales partially offset by new store openings. Sales were
negatively impacted by underwriting changes made in the fourth quarter
of fiscal year 2016 and during fiscal year 2017. For the fourth quarter
of fiscal year 2017, retail segment operating income was $56.1 million,
and adjusted retail segment operating income was $57.2 million after
excluding net charges of $1.1 million primarily associated with an
adjustment to our sales tax reserve.

The following table presents net sales and changes in net sales by
category:

		Three Months Ended January 31,																					Same store
(dollars in thousands)		2017				% of Total			2016				% of Total			Change				% Change			% change
Furniture and mattress		$	111,289			31.3	%		$	115,669			30.7	%		$	(4,380	)		(3.8	)%		(9.2	)%
Home appliance		83,723				23.5			88,838				23.6			(5,115		)		(5.8	)		(9.7	)
Consumer electronics		96,415				27.1			100,634				26.7			(4,219		)		(4.2	)		(6.4	)
Home office		25,483				7.2			30,332				8.1			(4,849		)		(16.0	)		(18.4	)
Other		5,018				1.4			5,174				1.4			(156		)		(3.0	)		(8.5	)
Product sales		321,928				90.5			340,647				90.5			(18,719		)		(5.5	)		(9.3	)
Repair service agreement commissions		30,766				8.6			32,140				8.5			(1,374		)		(4.3	)		(6.0	)
Service revenues		3,203				0.9			3,743				1.0			(540		)		(14.4	)
Total net sales		$	355,897			100.0	%		$	376,530			100.0	%		$	(20,633	)		(5.5	)%		(8.9	)%

The following provides a summary of items influencing Conn’s product
category performance during the fourth quarter of fiscal 2017, compared
to the prior-year period:

• Furniture unit volume decreased 18.4%, partially offset by a 9.1%
  increase in average selling price;
• Mattress unit volume decreased 13.5%, partially offset by an 11.9%
  increase in average selling price;
• Home appliance unit volume decreased 6.9% and average selling price
  decreased 3.0%;
• Consumer electronic unit volume decreased 9.7%, partially offset by a
  3.6% increase in average selling price; and
• Home office unit volume decreased 13.6% and average selling price
  decreased 5.5%.

Credit Segment Fourth Quarter Results (on a year-over-year basis
unless otherwise noted)

Credit revenues decreased 4.1% to $76.6 million. The decrease in credit
revenue was the result of both lower credit insurance commissions due to
higher claim volumes in Louisiana after the floods and lower origination
volume and the lower yield rate of 16.5%, which was 40 basis points
lower than the prior year quarter. The total customer portfolio balance
was $1.6 billion at January 31, 2017, declining 2.0%, or $31.4 million
from January 31, 2016.

Provision for bad debts for the fourth quarter of fiscal year 2017 was
$72.1 million, an increase of $7.6 million from the same prior-year
period. The increase was primarily driven by an $11.5 million increase
in charge-offs, net of recoveries, offset by a $3.9 million decrease in
the provision related to the change in the allowance for bad debts.

Additional information on the credit portfolio and its performance may
be found in the Customer Receivable Portfolio Statistics table included
within this press release and in our Form 10-K for the year ended
January 31, 2017, to be filed with the Securities and Exchange
Commission.

Fourth Quarter Net Income Results

For the fourth quarter of fiscal year 2017, we reported a net loss of
$0.1 million or $0.00 per diluted share compared to net income for the
fourth quarter of fiscal year 2016 of $1.1 million or $0.03 per diluted
share. On a non-GAAP basis, adjusted net income for the quarter of
fiscal year 2017 was $1.5 million or $0.05 per diluted share, which
excludes credits from legal and professional fees associated with
securities-related litigation, an adjustment to our sales tax audit
reserve, executive management transition costs and certain non-recurring
discrete tax items. This compares to adjusted net income for the fourth
quarter of fiscal year 2016 of $3.5 million or $0.11 per diluted share,
which excludes legal and professional fees related to the exploration of
strategic alternatives and securities-related litigation, sales tax
audit reserves, and executive management transition costs.

Store Update

During the fourth quarter of fiscal year 2017, the Company opened no new
stores. During fiscal year 2017, we opened 10 new stores. We currently
plan to open three new stores during fiscal year 2018, two of which were
opened in North Carolina in February.

Liquidity and Capital Resources

As of January 31, 2017, the Company had $161.5 million of immediately
available borrowing capacity under its $810 million revolving credit
facility, with an additional $465.8 million that could become available
upon increases in eligible inventory and customer receivable balances
under the borrowing base.

On March 31, 2017, the Company executed an amendment to its revolving
credit facility, which, among other things, extended the maturity by one
year to October 30, 2019, adjusted certain financial covenants and
definitions, and reduced the size by $60 million from $810 million to
$750 million. Refer to Note 19. Subsequent Events of Form 10-K
for the year ended January 31, 2017 for additional details.

Outlook and Guidance

The following are the Company’s expectations for the business for the
first quarter of fiscal year 2018:

• Change in same store sales down mid-teens;
• Retail gross margin between 37.5% and 38.0% of total net retail sales;
• Selling, general and administrative expenses between 30.5% and 32.0%
  of total revenues;
• Provision for bad debts between $56.0 million and $60.0 million;
• Finance charges and other revenues between $74.0 million and $78.0
  million; and
• Interest expense between $22.5 million and $24.0 million.

Conference Call Information

We will host a conference call on April 4, 2017, at 10 a.m. CT / 11 a.m.
ET, to discuss our fourth quarter fiscal 2017 financial results.
Participants can join the call by dialing 877-754-5302 or 678-894-3020.
The conference call will also be broadcast simultaneously via webcast on
a listen-only basis. A link to the earnings release, webcast and fourth
quarter fiscal 2017 conference call presentation will be available at ir.conns.com.

Replay of the telephonic call can be accessed through April 11, 2017 by
dialing 855-859-2056 or 404-537-3406 and Conference ID: 92161046.

About Conn’s, Inc.

Conn’s is a specialty retailer currently operating over 110 retail
locations in Alabama, Arizona, Colorado, Georgia, Louisiana,
Mississippi, Nevada, New Mexico, North Carolina, Oklahoma, South
Carolina, Tennessee and Texas. The Company’s primary product categories
include:

• Furniture and mattress, including furniture and related accessories
  for the living room, dining room and bedroom, as well as both
  traditional and specialty mattresses;
• Home appliance, including refrigerators, freezers, washers, dryers,
  dishwashers and ranges;
• Consumer electronics, including LED, OLED, Ultra HD, and
  internet-ready televisions, Blu-ray players, home theater and portable
  audio equipment; and
• Home office, including computers, printers and accessories.

Additionally, Conn’s offers a variety of products on a seasonal basis.
Unlike many of its competitors, Conn’s provides flexible in-house credit
options for its customers in addition to third-party financing programs
and third-party rent-to-own payment plans.

This press release contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 that
involve risks and uncertainties. Such forward-looking statements include
information concerning the Company’s future financial performance,
business strategy, plans, goals and objectives. Statements containing
the words “anticipate,” “believe,” “could,” “estimate,” “expect,”
“intend,” “may,” “plan,” “project,” “should,” or the negative of such
terms or other similar expressions are generally forward-looking in
nature and not historical facts. We can give no assurance that such
statements will prove to be correct, and actual results may differ
materially. A wide variety of potential risks, uncertainties, and other
factors could materially affect the Company’s ability to achieve the
results either expressed or implied by the Company’s forward-looking
statements including, but not limited to: general economic conditions
impacting the Company’s customers or potential customers; the Company’s
ability to execute periodic securitizations of future originated
customer loans including the sale of any remaining residual equity on
favorable terms; the Company’s ability to continue existing customer
financing programs or to offer new customer financing programs; changes
in the delinquency status of the Company’s credit portfolio; unfavorable
developments in ongoing litigation; increased regulatory oversight;
higher than anticipated net charge-offs in the credit portfolio; the
success of the Company’s planned opening of new stores; technological
and market developments and sales trends for the Company’s major product
offerings; the Company’s ability to protect against cyber-attacks or
data security breaches and to protect the integrity and security of
individually identifiable data of the Company’s customers and employees;
the Company’s ability to fund its operations, capital expenditures, debt
repayment and expansion from cash flows from operations, borrowings from
the Company’s revolving credit facility, and proceeds from accessing
debt or equity markets; the ability to continue the repurchase program;
and the other risks detailed in the Company’s most recent SEC reports,
including but not limited to, the Company’s Annual Report on Form 10-K
and the Company’s Quarterly Reports on Forms 10-Q and 10-Q/A and Current
Reports on Form 8-K. If one or more of these or other risks or
uncertainties materialize (or the consequences of such a development
changes), or should our underlying assumptions prove incorrect, actual
outcomes may vary materially from those reflected in our forward-looking
statements. You are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this
press release. We disclaim any intention or obligation to update
publicly or revise such statements, whether as a result of new
information, future events or otherwise. All forward-looking statements
attributable to us, or to persons acting on our behalf, are expressly
qualified in their entirety by these cautionary statements.

CONN-G

CONN’S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
		Three Months Ended January 31,								Year Ended January 31,
		2017				2016				2017				2016
Revenues:
Total net sales		$	355,897			$	376,530			$	1,314,471			$	1,322,589
Finance charges and other revenues		76,908				80,289				282,377				290,589
Total revenues		432,805				456,819				1,596,848				1,613,178
Costs and expenses:
Cost of goods sold		217,373				240,631				823,082				833,126
Selling, general and administrative expense		113,346				121,940				460,896				436,115
Provision for bad debts		72,316				64,780				242,294				222,177
Charges and credits		1,070				3,872				6,478				8,044
Total costs and expenses		404,105				431,223				1,532,750				1,499,462
Operating income		28,700				25,596				64,098				113,716
Interest expense		25,111				23,921				98,615				63,106
Loss on extinguishment of debt		—				—				—				1,367
Income (loss) before income taxes		3,589				1,675				(34,517		)		49,243
Provision (benefit) for income taxes		3,663				614				(8,955		)		18,388
Net income (loss)		$	(74	)		$	1,061			$	(25,562	)		$	30,855
Earnings (loss) per share:
Basic		$	—			$	0.03			$	(0.83	)		$	0.88
Diluted		$	—			$	0.03			$	(0.83	)		$	0.87
Weighted average common shares outstanding:
Basic		30,883				31,847				30,776				35,084
Diluted		30,883				32,195				30,776				35,557

CONN’S, INC. AND SUBSIDIARIES
CONDENSED RETAIL SEGMENT FINANCIAL INFORMATION
(unaudited)
(dollars in thousands)
		Three Months Ended January 31,								Year Ended January 31,
		2017				2016				2017				2016
Revenues:
Product sales		$	321,928			$	340,647			$	1,186,197			$	1,199,134
Repair service agreement commissions		30,766				32,140				113,615				109,730
Service revenues		3,203				3,743				14,659				13,725
Total net sales		355,897				376,530				1,314,471				1,322,589
Other revenues		301				415				1,569				1,639
Total revenues		356,198				376,945				1,316,040				1,324,228
Costs and expenses:
Cost of goods sold		217,373				240,631				823,082				833,126
Selling, general and administrative expense		81,480				87,300				326,078				313,694
Provision for bad debts		179				278				990				791
Charges and credits		1,070				3,872				6,478				8,044
Total costs and expenses		300,102				332,081				1,156,628				1,155,655
Operating income		$	56,096			$	44,864			$	159,412			$	168,573
Retail gross margin		38.9		%		36.1		%		37.4		%		37.0		%
Selling, general and administrative expense as percent of revenues		22.9		%		23.2		%		24.8		%		23.7		%
Operating margin		15.7		%		11.9		%		12.1		%		12.7		%
Store count:
Beginning of period		113				101				103				90
Opened		—				2				10				15
Closed		—				—				—				(2		)
End of period		113				103				113				103

CONN’S, INC. AND SUBSIDIARIES
CONDENSED CREDIT SEGMENT FINANCIAL INFORMATION
(unaudited)
(dollars in thousands)
		Three Months Ended January 31,								Year Ended January 31,
		2017				2016				2017				2016
Revenues–
Finance charges and other revenues		$	76,607			$	79,874			$	280,808			$	288,950
Costs and expenses:
Selling, general and administrative expense		31,866				34,640				134,818				122,421
Provision for bad debts		72,137				64,502				241,304				221,386
Total costs and expenses		104,003				99,142				376,122				343,807
Operating loss		(27,396		)		(19,268		)		(95,314		)		(54,857		)
Interest expense		25,111				23,921				98,615				63,106
Loss on extinguishment of debt		—				—				—				1,367
Loss before income taxes		$	(52,507	)		$	(43,189	)		$	(193,929	)		$	(119,330	)
Selling, general and administrative expense as percent of revenues		41.6		%		43.4		%		48.0		%		42.4		%
Selling, general and administrative expense as percent of average total customer portfolio balance (annualized)		8.2		%		8.9		%		8.7		%		8.4		%
Operating margin		(35.8		)%		(24.1		)%		(33.9		)%		(19.0		)%

CONN’S, INC. AND SUBSIDIARIES
CUSTOMER RECEIVABLE PORTFOLIO STATISTICS
(unaudited)
(dollars in thousands, except average outstanding customer balance and average income of credit customer)
		January 31,
		2017				2016
Weighted average credit score of outstanding balances		589				595
Average outstanding customer balance		$	2,376			$	2,406
Balances 60+ days past due as a percentage of total customer portfolio balance(1)		10.7		%		9.9		%
Re-aged balance as a percentage of total customer portfolio balance(1)		16.1		%		14.5		%
Account balances re-aged more than six months		$	73,903			$	62,288
Allowance for bad debts as a percentage of total customer portfolio balance		13.5		%		12.0		%
Percent of total customer portfolio balance represented by no-interest option receivables		27.1		%		37.1		%

(1) Accounts that become delinquent after being re-aged are included in
both the delinquency and re-aged amounts.

		Three Months Ended January 31,								Year Ended January 31,
		2017				2016				2017				2016
Total applications processed		362,487				376,132				1,337,850				1,287,478
Weighted average origination credit score of sales financed		607				614				609				615
Percent of total applications approved and utilized		32.7		%		39.9		%		34.5		%		42.7		%
Average down payment		2.6		%		2.9		%		3.2		%		3.3		%
Average income of credit customer at origination		$	43,100			$	41,900			$	41,900			$	41,100
Percent of retail sales paid for by:
In-house financing, including down payment received		68.8		%		79.8		%		72.0		%		81.8		%
Third-party financing		16.5		%		10.2		%		15.7		%		7.6		%
Third-party rent-to-own option		9.3		%		4.6		%		6.3		%		4.5		%
		94.6		%		94.6		%		94.0		%		93.9		%

CONN’S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except per share amounts)
		January 31,
		2017				2016
Assets
Current Assets:
Cash and cash equivalents		$	23,566			$	12,254
Restricted cash		110,698				78,576
Customer accounts receivable, net of allowances		702,162				743,931
Other accounts receivable		69,286				95,404
Inventories		164,856				201,969
Income taxes recoverable		2,150				10,774
Prepaid expenses and other current assets		14,955				20,092
Total current assets		1,087,673				1,163,000
Long-term portion of customer accounts receivable, net of allowances		615,904				631,645
Property and equipment, net		159,202				151,483
Deferred income taxes		71,442				70,219
Other assets		6,913				8,953
Total assets		$	1,941,134			$	2,025,300
Liabilities and Stockholders’ Equity
Current liabilities:
Current maturities of capital lease obligations		$	849			$	799
Accounts payable		101,612				86,797
Accrued expenses		39,781				39,374
Other current liabilities		25,139				19,155
Total current liabilities		167,381				146,125
Deferred rent		87,957				74,559
Long-term debt and capital lease obligations		1,144,393				1,248,879
Other long-term liabilities		23,613				17,456
Total liabilities		1,423,344				1,487,019
Stockholders’ equity		517,790				538,281
Total liabilities and stockholders’ equity		$	1,941,134			$	2,025,300

CONN’S, INC. AND SUBSIDIARIES
NON-GAAP RECONCILIATIONS
(unaudited)
(dollars in thousands)
RETAIL SEGMENT OPERATING INCOME, AS ADJUSTED
		Three Months Ended January 31,								Year Ended January 31,
		2017				2016				2017				2016
Retail segment operating income, as reported		$	56,096			$	44,864			$	159,412			$	168,573
Adjustments:
Store and facility closure costs		135				—				1,089				637
Legal and professional fees related to the exploration of strategic alternative and securities-related litigation		(646		)		947				101				3,153
Sales tax audit reserve		1,434				2,748				1,434				2,748
Executive management transition costs		—				177				234				1,506
Loss from retirement of leasehold improvements		6				—				1,986				—
Employee severance		141				—				1,634				—
Retail segment operating income, as adjusted		$	57,166			$	48,736			$	165,890			$	176,617
Retail segment total revenues		$	356,198			$	376,945			$	1,316,040			$	1,324,228
Operating margin:
As reported		15.7		%		11.9		%		12.1		%		12.7		%
As adjusted		16.0		%		12.9		%		12.6		%		13.3		%

NET INCOME, AS ADJUSTED, AND DILUTED EARNINGS PER SHARE AS ADJUSTED
		Three Months Ended January 31,								Year Ended January 31,
		2017				2016				2017				2016
Net income, as reported		$	(74	)		$	1,061			$	(25,562	)		$	30,855
Adjustments:
Changes in estimates		—				—				13,168				—
Store and facility closure costs		135				—				1,089				637
Legal and professional fees related to the exploration of strategic alternative and securities-related litigation		(646		)		947				101				3,153
Sales tax audit reserve		1,434				2,748				1,434				2,748
Executive management transition costs		—				177				234				1,506
Loss from retirement of leasehold improvements		6				—				1,986				—
Employee severance		141				—				1,634				—
Discrete tax item		932				—				932				—
Loss on extinguishment of debt		—				—				—				1,367
Tax impact of adjustments		(387		)		(1,421		)		(1,678		)		(3,510		)
Net income, as adjusted		$	1,541			$	3,512			$	(6,662	)		$	36,756
Weighted average common shares outstanding – Diluted		30,883				32,195				30,776				35,557
Earnings per share:
As reported		$	—			$	0.03			$	(0.83	)		$	0.87
As adjusted		$	0.05			$	0.11			$	(0.22	)		$	1.03

Basis for presentation of non-GAAP disclosures:

To supplement the condensed consolidated financial statements, which are
prepared and presented in accordance with accounting principles
generally accepted in the United States of America (“GAAP”), we also
provide retail segment adjusted operating income, retail adjusted
operating margin, adjusted net income, and adjusted earnings per diluted
share.

Contacts

S.M. Berger & Company
Andrew Berger, 216-464-6400

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