XFRA:CN4 Conn's Inc Quarterly Report 10-Q Filing - 7/31/2012

Effective Date 7/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549



FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2012
Commission File Number 000-50421

CONN'S, INC.
(Exact name of registrant as specified in its charter)

A Delaware Corporation
06-1672840
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)

4055 Technology Forest Blvd., Suite 210
The Woodlands, Texas 77381
(936) 230-5899
(Address, including zip code, and telephone
number, including area code, of registrant's
principal executive offices)

3295 College Street
Beaumont, Texas 77701
(Former name, former address and former
fiscal year, if changed since last report)

Indicate by check mark whether the registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x   No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer ¨
Accelerated filer x
Non-accelerated filer  ¨
smaller reporting company ¨
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of August 31, 2012:
 
Class
 
Outstanding
Common stock, $.01 par value per share
 
32,588,907
 


 
 

 
 

PART I.
FINANCIAL INFORMATION
Page No.
     
Item 1.
Financial Statements
 
     
 
1
     
 
2
     
 
3
     
 
4
     
 
5
     
 
6
     
Item 2.
14
     
Item 3.
29
     
Item 4.
29
     
PART II.
OTHER INFORMATION
 
     
Item 1.
30
     
Item 1A.
30
     
Item 2.
30
     
Item 3.
30
     
Item 4.
30
     
Item 5.
30
     
Item 6.
30
 
 
CONN’S, INC. AND SUBSIDIARIES
(unaudited)
(in thousands, except share data)

 
 
July 31,
   
January 31,
 
Assets
 
2012
   
2012
 
Current assets
 
 
   
 
 
Cash and cash equivalents
  $ 5,195     $ 6,265  
Customer accounts receivable, net of allowance of $26,962 and $28,979, respectively (includes balance of VIE of $49,779 at July 31, 2012)
    329,989       316,385  
Other accounts receivable, net of allowance of $55 and $54,  respectively
    35,159       38,715  
Inventories
    70,165       62,540  
Deferred income taxes
    14,534       17,111  
Federal income taxes recoverable
    3,725       5,256  
Prepaid expenses and other assets (includes balance of VIE of $8,292 at July 31, 2012)
    14,364       6,286  
Total current assets
    473,131       452,558  
                 
Long-term portion of customer accounts receivable, net of allowance of $23,022 and $24,999, respectively (includes balance of VIE of $42,505 at July 31, 2012)
    281,767       272,938  
Property and equipment
               
Land
    7,850       7,264  
Buildings
    10,838       10,455  
Equipment and fixtures
    26,574       24,787  
Transportation equipment
    839       1,468  
Leasehold improvements
    92,190       83,969  
Subtotal
    138,291       127,943  
Less accumulated depreciation
    (93,432 )     (89,459 )
Property and equipment, net
    44,859       38,484  
Deferred income taxes
    9,624       9,754  
Other assets
    9,951       9,564  
Total assets
  $ 819,332     $ 783,298  
                 
Liabilities and Stockholders’ Equity
               
Current Liabilities
               
Current portion of long-term debt (includes balance of VIE of $75,754 at July 31, 2012)
  $ 76,408     $ 726  
Accounts payable
    65,309       44,711  
Accrued compensation and related expenses
    6,462       7,213  
Accrued expenses
    20,315       24,030  
Income taxes payable
    1,374       2,028  
Deferred revenues and allowances
    15,443       15,966  
Total current liabilities
    185,311       94,674  
Long-term debt
    238,895       320,978  
Other long-term liabilities
    12,859       14,275  
Commitments and contingencies
               
Stockholders’ equity
               
Preferred stock ($0.01 par value, 1,000,000 shares authorized; none issued or outstanding)
    -       -  
Common stock ($0.01 par value, 50,000,000 and 40,000,000 shares authorized at July 31, 2012 and January 31, 2012, respectively; 32,582,908 and 32,139,524 shares issued at July 31, 2012 and January 31, 2012, respectively)
    325       321  
Additional paid-in capital
    141,728       136,006  
Accumulated other comprehensive loss
    (285 )     (293 )
Retained earnings
    240,499       217,337  
Total stockholders’ equity
    382,267       353,371  
Total liabilities and stockholders' equity
  $ 819,332     $ 783,298  

See notes to consolidated financial statements.
 
 
CONN’S, INC. AND SUBSIDIARIES
(unaudited)
(in thousands, except per share amounts)

   
Three Months Ended July 31,
   
Six Months Ended July 31,
 
   
2012
   
2011
   
2012
   
2011
 
Revenues
                       
Product sales
  $ 156,026     $ 138,231     $ 308,141     $ 282,510  
Repair service agreement commissions, net
    12,355       9,945       23,747       18,847  
Service revenues
    3,274       3,811       6,704       7,700  
Total net sales
    171,655       151,987       338,592       309,057  
Finance charges and other
    35,781       35,039       69,695       69,951  
Total revenues
    207,436       187,026       408,287       379,008  
Cost and expenses
                               
Cost of goods sold, including warehousing and occupancy costs
    110,910       105,477       219,353       211,930  
Cost of service parts sold, including warehousing and occupancy costs
    1,441       1,596       2,991       3,326  
Selling, general and administrative expense
    59,381       56,174       119,037       115,619  
Provision for bad debts
    12,204       7,151       21,389       16,715  
Store closing and relocation costs
    346       3,658       509       3,658  
Total cost and expenses
    184,282       174,056       363,279       351,248  
Operating income
    23,154       12,970       45,008       27,760  
Interest expense
    4,874       7,004       8,633       14,560  
Loss from early extinguishment of debt
    -       11,056       -       11,056  
Other (income) expense, net
    (6 )     34       (102 )     86  
Income (loss) before income taxes
    18,286       (5,124 )     36,477       2,058  
Provision (benefit) for income taxes
    6,680       (2,022 )     13,315       759  
Net income (loss)
  $ 11,606     $ (3,102 )   $ 23,162     $ 1,299  
                                 
Earnings (loss) per share:
                               
Basic
  $ 0.36     $ (0.10 )   $ 0.72     $ 0.04  
Diluted
  $ 0.35     $ (0.10 )   $ 0.70     $ 0.04  
Average common shares outstanding:
                               
Basic
    32,404       31,808       32,304       31,788  
Diluted
    33,119       31,808       33,017       31,897  

See notes to consolidated financial statements.
 

CONN’S, INC. AND SUBSIDIARIES
(unaudited)
(in thousands)

   
Three Months Ended July 31,
   
Six Months Ended July 31,
 
 
 
2012
   
2011
   
2012
   
2011
 
 
 
 
   
 
   
 
   
 
 
Net income (loss)
  $ 11,606     $ (3,102 )   $ 23,162     $ 1,299  
                                 
Change in fair value of hedges
    (31 )     37       12       110  
Impact of (provision) benefit for income taxes on comprehensive income
    11       (13 )     (4 )     (39 )
                                 
Comprehensive income (loss)
  $ 11,586     $ (3,078 )   $ 23,170     $ 1,370  

See notes to consolidated financial statements.
 
 
CONN’S, INC. AND SUBSIDIARIES
Six Months Ended July 31, 2012 and 2011
(unaudited)
(in thousands)

 
 
Common Stock
   
Additional
Paid-in
   
Accumulated Other Comprehensive
   
Retained
   
 
 
   
Shares
   
Amount
   
Capital
   
Loss
   
Earnings
   
Total
 
Balance at January 31, 2012
    32,140     $ 321     $ 136,006     $ (293 )   $ 217,337     $ 353,371  
Exercise of stock options, net of tax
    326       3       4,274       -       -       4,277  
Issuance of common stock under Employee Stock Purchase Plan
    14       -       163       -       -       163  
Vesting of restricted stock units
    103       1       -       -       -       1  
Stock-based compensation
    -       -       1,285       -       -       1,285  
Net income
    -       -       -       -       23,162       23,162  
Change in fair value of hedges, net of tax of $4
    -       -       -       8       -       8  
Balance at July 31, 2012
    32,583     $ 325     $ 141,728     $ (285 )   $ 240,499     $ 382,267  

   
Common Stock
   
Additional Paid-in
   
Accumulated Other Comprehensive
   
Retained
   
Treasury Stock
   
 
 
   
Shares
   
Amount
   
Capital
   
Loss
   
Earnings
   
Shares
   
Amount
   
Total
 
Balance at January 31, 2011
    33,488     $ 335     $ 131,590     $ (71 )   $ 263,262       (1,723 )   $ (37,071 )   $ 358,045  
Exercise of stock options, net of tax
    99       1       720       -       -       -       -       721  
Issuance of common stock under Employee Stock Purchase Plan
    14       -       54       -       -       -       -       54  
Stock-based compensation
    -       -       1,056       -       -       -       -       1,056  
Treasury shares cancelled
    (1,723 )     (17 )     -       -       (37,054 )     1,723       37,071       -  
Net income
    -       -       -       -       1,299       -       -       1,299  
Change in fair value of hedges, net of tax of $39
    -       -       -       71       -       -       -       71  
Balance at July 31, 2011
    31,878     $ 319     $ 133,420     $ -     $ 227,507       -     $ -     $ 361,246  

See notes to consolidated financial statements.
 
 
CONN’S, INC. AND SUBSIDIARIES
(unaudited)
(in thousands)

   
Six Months Ended July 31,
 
   
2012
   
2011
 
Cash flows from operating activities
           
Net income
  $ 23,162     $ 1,299  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
    4,596       5,604  
Amortization
    2,329       2,791  
Provision for bad debts and uncollectible interest
    25,907       19,862  
Stock-based compensation
    1,285       1,056  
Excess tax benefits from stock-based compensation
    (472 )     -  
Store closing costs
    163       3,658  
Loss from early extinguishment of debt
    -       11,056  
Provision for deferred income taxes
    2,692       3,869  
Gain on sale of property and equipment
    (104 )     (12 )
Discounts and accretion on promotional credit
    (162 )     (835 )
Change in operating assets and liabilities:
               
Customer accounts receivable
    (47,776 )     47,006  
Inventory
    (7,624 )     5,274  
Accounts payable
    20,597       (7,357 )
Accrued expenses
    (5,997 )     (4,469 )
Income taxes payable
    886       (1,998 )
Other
    2,511       (1,028 )
Net cash provided by operating activities
    21,993       85,776  
Cash flows from investing activities
               
Purchase of property and equipment
    (11,217 )     (1,338 )
Proceeds from sale of property and equipment
    350       -  
Net cash used in investing activities
    (10,867 )     (1,338 )
Cash flows from financing activities
               
Proceeds from issuance of asset-backed notes, net of original issue discount
    103,025       -  
Payments on asset-backed notes
    (27,444 )     -  
Change in restricted cash
    (8,292 )     -  
Borrowings under lines of credit
    94,745       146,939  
Payments on lines of credit
    (176,495 )     (135,234 )
Payments on promissory notes
    (405 )     (83 )
Payment of term loan
    -       (100,000 )
Proceeds from real estate note
    -       8,000  
Payment of prepayment premium
    -       (4,830 )
Payment of debt issuance costs
    (2,243 )     (2,702 )
Net proceeds from stock issued under employee benefit plans, including tax benefit
    4,441       775  
Excess tax benefits from stock-based compensation
    472       -  
Net cash used in financing activities
    (12,196 )     (87,135 )
Net change in cash
    (1,070 )     (2,697 )
Cash and cash equivalents
               
Beginning of period
    6,265       10,977  
End of period
  $ 5,195     $ 8,280  

See notes to consolidated financial statements.
 
 
CONN’S, INC. AND SUBSIDIARIES
(unaudited)

1.
Summary of Significant Accounting Policies
 
Basis of Presentation. The accompanying unaudited consolidated financial statements of Conn’s, Inc. and subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The accompanying financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature, except as otherwise described herein. The Company’s business is somewhat seasonal, with a higher portion of sales and operating profit realized during the quarter that ends January 31, due primarily to the holiday selling season. Operating results for the six-month period ended July 31, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2013. The financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended January 31, 2012, filed with the Securities and Exchange Commission on April 12, 2012.

The Company’s balance sheet at January 31, 2012, has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by GAAP for a complete financial presentation. Please review the Company’s Annual Report on Form 10-K for a complete presentation of the audited financial statements for the fiscal year ended January 31, 2012, together with all required footnotes, and for a complete presentation and explanation of the components and presentations of the financial statements.

Principles of Consolidation. The consolidated financial statements include the accounts of Conn’s, Inc. and its wholly-owned subsidiaries, including a bankruptcy-remote, variable-interest entity (“VIE”) further discussed below. Conn’s, Inc. is a holding company with no independent assets or operations other than its investments in its subsidiaries. All material intercompany transactions and balances have been eliminated in consolidation.
 
In April of 2012, the Company transferred certain customer receivables to a VIE in connection with a securitization. The VIE issued debt secured by the customer receivables that were transferred to it, which are included in customer accounts receivable and long-term portion of customer accounts receivable on the consolidated balance sheet.
 
The Company determined that the VIE should be consolidated within its financial statements due to the fact that it qualified as the primary beneficiary of the VIE based on the following considerations:
 
 
·
The Company directed the activities that generated the customer receivables that were transferred to the VIE;
 
·
The Company directs the servicing activities related to the collection of the customer receivables transferred to the VIE;
 
·
The Company absorbs losses incurred by the VIE to the extent of its interest in the VIE before any other investors incur losses; and
 
·
The Company has the right to receive benefits generated by the VIE after paying the contractual amounts due to the other investors.
 
The investors and the securitization trustee have no recourse to the Company’s other assets for failure of the VIE to repay the amounts due to them. Additionally, the Company has no recourse to the VIE’s assets to satisfy its obligations. The Company’s interests are subordinate to the investors’ interests, and will not be paid if the VIE is unable to repay the amounts due. The ultimate realization of the Company’s interest is subject to credit, prepayment, and interest rate risks on the transferred financial assets.

Use of Estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
 
 
Earnings per Share. Basic earnings per share is calculated by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share include the dilutive effects of any stock options and restricted stock units granted, to the extent not anti-dilutive, which is calculated using the treasury-stock method. The following table sets forth the shares outstanding for the earnings per share calculations:

 
 
Three Months Ended
July 31,
 
(in thousands)
 
2012
   
2011
 
             
Weighted average common shares outstanding - Basic
    32,404       31,808  
Assumed exercise of stock options
    611       -  
Unvested restricted stock units
    104       -  
Weighted average common shares outstanding - Diluted
    33,119       31,808  
 
   
Six Months Ended
July 31,
 
      2012       2011  
                 
Weighted average common shares outstanding - Basic
    32,304       31,788  
Assumed exercise of stock options
    596       93  
Unvested restricted stock units
    117       16  
Weighted average common shares outstanding - Diluted
    33,017       31,897  

The weighted average number of stock options and restricted stock units not included in the calculation due to their anti-dilutive effect was 1.0 million and 2.3 million for each of the three months ended July 31, 2012 and 2011, respectively, and 1.2 million and 2.4 million for each of the six months ended July 31, 2012 and 2011, respectively.
 
Fair Value of Financial Instruments. The fair value of cash and cash equivalents and accounts payable approximate their carrying amounts because of the short maturity of these instruments. The fair value of customer accounts receivables, determined using a discounted cash flow analysis, approximates their carrying amount. The fair value of the Company’s debt approximates carrying value due to the recent date of issuance on the VIE’s asset-backed notes and the anticipated rate at which the Company could obtain comparable financing to its current asset-based revolving credit facility. The Company’s interest rate cap options are presented on the balance sheet at fair value. Fair value of these instruments were determined using Level 2 inputs of the GAAP hierarchy, which are defined as inputs not quoted in active markets, but are either directly or indirectly observable.
 
2.
Charges
 
The Company recorded the following charges during the first six months of fiscal years 2013 and 2012:
 
Fiscal year 2013:
 
Second quarter:
 
 
·
The Company is relocating certain of its corporate operations from Beaumont to The Woodlands, Texas in the third quarter of fiscal year 2013. The Company incurred $346 thousand in pre-tax costs ($224 thousand after-tax) in connection with the relocation. This amount is reported within the retail segment and classified in store closing and relocation costs in the consolidated statement of operations.
 
First quarter:
 
 
·
The Company accrued the lease buyout costs related to one of its store closures and revised its estimate of future obligations related to its other closed stores. This resulted in a pre-tax charge of $163 thousand ($106 thousand after-tax). This amount is reported within the retail segment and classified in store closing and relocation costs in the consolidated statement of operations.
 

Fiscal year 2012:
 
Second quarter:
 
 
·
The Company closed three underperforming retail locations and recorded a pre-tax charge of $3,658 thousand ($2,230 thousand after-tax) related primarily to future lease obligations. This amount is reported within the retail segment and classified in store closing and relocation costs in the consolidated statement of operations.
 
 
·
The Company recorded a pre-tax charge of $11,056 thousand ($6,735 thousand after-tax) in connection with the prepayment of an existing term loan. This amount is reported within the credit segment and classified in loss from early extinguishment of debt in the consolidated statement of operations.
 
First quarter:
 
 
·
The Company recorded a pre-tax charge of $813 thousand ($513 thousand after-tax) associated with employee severance costs. On a pre-tax basis, $407 thousand is reported within the retail segment and the balance is reported in the credit segment and is classified in selling, general and administrative expenses in the consolidated statement of operations.
 
3.
Supplemental Disclosure of Customer Receivables
 
Customer accounts receivable are originated at the time of sale and delivery of the various products and services. The Company records the amount of principal and accrued interest on customer receivables that is expected to be collected within the next twelve months, based on contractual terms, in current assets on its consolidated balance sheet. Those amounts expected to be collected after twelve months, based on contractual terms, are included in long-term assets. Typically, customer receivables are considered delinquent if a payment has not been received on the scheduled due date.
 
As part of its efforts in mitigating losses on its accounts receivable, the Company may make loan modifications to a borrower experiencing financial difficulty that are intended to maximize the net cash flow after expenses, and avoid the need for repossession of collateral. The Company may extend the loan term, refinance or otherwise re-age an account.  In the quarter ended October 31, 2011, the Company adopted new accounting guidance that provides clarification on whether a debtor is experiencing financial difficulties and whether a concession has been granted to the debtor for purposes of determining if a loan modification constitutes a Troubled Debt Restructuring (“TDR”).  The adoption was applied retrospectively to its loan restructurings after January 31, 2011. The Company defines TDR accounts that originated subsequent to January 31, 2011 as accounts that have been re-aged cumulatively in excess of three months or refinanced. For accounts originating prior to January 31, 2011, if the cumulative re-aging exceeds three months and the accounts were re-aged subsequent to January 31, 2011, the account is considered a TDR.
 
The Company monitors the performance of customer accounts receivable and from time-to-time modifies its policies to improve the long-term portfolio performance. During the quarter ended July 31, 2011, the Company implemented a policy which limited the number of months that an account can be re-aged to a maximum of 18 months and further modified the policy to a maximum of 12 months in the third quarter of fiscal 2012. As of July 31, 2011, the Company modified its charge-off policy so that an account that is delinquent more than 209 days as of the end of a month is charged-off against the allowance for doubtful accounts and interest accrued subsequent to the last payment is reversed and charged against the allowance for uncollectible interest. Prior to July 31, 2011, the Company charged off all accounts for which no payment had been received in the past seven months, if the account was also delinquent more than 120 days.
 
 
The Company segregates the population of accounts within its receivables portfolio into two classes – those with origination credit scores less than 575 and those with origination scores equal to or greater than 575. The Company uses credit scoring criteria to differentiate underwriting requirements, potentially requiring differing down payment and initial application and documentation criteria. The following tables present quantitative information about the receivables portfolio managed by the Company, segregated by class:
 
 
 
Total Outstanding Balance
 
 
 
Customer Accounts Receivable
   
60 Days Past Due (1)
   
Re-aged (1)
 
   
July 31,
   
January 31,
   
July 31,
   
January 31,
   
July 31,
   
January 31,
 
(in thousands)
 
2012
   
2012
   
2012
   
2012
   
2012
   
2012
 
Customer accounts receivable:
                               
 
 
>= 575 credit score at origination
  $ 512,468     $ 479,301     $ 25,287     $ 23,424     $ 25,162     $ 26,005  
< 575 credit score at origination
    113,420       115,128       10,371       11,278       10,062       14,033  
      625,888       594,429       35,658       34,702       35,224       40,038  
Restructured accounts (2):
                                               
>= 575 credit score at origination
    21,633       27,760       8,260       11,428       21,617       27,749  
< 575 credit score at origination
    14,219       21,112       5,819       9,060       14,128       21,076  
      35,852       48,872       14,079       20,488       35,745       48,825  
Total receivables managed
    661,740       643,301     $ 49,737     $ 55,190     $ 70,969     $ 88,863  
                                                 
Allowance for uncollectible accounts  related to the credit portfolio
    (44,006 )     (49,904 )                                
Allowance for promotional credit  programs
    (5,978 )     (4,074 )                                
Current portion of customer accounts receivable, net
    (329,989 )     (316,385 )                                
Long-term customer accounts receivable, net
  $ 281,767     $ 272,938                                  

 
(1)
Amounts are based on end of period balances. As an account can become past due after having been re-aged, accounts may be presented in both the past due and re-aged columns shown above. The amounts included within both the past due and re-aged columns shown above as of July 31, 2012 and January 31, 2012 were $22.7 million and $32.5 million, respectively. The total amount of customer receivables past due one day or greater was $157.8 million and $152.4 million as of July 31, 2012 and January 31, 2012, respectively. These amounts include the 60 days past due totals shown above.
 
 
(2)
In addition to the amounts included in restructured accounts, there are $3.4 million and $7.9 million, respectively, of accounts re-aged four or more months, included in the re-aged balance above, that did not qualify as TDRs as of July 31, 2012 and January 31, 2012, respectively, because they were not re-aged subsequent to January 31, 2011.
 
 
 
Three Months Ended July 31,
   
Six Months Ended July 31, 2012
 
 
 
Average Balances
   
Net Credit
Charge-offs (3)
   
Average Balances
   
Net Credit
Charge-offs (3)
 
(in thousands)
 
2012
   
2011
   
2012
   
2011
   
2012
   
2011
   
2012
   
2011
 
Customer accounts receivable:
 
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
>= 575 credit score at origination
  $ 496,476     $ 426,095     $ 5,450     $ 6,886     $ 487,133     $ 452,562     $ 10,256     $ 12,585  
< 575 credit score at origination
    112,777       146,756       2,939       5,807       113,166       150,083       5,676       10,338  
      609,253       572,851       8,389       12,693     $ 600,299     $ 602,645       15,932       22,923  
Restructured accounts:
                                                               
>= 575 credit score at origination
    22,503       21,082       2,932       1,655       24,224       15,018       6,096       2,074  
< 575 credit score at origination
    15,398       19,422       2,308       1,613       17,242       13,615       5,130       1,972  
      37,901       40,504       5,240       3,268     $ 41,466     $ 28,633       11,226       4,046  
Total receivables managed
  $ 647,154     $ 613,355     $ 13,629     $ 15,961     $ 641,765     $ 631,278     $ 27,158     $ 26,969  
 
 
(3)
Charge-offs include the principal amount of losses (excluding accrued and unpaid interest) net of recoveries which include principal collections during the period shown of previously charged-off balances.
 

Following is the activity in the Company’s balance in the allowance for doubtful accounts and uncollectible interest for customer receivables for the six months ended July 31, 2012 and 2011:

   
Six Months Ended July 31, 2012
       
(in thousands)
 
Customer
Accounts Receivable
   
Restructured
Accounts
   
Total
   
Six Months
Ended July 31,
2011
 
Allowance at beginning of period
  $ 24,518     $ 25,386     $ 49,904     $ 44,015  
Provision (a)
    20,491       5,416       25,907       19,862  
Principal charge-offs (b)
    (17,316 )     (12,202 )     (29,518 )     (28,639 )
Interest charge-offs
    (2,726 )     (1,921 )     (4,647 )     (5,173 )
Recoveries (b)
    1,386       974       2,360       1,670  
Allowance at end of period
  $ 26,353     $ 17,653     $ 44,006     $ 31,735  
 
 
(a)
Includes provision for uncollectible interest, which is included in finance charges and other.
 
(b)
Charge-offs include the principal amount of losses (excluding accrued and unpaid interest), and recoveries include principal collections during the period shown of previously charged-off balances. These amounts represent net charge-offs.

The Company records an allowance for doubtful accounts, including estimated uncollectible interest, for its customer accounts receivable, based on its historical cash collections and net loss experience and expectations for future cash collections and losses. In addition to pre-charge-off cash collections and charge-off information, estimates of post-charge-off recoveries, including cash payments, amounts realized from the repossession of the products financed and, at times, payments received under credit insurance policies are also considered.

The Company determines reserves for those accounts that are TDRs based on the present value of cash flows expected to be collected over the life of those accounts. The excess of the carrying amount over the discounted cash flow amount is recorded as a reserve for loss on those accounts. The Company estimates its allowance for bad debts by evaluating the credit portfolio based on the number of months re-aged, if any.

The Company typically only places accounts in non-accrual status when legally required to do so. Interest accrual is resumed on those accounts once a legally-mandated settlement arrangement is reached or other payment arrangements are made with the customer. The amount of customer receivables carried on the Company’s balance sheet that were in non-accrual status was $8.2 million and $9.8 million at July 31, 2012 and January 31, 2012, respectively. The amount of customer receivables carried on the Company’s consolidated balance sheet that were past due 90 days or more and still accruing interest was $36.0 million and $39.5 million at July 31, 2012 and January 31, 2012, respectively.
 
4.
Supplemental Disclosure of Finance Charges and Other Revenue
 
The following is a summary of the classification of the amounts included as finance charges and other for the three and six months ended July 31, 2012 and 2011:

   
Three Months Ended July 31,
   
Six Months Ended July 31,
 
(in thousands)
 
2012
   
2011
   
2012
   
2011
 
Interest income and fees on customer receivables
  $ 29,817     $ 29,661     $ 58,457     $ 60,292  
Insurance commissions
    5,688       4,985       10,722       9,041  
Other
    276       393       516       618  
Finance charges and other
  $ 35,781     $ 35,039     $ 69,695     $ 69,951  

The amount included in interest income and fees on customer receivables related to TDR accounts was $1.0 million for each of the three–month periods ended July 31, 2012 and 2011, and $2.2 million and $1.4 million for each of the six-month periods ended July 31, 2012 and 2011, respectively. The Company recognizes interest income on TDR accounts using the interest income method, which requires reporting interest income equal to the increase in the net carrying amount of the loan attributable to the passage of time. Cash proceeds and other adjustments are applied to the net carrying amount such that it always equals the present value of expected future cash flows.
 

5.
Accrual for Store Closures
 
During the fiscal year ended January 31, 2012, the Company closed 11 retail locations that did not perform at the level the Company expects for mature store locations. As a result of the closure of eight stores with unexpired leases, the Company recorded an accrual in fiscal 2012 for the present value of remaining lease obligations and anticipated ancillary occupancy costs, net of estimated sublease income. Revisions to these projections for changes in estimated marketing times or sublease rates will be made to the obligation as further information related to the actual terms and costs become available. The estimate was calculated using Level 2 fair value inputs as defined by the GAAP fair value hierarchy. The changes in the liability recorded for store closures for the six months ended July 31, 2012 were as follows:

(in thousands)
     
Balance at January 31, 2012
  $ 8,106  
Accrual for closure
    450  
Change in estimate
    (287 )
Cash payments
    (2,187 )
Balance at July 31, 2012
  $ 6,082  
 
The change in estimate results from the favorable impact of the termination of a lease and is partially offset by changes in sublet assumptions for certain locations and accretion of the present value of the expected future rental payments. The cash payments include payments made for facility rent and related costs.

6.
Debt and Letters of Credit
 
The Company’s long-term debt consisted of the following at the period ended:

   
July 31,
   
January 31,
 
(in thousands)
 
2012
   
2012
 
Asset-based revolving credit facility
  $ 231,500     $ 313,250  
Asset-backed notes, net of discount of $481
    75,754       -  
Real estate loan
    7,613       7,826  
Other long-term debt
    436       628  
Total debt
    315,303       321,704  
Less current portion of debt
    76,408       726  
Long-term debt
  $ 238,895     $ 320,978  

The Company’s asset-based revolving credit facility, as amended, provides for funding of up to $450 million based on a borrowing base calculation that includes customer accounts receivable and inventory. The credit facility bears interest at LIBOR plus a spread ranging from 350 basis points to 400 basis points, based on a leverage ratio (defined as total liabilities to tangible net worth). In addition to the leverage ratio, the revolving credit facility includes a fixed charge coverage requirement, a minimum customer receivables cash recovery percentage requirement and a net capital expenditures limit. Additionally, the agreement contains cross-default provisions, such that, any default under another of the Company’s credit facilities would result in a default under this agreement, and any default under this agreement would result in a default under those agreements.
 
On April 30, 2012, the Company’s VIE issued $103.7 million of asset-backed notes which bear interest at 4.0% and were sold at a discount to deliver a 5.21% yield, before considering transaction costs. The principal balance of the notes, which are secured by certain customer receivables, is reduced on a monthly basis by collections on the underlying customer receivables after the payment of interest and other expenses of the VIE. While the final maturity for the notes is April 2016, the Company currently expects to repay any outstanding note balance in April 2013 and, therefore, has classified the outstanding principal within the current portion of long-term debt. Additionally, the notes include a prepayment incentive fee whereby if the notes are not repaid by the expected final principal payment date of April 15, 2013, the VIE will be required to pay, in addition to accrued interest on the notes, a monthly fee equal to an annual rate of 8.5% times the outstanding principal balance. The VIE’s borrowing agreement contains certain covenants, including the maintenance of a minimum net worth for the VIE. The VIE’s debt is secured by the customer accounts receivable that were transferred to it, which are included in customer accounts receivable and long-term portion of customer accounts receivable on the consolidated balance sheet. At July 31, 2012, the VIE held cash of $8.3 million from collections on underlying customer receivables which is classified within prepaid expenses and other assets on the consolidated balance sheet. The investors and the securitization trustee have no recourse to the Company’s other assets for failure of the VIE to pay the notes when due or any other of its obligations. Additionally, the VIE’s assets are not available to satisfy the Company’s obligations. The Company’s interests in the VIE are subordinate to the investors’ interests, and would not be paid if the VIE is unable to repay the amounts due. The ultimate realization of the Company’s interest is subject to credit, prepayment, and interest rate risks on the transferred financial assets. Net proceeds from the offering were used to repay borrowings under the Company’s asset-based revolving credit facility.
 
 
The Company was in compliance with its debt covenants at July 31, 2012.
 
As of July 31, 2012, the Company had immediately available borrowing capacity of approximately $135.7 million under its asset-based revolving credit facility, net of standby letters of credit issued, for general corporate purposes. The Company also had $78.6 million that may become available under its asset-based revolving credit facility if it grows the balance of eligible customer receivables and its total eligible inventory balances.

The Company’s asset-based revolving credit facility provides it the ability to utilize letters of credit to secure its deductibles under the Company’s property and casualty insurance programs and its obligations to remit payments collected as servicer of the VIE’s receivables, among other acceptable uses. At July 31, 2012, the Company had outstanding letters of credit of $4.3 million under this facility. The maximum potential amount of future payments under these letter of credit facilities is considered to be the aggregate face amount of each letter of credit commitment, which totals $4.3 million as of July 31, 2012.

7.
Contingencies
 
The Company is involved in routine litigation and claims incidental to its business from time to time, and, as required, has accrued its estimate of the probable costs for the resolution of these matters, which are not expected to be material. These estimates have been developed in consultation with counsel and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. The Company has been included in various patent infringement claims and litigation, the outcomes of which are difficult to predict at this time. Due to the timing of these matters, the Company has determined that no reasonable estimates of probable costs for resolution can be ascertained at this time, and it is possible, however, that future results of operations for any particular period could be materially affected by changes in the Company’s assumptions or the effectiveness of its strategies related to these proceedings. However, the results of these proceedings cannot be predicted with certainty, and changes in facts and circumstances could impact the Company’s estimate of reserves for litigation.
 
 
8.
Segment Reporting
 
Financial information by segment is presented in the following tables for the three and six months ended July 31, 2012 and 2011:
 
   
Three Months Ended July 31, 2012
   
Three Months Ended July 31, 2011
 
(in thousands)
 
Retail
   
Credit
   
Total
   
Retail
   
Credit
   
Total
 
Revenues
                                   
Product sales
  $ 156,026     $ -     $ 156,026     $ 138,231     $ -     $ 138,231  
Repair service agreement commissions, net
    12,355       -       12,355       9,945       -       9,945  
Service revenues
    3,274       -       3,274       3,811       -       3,811  
Total net sales
    171,655       -       171,655       151,987       -       151,987  
Finance charges and other
    276       35,505       35,781       393       34,646       35,039  
Total revenues
    171,931       35,505       207,436       152,380       34,646       187,026  
Cost and expenses
                                               
Cost of goods sold, including warehousing and occupancy costs
    110,910       -       110,910       105,477       -       105,477  
Cost of service parts sold, including warehousing and occupancy cost
    1,441       -       1,441       1,596       -       1,596  
Selling, general and administrative expense (a)
    46,508       12,873       59,381       42,008       14,166       56,174  
Provision for bad debts
    189       12,015       12,204       191       6,960       7,151  
Store closing and relocation costs
    346       -       346       3,658       -       3,658  
Total cost and expense
    159,394       24,888       184,282       152,930       21,126       174,056  
Operating income (loss)
    12,537       10,617       23,154       (550 )     13,520       12,970  
Interest expense, net
    -       4,874       4,874       -       7,004       7,004  
Loss from early extinguishment of debt
    -       -       -       -       11,056       11,056  
Other (income) expense, net
    (6 )     -       (6 )     34       -       34  
Income (loss) before income taxes
  $ 12,543     $ 5,743     $ 18,286     $ (584 )   $ (4,540 )   $ (5,124 )
 
 
   
Six Months Ended July 31, 2012
   
Six Months Ended July 31, 2011
 
(in thousands)
 
Retail
   
Credit
   
Total
   
Retail
   
Credit
   
Total
 
Revenues
                                   
Product sales
  $ 308,141     $ -     $ 308,141     $ 282,510     $ -     $ 282,510  
Repair service agreement commissions, net
    23,747       -       23,747       18,847       -       18,847  
Service revenues
    6,704       -       6,704       7,700       -       7,700  
Total net sales
    338,592       -       338,592       309,057       -       309,057  
Finance charges and other
    517       69,178       69,695       618       69,333       69,951  
Total revenues
    339,109       69,178       408,287       309,675       69,333       379,008  
Cost and expenses
                                               
Cost of goods sold, including warehousing and occupancy costs
    219,353       -       219,353       211,930       -       211,930  
Cost of service parts sold, including warehousing and occupancy cost
    2,991       -       2,991       3,326       -       3,326  
Selling, general and administrative expense (a)
    92,557       26,480       119,037       86,113       29,506       115,619  
Provision for bad debts
    401       20,988       21,389       334       16,381       16,715  
Store closing and relocation costs
    509       -       509       3,658       -       3,658  
Total cost and expense
    315,811       47,468       363,279       305,361       45,887       351,248  
Operating income
    23,298       21,710       45,008       4,314       23,446       27,760  
Interest expense, net
    -       8,633       8,633       -       14,560       14,560  
Loss from early extinguishment of debt
    -       -       -       -       11,056       11,056  
Other (income) expense, net
    (102 )     -       (102 )     86       -       86  
Income (loss) before income taxes
  $ 23,400     $ 13,077     $ 36,477     $ 4,228     $ (2,170 )   $ 2,058  
 
(a)   
Selling, general and administrative expenses include the direct expenses of the retail and credit operations, allocated overhead expenses and a charge to the credit segment to reimburse the retail segment for expenses it incurs related to occupancy, personnel, advertising and other direct costs of the retail segment which benefit the credit operations by sourcing credit customers and collecting payments. The reimbursement received by the retail segment from the credit segment is estimated using an annual rate of 2.5% times the average portfolio balance for each applicable period. The amount of overhead allocated to each segment was approximately $2.0 million for the three months ended July 31, 2012 and 2011, and approximately $4.2 million and $4.3 million for the six months ended July 31, 2012 and 2011, respectively. The amount of reimbursement made to the retail segment by the credit segment was approximately $4.0 million and $3.8 million for the three months ended July 31, 2012 and 2011, respectively, and approximately $8.0 million and $7.9 million for the six months ended July 31, 2012 and 2011, respectively.
 
 
 
Forward-Looking Statements
 
This report contains forward-looking statements that involve risks and uncertainties.  Such forward-looking statements include information concerning our future financial performance, business strategy, plans, goals and objectives.  Statements containing the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “should,” or the negative of such terms or other similar expressions are generally forward-looking in nature and not historical facts. Although we believe that the expectations, opinions, projections, and comments reflected in these forward-looking statements are reasonable, we can give no assurance that such statements will prove to be correct. A wide variety of potential risks, uncertainties, and other factors could materially affect our ability to achieve the results either expressed or implied by our forward-looking statements including, but not limited to: general economic conditions impacting our customers or potential customers; our ability to continue existing or offer new customer financing programs; changes in the delinquency status of our credit portfolio; higher than anticipated net charge-offs in the credit portfolio; the success of our planned opening of new stores and the update of existing stores; technological and market developments, and sales trends for our major product offerings; our ability to fund our operations, capital expenditures, debt repayment and expansion from cash flows from operations, borrowings from our revolving credit facility, and proceeds from accessing debt or equity markets; and the other risks detailed from time-to-time in our United States Securities and Exchange Commission (“SEC”) reports, including but not limited to, our Annual Report on Form 10-K for our fiscal year ended January 31, 2012.  You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Except as required by law, we are not obligated to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.
 
General
 
We are a specialty retailer of durable consumer products, and we also provide credit to support our customers’ purchases of the products that we offer. We derive our revenue from two primary sources: retail sales and delivery of consumer goods, including sales of third-party repair service agreements; and our in-house customer credit program, including sales of credit insurance products. We operate a highly integrated and scalable business through our retail stores and our website, providing our customers with a broad range of brand name products, in-house and third-party financing options, next day delivery capabilities, and product repair service through well-trained and knowledgeable sales, credit and service personnel.
 
We currently operate 65 retail locations in Texas, Louisiana and Oklahoma. The Company’s primary product categories include:
 
 
·
Home appliance, including refrigerators, freezers, washers, dryers, dishwashers, ranges and room air conditioners;
 
·
Furniture and mattress, including furniture for the living room, dining room, bedroom and related accessories and mattresses;
 
·
Consumer electronic, including LCD, LED, 3-D, plasma and DLP televisions, camcorders, digital cameras, Blu-ray players, video game equipment, portable audio and home theater products; and
 
·
Home office, including desktop and notebook computers, tablets, printers and computer accessories.
 
Additionally, we offer a variety of products on a seasonal basis, including lawn and garden equipment, and continue to introduce additional product categories for the home to respond to customers product needs and to increase same store sales. We require our sales associates to be knowledgeable of all of our products.
 
Our business is moderately seasonal, with a greater share of our revenues, operating and net income historically realized during the quarter ending January 31, due primarily to the holiday selling season.
 
Unlike many of our competitors, we provide flexible in-house credit options for our customers. In the last three years, we financed, on average, approximately 61% of our retail sales through our internal credit programs. We offer our customers an interest-bearing installment financing program and, at times, we offer promotional credit programs to certain of our customers that provide for “same as cash” or deferred interest interest-free periods of varying terms, generally three, six and 12 months, and require monthly payments beginning in the month after the sale. In addition to our own credit programs, we use third-party financing programs, including a Conn’s-branded revolving charge card and non-interest bearing financing with terms greater than 12 months, for purchases made by our customers. We also use a third-party provider to offer a rent-to-own payment option to our customers.
 
 
The following tables present, for comparison purposes, information about our credit portfolios (dollars in thousands, except average outstanding customer balance).
 
   
Six Months Ended
 
   
July 31,
 
   
2012
   
2011
 
Total outstanding balance (period end)
  $ 661,740     $ 599,706  
Percent of total outstanding balances represented by balances over 36 months old (period end) (1)
    1.4 %     3.0 %
Percent of total outstanding balances represented by balances over 48 months old (period end) (1)
    0.3 %     0.7 %
Average outstanding customer balance
  $ 1,436     $ 1,267  
Number of active accounts (period end)
    460,675       473,386  
Account balances 60+ days past due (period end) (2)
  $ 49,763     $ 36,706  
Percent of balances 60+ days past due to total outstanding balance (period end)
    7.5 %     6.1 %
Total account balances reaged (period end) (2)
  $ 70,969     $ 103,173  
Percent of re-aged balances to total outstanding balance (period end)
    10.7 %     17.2 %
Account balances re-aged more than six months (period end)
  $ 21,475     $ 48,802  
Weighted average credit score of outstanding balances
    602       594  
Total applications processed
    366,419       349,069  
Weighted average origination credit score of sales financed
    615       626  
Total applications approved
    58.9 %     56.2 %
Average down payment
    3.7 %     6.9 %
Average total outstanding balance
  $ 641,765     $ 631,278  
Bad debt charge-offs (net of recoveries) (3)
  $ 27,158     $ 26,969  
Percent of bad debt charge-offs (net of recoveries) to average outstanding balance, annualized (3)
    8.5 %     8.5 %
Percent of total bad debt allowance to total outstanding customer receivable balance (period end)
    6.7 %     5.3 %
Percent of total outstanding balance represented by promotional receivables (period end)
    21.0 %     9.2 %
Weighted average monthly payment rate (4)
    5.7 %     5.9 %
Percent of retail sales paid for by:
               
Third-party financing
    14.2 %     10.0 %
In-house financing, including down payment received
    68.1 %     55.7 %
Third-party rent-to-own options
    3.5 %     3.9 %
Total
    85.8 %     69.6 %
 
 
(1)
Includes installment accounts only. Balances included in over 48 months old totals are also included in balances over 36 months old totals.
 
(2)
Accounts that become delinquent after being re-aged are included in both the delinquency and re-aged amounts. Re-aged portfolio data was adjusted to include certain refinanced account balances not previously included.
 
(3)
On July 31, 2011, we revised our charge-off policy to require an account that is delinquent more than 209 days at month end to be charged-off.
 
(4)
Rolling average of gross cash payments as a percentage of gross principal balances outstanding at the beginning of each month in the period.


Historical Static Loss Table

The following static loss analysis calculates the cumulative percentage of balances charged off, based on the year the credit account was originated and the period the balance was charged off. The percentage computed below is calculated by dividing the cumulative net amount charged off since origination by the total balance of accounts originated during the applicable fiscal year. The net charge-off was determined by estimating, on a pro rata basis, the amount of the recoveries received during a period that were allocable to the applicable origination period.

   
Cumulative loss rate as a % of balance originated (a)
 
Fiscal Year
 
Years from origination
 
of Origination
    0       1       2       3       4       5       6    
Terminal (b)
 
2005
    0.3 %     1.7 %     3.4 %     4.3 %     4.7 %     4.9 %     5.0 %     5.0 %
2006
    0.3 %     1.9 %     3.6 %     4.8 %     5.4 %     5.7 %     5.7 %     5.7 %
2007
    0.2 %     1.7 %     3.5 %     4.6 %     5.4 %     5.6 %     5.6 %        
2008
    0.2 %     1.8 %     3.6 %     5.0 %     5.7 %     5.8 %                
2009
    0.2 %     2.0 %     4.6 %     6.0 %     6.5 %                        
2010
    0.2 %     2.4 %     4.5 %     5.5 %                                
2011
    0.4 %     2.6 %     4.2 %                                        
2012
    0.2 %     1.1 %                                                

 
(a)
The most recent percentages in years from origination 1 through 6 include loss data through July 31, 2012, and are not comparable to prior fiscal year accumulated net charge-off percentages in the same column.
 
 
(b)
The terminal loss percentage presented represents the point at which that pool of loans has reached its maximum loss rate.
 
Segment Overview
 
This narrative provides an overview of our segment operations for the three and six months ended July 31, 2012.  A detailed explanation of the changes in our operations for the comparative periods is included under Results of Operations.
 
Retail Segment Review
 
 
·
Revenues rose $19.6 million, or 12.8%, to $171.9 million in the current quarter, from the comparable prior-year period. Same store revenues for the three months ended July 31, 2012 increased 21.5% over the same period last year. The increase in revenues during the quarter was driven by higher average selling prices in the major product categories, improved and expanded product selection in the furniture and mattress category and retention of a portion of the unit volume from closed stores. Reported revenues during the current quarter also reflects the benefit of the opening of a Conn’s Home Plus store in Waco, Texas in mid-June and the completion of four store remodels. This growth in sales was partially offset by store closures. Revenues for the six months ended July 31, 2012 increased by 9.5% over the prior-year period, driven by same store sales growth of 19.6%;
 
 
·
Retail gross margin was 34.1% in the current-year quarter compared to 28.8% in the prior year. Margin expansion was reported within each of the major product categories.  Additionally, results were favorably influenced by sales mix, with the 50% increase in higher-margin, furniture and mattress sales outpacing the overall growth realized in the other product categories. The broad margin improvement across all categories was driven by the exit of low price point, low margin products and continued focus on sourcing opportunities. Retail gross margin for the six-month period increased from 28.8% in the prior-year period to 33.9% in the current quarter reflecting a favorable shift in product mix and margin expansion in each of the product categories; and
 
 
·
Selling, general and administrative (“SG&A”) expense increased by $4.5 million, but declined 50 basis points as a percent of segment revenues to 27.1% for the quarter ended July 31, 2012 as compared to 27.6% for the quarter ended July 31, 2011. The SG&A expense increase was primarily due to higher sales-driven compensation costs and advertising expenses, partially offset by a reduction in depreciation and facility-related expenses. SG&A for the six months ended July 31, 2012 increased by $6.4 million from the prior-year period but declined 50 basis points as a percentage of revenue reflecting the leveraging effect of higher total revenues.
 
 
Credit Segment Review
 
 
·
Total revenues for the three months ended July 31, 2012 increased by $0.9 million, as compared to the prior year. The impact of year-over-year growth in the average balance of the portfolio was offset by a decline in portfolio interest and fee yield reflecting a higher proportion of short-term promotional receivables relative to the total portfolio balance outstanding and a higher provision for uncollectible interest related to charge-offs. Total revenues for the six-month period decreased by $0.2 million from the prior-year period, driven by the reduction in portfolio yield due to the increased proportion of short-term promotional receivables;
 
 
·
SG&A expense for the credit segment declined $1.3 million, primarily due to reduced compensation and related expenses. We reduced staffing in the credit segment as we continue to refine our collection strategy to balance compensation expense and provision for bad debts. Credit segment SG&A expense as a percent of revenues was 36.3% for the three months ended July 31, 2012 versus 40.9% in the prior year. For the six-month period, credit segment SG&A decreased by $3.0 million due to reduced compensation and related expenses;
 
 
·
The provision for bad debts increased by $5.1 million over the prior-year period, driven by a 46% increase in originations under the Conn's credit portfolio compared to the prior-year period and the impact of our implementation of stricter re-aging and charge-off policies in the second and third quarters of fiscal 2012. The provision for bad debts increased by $4.6 million for the six-month period also due to the effect of increased receivable originations compared to the prior-year period and the re-age and charge-off policy modifications; and
 
 
·
Net interest expense decreased in the three months ended July 31, 2012 by $2.1 million from the prior-year period attributable to a reduction in the effective interest rate on outstanding borrowings and a decline in outstanding debt. For the six months ended July 31, 2012, net interest expense declined by $5.9 million due to the decline in interest rate and borrowings outstanding.
 
Operational changes and outlook

We have implemented, continued to focus on or modified operating initiatives that we believe should positively impact future results, including:
 
 
·
Opening expanded Conn’s Home Plus stores in new markets. We opened one new store in Waco, Texas in June of 2012 and plan to open five additional stores over the balance of fiscal year 2013 - four in new markets;
 
 
·
Remodeling existing stores to improve our customers shopping experience and expand our product offering of higher-margin furniture and mattresses;
 
 
·
The exit of lower-price, lower-margin products to improve operating performance;
 
 
·
Reviewing our existing store locations to ensure the customer demographics and retail sales opportunity are sufficient to achieve our store performance expectations, and selectively closing or relocating stores to achieve those goals.  In this regard, we closed 11 retail locations in fiscal 2012 that did not perform at the level we expect for mature store locations and closed one additional store in May 2012;
 
 
·
Augmenting our credit offerings through the use of third-party consumer credit providers to provide flexible financing options to meet the varying needs of our customers, while focusing the use of our credit program to offer credit to customers where third-party programs are not available; and
 
 
·
Limiting the number of months an account can be re-aged and reducing the period of time a delinquent account can remain outstanding before it is charged off. Additionally, we are utilizing shorter contract terms for higher-risk products and smaller-balances originated to continue to increase the payment rate and improve credit quality. We have increased credit lines to higher credit scored customers to allow them to purchase additional products given our furniture and mattress offerings expansion. In total, these changes are expected to continue to improve the performance of our portfolio and increase the cost-effectiveness of our collections operation.
 
While we have benefited from our operations being concentrated in the Texas, Louisiana and Oklahoma region in the past, continued weakness in the national and state economies, including instability in the financial markets and the volatility of oil and natural gas prices, have and will present significant challenges to our operations in the coming quarters.
 
 
Results of Operations
 
The following table sets forth certain statement of operations information as a percentage of total revenues for the periods indicated:

   
Three Months Ended
   
Six Months Ended
 
   
July 31,
   
July 31,
 
   
2012
   
2011
   
2012
   
2011
 
Revenues
                       
Product sales
    75.2 %     73.9 %     75.5 %     74.5 %
Repair service agreement commissions, net
    6.0       5.3       5.8       5.0  
Service revenues
    1.6       2.1       1.6       2.0  
Total net sales
    82.8       81.3       82.9       81.5  
Finance charges and other
    17.2       18.7       17.1       18.5  
Total revenues
    100.0       100.0       100.0       100.0  
Cost and expenses
                               
Cost of goods sold, including warehousing and occupancy costs
    53.4       56.4       53.7       55.9  
Cost of service parts sold, including warehousing and occupancy cost
    0.7       0.9       0.7       0.9  
Selling, general, administrative expense
    28.6       30.0       29.2       30.5  
Provision for bad debts
    5.9       3.8       5.3       4.4  
Store closing and relocation costs
    0.2       2.0       0.1       1.0  
Total cost and expenses
    88.8       93.1       89.0       92.7  
Operating income
    11.2       6.9       11.0       7.3  
Interest expense
    2.4       3.8       2.1       3.9  
Loss from early extinguishment of debt
    0.0