Lawsuit accuses Conn’s of misleading investors
A Connecticut-based investor has sued Conn’s and a group of former top executives, alleging the home appliance and furniture retailer misled investors about the financial health of its in-store financing program.
The federal lawsuit, filed by MicroCapital Fund this week in Houston, came even as The Woodlands-based retailer announced improvements in its customer delinquency rate. The company revealed in its fourthquarter earnings report Thursday that 9.9 percent of its customers were delinquent after 60 days, down from 10.7 percent a year earlier.
The company has long dealt with the fallout from aggressive
lending to higher-risk customers earlier this decade. A spike in delinquencies led to the company’s stock price falling from a $77per-share peak in January 2014 to less than $7 in August 2016, spurring a Securities and Exchange Commission investigation and several lawsuits.
As Conn’s tightened its credit standards in recent years, its stock price rebounded somewhat. Shares closed Friday at $27.70. The average credit score for its customers rose to 611 in the fourth quarter, up from 607 a year earlier. However, Conn’s customers carried an average outstanding balance of $2,443, up from $2,376.
In its lawsuit, MicroCapital alleges the retailer relaxed credit requirements in late 2012 and early 2013 to boost revenue as it opened new stores and failed to inform investors about the practice.
“Although credit applications of customers with FICO scores below 520 had been denied previously, the metrics were changed such that FICO scores as low as 400 were being considered, rather than rejected,” the lawsuit states, citing an analysis of Conn’s public records and interviews with five former employees, including an underwriter.
Conn’s did not respond Friday to a call for comment. Norm Miller, the company’s chairman and CEO, said in a statement announcing its fourthquarter earnings that the performance of its in-store credit program has improved because of “higher finance charges, stronger portfolio fundamentals, controlled expenses and lower borrowing costs.”
“Conn’s fiscal year 2018 financial results demonstrate the successful execution of the company’s turnaround strategies and, as expected, a return to full-year profitability,” Miller said in a statement. “I am encouraged by the platform we have created and the positive momentum underway at Conn’s.”
Conn’s reported net income of $3.2 million during the fourth quarter, exceeding Wall Street expectations.
However, same-store sales missed expectations, falling 8 percent. The company expects same-store sales to decline by 3 percent to 5 percent during the current quarter.
Conn’s allowance for bad debts, an estimate of the amount of credit issued that may default, was $54.7 million in the fourth quarter, down from $72.1 million a year earlier. The figure is about 13 percent of Conn’s total customer portfolio. The company expects the allowance for bad debt to fall further this quarter.