CONN - Conn's: Still A Lot Of Work To Do

2023-12-29 11:32:53 ET

Summary

• Conn's Q3 FY24 results show a decline in sales and increased losses, indicating a struggling financial condition.
• The stock is trading near a strong support zone and has previously reversed from the same price level, suggesting a potential reversal.
• Despite the poor financial condition, it is advised to hold the stock due to its proximity to the support level and signs of potential reversal.

I last wrote on Conn's ( CONN ) in December 2022. I assigned a sell rating on it, and since then, it has fallen around 27%, whereas the market is at an all-time high. It recently posted its Q3 FY24 results, which shows that they are still struggling. Its financial and fundamental condition doesn't look quite good. However, I am changing my sell rating to a hold because the stock is near the strong support zone, and it has previously reversed from the same price level.

Financial Analysis

It recently posted its Q3 FY24 results . The total sales for Q3 FY24 were $280.1 million, a decline of 12.7% compared to Q3 FY23. The main reason for the drop was a decline in sales in its retail and credit segment. The retail segment sales declined by 13% in Q3 FY24 compared to Q3 FY23. Lower discretionary spending resulted in lower same-store sales, which affected its retail segment. Its furniture & mattress, home appliance, and consumer electronics sales declined 6.9%, 22.6%, and 21.2% in Q3 FY24 compared to Q3 FY23. The revenue from its credit segment declined 7.7% in Q3 FY24 compared to Q3 FY23.

Its net loss for Q3 FY24 was $51.3 million, which was $24.8 million in Q3 FY23. Its profitability was affected by bad debts and increased SG&A expenses. Honestly, the current situation of CONN looks worse than when I covered it the last time. The losses have widened, and the main problem that has been with the company is increasing bad debts. Its credit applications grew by 40.6% in Q3 FY24 compared to Q3 FY23, but the main problem here is its ability to recover the credit. Most of their customers default on credit repayment, which has been affecting their profitability. So, in my opinion, they have to find a way to tackle this issue because if they don't, then the financial condition will only get worse with time. In addition, they are focused on expanding their business by opening new stores, which I think has not been working for them because focusing on opening new stores and allocating funds to it instead of working on the profitability has been backfiring at them. In FY24, they opened eight new stores, and there is nothing wrong with expanding business, but just bringing customers won't help because if customers continue to default on the credit, then CONN will continue to suffer no matter how much they expand the business. Their balance sheet is also deteriorating. The cash has reduced to $5.5 million, which was $19.5 million in January 2023, and the long-term debt has increased to $673.4 million, which was $636 million in January 2023. So their financial and fundamental condition has been worsening.

Technical Analysis

CONN is trading at $4.5. When the market is at its all-time high, this stock is near its all-time low. In my last report, I warned investors that it is like a falling knife. Don't try to catch it. In the last twelve months, it has fallen more than 50%. However, the stock is showing signs of reversal. Recently, the price touched an important support zone of $2.96. The $2.96 level is a significant support for the stock. In the past, the stock price has touched this level just two times. The first time it happened was in 2011, and the second time it happened was during the Covid crash in 2020. Both times, the stock price took support from that level and saw a reversal. Talking about the current situation, the same happened when the price recently touched the $2.96 level. It took support from it, and it is up around 54% from the support level. So, if the stock succeeds in sustaining above the support zone for around three months, then we might get to see a reversal in the stock.

Should One Invest In CONN?

The financial and fundamental condition of CONN is not looking good. The increasing loss and declining revenues are also concerns. But even if they are able to grow the revenues in the coming quarters, I think they might still struggle with profitability due to the increasing bad debts. In addition, CONN's shareholding pattern looks unattractive. Institutions own just 30.95% of the shares in the company, which is quite a small number. Less institutional holding creates more volatility in share price fluctuations, which is evident in the case of CONN.

The current situation of CONN doesn't look quite good, and I think there is a lot of work to do. However, I won't advise selling the stock at current price levels because it is near the multiyear support level, and the stock price is showing signs of reversal. Hence, I am changing my sell rating to a hold.

Risk

After the start of the 2009 financial crisis, the asset-backed securities sector in the United States has come under more regulatory and political scrutiny, leading to more regulation. Such laws may have a materially negative effect on the liquidity of such securities, which could have a materially negative impact on their liquidity. It is unclear how these regulations would affect investors in securitization markets and what the incentives are for some investors to hold asset-backed securities. Furthermore, sponsors of asset-backed securities are now required by requirements from multiple agencies to maintain an ownership position in securitization transactions. Any unfavorable modifications to these regulations may effectively restrict their ability to use securitization as a source of funding or change the way securitizations are structured, which may put their participation in securitizations at risk or lessen or eliminate the financial incentives for them to do so.

Bottom Line

The current condition of CONN doesn't look quite good. It is struggling financially, and its balance sheet is worsening. However, I won't advise selling it at current price levels because the stock price is near the multiyear support level, and the stock price has reversed from the same price level in the past. Hence, I am changing my sell rating to a hold.

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