This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Greenberg: Conn's Crunched by Credit


This article appeared at 11:11 a.m. EDT on RealMoney Sept. 2.

SAN DIEGO (RealMoney) -- Funny tweet this morning from Barbarian Capital:

"$CONN discovers Marketing 101: giving stuff away works. SSS up double digits, credit performance collapses."

And therein lies the issue with Conn's (CONN - Get Report) , the Texas retailer famous for providing credit for the un-creditworthy.

While same-store sales rose, the company missed second-quarter earnings expectations and guided down, as it increased its provision for bad debts. As I noted in Columnist Conversation this morning, credit has always been the bearish story at Conn's.

In retrospect, cracks in the company's credit story have been getting wider and wider, quarter after quarter.

As far back as a year ago, the company was blaming "short-term execution issues in our collections operations" for unexpectedly bad performance in its credit operations, which account for nearly a quarter of all revenue.

The situation worsened in February, with a twist: the company blamed the weather (and a bunch of other stuff) for its poor credit performance, which in turn led to an earnings warning.

As is the case today, the stock collapsed on that news, only to slowly recover as investors unwisely shrugged off credit concerns.

From today's release:

"Our credit operations ran into unexpected headwinds, resulting in portfolio performance deterioration. Despite tighter underwriting, lower early-stage delinquency and improved collections staffing and execution, delinquency unexpectedly deteriorated across all credit quality levels, customer groups, product categories, geographic regions and years of origination. Tighter underwriting and better collections execution did not offset deterioration in our customers' ability to resolve delinquency."

The company went on to say delinquency rates improved, but then quickly added:

"However, over 60-day delinquency rates unexpectedly deteriorated a combined 90 basis points in July and August. We now expect future 60-plus day delinquency to increase to levels above our historical highs in the third and fourth quarter of fiscal 2015."

Then, a few sentences later:

"Longer term, we believe the changes necessary to optimize portfolio performance are in place, although we may not return to credit loss rates of prior years."

In other words, after years of brushing off concerns that it faced a credit issue, Conn's is conceding that it does face one, that it's not necessarily fixable and that, as it braces for more credit losses, its earnings will suffer.

That's something to keep in mind if you get around to scanning through an amended class-action lawsuit initially filed last March. Amended complaints, such as the July amendment to this case, often include interviews with former employees or others who claim to have the inside scoop.

In this case, according to the lawsuit, "confidential witnesses" allege, among other things:

"In order to drive sales (including sales in its  new stores) in the months leading up to the start of the Class Period, Conn's had dramatically loosened its lending policies and underwriting guidelines, contrary to its assurances to investors, and had allowed non-creditworthy customers to receive substantial lines of credit at Conn's retail

locations, thereby exposing the Company to high amounts of bad debt and increased collections risks."

And ...

"During the first few months of opening, new stores provided up to $5,000 of credit to each customer who applied for credit— regardless of the customer's FICO score, income level, employment status, or prior foreclosure history. In addition, store employees were

not only instructed, but practically forced, to ensure that all customers who were approved for credit in a new store (meaning virtually everyone who applied) exhausted their full $5,000 credit line—regardless of their ability to pay Conn's back. In this manner, Conn's was able to generate record sales levels in the first few months of opening each new store—a metric watched closely by the financial community."

These are just allegations, of course, and the company will likely claim they're not true. But given what's happened lately at Conn's, they certainly can't be ignored.

At the time of publication, Greenberg had no positions in stocks mentioned but positions can change at any time.

Follow @herbgreenberg.

Subscribe to RealityCheck, Herb On TheStreet Blog

Herb Greenberg, editor of Herb Greenberg's Reality Check, is a contributor to CNBC. He does not own shares, short or trade shares in an individual corporate security. He can be reached at


Chart of I:DJI
DOW 17,773.64 -57.12 -0.32%
S&P 500 2,065.30 -10.51 -0.51%
NASDAQ 4,775.3580 -29.9330 -0.62%

Herb's Tweets

Select the service that is right for you!

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
Real Money Pro

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Trifecta Stocks

Trifecta Stocks analyzes over 4,000 equities weekly to find the elite 1% of stocks that pass rigorous quantitative, fundamental and technical tests.

Product Features:
  • Model portfolio
  • Trade alerts
  • Recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Growth Seeker

Chris Versace, using sophisticated stock screening and fundamental research, identifies potentially explosive small and mid-cap stocks.

Product Features:
  • Model portfolio
  • Small-cap and mid-cap focus
  • Intraday trade alerts
  • Weekly roundups
Daily Swing Trade

Master swing trader Alan Farley uses his sophisticated software screens to review thousands of stocks each day for you, to find just the handful that meet his demanding criteria.

Product Features:
  • Daily commentary and coaching on swing trading
  • Technical charts and analysis
Top Rated Stocks Top Rated Funds Top Rated ETFs