Loan defaults from its low income customers cause earnings problems as company considers selling credit division of company, which could yield additional problems
Conn’s Inc. (NASDAQ:CONN) stock price tanked and hedge fund managers Christian Leone of Luxor Capital (H/T MarketFolly), David Einhorn of Greenlight Capital and Daniel Gold of QVT Financial saw opportunity. That opportunity might come in the form of the firm selling itself.
To start the year, Conn’s was trading near $77 per share and then troubles began eating at the retailer, who caters to lower income customers. Defaults began to increase in the credit financing business, which accounts for as much as 77 percent of sales as of the ended in July, according to a Reuters report.
It is the credit financing business that has come under fire. On September 2, Conn’s slashed its profit forecast for its year ending in January due to an increased provision for bad debts related to higher than expected delinquency rates. The stock shed nearly one third of its value that day, dropping from near $44 in price down to $31 and would eventually reach a near term low of $27.37.
Conn’s Inc. (NASDAQ:CONN) Luxor Capital
Luxor’s Christian Leone snapped up nearly 1.1 million shares of the stock at an average price of $27.82 across several transactions and now owns 5.63 million shares of the company, according to regulatory filings, making him the largest shareholder. Einhorn’s Greenlight Capital upped his stake in the company during the second quarter by 7 percent to 3.5 million shares, while Gold’s QVT Financial boosted its position by 150 percent to 762,000 shares.
Conn’s Inc. (NASDAQ:CONN) plans
After adopting a poison pill provision Monday, Conn’s sought to pair its losses by announcing it might spinning the company into two parts.
Under consideration is selling the credit lending business as a component of an overall review of options. However, selling the lending business could impact sales as a third party credit firm might have tighter borrowing standards which could crimp sales and expansion.
The company has plans to expand by opening another 14 stores, which could be hurt by tighter lending standards. Even with the credit problems, revenue has been solid with $353 million reported in the second quarter, up from $271 million on a year over year basis. While revenue increased, howver, the quality of that revenue dropped as earnings per share declined to $0.48 per share from $0.52, which could be a reflection of the credit issues. Same store sales over the same period of time have increased by nearly one third.
“What I’d think would be more likely is a partial or full spin off of the credit part of the business,” SunTrust Robinson Humphrey Capital Markets analyst David Magee told Reuters.
Spinning off the credit business might be easier said than done, however.
Conn’s Inc. CONN
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