Anchorage Capital Sees Bigger Things Ahead For This Retailer Than Its Paltry 41% Returns This Year

Just a few weeks ago, CONN’S Inc. (NASDAQ:CONN) was downgraded to “Hold” from “Buy” by Stifel Nicolaus, citing the company’s persistent credit issues. As already mentioned, the company is not only selling durable consumer goods, but is also providing credit financing for its credit-constrained customers. The steady-strengthening of its retail business has been offset by the worsening trends in its greater than 60-day delinquencies. To be more detailed, CONN’S reported a greater than 60-day delinquency rate of 9.2% at the end of the second quarter, compared to 8.7% registered in the same quarter a year ago. Even more to that, the company delivered a credit segment operating loss of $9.0 million, which was primarily caused by increased provision for bad debts.

John Baugh, Stifel Nicolaus’ analyst who stands behind the downgrade, indicated in a note to clients that: “Unfortunately, if the company cannot stabilize its charge-offs and past dues, the retail figures are somewhat meaningless as profits are booked upon the issuance of the loan in the retail segment, but the money has to be collected through time.” Having said that, it is not quite sure what has been driving the demand for the products marketed by CONN’S. Undoubtedly, the strengthening U.S economy and the improving labor market have driven up the sales of CONN’S, but it is also highly likely that the company’s strategy to serve the cash-strapped working class households has lured many customers to its stores.

In the meantime, CONN’S recently announced a number of strategic initiatives that are set to change the company’s business and position, which might in turn reduce risk and enhance shareholder value. These initiatives include the appointment of Norman Miller as the new Chief Executive Officer, entering into an agreement to securitize $1.4 billion of retail installment contract receivables, and a share repurchase program of up to $75 million of securities. Therefore, it appears that both Anchorage Capital Partners and Tourbillon Capital Partners boosted their stakes in the company betting on the success of the recently-announced initiatives.

Disclosure: None